G.R. No. 172292 is a petition for review^[1] assailing the Decision^[2] promulgated on 26 August 2005 by the Court of Appeals (appellate court) as well as the Resolution^[3] promulgated on 14 March 2006 in CA-G.R. CV No. 76076.  The appellate court partially granted the petition filed by Shirley M. Yu-Go, Ma. Victoria M. Yu-Lim, and Ma. Estrella M. Yu (Yu siblings) and reversed the decision of the Regional Trial Court of Naga City, Branch 27 (trial court), dated 28 June 2002 in Civil Case No. 99-4216. The appellate court ordered spouses Antonio and Alida Mores (spouses Mores) to pay the Yu siblings moral damages in the amount of P100,000.

The Facts

Antonio Mores passed away during the pre-trial stage. Hence, Alida Mores remained as the only defendant, per the trial court's order dated 3 May 2000.^[4]

The appellate court narrated the facts as follows:

On January 21, 1998, plaintiffs-appellants Shirley M. Yu-Go, Ma. Victoria M. Yu-Lim and Ma. Estrella M. Yu ("appellants") filed a Complaint for Injunction and Damages with Prayer for Issuance of a Temporary Restraining Order and Preliminary Injunction before the Regional Trial Court in Naga City against defendants-appellees, spouses Antonio and Alida Mores ("appellees").  Appellants alleged that they co-owned a parcel of land located in Sto. Tomas, Magarao, Camarines Sur on which a building of strong materials ("subject property") was built.  In March 1983, appellees pleaded to appellants that they be allowed to stay in the subject property in the meantime that they did not own a house yet. Since appellee Antonio Mores used to be an errand boy of appellants' family, they readily agreed without asking for any rental but subject only to the condition that the said stay would last until anyone of appellants would need the subject property.  Forthwith, appellees and their children occupied the same as agreed upon.

In November 1997, appellants made known to appellees that they were already in need of the subject property.  They explained that appellant Shirley Yu-Go needed the same and, besides, appellees already have their own house in Villa Grande Homes, Naga City.  Yet, appellees begged that they be given a 6-month extension to stay thereat or until May 1998.  However, even after May 1998, appellees failed to make good their promise and even further asked that they be allowed to stay therein until October 1998, which was again extended until the end of the same year. Thus, sometime in the first week of January 1999, appellants gave their final demand for appellees to vacate the subject property.  However, instead of heeding such demand, appellees hired some laborers and started demolishing the improvements on the subject property on January 20, 1999.

Appellants' protest fell on deaf ears because appellees continued their demolition and even took away and appropriated for themselves the materials derived from such unlawful demolition.  Consequently, appellants instituted the said action for injunction where they also prayed for the reimbursement of the value of the residential building illegally demolished as well as for the payment of moral damages, attorney's fees, litigation expenses and costs of suit.

On February 5, 1999, appellees filed their Answer where they denied the material averments of the complaint. They claimed that appellee Antonio Mores, who was appellants' uncle, used to be the assistant manager and cashier of appellants' father at their Caltex Service Station until the later's death sometime in 1980.  Appellants' Caltex Filling Station had stopped operation and was just rented out to Herce Trucking Service.  Upon the expiration of such lease contract, appellees were allowed to occupy the subject property as their dwelling places.  They were the ones who caused its renovation consisting of a 3-bedroom annex, a covered veranda and a concrete hollow block fence, at their own expense, and with appellants' consent, which renovation was made without altering the form and substance of the subject property.  They denied that appellants made a demand for them to vacate the subject property, insisting that it was merely a sort of reminder that sooner or later appellees should yield possession thereof since, after all, they had already bought a second-hand house which was undergoing repair. Appellees argued that what they removed was merely the improvements made on the subject property, which removal had not caused any substantial damage thereto as, in fact, it remained intact. By way of counterclaims, they demanded payment of actual damages, attorney's fees and litigation expenses.^[5]

The Trial Court's Ruling

On 28 June 2002, the trial court promulgated its Decision in favor of the spouses Mores.  The trial court ratiocinated and ruled thus:

Defendants, who are possessors in good faith, were able to prove by preponderance of evidence that they removed only the improvements they introduced without destroying the principal building, after the plaintiffs refused to pay them the reasonable value of the improvements. x x x

But defendants failed to prove the allegations in their counterclaims that plaintiffs acted in bad faith and/or through gross and reckless negligence in filing this complaint, and the damages defendants allegedly suffered.  Failing in this, plaintiffs must also be presumed to have acted in good faith when they filed this complaint with the honest belief that their rights were violated when defendants removed the useful improvements from the principal building and land of plaintiffs.  Applying the same principle, the equipoise rule, defendants' counterclaims must necessarily fail.

Both parties having acted in good faith, the court will not disturb the present status, and will leave the parties where it found them.  Wounds should not be scratched in order to hasten the healing process, and neither should this Court scratch herein parties rift that torn [sic] them apart from being close relatives before this controversy started.  Parties owe to their siblings and to their posterity to reconcile.  Anyway, this case was started because parties were very close relatives.

The courts are not only courts of justice but also courts of equity.

WHEREFORE, the complaint and the counterclaims are hereby dismissed.  No pronouncement as to cost.

SO ORDERED.^[6]

The trial court gave due course to the Yu siblings' Notice of Appeal in an Order dated 22 July 2002.

The Appellate Court's Ruling

The appellate court partially granted the Yu siblings' appeal. The appellate court disagreed with the trial court's conclusion that the spouses Mores were builders in good faith and have the right of accession under Articles 546 and 547 of the Civil Code. Instead, the appellate court believed that the relationship between the Yu siblings and the spouses Mores is one between a lessor and a lessee, making Article 1678 of the Civil Code applicable to the present case. The options given by Article 1678, the right of appropriating the useful improvements after reimbursing 50% of its value or the right of removal of the useful improvements, are given by law to the lessor - the Yu siblings.  The spouses Mores, however, failed to give the Yu siblings the opportunity to choose from these two options. The appellate court thus ordered the spouses Mores to pay the Yu siblings moral damages worth P100,000.

The appellate court resolved to deny Alida Mores' Motion for Reconsideration for want of merit.^[7]

The Issues

In her petition, Alida Mores stated that the decision of the appellate court awarding the Yu siblings moral damages in the amount of P100,000 is rendered with grave abuse of discretion and is not in accord with the decisions of this Court.^[8]

The Court's Ruling

The petition has merit.

Alida Mores argues that in case of breach of contract between a lessor and a lessee, moral damages are not awarded to the lessor if the lessee is not shown to have acted in bad faith.  She proves her and her husband's alleged good faith by quoting the appellate court's decision which stated that:

[The Spouses Mores'] good faith is underscored by the fact that no one from appellants had objected or prevented appellees from effecting said improvements which, obviously, were undertaken in quite a span of time.  Even if we believe appellant Victoria Yu-Lim's testimony that they would only learn of the introduction of such improvements after each of such improvements had already been built, [the Yu siblings] never made known their objections thereto nor did they pose a warning against future introduction of any improvement. After all, the said improvements were not introduced simultaneously.^[9]

The good faith referred to by Alida Mores was about the building of the improvements on the leased subject property. However, tenants like the spouses Mores cannot be said to be builders in good faith as they have no pretension to be owners of the property.^[10]  Indeed, full reimbursement of useful improvements and retention of the premises until reimbursement is made applies only to a possessor in good faith, i.e., one who builds on land with the belief that he is the owner thereof.  It does not apply where one's only interest is that of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to "improve" his landlord out of his property.^[11]

The appellate court is correct in ruling that Article 1678 of the Civil Code should apply in the present case.  Article 1678 reads:

If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay the lessee one-half of the value of the improvements at that time.  Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby.  He shall not, however, cause any more impairment upon the property leased than is necessary.

With regard to the ornamental expenses, the lessee shall not be entitled to any reimbursement, but he may remove the ornamental objects, provided no damage is caused to the principal thing, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished.

It is incorrect, however, for the appellate court to state that the spouses Mores did not give the Yu siblings the option to retain the improvements.  The appellate court stated that "nothing in the records reveal that [the Yu siblings] were given the chance to choose from the options of either paying one-half (½) of the value of the improvements at the time they were made on the subject property, or to demand the removal by [the spouses Mores] of such improvements at their expense."^[12] The trial court even quoted from the transcript of Alida Mores' direct testimony on 10 October 2001 on the subject:

Q:	Plaintiff Yu-Lim likewise testified that the plaintiffs demanded in 1998 that you vacate the premises because it will be needed by plaintiff Shirley Yu-Co, what can you say to that?
A:	It was in November 1998 that the plaintiff intimated that we will soon vacate the place because by that time we had already bought a second-hand house.
Q:	What happened after that?
A:	My husband good-naturedly asked for reimbursement for the improvements we constructed at our expense.
Q:	What happened to that demand?
A:	The plaintiffs became mad at us and refused to pay.
Q:	What happened after that, what did your husband do?
A:	My husband removed the roofing, coco lumber, trusses, the electrical installation and the improvements constructed, glass panel and window panel.
Q:	By the way, who spent for the introduction of these improvements?
A:	My husband and I.[13]

There is thus no reason for the appellate court's award of moral damages to the Yu siblings.  We agree with the trial court's finding that the spouses Mores "removed only the improvements they introduced without destroying the principal building, after the [Yu siblings] refused to pay them the reasonable value of the improvements."^[14] When the spouses Mores demanded reimbursement, the Yu siblings should have offered to pay the spouses Mores one-half of the value of the improvements.  Since the Yu siblings failed to make such offer, the spouses Mores had the right to remove the improvements.

WHEREFORE, we GRANT the petition.  We AFFIRM with MODIFICATION the Decision of the Court of Appeals  promulgated on 26 August 2005 as well as the Resolution promulgated on 14 March 2006 in CA-G.R. CV No. 76076.  Article 1678 of the Civil Code is applicable to the present case.  The award of moral damages worth P100,000 to the Yu siblings is deleted.

  SO ORDERED.

Nachura, Peralta, Abad, and Mendoza, JJ., concur,

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^[1] Under Rule 45 of the 1997 Rules of Civil Procedure.

^[2] Rollo, pp. 18-28.  Penned by Associate Justice Magdangal M. De Leon, with Associate Justices  Salvador J. Valdez, Jr. and Mariano C. Del Castillo (now an Associate Justice of this Court), concurring.

^[3] Id. at 36-38.  Penned by Associate Justice Magdangal M. De Leon, with Associate Justices Mariano C. Del Castillo and Amelita G. Tolentino, concurring.

^[4] CA rollo, p. 25.

^[5] Rollo, pp. 19-21.

^[6] CA rollo, p. 29.

^[7] Rollo, pp. 36-38.

^[8] Id. at 11.

^[9] Id. at 12-13, quoting page 10 of the appellate court's Decision.

^[10]  Quemuel and Solis v. Olaes and Prudente, 111 Phil. 797 (1961).

^[11]  Geminiano v. Court of Appeals, 328 Phil. 682 (1996).

^[12]  Rollo, pp. 27-28.

^[13]  CA rollo, p. 28. TSN (Alida Mores), 10 October 2001, pp. 16-17.

^[14]  Id. at 29.