THIRD DIVISION

[G.R. No. 120303. July 24, 1996.]

FEDERICO GEMINIANO, MARIA GEMINIANO, ERNESTO GEMINIANO,

ASUNCION GEMINIANO, LARRY GEMINIANO, and MARLYN
GEMINIANO , petitioners, vs . COURT OF APPEALS, DOMINADOR
NICOLAS, and MARY A. NICOLAS , respondents.

Decano and Decano Law Office for petitioners.

Bengson, Baraan, Fernandez Law Offices for private respondents.

SYLLABUS

1. CIVIL LAW; PROPERTY; OWNERSHIP; RIGHT TO FULL REIMBURSEMENT OF

USEFUL IMPROVEMENTS AND RETENTION OF THE PREMISES UNTIL REIMBURSEMENT
IS MADE, APPLIES ONLY TO A POSSESSOR IN GOOD FAITH. — This Court has held that
Article 448 of the Civil Code, in relation to Article 546 of the same Code, which allowed 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.
2. ID.; LEASE; THE RIGHT TO INDEMNITY ARISES ONLY IF THE LESSOR OPTS
TO APPROPRIATE THE IMPROVEMENTS. — The right to indemnity under Article 1678 of
the Civil Code arises only if the lessor opts to appropriate the improvements. Once the
petitioners refused to exercise that option, the private respondents cannot compel them
to reimburse the one-half value of the house and improvements. Neither can they retain the
premises until reimbursement is made. The private respondents' sole right then is to
remove the improvements without causing any more impairment upon the property leased
than is necessary.

DECISION

DAVIDE , JR. , J : p

This petition for review on certiorari has its origins in Civil Case No. 9214 of Branch
3 of the Municipal Trial Court in Cities (MTCC) in Dagupan City for unlawful detainer and
damages. The petitioners ask the Court to set aside the decision of the Court of Appeals
a rming the decision of Branch 40 of the Regional Trial Court (RTC) of Dagupan City,
which, in turn, reversed the MTCC; ordered the petitioners to reimburse the private
respondents the value of the house in question and other improvements; and allowed the
latter to retain the premises until reimbursement was made.
It appears that Lot No. 3765-B-1 containing an area of 314 square meters was
originally owned by the petitioners' mother, Paulina Amado vda. de Geminiano. On a 12-
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 square-meter portion of that lot stood the petitioners' un nished bungalow, which the
petitioners sold in November 1978 to the private respondents for the sum of P6,000.00,
with an alleged promise to sell to the latter that portion of the lot occupied by the house.
Subsequently, the petitioners' mother executed a contract of lease over a 126 square-
meter portion of the lot, including that portion on which the house stood, in favor of the
private respondents for P40.00 per month for a period of seven years commencing on 15
November 1978. 1 The private respondents then introduced additional improvements and
registered the house in their names. After the expiration of the lease contract in November
1985, however, the petitioners' mother refused to accept the monthly rentals.
It turned out that the lot in question was the subject of a suit, which resulted in its
acquisition by one Maria Lee in 1972. In 1982, Lee sold the lot to Lily Salcedo, who in turn
sold it in 1984 to the spouses Agustin and Ester Dionisio.
On 14 February 1992, the Dionisio spouses executed a Deed of Quitclaim over the
said property in favor of the petitioners. 2 As such, the lot was registered in the latter's
names. 3
On 9 February 1993, the petitioners sent, via registered mail, a letter addressed to
private respondent Mary Nicolas demanding that she vacate the premises and pay the
rentals in arrears within twenty days from notice. 4
Upon failure of the private respondents to heed the demand, the petitioners led
with the MTCC of Dagupan City a complaint for unlawful detainer and damages.
During the pre-trial conference, the parties agreed to con ne the issues to: (1)
whether there was an implied renewal of the lease which expired in November 1985; (2)
whether the lessees were builders in good faith and entitled to reimbursement of the value
of the house and improvements; and (3) the value of the house.
The parties then submitted their respective position papers and the case was heard
under the Rule on Summary Procedure.
On the rst issue, the court held that since the petitioners' mother was no longer the
owner of the lot in question at the time the lease contract was executed in 1978, in view of
its acquisition by Maria Lee as early as 1972, there was no lease to speak of, much less, a
renewal thereof. And even if the lease legally existed, its implied renewal was not for the
period stipulated in the original contract, but only on a month-to-month basis pursuant to
Article 1687 of the Civil Code. The refusal of the petitioners' mother to accept the rentals
starting January 1986 was then a clear indication of her desire to terminate the monthly
lease. As regards the petitioners' alleged failed promise to sell to the private respondents
the lot occupied by the house, the court held that such should be litigated in a proper case
before the proper forum, not an ejectment case where the only issue was physical
possession of the property.
The court resolved the second issue in the negative, holding that Articles 448 and
546 of the Civil Code, which allow possessors in good faith to recover the value of
improvements and retain the premises until reimbursed, did not apply to lessees like the
private respondents, because the latter knew that their occupation of the premises would
continue only during the life of the lease. Besides, the rights of the private respondents
were speci cally governed by Article 1678, which allows reimbursement of up to one-half
of the value of the useful improvements, or removal of the improvements should the lessor
refuse to reimburse.
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 On the third issue, the court deemed as conclusive the private respondents'
allegation that the value of the house and improvements was P180,000.00, there being no
controverting evidence presented.
The trial court thus ordered the private respondents to vacate the premises, pay the
petitioners P40.00 a month as reasonable compensation for their stay thereon from the
filing of the complaint on 14 April 1993 until they vacated, and to pay the sum of P1,000.00
as attorney's fees, plus costs. 5
On appeal by the private respondents, the RTC of Dagupan City reversed the trial
court's decision and rendered a new judgment: (1) ordering the petitioners to reimburse
the private respondents for the value of the house and improvements in the amount of
P180,000.00 and to pay the latter P10,000.00 as attorney's fees and P2,000.00 as
litigation expenses; and (2) allowing the private respondents to remain in possession of
the premises until they were fully reimbursed for the value of the house. 6 It ruled that since
the private respondents were assured by the petitioners that the lot they leased would
eventually be sold to them, they could be considered builders in good faith, and as such,
were entitled to reimbursement of the value of the house and improvements with the right
of retention until reimbursement had been made.
On appeal, this time by the petitioners, the Court of Appeals a rmed the decision of
the RTC 7 and denied 8 the petitioners' motion for reconsideration. Hence, the present
petition.
The Court is confronted with the issue of which provision of law governs the case at
bench: Article 448 or Article 1678 of the Civil Code? The said articles read as follows:
Art. 448. The owner of the land on which anything has been built,
sown or planted in good faith, shall have the right to appropriate as his own the
works, sowing or planting, after payment of the indemnity provided for in articles
546 and 548, or to oblige the one who built or planted to pay the price of the land,
and the one who sowed, the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of the building
or trees. In such case, he shall pay reasonable rent, if the owner of the land does
not choose to appropriate the building or trees after proper indemnity. The parties
shall agree upon the terms of the lease and in case of disagreement, the court
shall fix the terms thereof.
xxx xxx xxx

Art. 1678. 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 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.

The crux of the said issue then is whether the private respondents are builders in
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 good faith or mere lessees.
The private respondents claim they are builders in good faith, hence, Article 448 of
the Civil Code should apply. They rely on the lack of title of the petitioners' mother at the
time of the execution of the contract of lease, as well as the alleged assurance made by
the petitioners that the lot on which the house stood would be sold to them.
It has been said that while the right to let property is an incident of title and
possession, a person may be a lessor and occupy the position of a landlord to the tenant
although he is not the owner of the premises let. 9 After all, ownership of the property is
not being transferred, 1 0 only the temporary use and enjoyment thereof. 1 1
In this case, both parties admit that the land in question was originally owned by the
petitioners' mother. The land was allegedly acquired later by one Maria Lee by virtue of an
extrajudicial foreclosure of mortgage. Lee, however, never sought a writ of possession in
order that she gain possession of the property in question. 1 2 The petitioners' mother
therefore remained in possession of the lot.
It is undisputed that the private respondents came into possession of a 126 square-
meter portion of the said lot by virtue of a contract of lease executed by the petitioners'
mother in their favor. The juridical relation between the petitioners' mother as lessor, and
the private respondents as lessees, is therefore well-established, and carries with it a
recognition of the lessor's title. 1 3 The private respondents, as lessees who had
undisturbed possession for the entire term under the lease, are then estopped to deny
their landlord's title, or to assert a better title not only in themselves, but also in some third
person while they remain in possession of the leased premises and until they surrender
possession to the landlord. 1 4 This estoppel applies even though the lessor had no title at
the time the relation of lessor and lessee was created, 1 5 and may be asserted not only by
the original lessor, but also by those who succeed to his title. 1 6
Being mere lessees, the private respondents knew that their occupation of the
premises would continue only for the life of the lease. Plainly, they cannot be considered as
possessors nor builders in good faith. 1 7
In a plethora of cases, 1 8 this Court has held that Article 448 of the Civil Code, in
relation to Article 546 of the same Code, which allows 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.
Anent the alleged promise of the petitioners to sell the lot occupied by the private
respondents' house, the same was not substantiated by convincing evidence. Neither the
deed of sale over the house nor the contract of lease contained an option in favor of the
respondent spouses to purchase the said lot. And even if the petitioners indeed promised
to sell, it would not make the private respondents possessors or builders in good faith so
as to be covered by the provisions of Article 448 of the Civil Code. The latter cannot raise
the mere expectancy of ownership of the aforementioned lot because the alleged promise
to sell was not ful lled nor its existence even proven. The rst thing that the private
respondents should have done was to reduce the alleged promise into writing, because
under Article 1403 of the Civil Code, an agreement for the sale of real property or an
interest therein is unenforceable, unless some note or memorandum thereof be produced.
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 Not having taken any steps in order that the alleged promise to sell may be enforced, the
private respondents cannot bank on that promise and profess any claim nor color of title
over the lot in question.
There is no need to apply by analogy the provisions of Article 448 on indemnity as
was done in Pecson vs. Court of Appeals, 1 9 because the situation sought to be avoided
and which would justify the application of that provision, is not present in this case. Su ce
it to say, "a state of forced co-ownership" would not be created between the petitioners
and the private respondents. For, as correctly pointed out by the petitioners, the rights of
the private respondents as lessees are governed by Article 1678 of the Civil Code which
allows reimbursement to the extent of one-half of the value of the useful improvements.
It must be stressed, however, that the right to indemnity under Article 1678 of the
Civil Code arises only if the lessor opts to appropriate the improvements. Since the
petitioners refused to exercise that option, 2 0 the private respondents cannot compel
them to reimburse the one-half value of the house and improvements. Neither can they
retain the premises until reimbursement is made. The private respondents' sole right then
is to remove the improvements without causing any more impairment upon the property
leased than is necessary. 2 1
WHEREFORE, judgment is hereby rendered GRANTING the instant petition;
REVERSING and SETTING ASIDE the decision of the Court of Appeals of 27 January 1995
in CA-G.R. SP No. 34337; and REINSTATING the decision of Branch 3 of the Municipal Trial
Court in Cities of Dagupan City in Civil Case No. 9214 entitled "Federico Geminiano, et al.
vs. Dominador Nicolas, et al."
Costs against the private respondents
SO ORDERED.
Narvasa, C . J ., Melo, Francisco, and Panganiban, JJ ., concur.

Footnotes

1. Rollo, CA-G.R. SP No. 34337 (CA-Rollo), 26.

2. Id., 25.
3. Id., 24.
4. Id., 28.
5. CA-Rollo, 37. Per Judge Emilio V. Angeles.
6. Id., 20. Per Judge Deodoro J. Sison.
7. Annex "A" of Petition; Rollo, 15. Per Luna, A., J., with Barcelona, R., and Jacinto, G., JJ.,
concurring.
8. Annex "B", Id., 28.

9. 49 Am Jur 2d, Landlord and Tenant, §12, 55.

10. EDGARDO L. PARAS, Civil Code of the Philippines, vol. V [1986], 258.

11. Jovellanos vs. Court of Appeals, 210 SCRA 126, 132 [1992].
CD Technologies Asia, Inc. 2018 cdasiaonline.com
 12. Joven vs. Court of Appeals, 212 SCRA 700, 708 [1992].
13. 49 Am Jur, op. cit., §120, 150.
14. §2(b), Rule 131, Rules of Court; Borre vs. Court of Appeals, 158 SCRA 560, 566 [1988];
Manuel vs. Court of Appeals, 199 SCRA 603, 607 [1991]; Munar vs. Court of Appeals, 238
SCRA 372, 380 [1994]; 49 Am Jur, op. cit., § 129, 158.
15. Manuel vs. Court of Appeals, supra note 14, at 607-608; 49 Am Jur, op. cit., § 110, 144;
§ 129, 158.
16. 49 Am Jur, op. cit., § 122, 152.

17. Racaza vs. Susana Realty, Inc., 18 SCRA 1172, 1178 [1966]; Vda. de Bacaling vs.
Laguna, 54 SCRA 243, 250 [1973]; Santos vs. Court of Appeals, 221 SCRA 42, 46 [1993].
18. Alburo vs. Villanueva, 7 Phil. 277, 280 [1907] referring to the provisions of the Old Civil
Code); Racaza vs. Susana Realty, Inc., supra note 17, at 1177-1178; Bulacanag vs.
Francisco, 122 SCRA 498, 502 [1983]; Gabrito vs. Court of Appeals, 167 SCRA 771, 778-
779 [1988]; Cabangis vs. Court of Appeals, 200 SCRA 414, 419-421 [1991]; Heirs of the
late Jaime Binuya vs. Court of Appeals, 211 SCRA 761, 766 [1922].
19. 244 SCRA 407 SCRA 407 [1995].
20. CA-Rollo, 15.
21. Heirs of the late Jaime Binuya vs. Court of Appeals, supra note 18, at 768.

CD Technologies Asia, Inc. 2018 cdasiaonline.com