FIRST DIVISION

[G.R. No. 136913. May 12, 2000.]

ANITA C. BUCE, petitioner, v s . THE HONORABLE COURT OF

APPEALS, SPS. BERNARDO C. TIONGCO and ARACELI TIONGCO,
SPS. DIONISIO TIONGCO and LUCILA TIONGCO, and JOSE M.
TIONGCO, respondents.

Melgar Tria and Associates for petitioner.

Abano Pamfilo Paras Pineda and Agustin Law Offices for respondents.

SYNOPSIS

Petitioner leased a 56-square meter parcel of land. The lease contract was for a
period of fifteen years to commence on 1 June 1979 and to end on 1 June 1994
"subject to renewal for another ten (10) years, under the same terms and
conditions." Petitioner then constructed a building and paid the required monthly
rental. Private respondents later demanded a gradual increase in the rental until it
reached P400 in 1985. For July and August 1991, petitioner paid P1,000.00 as
monthly rental. Private respondents' counsel wrote petitioner informing her of the
increase in the rent to P1,576.58 effective January 1992 pursuant to the provisions
of the Rent Control Law. Petitioner tendered checks payable to private respondent
Jose Tiongco as administrator. As might be expected, private respondents refused to
accept the same. Petitioner filed with the Regional Trial Court of Manila a complaint
for specific performance with prayer for consignation. She prayed that private
respondents be ordered to accept the rentals in accordance with the lease contract
and to respect the lease of fifteen years, which was renewable for another ten
years, at the rate of P200 a month. The RTC declared the lease contract
automatically renewed for ten years and considered as evidence thereof (a) the
stipulations in the contract giving the lessee the right to construct buildings and
improvements, and (b) the filing by petitioner of the complaint almost one year
before the expiration of the initial term of fifteen years. On appeal, the Court of
Appeals reversed the decision of the RTC, and ordered petitioner to immediately
vacate the leased premises on the ground that the contract expired on 1 June 1994
without being renewed and to pay the rental arrearages at the rate of P1,000
monthly. Petitioner filed a motion for reconsideration, but it was denied by the
appellate court. Hence, the present petition. The basic issue, as agreed upon by the
parties, is the correct interpretation of the contract provision "this lease shall be for
a period of fifteen (15) years effective June 1, 1979, subject to renewal for another
ten (10) years, under the same terms and conditions."

The Supreme Court ruled that the renewal of the subject contract may be had only
upon their mutual agreement or at the will of both of the parties. Since the private
respondents were not amenable to a renewal, they cannot be compelled to execute
a new contract when the old contract terminated on 1 June 1994. It is the owner-
lessor's prerogative to terminate the lease at its expiration. The continuance,
effectivity and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee between continuing
the payment of the rentals or not, completely depriving the owner of any say in the
matter. Mutuality does not obtain in such a contract of lease and no equality exists
between the lessor and the lessee since the life of the contract would be dictated
solely by the lessee. The Court, however, reversed the decision of the Court of
Appeals insofar as it ordered the petitioner to immediately vacate the leased
premises, without prejudice, to the filing by the private respondents of an action for
the recovery of possession of the subject property because the issue of possession of
the leased premises was not among the issues agreed upon by the parties or
threshed out before the court a quo. Neither was it raised by private respondents on
appeal. The Court of Appeals went beyond the bounds of its authority when after
interpreting the questioned provision of the lease contract in favor of the private
respondents, it proceeded to order petitioner to vacate the subject premises.

SYLLABUS

1. CIVIL LAW; CONTRACTS; LEASE; NO AUTOMATIC RENEWAL OR EXTENSION

OF A LEASE CONTRACT; ALLOWING THE LESSEE TO INTRODUCE IMPROVEMENTS
OR ACCEPTANCE OF INCREASED RENTALS ARE NOT INDICATIVE OF AUTOMATIC
RENEWAL OF CONTRACT. — There is nothing in the stipulations in the contract and
the parties' actuation that shows that the parties intended an automatic renewal or
extension of the term of the contract. Even the RTC conceded that the issue of
automatic renewal is debatable. The fact that the lessee was allowed to introduce
improvements on the property is not indicative of the intention of the lessors to
automatically extend the contract. Considering the original 15-year duration of the
contract, structures would have necessarily been constructed, added, or built on the
property, which in its previous state was an idle 56-square meter lot in the heart of
Manila. Petitioner leased the property for the purpose of turning it into a
commercial establishment and to which it has been transformed as Anita's Grocery
and Store. Neither the filing of the complaint a year before the expiration of the 15-
year term nor private respondents' acceptance of the increased rentals has any
bearing on the intention of the parties regarding renewal. It must be recalled that
the filing of the complaint was even spawned by private respondents' refusal to
accept the payment of monthly rental in the amount of only P400.

2. ID.; ID.; ID.; RENEWAL OF LEASE CONTRACT MUST BE BASED ON MUTUAL

AGREEMENT OF THE PARTIES AND NOT DEPENDENT ON CONTINUED PAYMENT OF
RENTALS BY LESSEE; CASE AT BAR. — In the case at bar, it was not specifically
indicated who may exercise the option to renew, neither was it stated that the
option was given for the benefit of herein petitioner. Thus, pursuant to the
Fernandez ruling and Article 1196 of the Civil Code, the period of the lease contract
is deemed to have been set for the benefit of both parties. Renewal of the contract
may be had only upon their mutual agreement or at the will of both of them. Since
the private respondents were not amenable to a renewal, they cannot be compelled
to execute a new contract when the old contract terminated on 1 June 1994. It is
the owner-lessor's prerogative to terminate the lease at its expiration. The
continuance, effectivity and fulfillment of a contract of lease cannot be made to
depend exclusively upon the free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely depriving the owner of
any say in the matter. Mutuality does not obtain in such a contract of lease and no
equality exists between the lessor and the lessee since the life of the contract would
be dictated solely by the lessee.aEHADT

3. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; THE COURT OF APPEALS WENT

BEYOND THE BOUNDS OF ITS AUTHORITY WHEN IT ORDERED PETITIONER TO
VACATE THE SUBJECT PREMISES; POSSESSION OF THE LEASED PREMISES NOT
AMONG THE ISSUES AGREED UPON BY THE PARTIES OR THRESHED OUT BEFORE
THE COURT A QUO; CASE AT BAR. — After the lease terminated on 1 June 1994
without any agreement for renewal being reached, petitioner became subject to
ejectment from the premises. It must be noted, however, that private respondents
did not include in their Answer with Counterclaim a prayer for the restoration of
possession of the leased premises. Neither did they file with the proper Metropolitan
Trial Court an unlawful detainer suit against petitioner after the expiration of the
lease contact. Moreover, the issues agreed upon by the parties to be resolved during
the pre-trial were the correct interpretation of the contract and the validity of
private respondents' refusal to accept petitioner's payment of P400 as monthly
rental. They later limited the issue to the first, i.e., the correct interpretation of the
contract. The issue of possession of the leased premises was not among the issues
agreed upon by the parties or threshed out before the court a quo. Neither was it
raised by private respondents on appeal. Accordingly, as correctly contended by the
petitioner, the Court of Appeals went beyond the bounds of its authority when after
interpreting the questioned provision of the lease contract in favor of the private
respondents it proceeded to order petitioner to vacate the subject premises.

DECISION

DAVIDE, JR., C.J :p

The basic issue in this petition is whether the parties intended an automatic
renewal of the lease contract 1 when they agreed that the lease shall be for a period
of fifteen years "subject to renewal for another ten (10) years." LibLex

Petitioner leased a 56-square meter parcel of land located at 2068 Quirino Avenue,
Pandacan, Manila. The lease contract was for a period of fifteen years to commence
on 1 June 1979 and to end on 1 June 1994 "subject to renewal for another ten (10)
years, under the same terms and conditions." Petitioner then constructed a building
and paid the required monthly rental of P200. Private respondents, through their
administrator Jose Tiongco, later demanded a gradual increase in the rental until it
reached P400 in 1985. For July and August 1991, petitioner paid private
respondents P1,000 as monthly rental. 2
On 6 December 1991, private respondents’ counsel wrote petitioner informing her
of the increase in the rent to P1,576.58 effective January 1992 pursuant to the
provisions of the Rent Control Law. 3 Petitioner, however, tendered checks dated 5
October 1991, 4 5 November 1991, 5 5 December 1991, 6 5 January 1992, 7 31 May
1992, 8 and 2 January 1993 9 for only P400 each, payable to Jose Tiongco as
administrator. As might be expected, private respondents refused to accept the
same.

On 9 August 1993, petitioner filed with the Regional Trial Court of Manila a
complaint for specific performance with prayer for consignation, which was docketed
as Civil Case No. 93-67135. She prayed that private respondents be ordered to
accept the rentals in accordance with the lease contract and to respect the lease of
fifteen years, which was renewable for another ten years, at the rate of P200 a
month.

In their Answer, private respondents countered that petitioner had already paid the
monthly rent of P1,000 for July and August 1991. Under Republic Act No. 877, as
amended, rental payments should already be P1,576.58 10 per month; hence, they
were justified in refusing the checks for P400 that petitioner tendered. Moreover,
the phrase in the lease contract authorizing renewal for another ten years does not
mean automatic renewal; rather, it contemplates a mutual agreement between the
parties.

During the pendency of the controversy, counsel for private respondents wrote
petitioner reminding her that the contract expired on 1 June 1994 and demanding
that she pay the rentals in arrears, which then amounted to P33,000.

On 29 August 1995, the RTC declared the lease contract automatically renewed for
ten years and considered as evidence thereof (a) the stipulations in the contract
giving the lessee the right to construct buildings and improvements and (b) the
filing by petitioner of the complaint almost one year before the expiration of the
initial term of fifteen years. It then fixed the monthly rent at P400 from 1 June
1990 to 1 June 1994; P1,000 from 1 June 1994 until 1 June 1999; and P1,500 for
the rest of the period or from 1 June 2000 to 1 June 2004, reasoning that the
continuous increase of rent from P200 to P250 then P300, P400 and finally P1,000
caused "an inevitable novation of their contract." 11

On appeal, the Court of Appeals reversed the decision of the RTC, and ordered
petitioner to immediately vacate the leased premises on the ground that the
contract expired on 1 June 1994 without being renewed and to pay the rental
arrearages at the rate of P1,000 monthly. 12

According to the Court of Appeals, the phrase in the contract "this lease shall be for
a period of fifteen (15) years effective June 1, 1979, subject to renewal for another
ten (10) years, under the same terms and conditions" is unclear as to who may
exercise the option to renew. The stipulation allowing the construction of a building
and other improvements and the fact that the complaint was filed a year before the
expiration of the contract are not indicative of automatic renewal. It applied the
ruling in Fernandez v. Court of Appeals 13 that without a stipulation that the option
to renew the lease is solely for the benefit of one party any renewal of a lease
contract must be upon the agreement of the parties. Since private respondents
were not agreeable to an extension, the original term of the lease ended on 1 June
1994. Private respondents’ refusal to accept petitioner’s checks for P400 was
justified because although the original contract specified a monthly rental of P200,
the tender and acceptance of the increased rental of P1,000 novated the contract of
lease; thus, petitioner was estopped from claiming that the monthly rental is
otherwise.

The Court of Appeals denied petitioner’s motion for reconsideration. Hence this
petition.

Petitioner contends that by ordering her to vacate the premises, the Appellate Court
went beyond the bounds of its authority because the case she filed before the RTC
was for "Specific Performance" not unlawful detainer. The power to order the lessee
to vacate the leased premises is lodged in another forum. Additionally, private
respondents did not pray for the ejectment of petitioners from the leased premises
in their Answer with Counterclaim; well-settled is the rule that a court cannot
award relief not prayed for in the complaint or compulsory counterclaim.

Petitioner further maintains that the phrase "renewable for another ten years at
the option of both parties" in the Fernandez case clearly indicated the intention of
the parties to renew the contract only upon mutual agreement. Whereas in this
case the contract states, "[T]his lease shall be for a period of fifteen (15) years
effective June 1, 1979, subject to renewal for another ten (10) years, under the
same terms and conditions," making this stipulation subject to interpretation with
due regard to the contemporaneous and subsequent acts of the parties. The
stipulation in the contract allowing the lessee to construct buildings and
improvements; her filing of the complaint a year before the expiration of the initial
15-year term; and private respondents’ acceptance of the increased rental are
contemporaneous and subsequent acts that signify the intention of the parties to
renew the contract.

On the other hand, private respondents aver that even if the original petition filed
before the RTC was not for unlawful detainer, the order of the Court of Appeals
requiring petitioner to vacate the premises is but a logical consequence of its finding
that the lease contract had expired. To require another litigation would constitute
multiplicity of suits; besides, petitioner has no other reason to stay in the premises.
There is no basis why Fernandez should not be applied to the case at bar. Absent
contrary stipulation in reciprocal contracts, the period of lease is deemed to be for
the benefit of both parties.

Private respondents argue that the alleged contemporaneous and subsequent acts
do not determine the real intention of the parties as regards renewal of the lease
contract. Had they intended an automatic renewal of the lease contract they would
have agreed on a 25-year period instead. Correlatively, private respondents' letter
reminding petitioner of the expiration of the contract on 1 June 1994 and
demanding payment of the rentals in arrears signifies that they are no longer
interested in renewing the contract. Also petitioner's refusal to pay the increased
rental of P1,000 as early as 1991 and private respondents' refusal to accept the
P400 tendered constituted a disagreement on the rate of rental; hence, any renewal
is out of the question.
cdasia

The basic issue, as agreed upon by the parties, is the correct interpretation of the
contract provision "this lease shall be for a period of fifteen (15) years effective June
1, 1979, subject to renewal for another ten (10) years, under the same terms and
conditions."

The literal meaning of the stipulations shall control if the terms of the contract are
clear and leave no doubt upon the intention of the contracting parties. 14 However,
if the terms of the agreement are ambiguous resort is made to contract
interpretation which is the determination of the meaning attached to written or
spoken words that make the contract. 15 Also, to ascertain the true intention of the
parties, their actions, subsequent or contemporaneous, must be principally
considered. 16

The phrase "subject to renewal for another ten (10) years" is unclear on whether
the parties contemplated an automatic renewal or extension of the term, or just an
option to renew the contract; and if what exists is the latter, who may exercise the
same or for whose benefit it was stipulated.

In this jurisdiction, a fine delineation exists between renewal of the contract and
extension of its period. Generally, the renewal of a contract connotes the death of
the old contract and the birth or emergence of a new one. A clause in a lease
providing for an extension operates of its own force to create an additional term, but
a clause providing for a renewal merely creates an obligation to execute a new lease
contract for the additional term. As renewal of the contract contemplates the
cessation of the old contract, then it is necessary that a new one be executed
between the parties. 17

There is nothing in the stipulations in the contract and the parties' actuation that
shows that the parties intended an automatic renewal or extension of the term of
the contract. Even the RTC conceded that the issue of automatic renewal is
debatable. The fact that the lessee was allowed to introduce improvements on the
property is not indicative of the intention of the lessors to automatically extend the
contract. Considering the original 15-year duration of the contract, structures would
have necessarily been constructed, added, or built on the property, which in its
previous state was an idle 56-square meter lot in the heart of Manila. Petitioner
leased the property for the purpose of turning it into a commercial establishment
and to which it has been transformed as Anita's Grocery and Store. Neither the
filing of the complaint a year before the expiration of the 15-year term nor private
respondents' acceptance of the increased rentals has any bearing on the intention of
the parties regarding renewal. It must be recalled that the filing of the complaint
was even spawned by private respondents' refusal to accept the payment of
monthly rental in the amount of only P400.

Now on the applicability of Fernandez v . Court of Appeals to the case at bar.

Although the factual scenario in that case with regard to the renewal option is
slightly off-tangent to the case under consideration because the intention of the
parties therein for future mutual agreement was clearly discernible in their
contract, we cannot completely disregard the pronouncement of this Court in that
case; thus:

[I]n a reciprocal contract like a lease, the period must be deemed to have
been agreed upon for the benefit of both parties, absent language showing
that the term was deliberately set for the benefit of the lessee or lessor
alone. 18 We are not aware of any presumption in law that the term was
deliberately set for the benefit of the lessee alone. Koh and Cruz in effect
rested upon such a presumption. But that presumption cannot reasonably
be indulged in casually in an era of rapid economic change, marked by,
among other things, volatile costs of living and fluctuations in the value of
domestic currency. The longer the period the more clearly unreasonable
such a presumption would be. In an age like that we live in, very specific
language is necessary to show an intent to grant a unilateral faculty to
extend or renew a contract of lease to the lessee alone or to the lessor
alone for that matter. 19

In the case at bar, it was not specifically indicated who may exercise the option to
renew, neither was it stated that the option was given for the benefit of herein
petitioner. Thus, pursuant to the Fernandez ruling and Article 1196 of the Civil
Code, the period of the lease contract is deemed to have been set for the benefit of
both parties. Renewal of the contract may be had only upon their mutual
agreement or at the will of both of them. Since the private respondents were not
amenable to a renewal, they cannot be compelled to execute a new contract when
the old contract terminated on 1 June 1994. It is the owner-lessor's prerogative to
terminate the lease at its expiration. 20 The continuance, effectivity and fulfillment
of a contract of lease cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the payment of the rentals or
not, completely depriving the owner of any say in the matter. Mutuality does not
obtain in such a contract of lease and no equality exists between the lessor and the
lessee since the life of the contract would be dictated solely by the lessee. 21

After the lease terminated on 1 June 1994 without any agreement for renewal
being reached, petitioner became subject to ejectment from the premises. 22 It must
be noted, however, that private respondents did not include in their Answer with
Counterclaim a prayer for the restoration of possession of the leased premises.
Neither did they file with the proper Metropolitan Trial Court an unlawful detainer
suit 23 against petitioner after the expiration of the lease contact. Moreover, the
issues agreed upon by the parties to be resolved during the pre-trial were the
correct interpretation of the contract and the validity of private respondents’ refusal
to accept petitioner’s payment of P400 as monthly rental. 24 They later limited the
issue to the first, i.e., the correct interpretation of the contract. 25 The issue of
possession of the leased premises was not among the issues agreed upon by the
parties or threshed out before the court a quo. Neither was it raised by private
respondents on appeal.

Accordingly, as correctly contended by the petitioner, the Court of Appeals went

beyond the bounds of its authority 26 when after interpreting the questioned
provision of the lease contract in favor of the private respondents it proceeded to
order petitioner to vacate the subject premises.

WHEREFORE, the instant petition is partly GRANTED. The assailed decision of the
Court of Appeals is REVERSED insofar as it ordered the petitioner to immediately
vacate the leased premises, without prejudice, however, to the filing by the private
respondents of an action for the recovery of possession of the subject property.

No costs. cda

SO ORDERED.

Puno, Kapunan and Pardo, JJ., concur.

Ynares-Santiago, J., took no part.

Footnotes

1. Exhibit "A"; Original Record (OR), 26.

2. Exhibits "2-A" and "2-B"; OR, 35.

3. Exhibit "1"; Id., 34.

4. Exhibit "F"; Id., 9.

5. Exhibit "C"; Id., 6.

6. Exhibit "D"; Id., 7.

7. Exhibit "E"; Id., 8.

8. Exhibit "B"; Id., 5.

9. Exhibit "G"; Id., 11.

10. Private respondents computed the rental increase pursuant to the Rent Control
Law, as follows: 1985: P400 + P40 (10%)= P440; 1986: P440 + P88 (20%) =
P528; 1987: P528 + P105.60 (20%)= P633.60; 1988: P633.60 + 126.72 (20%) =
P760.32; 1989: P760.32 + 152.06 (20%) = P912.38; 1990: P912.38 + 182.41
(20%) = P1,094.85; 1991: P1,094.85 + P218.97 (20%) = P1,313.82; 1992:
P1,313.82 + 262.76 (20%) = P1,576.58; 1993; P1,576.58 + P315.31 (20%) =
P1,891.89; 1994: P1,891.89 + P378.38 (20%) = P2,270.27.

11. Per Judge Eudoxia T. Gualberto. OR, 133-136.

12. Per Salas, B., J., with Yñares-Santiago, C., now a member of this Court, and
Rivera, C., JJ., concurring. Rollo, 21-25.

13. 166 SCRA 577 (1988).

14. Article 1370, CIVIL CODE. See Labasan v. Lacuesta, 86 SCRA 16, 21 (1978);
Badayos v. Court of Appeals , 207 SCRA 209, 216 (1992); Intestate Estate of the
Late Ricardo P. Presbitero, Sr. v. Court of Appeals , 217 SCRA 372, 383 (1993).

15. National Irrigation Administration v. Gamit, 215 SCRA 436, 453-454 (1992).

16. Article 1371, CIVIL CODE.

17. See Inter-Asia Services Corp. (International) v. Court of Appeals , 263 SCRA 408,
418 (1996).

18. Citing Article 1196, CIVIL CODE.

19. Supra note 13, at 587.

20. Vda. de Roxas v. Court of Appeals , 63 SCRA 302, 303-304 (1975).

21. Lao Lim v. Court of Appeals , 191 SCRA 150, 155 (1990).

22. See Chua v. Court of Appeals , 301 SCRA 356, 362-363 (1999).

23. See Pardo de Tavera v. Encarnacion , 22 SCRA 632 (1968]; Rosales v. CFI of
Lanao del Norte, Br. III, 154 SCRA 153 (1987).

24. OR, 57-58.

25. Id., 118.

26. See Abubakar v. Abubakar, G.R. No. 134622, 22 October 1999.