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VOL.

284, JANUARY 16, 1998 contract expired, an action for ejectment was commenced
before the MTC of Quezon City. The MTC, RTC and CA ruled in favor
357 of the Tanquecos. Hence, this present petition.

Allied Banking Corporation vs. Court of Appeals Ruling:


We agree with ALLIED. Article 1308 of the Civil Code
Issues: expresses what is known in law as theprinciple of mutuality of
There are two (2) main issues in this petition for review:(a) Whether a contracts. It provides that "the contract must bind both the
stipulation in a contract of lease to the effect that the contract "may be contracting parties; its validity or compliance cannot be left to the will
renewed for a like term at the option of the lessee" is void for being of one of them." The ultimate purpose is to render void a contract
potestative or violative of the principle of mutuality of contracts under containing a condition which makes its fulfillment dependent solely
Art. 1308 of the Civil Code and, corollarily, what is the meaning of the upon the uncontrolled will of one of the contracting parties.A n
clause "may be renewed for a like term at the option of the lessee;" express agreement which gives the lessee the sole
and( b ) W h e t h e r a l e s s e e h a s t h e l e g a l p e r s o n a l i t y t o o p t i o n t o r e n e w t h e l e a s e i s frequent and subject to
a s s a i l t h e v a l i d i t y o f a d e e d o f d o n a t i o n executed by the statutory restrictions, valid and binding on the parties. This option,
lessor over the leased premises. which is provided in the same lease agreement, is fundamentally part
of the consideration in the contract and is no different from any
Facts: other provision of the lease carrying an undertaking on the
Spouses Tanqueco owned a 512-square meter lot. They leased part of the lessor to act conditioned on the performance by the
the property to Allied Banking Corporation (ALLIED). lessee. It is a purely executory contract and at most confers a righto
obtain a renewal if there is compliance with the conditions on which
The lease contract specifically states in its Provision No. 1 the rights is made to depend. The right of renewal constitutes a part of
that "the term of this lease shall be fourteen (14) years the lessee's interest in the land and forms a substantial and integral
commencing from April 1, 1978 and may be renewed for a like term at part of the agreement. The fact that such option is binding only
the option of the lessee. “Sometime in February 1988 the Tanqueco on the lessor and can be exercised only by the lessee does not
spouses executed a deed of donation over the subject property in render it void for lack of mutuality. After all, the lessor is free to give or
favor of their four (4) children who accepted the donation in the not to give the option to the lessee. With respect to the meaning
same public instrument. A year before the expiration of the of the clause "may be renewed for a like term at the option
contract of lease, the Tanquecos notified ALLIED that they of the lessee," we sustain petitioner's contention that
were no longer interested in renewing the lease. its exercise of the option resulted in the automatic extension
of the contract of lease under the same terms and conditions. Finally,
ALLIED replied that it was exercising its option to renew their lease ALLIED cannot assail the validity of the deed of donation, not
under the same terms with additional proposals. When the lease being a party thereto. A person who is not principally or subsidiarily
bound has no legal capacity to challenge the validity of the contract. dependent solely upon the uncontrolled will of one of the contracting
WHEREFORE, the Decision of the Court of Appeals is REVERSED parties.
and SET ASIDE. Considering that ALLIED already vacated the leased
premises, the renewed lease contract is deemed terminated as of that Same; Same; Same; An express agreement which gives the les-see the
date. However, ALLIED is required to pay rentals to lessors at the rate sole option to renew the lease is frequent and subject to statutory
provided in their existing restrictions, valid and binding on the parties—the right of re-newal
constitutes a part of the lessee’s interest in the land and forms a
G.R. No. 124290. January 16, 1998.* substantial and integral part of the agreement.—An express
agreement which gives the lessee the sole option to renew the lease is
ALLIED BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, frequent and subject to statutory restrictions, valid and binding on the
HON. JOSE C. DE GUZMAN, OSCAR D. TANQUECO, LUCIA D. parties. This option, which is provided in the same lease agreement, is
TANQUECO-MATIAS, RUBEN D. TANQUECO and NESTOR D. fundamentally part of the consideration in the contract and is no
TANQUECO, respondents. different from any other provision of the lease carrying an undertaking
on the part of the lessor to act conditioned on the performance by the
Contracts; Leases; Principle of Mutuality; The binding effect of a
lessee. It is a purely executory contract and at most confers a right to
contract on both parties is based on the principle that the obligations
obtain a renewal if there is compliance with the conditions on which
arising from contracts have the force of law between the contracting
the right is made to depend. The right of renewal constitutes a part of
parties, and there must be mutuality between them based essentially
the lessee’s interest in the land and forms a substantial and integral
on their equality under which it is repugnant to have one party bound
part of the agreement.
by the contract while leaving the other free therefrom.—Article 1308 of
the Civil Code expresses what is known in law as the principle of Same; Same; Same; The fact that an option to renew is binding only on
mutuality of contracts. It provides that “the contract must bind both the lessor and can only be exercised by the lessee does not render it
the contracting parties; its validity or compliance cannot be left to the void for lack of mutuality.—The fact that such option is binding only on
will of one of them.” This binding effect of a contract on both parties is the lessor and can be exercised only by the lessee does not render it
based on the principle that the obligations arising from contracts have void for lack of mutuality. After all, the lessor is free to give or not to
the force of law between the contracting parties, and there must be give the option to the lessee. And while the lessee has a right to elect
mutuality between them based essentially on their equality under whether to continue with the lease or not, once he exercises his option
which it is repugnant to have one party bound by the contract while to continue and the lessor accepts, both parties are thereafter bound
leaving the other free therefrom. The ultimate purpose is to render by the new lease agreement. Their rights and obligations become
void a contract containing a condition which makes its fulfillment mutually fixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor may hold him be reasonably avoided, and to this end, a construction which will
liable for the rent therefor. The lessee cannot thereafter escape liability render every word operative is to be preferred over that which would
even if he should subsequently decide to abandon the premises. make some words idle and nugatory.—Besides, if we were to adopt
Mutuality obtains in such a contract and equality exists between the the contrary theory that the terms and conditions to be embodied in
lessor and the lessee since they remain with the same faculties in the renewed contract were still subject to mutual agreement by and
respect to fulfillment. between the parties, then the option—which is an integral part of the
consideration for the contract—would be rendered worthless. For
Same; Same; Words and Phrases; The clause “may be renewed for a
then, the lessor could easily defeat the lessee’s right of renewal by
like term at the option of the lessee,” when exercised by the lessee, simply imposing unreasonable and onerous conditions to prevent the
results in the automatic extension of the contract of lease under the parties from reaching an agreement, as in the case at bar. As in a
same terms and conditions, the phrase “for a like term” referring to statute no word, clause, sentence, provision or part of a contract shall
the period.—With respect to the meaning of the clause “may be
be considered surplusage or superfluous, meaningless, void,
renewed for a like term at the option of the lessee,” we sustain insignificant or nugatory, if that can be reasonably avoided. To this end,
petitioner’s contention that its exercise of the option resulted in the a construction which will render every word operative is to be
automatic extension of the contract of lease under the same terms and
preferred over that which would make some words idle and nugatory.
conditions. The subject contract simply provides that “the term of this
lease shall be fourteen (14) years and may be renewed for a like term at Same; Same; Where the old lease contract was deemed renewed under
the option of the lessee.” As we see it, the only term on which there the same terms and conditions upon the exercise by the lessee of its
has been a clear agreement is the period of the new contract, i.e., option, the basis of the computation of rentals should be the rental
fourteen (14) years, which is evident from the clause “may be renewed rate provided for in the existing contract.—Fortunately for respondent
for a like term at the option of the lessee,” the phrase “for a like term” lessors, ALLIED vacated the premises on 20 February 1993 indicating its
referring to the period. It is silent as to what the specific terms and abandonment of whatever rights it had under the renewal clause.
conditions of the renewed lease shall be. Shall it be the same terms and Consequently, what remains to be done is for ALLIED to pay rentals for
conditions as in the original contract, or shall it be under the terms and the continued use of the premises until it vacated the same, computed
conditions as may be mutually agreed upon by the parties after the from the expiration of the original term of the contract on 31 March
expiration of the existing lease? 1992 to the time it actually left the premises on 20 February 1993,
deducting therefrom the amount of P68,400.00 consigned in court by
Same; Same; Statutory Construction; As in a statute no word, clause, ALLIED and any other amount which it may have deposited or
sentence, provision or part of a contract shall be considered surplusage advanced in connection with the lease. Since the old lease contract was
or superfluous, meaningless, void, insignificant or nugatory, if that can
deemed renewed under the same terms and conditions upon the H.D. Tumaneng & Associates for private respondents.
exercise by ALLIED of its option, the basis of the computation of
rentals should be the rental rate provided for in the existing contract.

Same; Same; Donations; Words and Phrases; “Interest,” Explained; A BELLOSILLO, J.:
person who is not principally or subsidiarily bound has no legal capacity
to challenge the validity of a contract of donation—he must first have
an interest in it, meaning a material interest, an interest to be affected There are two (2) main issues in this petition for review: namely, (a)
by the deed, as distinguished from a mere incidental interest.—ALLIED whether a stipulation in a contract of lease to the effect that the
cannot assail the validity of the deed of donation, not being a party contract “may be renewed for a like term at the option of the lessee” is
thereto. A person who is not principally or subsidiarily bound has no void for being potestative or violative of the principle of mutuality of
legal capacity to challenge the validity of the contract. He must first contracts under Art. 1308 of the Civil Code and, corollarily, what is the
have an interest in it. “Interest” within the meaning of the term means meaning of the clause “may be renewed for a like term at the option of
material interest, an interest to be affected by the deed, as the lessee”; and, (b) whether a lessee has the legal personality to assail
distinguished from a mere incidental interest. Hence, a person who is the validity of a deed of donation executed by the lessor over the
not a party to a contract and for whose benefit it was not expressly leased premises.
made cannot maintain an action on it, even if the contract, if
Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-
performed by the parties thereto would incidentally affect him, except
square meter lot located at No. 2 Sarmiento Street corner Quirino
when he is prejudiced in his rights with respect to one of the
Highway, Novaliches, Quezon City, covered by TCT No. 136779 in their
contracting parties and can show the detriment which could positively
name. On 30 June 1978 they leased the property to petitioner Allied
result to him from the contract in which he had no intervention. We
Banking Corporation (ALLIED) for a monthly rental of P1,000.00 for the
find none in the instant case.
first three (3) years, adjustable by 25% every three (3) years thereafter.1
PETITION for review on certiorari of a decision of the Court of Appeals. The lease contract specifically states in its Provision No. 1 that “the
term of this lease shall be fourteen (14) years commencing from April 1,
1978 and may be renewed for a like term at the option of the lessee.”
The facts are stated in the opinion of the Court. Pursuant to their lease agreement, ALLIED introduced an improvement
on the property consisting of a concrete building with a floor area of
Ocampo, Quiroz, Pesayco & Associates for petitioner.
340-square meters which it used as a branch office. As stipulated, the
ownership of the building would be transferred to the lessors upon the ALLIED proposed the following terms for the extension of the lease: (1)
expiration of the original term of the lease. Term of Lease: ten (10) years; (2) Escalation Rate: 10% per annum
starting on the second year; (3) Monthly Rental: P8,000/month on the
Sometime in February 1988 the Tanqueco spouses executed a deed of first year; and, (4) Advance Rental: Six (6) months to be applied to the
donation over the subject property in favor of their four (4) children,
first six (6) months of the lease.
namely, private respondents herein Oscar D. Tanqueco, Lucia
Tanqueco-Matias, Ruben D. Tanqueco and Nestor D. Tanqueco, who 4 The counter-proposal: (1) Term: Two (2) years subject to renewal at
accepted the donation in the same public instrument. the sole option of the lessor; (2) Rent: a) at P80,000 a month payable
within the first five (5) days of each month commencing from the date
On 13 February 1991, a year before the expiration of the contract of the lease contract is executed; b) Twelve (12) months rental payable in
lease, the Tanquecos notified petitioner ALLIED that they were no advance upon signing of the lease contract; (3) Deposit: P80,000 to
longer interested in renewing the lease.2 ALLIED replied that it was answer for any unpaid obligations of the lessee, payable upon signing
exercising its option to renew their lease under the same terms with of the lease contract and refundable upon the termination of the lease
additional proposals.3 Respondent Ruben D. Tanqueco, acting in behalf
(net of any amount applied to the payment of any such unpaid
of all the donee-lessors, made a counter-proposal.4 ALLIED however obligations). x x x but such provision [in the lease contract], to the
rejected the counter-proposal and insisted on Provision No. 1 of their mind of the Court, does not add luster to defendant’s cause nor
lease contract. constitutes as an unbridled or unlimited license or sanctuary of the
When the lease contract expired in 1992 private respondents defendant to perpetuate its occupancy on the subject property. The
demanded that ALLIED vacate the premises. But the latter asserted its basic intention of the law in any contract is mutuality and equality. In
sole option to renew the lease and enclosed in its reply letter a other words, the validity of a contract cannot be left at (sic) the will of
cashier’s check in the amount of P68,400.00 representing the advance one of the contracting parties. Otherwise, it infringes (upon) Article
rental payments for six (6) months taking into account the escalation 1308 of the New Civil Code, which provides: The contract must bind
clause. Private respondents however returned the check to ALLIED, both contracting parties; its validity or compliance cannot be left to the
prompting the latter to consign the amount in court. will of one of them x x x x Using the principle laid down in the case of
Garcia v. Legarda as cornerstone, it is evident that the renewal of the
An action for ejectment was commenced before the Metropolitan Trial lease in this case cannot be left at the sole option or will of the
Court of Quezon City. After trial, the MeTC-Br. 33 declared Provision defendant notwithstanding provision no. 1 of their expired contract.
No. 1 of the lease contract void for being violative of Art. 1308 of the For that would amount to a situation where the continuance and
Civil Code thus— effectivity of a contract will depend only upon the sole will or power of
the lessee, which is repugnant to the very spirit envisioned under contract while leaving the other free therefrom. The ultimate purpose
Article 1308 of the New Civil Code x x x x the theory adopted by this is to render void a contract containing a condition which makes its
Court in the case at bar finds ample affirmation from the principle fulfillment dependent solely upon the uncontrolled will of one of the
echoed by the Supreme Court in the case of Lao Lim v. CA, 191 SCRA contracting parties.
150, 154, 155.
An express agreement which gives the lessee the sole option to renew
On appeal to the Regional Trial Court, and later to the Court of Appeals, the lease is frequent and subject to statutory restric-tions, valid and
the assailed decision was affirmed.5 binding on the parties. This option, which is provided in the same lease
agreement, is fundamentally part of the consideration in the contract
On 20 February 1993, while the case was pending in the Court of and is no different from any other provision of the lease carrying an
Appeals, ALLIED vacated the leased premises by reason of the undertaking on the part of the lessor to act conditioned on the
controversy.6 performance by the lessee. It is a purely executory contract and at
ALLIED insists before us that Provision No. 1 of the lease contract was most confers a right to obtain a renewal if there is compliance with the
mutually agreed upon hence valid and binding on both parties, and the conditions on which the right is made to depend. The right of renewal
exercise by petitioner of its option to renew the contract was part of constitutes a part of the lessee’s interest in the land and forms a
their agreement and in pursuance thereof. substantial and integral part of the agreement.

We agree with petitioner. Article 1308 of the Civil Code expresses what The fact that such option is binding only on the lessor and can be
is known in law as the principle of mutuality of contracts. It provides exercised only by the lessee does not render it void for lack of
that “the contract must bind both the Decision penned by Judge Jose mutuality. After all, the lessor is free to give or not to give the option to
C. de Guzman, RTC-Br. 93, Quezon City; Decision of the Court of the lessee. And while the lessee has a right to elect whether to
Appeals penned by Justice Jesus M. Elbinias, concurred in by Justices continue with the lease or not, once he exercises his option to continue
Ramon U. Mabutas, Jr., and Salvador J. Valdez, Jr., CA-G.R. SP. Case No. and the lessor accepts, both parties are thereafter bound by the new
30162. contracting parties; its validity or compliance cannot be left to lease agreement. Their rights and obligations become mutually fixed,
the will of one of them.” This binding effect of a contract on both and the lessee is entitled to retain possession of the property for the
parties is based on the principle that the obligations arising from duration of the new lease, and the lessor may hold him liable for the
contracts have the force of law between the contracting parties, and rent therefor. The lessee cannot thereafter escape liability even if he
there must be mutuality between them based essentially on their should subsequently decide to abandon the premises. Mutuality
equality under which it is repugnant to have one party bound by the obtains in such a contract and equality exists between the lessor and
the lessee since they remain with the same faculties in respect to which is evident from the clause “may be renewed for a like term at
fulfillment.7 the option of the lessee,” the phrase “for a like term” referring to the
period. It is silent as to what the specific terms and conditions of the
The case of Lao Lim v. Court of Appeals8 relied upon by the trial court renewed lease shall be. Shall it be the same terms and conditions as in
is not applicable here. In that case, the stipulation in the disputed the original contract, or shall it be under the terms and conditions as
compromise agreement was to the effect that the lessee would be may be mutually agreed upon by the parties after the expiration of the
allowed to stay in the premises “as long as he needs it and can pay the
existing lease?
rents.” In the present case, the questioned provision states that the
lease “may be renewed for a like term at the option of the lessee.” The In Ledesma v. Javellana10 this Court was confronted with a similar
lessor is bound by the option he has conceded to the lessee. The lessee problem. In that case the lessee was given the sole option to renew the
likewise becomes bound only when he exercises his option and the lease, but the contract failed to specify the terms and conditions that
lessor cannot thereafter be excused from performing his part of the would govern the new contract. When the lease expired, the lessee
agreement. demanded an extension under the same terms and conditions. The
lessor expressed conformity to the renewal of the contract but refused
Likewise, reliance by the trial court on the 1967 case of Garcia v. Rita to accede to the claim of the lessee that the renewal should be under
Legarda, Inc.,9 is misplaced. In that case, what was involved was a the same terms and conditions as the original contract. In sustaining
contract to sell involving residential lots, which gave the vendor the
the lessee, this Court made the following pronouncement:
right to declare the contract cancelled and of no effect upon the failure
of the vendee to fulfill any of the conditions therein set forth. In the x x x in the case of Hicks v. Manila Hotel Company, a similar issue was
instant case, we are dealing with a contract of lease which gives the resolved by this Court. It was held that ‘such a clause relates to the very
lessee the right to renew the same. contract in which it is placed, and does not permit the defendant upon
the renewal of the contract in which the clause is found, to insist upon
With respect to the meaning of the clause “may be renewed for a like different terms than those embraced in the contract to be renewed;’
term at the option of the lessee,” we sustain petitioner’s contention and that ‘a stipulation to renew always relates to the contract in which
that its exercise of the option resulted in the automatic extension of
it is found and the rights granted thereunder, unless it expressly
the contract of lease under the same terms and conditions. The subject
provides for variations in the terms of the contract to be renewed.’
contract simply provides that “the term of this lease shall be fourteen
(14) years and may be renewed for a like term at the option of the The same principle is upheld in American Law regarding the renewal of
lessee.” As we see it, the only term on which there has been a clear lease contracts. In 50 Am. Jur. 2d, Sec. 1159, at p. 45, we find the
agreement is the period of the new contract, i.e., fourteen (14) years, following citations: ‘The rule is well-established that a general covenant
to renew or extend a lease which makes no provision as to the terms of to mutual agreement by and between the parties, then the option—
a renewal or extension implies a renewal or extension upon the same which is an integral part of the consideration for the contract—would
terms as provided in the original lease.’ be rendered worthless. For then, the lessor could easily defeat the
lessee’s right of renewal by simply imposing unreasonable and onerous
In the lease contract under consideration, there is no provision to conditions to prevent the parties from reaching an agreement, as in
indicate that the renewal will be subject to new terms and conditions the case at bar. As in a statute no word, clause, sentence, provision or
that the parties may yet agree upon. It is to renewal provisions of lease part of a contract shall be considered surplusage or superfluous,
contracts of the kind presently considered that the principles stated
meaningless, void, insignificant or nugatory, if that can be reasonably
above squarely apply. We do not agree with the contention of the avoided. To this end, a construction which will render every word
appellants that if it was intended by the parties to renew the contract operative is to be preferred over that which would make some words
under the same terms and conditions stipulated in the contract of
idle and nugatory.11
lease, such should have expressly so stated in the contract itself. The
same argument could easily be interposed by the appellee who could Fortunately for respondent lessors, ALLIED vacated the premises on 20
likewise contend that if the intention was to renew the contract of February 1993 indicating its abandonment of whatever rights it had
lease under such new terms and conditions that the parties may agree under the renewal clause. Consequently, what remains to be done is
upon, the contract should have so specified. Between the two for ALLIED to pay rentals for the continued use of the premises until it
assertions, there is more logic in the latter. vacated the same, computed from the expiration of the original term
of the contract on 31 March 1992 to the time it actually left the
The settled rule is that in case of uncertainty as to the meaning of a premises on 20 February 1993, deducting therefrom the amount of
provision granting extension to a contract of lease, the tenant is the
P68,400.00 consigned in court by ALLIED and any other amount which
one favored and not the landlord. ‘As a general rule, in construing it may have deposited or advanced in connection with the lease. Since
provisions relating to renewals or extensions, where there is any the old lease contract was deemed renewed under the same terms and
uncertainty, the tenant is favored, and not the landlord, because the conditions upon the exercise by ALLIED of its option, the basis of the
latter, having the power of stipulating in his own favor, has neglected computation of rentals should be the rental rate provided for in the
to do so; and also upon the principle that every man’s grant is to be existing contract.
taken most strongly against himself (50 Am. Jur. 2d, Sec. 1162, p. 48;
see also 51 C.J.S. 599).’ Finally, ALLIED cannot assail the validity of the deed of donation, not
being a party thereto. A person who is not principally or subsidiarily
Besides, if we were to adopt the contrary theory that the terms and bound has no legal capacity to challenge the validity of the contract.12
conditions to be embodied in the renewed contract were still subject He must first have an interest in it. “Interest” within the meaning of
the term means material interest, an interest to be affected by the Principles governing the binding effect of any agreement between
deed, as distinguished from a mere incidental interest. Hence, a person parties to a contract; Any contract which appears to be heavily
who is not a party to a contract and for whose benefit it was not weighed in favor of one of the parties so as to lead to an
expressly made cannot maintain an action on it, even if the contract, if unconscionable result is void. (Almeda vs. Court of Appeals, 256 SCRA
performed by the parties thereto would incidentally affect him,13 292 [1996])
except when he is prejudiced in his rights with respect to one of the
contracting parties and can show the detriment which could positively ——o0o—— Allied Banking Corporation vs. Court of Appeals, 284
result to him from the contract in which he had no intervention.14 We SCRA 357, G.R. No. 124290 January 16, 1998
find none in the instant case.

WHEREFORE, the Decision of the Court of Appeals is REVERSED and


SET ASIDE. Considering that petitioner ALLIED BANKING
CORPORATION already vacated the leased premises as of 20 February
1993, the renewed lease contract is deemed terminated as of that date.
However, petitioner is People vs. Aquino required to pay rentals to
respondent lessors at the rate provided in their existing contract,
subject to computation in view of the consignment in court of
P68,400.00 by petitioner, and of such other amounts it may have
deposited or advanced in connection with the lease.

SO ORDERED.

Davide, Jr. (Chairman), Vitug and Kapunan, JJ., concur.

Reviewed decision reversed and set aside.

Notes.—In case of ambiguity in contract language, that interpretation


which establishes a less onerous transmission of rights or imposition of
lesser burdens which permits greater reciprocity between the parties is
to be adopted. (Castelo vs. Court of Appeals, 244 SCRA 180 [1995])

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