SPECIAL CONTRACT

Kinds of Trust
(2024 NOTES) 1.Express Trust- Created by the intention of the trustor or of the parties(Art. 1441, CC)

Elements:
a. Competent trustor or settlor
b. Trustee
TRUST c. Ascertainable trust res / Trust property
d. Sufficiently certain beneficiaries

Trust is created:
A trust is the legal relationship between one person having an equitable ownership of
a. By declaration of the trustor or settlor that he holds property in
property (trustee) and another person owning the legal title to such property (trustor), the
trust,
equitable ownership of the former entitling him to the performance of certain duties and the
b. By conveyance to the trustee,
exercise of certain powers by the latter.
c. Inter vivos, or
d. By testament.

Proof Required:
Characteristics of Trust:
a. NO express trusts concerning an immovable or any interest
therein may be proved by parol evidence (Art. 1443, CC). Trusts
1. It is a relationship
over real property are unenforceable unless in writing, although
2. The relationship is of fiduciary character
writing is not required for validity, only for proof.
3. The relationship is with respect to property,not one involving merely personal
b. Where the trust is over personal property, an oral trust is
duties
sufficient between the parties.
4. It involves the existence of equitable duties imposed upon the holder of the title
c. But to bind third persons the trust must be in a public
to the property to deal with it for the benefit ofanother
instrument(Art. 1358(1) and (3), CC)
5. It arises as a result of a manifestation ofintention to create the relationship
Form of Express Trusts
Art. 1444, CC. No particular words are required for the creation
Parties(Art. 1440, CC)
of an express trust, it being sufficient that trust is clearly intended.
1. Trustor – the person who establishes the trust
Want of Trustee
2. Trustee – one in whom the confidence is reposed as regards property for the
Art. 1445, CC. No trust shall fail because the trustee appointed
benefit of another person
declines the designation, unless the contrary should appear in the
3. Beneficiary or cestui que trust – person for whose benefit the trust has been
instrument constituting the trust.
created
Acceptance by beneficiary
Acceptance by beneficiary is NECESSARY(Art. 1446, CC). It may be:
a. Express
b. Implied – acceptance by the beneficiary isnot subject to the
Express Trust Implied Trust
formal rules of donations
As to Creation c. Presumed – if the trust imposes no onerous condition upon the
Created by the intention of the trustor or the Comes into being by operation of law. beneficiary
parties.
Those, without being expressed, are Termination of Express Trusts
Created by the direct and positive acts of the deductible from the nature of the transaction a. Revocation or modification by the trustor under a reserved power
parties by some writing or deed or will or by by operation of law as matters of equity, b. Rescission
words evidencing an intention to create a independently of the particular intention of c. Expiration of the period or happening of theresolutory condition
trust. the parties. d. Accomplishment of the purpose or its becoming impossible or
As to Proof illegal
An express trust over an immovable property An implied trust may be proved by oral e. Dissolution by the Court if continuation will defeat the purpose of
or any interest therein cannot be proved by evidence the trust
parol evidence f. Dissolution by the consent of all the beneficiaries and/or the
As to Prescription settlor
Action must be made within 10 years from In resulting trust: Action must be made g. Merger
knowledge of the repudiation, otherwise within 10 years from knowledge of 2.Implied Trust
prescribed. repudiation, otherwise prescribed. How established- Implied trusts come into being by operation of law(Art. 144)

In constructive trust: It must be made within Proof required

10 years from date of registration. Art. 1457.An implied trust may be proved by oral evidence.
As to Laches
An express repudiation made known to the In constructive trusts, even if there is no A trust must be proven by clear, satisfactory, and convincing evidence. It cannot
beneficiary is necessary in order that laches repudiation, laches may bar an action to rest on vague and uncertain evidence or on loose, equivocal or indefinite
or acquisitive prescription may bar an action enforce an implied trust declaration.
to enforce an express trust. XPN: If there is concealment.
As to Suability As a rule, the burden of proving the existence of a trust is on the party asserting
Trustee can sue and be sued alone Trustee cannot sue and be sued alone its existence, and such proof must be clear and satisfactorily show the existence
of the trust and its elements.

Kinds of Implied Trusts

Q: Joaquin Reyes bought from Julio Cruz a residential lot of 300 square meters in Quezon City
for which Joaquin paid Julio the amount of P300,000.00. When the deed was about to be
prepared Joaquin told Julio that it be drawn in the name of Joaquina Roxas, his acknowledged
natural child. Thus, the deed was so prepared and executed by Julio. Joaquina then built a house
on the lot where she, her husband and children resided. Upon Joaquin‘s death, his legitimate
children sought to recover possession and ownership of the lot, claiming that Joaquina Roxas
was but a trustee of their father. Will the action against Joaquina Roxas prosper? (1993 Bar)
A: Yes, because there is a presumed donation in favorofJoaquinaunderArt. 1448oftheCivil
Code. (De Los Santos v. Reyes, 27 January 1992, 206 SCRA 437) However, the donation
should be collated to the hereditary estate and the legitime oftheotherheirs shouldbepreserved.
Q: In 1980, Maureen purchased two lots in a plush subdivision registering Lot 1 in her name
and Lot 2 in the name of her brother Walter with the latter‘s consent. The idea was to
circumvent a subdivision policy against the acquisition of more than one lot by one buyer.
Maureen constructed a house on Lot 1 with an extension on Lot 2 to serve as a guest house. In
1987, Walter who had suffered serious business losses demanded that Maureen remove the
extension house since the lot on which the extension was built was his property. In 1992,
Maureen sued for the reconveyance to her of Lot 2 asserting that a resulting trust was created
when she had the lot registered in Walter‘s name even if she paid the purchase price. Walter
opposed the suit arguing that assuming the existence of a resulting trust the action of Maureen
has already prescribed since ten years have already elapsed from the registration of the title in
his name. Decide. Discuss fully. (1995 Bar)
A: This is a case of an implied resulting trust. If Walter claims to have acquired ownership of
the land by prescription or if he anchors his defense on extinctive prescription, the ten year
period must be reckoned from 1987 when he demanded that Maureen remove the extension
house on Lot No. 2 because such demand amounts to an express repudiation of the trust and it
was made known to Maureen. The action for reconveyance filed in 1992 is not yet barred by
prescription.
a. Resulting Trusts - a trust raised byimplication of law and
presumed to have been contemplated by the parties, the intention
as to which is to be found in the nature of their transaction, but
not expressed in the deed or instrument of conveyance.
b. Constructive Trusts - a trust not created by any words, either
expressly or impliedly evincing a direct intension to create a trust,
but by the construction of equity in order to satisfy the demands
of justice.
Q: Explain the concept of trust de son tort (Constructive Trust) (2007 Bar)
A: A constructive trust is a trust not created by any word or phrase, either expressly or
impliedly, evincing a direct intention to create a trust, but is one that arises in order to satisfy
the demands of justice. It does not come about by agreement or intention but mainly operation
of law and construed as a trust against one who, by fraud, duress or abuse of confidence, obtains
or holds the legal right to property which he ought not, in equity and good conscience, to hold.
(Heirs of Lorenzo Yap v. Court of Appeals, 371 Ph
il. 523 [1999])
The following are examples of constructive trust:
1. Article 1456 NCC which provides: ―If property is acquired through mistake or fraud,
the person obtaining it is, by force of law considered a trustee of an implied trust for the
benefit of the person from whom the propertycomes.‖
2. Article 1451 NCC which provides: ―When land passes by succession to any person and
he causes the legal title to be put in the name of another, a trust is established by
implication of law for the benefit of the true-owner.‖
3. Article 1454 NCC which provides: ―If an absolute conveyance of property is made in
order to secure the performance of an obligation of the grantor toward the grantee, a trust
by virtue of law is established. If the fulfillment of the obligation is offered by the grantor
when it becomes due, he may demand the reconveyance of the property to him.‖
4. Article 1455 NCC which provides: ―When any trustee, guardian or other person
holding a fiduciary relationship uses trust funds for the purchase of property, and causes
the conveyance to be made to him or to a third person, a trust is established towhomthe
findingsbelong.

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AGENCY

Nature and form- By the contract of agency, a person binds himself to render some 3. As To Authority Conferred: Couched In General Terms And Couched In
service or to do something in representation or on behalf of another, with the consent or Specific Terms(Art. 1877, CC):
authority of the latter (Art. 1868, CC).
1. Couched in general terms: comprisesonly acts of administration, even if:
Using this definition, there are two parties in a contract of agency. The agent is the one a. The principal should state that he withholds no power or that
who binds himself to represent another; while the principal is the one who is the agent may execute such acts as he mayconsider
represented by the agent. appropriate, or
b. Or even though the agency shouldauthorize a general and
A contract of agency has at least 4 essential elements: unlimited management (Art. 1877, CC).

1. There is consent, express or implied of theparties to establish the The term ―acts of administration‖ are ―those which do not imply the
relationship; authority to alienate for the exercise of which an express power is
2. The object is the execution of a juridical actin relation to a third person; necessary‖.
3. The agents acts as a representative andnot for himself, and 2. Couched in specific terms: A special power of attorney is necessary in
4. The agent acts within the scope of hisauthority. acts of strict dominion. The circumstances enumerated in Art. 1878 pertain
to this, namely:
It must be noted, however, that agency is not always contractual. As will be discussed, a. To make such payments as are not usually considered as acts
even if some of these elements are missing, agency may still be created by operation of of administration;
law, such as Articles 1930 and 1931. b. To effect novations which put an end to obligations already
in existence at the time the agency was constituted;
c. To compromise, to submit questions to arbitration, to
renounce the right to appeal from a judgment, to waive
GR as to form- Agency may be written or oral, unless the law requires a specific form objections to the venue of an action or to abandon a
(Art. 1869, CC). prescription already acquired;
XPNas to form d. To waive any obligation gratuitously;
1. In an agency to sell a piece of land or anyinterest therein, the authority e. To enter into any contract by which the ownership of an
of the agent shall be in writing. Otherwise, the sale shall be void.(Art. immovable is transmitted or acquired either gratuitously or
1874, CC) for a valuable consideration;
2. A corporation may act only through itsboard of directors or, when f. To make gifts, except customary ones for charity or those
authorized either by its bylaws or by its board resolution, through its made to employees in the business managed by the agent;
officers or agents in the normal course of business. g. To loan or borrow money, unless the latter act be urgent and
indispensable for the preservation of the things which are
under administration;
h. To lease any real property to another person for more than 1
Kinds year;
i. To bind the principal to render some service without
compensation;
1. As To Manner Of Creation: Express And Implied j. To bind the principal in a contract of partnership;
k. To obligate the principal as a guarantor or surety;
l. To create or convey real rights over immovable property;
An agency may be express or implied(Art. 1869, CC). m. To accept or repudiate an inheritance;
n. To ratify or recognize obligations contracted before the
1. Express: oral or written agency;
2. Implied from: o. Any other act of strict dominion.
a. The acts of the principal,
b. His silence or lack of action, or
c. His failure to repudiate the agency, knowing that another
person in acting on his behalf without authority. 4blue 95 NOTE: that the special power to sell excludes the power to mortgage; and a
special power to mortgage does not include the power to sell (Art. 1879, CC). Note
Acceptance by the agent may also be express or implied. further that the power to compromise does not authorize submission to arbitration(Art.
1. Express: oral or written 1880, CC).
2. Implied from
a. His acts which carry out the agency, or
b. His silence or inaction according tothe circumstances (Art.
1870, CC)

Between persons who are PRESENT, the acceptance of the agency may also be implied
if the principal delivers his power of attorney to the agent and the latter receives it
without any objection(Art. 1871, CC).

Between persons who are ABSENT, the acceptance of the agency CANNOT be implied
from the silence of the agent, except:
1. When the principal transmits his power of attorney to the agent, who
receives it without any objection;
2. When the principal entrusts to him by letter or telegram a power of
attorney with respect to the business in which he is habitually engaged as
an agent, and he did not reply to the letter or telegram (Art. 1872, CC).

2. As To Scope Of Business: General And Special(Art. 1876, CC):

1. General: comprises of all the business of the principal

2. Special: Comprises one or more specific transactions

A general agent is ―one authorized to do all acts pertaining to a business of a certain

kind or at a particular place, or all acts pertaining to a business of a particular class or
series, while a special agent is ―one authorized to do some particular act or to act upon
some particular occasion. He acts usually in accordance with specific instructions or
under limitations necessarily implied from the nature of the act to be done.‖

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4. Other Kinds Of Agency

Agency by estoppel- In an agency by estoppel, there is no agency at all, but the one
assuming to act as agent has apparent authority, to represent another, although not real.
To establish agency by estoppel, the following elements must be shown:
1. The principal manifested arepresentation of the agent‘s authority or
knowingly allowed the agent to assume such authority;
2. The third person, in good faith, relied upon such representation; and
3. Relying upon such representation, such third person has changed his
position to his detriment.
Agency by operation of law- While agency is generally contractual, the Civil Code
admits several exceptions.
1. The agent must finish the businessalready begun on the death of the
principal, should delay entail any danger (Art. 1884, par. 2, CC)
2. The agent, even if he should withdraw from the agency for a valid reason,
must continue to act until the principal has had reasonable opportunity to
take the necessary steps to meet the situation. (Art. 1929, CC)
3. The agency shall remain in full force and effect even after the death of the
principal, if it has been constituted in the common interest of the latter and
of the agent, or in the interest of a third person who hasaccepted the
stipulation in his favor (Art.1930, CC)
4. Anything done by the agent, withoutknowledge of the death of the
principal or of any other cause which extinguishes the agency, is valid and
shall be fully effective with respect to third persons who may have
contracted with him in good faith. (Art. 1931, CC)
OBLIGATIONS OF THE AGENT
1. To act within the scope of authority(Art. 1881, CC). This includes acting
according to the instructions of the principal; and in default thereof, to the
diligence of a good father of a family (Art. 1887, CC).
a. Acts that may be conducive to theaccomplishment of the
purpose of theagency (Art. 1881, CC);
b. Acts performed in a manner moreadvantageous to the
principal than thatspecified by him (Art. 1882, CC);
c. So far as third persons are concerned, acts within the terms
of the written power of attorney, even if the agent has in fact
exceeded the limits of his authority according to an
understanding between theprincipal and the agent (Art. 1900,
CC)
2. To carry out the agency(Art. 1884, CC).
a. Be liable for the damages caused to the principal through his
non- performance (Art. 1884, CC);
b. Finish the business already begun on the death of the
principal, should delay entail danger (Art. 1884, CC);
c. Even if the agent withdraws, continue to act as an agent until
the principalhas had reasonable opportunity to take the
necessary steps to meet the situation (Art. 1929, CC).
The obligation to carry out the agency also includes the obligation to NOT
carry out the agency if its execution would manifestly result in loss or
damage to the principal (Art. 1888, CC).
3. To prefer the interest of the principal over his own- This obligation is
manifested in two ways:
a. An agent shall be liable for damages if, there being a conflict
between his interests and those of the principal, he should
preferhis own (Art. 1889, CC);
b. An agent, who has been authorized to lendmoney, may not
borrow it without the consent of the principal (Art. 1890,
CC).
4. To render account and to deliver- An agent must render an account of
his transactions and deliver to the principal whatever he may have received
by virtue of the agency, even though it may not be owing to the
principal(Art. 1891, CC).A stipulation exempting the agent from the
obligation to render an account shall be void (Art. 1891, CC).
5. To pay interest- The agent owes interest on
a. The sums he has applied to his own usefrom the day on
which he did so; and
b. Those which he still owes after the extinguishment of the
agency (Art. 1896, CC).
6. To be liable for fraud and negligence- The agent is also liable for fraud
and negligence. In this case, negligence shall be judged with more or less
rigor by the courts,according to whether the agency was or was not for
compensation (Art. 1909, CC).
Q: A foreign manufacturer of computers and a Philippine distributor entered into a
contract whereby the distributor agreed to order 1,000 units of the manufacturer‘s
computers every month and to resell them in the Philippines at the manufacturer‘s
suggested prices plus 10%. All unsold units at the end of the year shall be bought back
by the manufacturer at the same price they were ordered. The manufacturer shall hold
the distributor free and harmless from any claim for defects in the units. Is the agreement
one for sale or agency? (2000 Bar)
A: The contract is one of agency not sale. The notion of sale is negated by the following
indicia:
(1) the price is fixed by the manufacturer with the 10% mark up constituting the
commission;
(2) the manufacturer reacquires the unsold units at exactly the same price; and
(3) warranty for the units was borne by the manufacturer. The foregoing indicia negate
sale because they indicate that ownership over the units was never intended to transfer to
the distributor.
Q: Jo-Ann asked her close friend, Aissa, to buy some groceries for her in the
supermarket. Was there a nominate contract entered into between Jo-Ann and Aissa? In
the affirmative, what was it? Explain. (2003 Bar)
A: Yes, there was a nominate contract. On the assumption that Aissa accepted the
request of her close friend Jo-Ann to buy some groceries for her in the supermarket,
what they entered into was the nominate contract of Agency. Art. 1898 of the New Civil
Code provides that by the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another, with the consent or
authority of the latter.
Q: A as principal appointed B as his agent granting him general and unlimited
management over A's properties, stating that A withholds no power from B and that the
agent may execute such acts as he may consider appropriate. Accordingly, B leased A's
parcel of land in Manila to C for four (4) years at P60,000.00 per year, payable annually
in advance. B leased another parcel of land of A in Caloocan City to D without a fixed
term at P3,000.00 per month payable monthly. B sold to E a third parcel of land
belonging to A located in Quezon City for three (3) times the price that was listed in the
inventory by A to B. All those contracts were executed by B while A was confined due
to illness in the Makati Medical Center. Rule on the validity and binding effect of each
of the above contracts upon A the principal. Explain your answers. (1992 Bar)
A: The agency couched in general terms comprised only acts of administration (Art.
1877). The lease contract on the Manila parcel is not valid, not enforceable and not
binding upon A. For B to lease the property to C, for more than one (1) year, A must
provide B with a special power of attorney (Art. 1878). The lease of the Caloocan City
property to D is valid and binding upon A. Since the lease iswithout a fixed term, it is
understood to be from month to month, since the rental is payable monthly (Art. 1687).
The sale of the Quezon City parcel to E is not valid and not binding upon A. B needed a
special power of attorney to validly sell the land (Arts. 1877 and 1878). The sale of the
land at a very good price does not cure the defect of the contract arising from lack of
authority.
Q: CX executed a special power of attorney authorizing DY to secure a loan from any
bank and to mortgage his property covered NATURE, FORM AND KINDS OF
AGENCY (1992, 2004 BAR) bytheowner‘scertificateoftitle.Insecuring a loan from
MBank, DY did not specify that he was acting for CX in the transaction with said bank.
Is CX liable for the bank loan? Why or why not? Justify your answer. (2004 Bar)
A: CX is liable for the bank loan because he authorized the mortgage on his property to
secure the loan contracted by DY. If DY later defaults and fails to pay the loan, CX is
liable to pay. However, his liabilityis limitedto theextent ofthe value ofthe said property.

LIABILITY FOR ACTS OF SUBSTITUTES

Appointment of a substitute
GR: An agent may appoint a substitute.
XPN: Principal prohibits the agent from doing so. In this case, all of the substitute‘s acts
shall be void (Art. 1892, CC).

Liability of the agent for his substitutes

GR: The agent shall NOT be responsible for the acts of the substitute.
XPNs: An agent is responsible for the acts of the substitute in the following cases:
a. When the agent was not given the power to appoint one;
b. When the agent was given such power, but without designating the person,
and the person appointed was notoriously incompetent or insolvent(Art.
1892, CC).

In both of these cases, the principal may bring an action against the substitute with
respect to the obligations the substitute has contracted under the said substitution (Art.
1893, CC).

Solidary Liability
Just like ordinary contracts, solidary liability is not presumed, even if two or more
agents are appointed simultaneously. Solidary liability among such agents must be
expressly stipulated (Art. 1894, CC).

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COMPROMISE
A compromise is a contract whereby the parties, by making reciprocal Annulment/ Rescission
concessions,avoid a litigation or put an end to one already commenced. (Art. 2028, CC)
Newly-discovered Documents-Triggers:
1. Parties have compromised generally in all differences they have.
As a contract, a valid compromise agreement must possess the following requisites:
2. There is a subsequent discovery of documents referring to one or more but
1. The consent of the parties to thecompromise,
not to all of the questions settled.
2. An object certain that is the subject matterof the compromise, and
GR: Discovery shall NOT itself be a cause for ANNULMENT of the compromise
3. The cause of the obligation that isestablished.
XPN: Discovery shall be a cause for annulment if:
1. The said documents were concealed by one party;
2. The compromise refers only to one thing to which one of the parties
The Civil Code provides for additional requisites in special cases:
has no right, as shown by the newly- discovered documents.(Art. 2039,
CC)
1. A special power of attorney for acompromise agreement to be entered
into by an agent on behalf of the principal (Art. 1878(3), CC)
NOTE: A special power to compromise does not authorize submission to Triggers:
1. The parties to the compromise had a case pending litigation
arbitration. (Art. 1880, CC)
2. Final judgement has been rendered on the case
2. The consent of all the partners in a partnership, except when 3. Parties are unaware of the existence of final judgement
4. Parties have entered a compromise agreement
authorized by the other partners or unless they have abandoned the
GR: The compromise agreement may be RESCINDED.
business. (Art. 1818, CC)
XPN: Ignorance of a judgment which may be revoked or set aside is NOT a valid
ground for attacking a compromise. ―This refers to the instance when the court‘s
Kinds of Compromise
decision is still appealable or otherwise subject to modification. Ignorance of the
1. Judicial – puts an end to a pending litigation
decision is not a ground to rescind a compromise agreement, because the parties are still
2. Extrajudicial – to avoid litigation
unsure of the final outcome of the case at this time‖. (Art. 2040, CC)
Coverage- A compromise comprises only those objects which are:
In Case of Breach- If one of the parties fails or refuses to abide by the compromise, the
1. definitely stated therein, or
other party may either enforce the compromise orregard it as rescinded and insist upon
2. which by necessary implication from itsterms should be deemed to have
his original demand. (Art. 2041, CC)
been included in the same.
Trigger: One of the parties fails or refuses to abide by the compromise agreement
Effect: The innocent party may either:
A general renunciation of rights is understood to refer only to those that are connected
1. Demand specific performance of thecompromise agreement.
with the dispute which was the subject of the compromise (Art. 2036, CC)
2. Rescind the compromise agreementand insist upon the original demand.
The innocent party need NOT seek a judicial declaration of rescission, for he may
Limitation on Juridical Persons- Juridical persons may compromise only in the form
‗regard‘ the compromise agreement already ‗rescinded‘
and with the requisites which may benecessary to alienate their property (Art. 2033,
CC).

Effects
1. Suspension of Pending Litigation- Every civil action or proceeding shall
be suspended:
a. If willingness to discuss a possiblecompromise is expressed
by one or bothparties; or
b. If it appears that one of the parties, beforethe commencement
of the action or proceeding, offered to discuss a possible
compromise but the other party refused the offer.
2. Res Judicata- A compromise has upon the parties the effect and authority
of res judicata; but there shall be no execution except in compliance with a
judicial compromise. (Art. 2037, CC)

Role of the Court

Persuade Litigants to Compromise- The court shall endeavor to persuade the litigants
in a civil case to agree upon some fair compromise (Art. 2029, CC)
Mitigate Damages- The courts may mitigate the damages to be paid by the losing party
who has shown a sincere desire for a compromise (Art. 2031, CC)
Approve Compromise in Special Cases- The court's approval is necessary in
compromises entered into by guardians, parents, absentee's representatives, and
administrators or executors of decedent's estates. (Art. 2032, CC)

Effect on Criminal Action- There may be a compromise upon the civil liability arising
from an offense; but such compromise shall not extinguish the public action for the
imposition of the legal penalty. (Art. 2034, CC)
Trigger(s): A person has committed an offense; The offender party and the offender is
willing to seek compromise on the civil liability.
Effect: Compromise may extinguish or novate the civil liability but shall not affect
criminal liability

Void Compromise-No compromise upon the following questions shall be valid:

1. The civil status of persons;
2. The validity of a marriage or a legal separation;
3. Any ground for legal separation;
4. Future support;
5. The jurisdiction of courts;
6. Future legitime.

Voidable Compromise- A compromise in which there is mistake, fraud, violence,

intimidation, undue influence, or falsity of documents, (Grounds to annul a
compromise agreement)is subject to the provisions of article 1330 of this Code.
However, one of parties cannot set up a mistake of fact as against the other if the latter,
by virtue of the compromise, has withdrawn from a litigation already commenced. (Art.
2038, CC)

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LOAN

1. LOAN

Art. 1933, CC.By the contract of loan, one of the parties delivers to
another, either something not consumable so the latter may use the same
for a certain time and return it, in which case the contract is called a
commodatum, or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loanmay be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing loaned while
in simple loan, ownership passes to the borrower.
2. COMMODATUM
Commodatum– an essentially gratuitous contract where one party (bailor) delivers to
another (bailee) something not consumable so that the latter may use the same for a
certain time and return it. (Art. 1933)
KINDS OF COMMODATUM
1. Ordinary commodatum – the use of thething by the bailee is for a certain
period oftime (Art. 1933)
2. Precarium – the bailor maydemand the thing loaned at will; if any one
of the following is present
a. The duration and purpose of thecontract is not stipulated, or
b. The use of the thing is merely toleratedby the owner (Art.
1947)
Parties
1. Bailor: creditor
Who may be a bailor in commodatum?Anyone. The bailor in
commodatum need NOT be the owner of the thing loaned(Art. 1938), but
as against the bailee, the bailor retains ownership of the thing loaned.
OBLIGATIONS OF THE BAILOR
1. Demand the return of the thing only upon the expiration of the term
or after the accomplishment of the use(Art. 1946, CC)
XPN:
a. When bailor has urgent need of the thing, he may demand its
return (extinguish commodatum) or its temporary use
(suspend commodatum) (Art. 1946, CC)
b. Precarium(Art. 1947, CC)or a contractual relation where the
bailor may demand the property loaned at will
c. If bailee commits any acts of ingratitude in Art. 765: (Art.
1948, CC)
i. Bailee committed some offenseagainst the
person, honor or property of the bailor, or of his
wife or children under his parental authority;
ii. Bailee imputes to bailor any criminal offense,
or any act involving moral turpitude, even
though he should prove it, unless the crime or
act has been committed against the bailee
himself, his wife or children under his
authority; or
iii. Bailee unduly refuses bailor support when
bailee is legally ormorally bound to give
support the bailor.
2. Refund the extraordinary expenses during the contract for the
preservation of the thing loaned. (Art. 1949, CC)
Provided that: Bailee brings the same to the knowledge of the bailor
before incurring them, except when they are so urgent that the reply
cannot be awaited without danger.
3. Bear equally (with the bailee) the extraordinary expenses arising on the
occasion of actual use of the thing by the bailee. (Art. 1949, CC)
XPN: Contrary stipulation
4. Pay damages to the bailee for hidden flawsknown to the bailor. (Art.
1951, CC)
NOTE: Bailor has no right of abandonment; he cannot exempt himself
from payment of expenses or damages to the bailee by abandoning the
thing to the latter. (Art. 1952, CC)

2. Bailee: debtor Liability for Deterioration

GR: The bailee is NOT liable for the deterioration of the thing loaned when the
deterioration of the thing is due only to the use thereof and without his fault. (Art. 1943,
USE BY THE BAILEE
CC)
Rules as to who may make use of the property loaned
XPN: The bailee is liable only when the deterioration of the thing is due to his fault.
GR: The bailee acquires permissive use of the thing loaned only for himself. He may
(Art. 1943, CC)
NOT lend nor lease the thing loaned to him to a third person.
XPN: The members of the bailee‘s household may make use of the thing loaned
XPN to the XPN: Liability for Loss
GR: The bailee is NOT liable for loss of the thing due to fortuitous event. (Art. 1174,
1. If there is a stipulation to the contrary, or
CC)
2. The nature of the thing forbids such use.(Art. 1939(2), CC)
Since the bailor retains ownership of the property loaned, generally, it is the bailor who
Rules as to the use of fruits of the thing loaned
bears the liability for loss of the property loaned due to fortuitous events.
GR: The bailee acquires the permissive use of the thing loaned but NOT its fruits (Art.
1935, CC)
XPN: The bailee is liable for loss of the thing, even if it is through a fortuitous
XPN: Parties stipulate otherwise; such stipulation is considered valid (Art. 1940, CC)
event, if the bailee:
1. Devoted the thing to any purpose differentfrom that for which it has been
OBLIGATIONS OF THE BAILEE
loaned;
2. Loaned thing has been delivered withappraisal of its value
1. Take care of the thing loaned with theproper diligence of a good father of
XPN: Unless there is a stipulation exempting the bailee from
afamily. (Art. 1163, CC)
responsibility in case of a fortuitous event;
2. Use the thing loaned only for the purposefor which it was loaned and not
3. Saved his own thing, being able to save either the thing borrowed or his
for any other purpose. (Art. 1935, 1939(2), 1942 [1], CC)
own thing
3. Not to lend the thing to a third person who is not a member of his
4. Kept the thing longer than the period stipulated, or after the
household. (Art. 1942 (4), CC)
accomplishment of the use for which the commodatum has been
4. Return the thing upon the expiration of the period stipulated or after the
constituted;
accomplishment of the use for which it has been constituted. (Art. 1944,
5. Lent or leased the thing to a third person, who is not a member of his
1946, CC)
household; (Art. 1942, CC)
XPN: Bailee has right of retention for damages when the bailor who,
knowing the flaws of the thing loaned, does not advise the bailee of the
Right of Retention
same. (Arts. 1946, 1944, CC)
GR: The bailee has no right of retention of the thing loaned on the ground that the bailor
5. Pay for the ordinary expenses for the use and preservation of the thing
owes him something, even though it may be by reason of expenses. (Art. 1944, CC)
loaned. (Art. 1941, CC)
XPN: The bailee has the right of retention for damages arising from hidden flaws. (Art.
6. Bear equally (with the bailor) the extraordinary expenses arising on
1944, 1951, CC)
theoccasion of actual use of the thing by the bailee even though bailee
acted without fault. (Art. 1949, CC)
XPN: Contrary stipulation Extinguishment
1. Death of either the bailor or the bailee(Art. 1939, CC)
7. Solidarily liable when there are two or more bailees to whom a thing is
2. Expiration of term or accomplishment of purpose(Art. 1946, CC)
loaned in the same contract. (Art. 1945, CC)
3. Act/s of ingratitude has/have been committed by the bailee, and the bailor
demands the return
NOTE: If, for the purpose of making use of the thing loaned, the bailee
4. Upon demand in case ofprecarium
incurs ordinary or extraordinary expenses which are neither for the use nor
5. Bailor has urgent need of the thing loaned, and he demands the return
the preservation of the thing, he is not entitled to reimbursement. (Art.
(and not justtemporary use)
1950, CC)

5
3. SIMPLE LOAN Rules for the Award of Interest in the Concept of Actual and Compensatory Damages
4blue 95 NOTE:
Art. 1953, CC. A person who receives a loan of money or any other 1. When the obligation is breached, and it consists in the payment of a sum of
fungible thing acquires the ownership thereof, and is bound to pay to the money, i.e., a loan or forbearance of money,
creditor an equal amount of the same kind and quality. a. The interest due should be that which may have been stipulated in
writing.
b. The interest due shall itself earn legal interest from the time it is
Mutuum – a contract where one of the parties (creditor) delivers to another judicially demanded.
(debtor/borrower) money or other consumable thing upon the condition that the same c. In the absence of stipulation, the rate of interest shall be 6% per
amount of the same kind and quality shall be paid. (Art. 1953) annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
OBLIGATIONS OF THE BORROWER Article 1169 of the CC.
1. Pay the creditor an equal amount of the same kind and quality(Art. 2. When an obligation, not constituting a loan or forbearance of money, is
1953, CC) breached
2. Pay value at the time of perfection of loan, if impossible, to deliver the a. An interest on the amount of damages awarded may be imposed
same kind (Art. 1955, CC) at the discretion of the court at the rate of 6% per annum.
3. Pay interest, if stipulated. (Art. 1956, CC) b. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established
with reasonable certainty.
RIGHTS OF THE BORROWER
c. Where the demand is established with reasonable certainty, the
1. Right of ownership; upon delivery/receipt of the loan of money or any interest shall begin to run from the time the claim is made
fungible thing, the person acquires ownership of the money/fungible thing judicially or extrajudicially (Art. 1169, CC)
(Art. 1953, CC) d. When such certainty cannot be so reasonably established at the
2. Right to not pay interest, unless stipulated (Art. 1956, CC) time the demand is made, the interest shall begin to run only from
a. If the debtor however pays interest when there is no the date the judgment of the court is made [at which time the
stipulation, the rules on SolutioIndebiti, or natural quantification of damages may be deemed to have been
obligations, shall be applied (Art. 1956, CC). reasonably ascertained].
e. The actual base for the computation of legal interest shall, in any
OBLIGATIONS OF THE CREDITOR case, be on the amount finally adjudged.
Barred from placing stipulations under any cloak or device that circumvent laws on f. When the judgment of the court awarding a sum of money
usury (Art. 1957, CC). becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction, this interim
RIGHTS OF THE CREDITOR period being deemed to be by then an equivalent to a forbearance
1. Right to receive an equal amount of the same kind and quality (Art. 1953, of credit.
CC)
2. Right to impose interest, once stipulated(Art. 1959, CC). d. FINANCE CHARGES

1. Under the Truth in Lending Act

Rep. Act No. 3765, ―Truth in Lending Act‖ (TILA)

Sec. 3(3)"Finance charge"includes interest, fees, service charges, discounts,
and such other charges incident to the extension of credit as the Board may be
regulation prescribe.
4. INTEREST IN LOAN
Sec. 4, TILA. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and
Requisites for Interest to be Chargeable regulations prescribed by the Board, the following information:
1. Must be expressly stipulated(Art. 1956, CC) a. the cash price or delivered price of the property or service to be
XPN: acquired;
a. The debtor in delay is liable to pay legal interest (6% per b. the amounts, if any, to be credited as down payment and/or trade-
annum) as indemnity for damages (Art. 2209, CC) in;
b. Interest accruing from unpaid interest – Interest demanded c. the difference between the amounts set forth under clauses (1) and
shall earn interest from the time it is judicially demanded(Art. (2);
2212, CC)or where there is an express stipulation(Art.1959, CC) d. the charges, individually itemized, which are paid or to be paid by
2. Agreement must be in writing(Art.1956, CC) such person in connection with the transaction but which are not
3. Must be lawful incident to the extension of credit;
NOTE: If the abovementioned requisites are not met, and the borrower: e. the total amount to be financed;
a. Paid interest by mistake, the creditoris obliged to return what was f. the finance charge expressed in terms of pesos and centavos; and
delivered(Arts 1960 and 2154, CC) g. the percentage that the finance bears to the total amount to be
b. Voluntarily paid interest (i.e., withknowledge that the requisites financed expressed as a simple annual rate on the
have not been met), the creditor is authorized to retain what was outstandingunpaid balance of the obligation
paid (Art. 1423, CC)
Under Section 4(6),"finance charge" represents the amount to be paid by the
debtor incident to the extension of credit such as interest or discounts, collection
fees, credit investigation fees, attorney‘s fees, and other service charges. The
a. CONVENTIONAL INTEREST total finance charge represents the difference between (1) the aggregate
consideration (down payment plus installments) on the part of the debtor, and (2)
Simple Interest – Paid for the principal at acertain rate fixed or stipulated by the parties. the sum of the cash price and non-finance charges

2. Under the Philippine Credit Card Industry Regulation Law

Sec. 5(k).Finance charges refer to the interest charged to the cardholder on all
credit card transactions in accordance with the terms and conditions specified in
b. INTEREST ON INTEREST the agreement on the use of the credit card;
Compound Interest- Interest which is imposed when interest dues and unpaid is capitalized or Requirement for Disclosure
added to the principal (Art. 1959, CC) Section 11. Information to be Disclosed. - A credit card issuer shall disclose to
all credit cardholders and potential credit cardholders the following information:
Compound Interest is Allowed: (a) Finance charges for unpaid amounts after payment due date
1. When there is an express written stipulation to that effect(Art.1956, CC)OR
2. Upon judicial demand. However, debtor is NOT liable to pay compound interest
even after judicial demand when there is no stipulation for payment of interest. e. USURY
(Art. 2212, CC)
Unlawful or Usurious Interest – Paid or stipulated to be paid beyond the maximum fixed by
law.

c. COMPENSATORY, PENALTY OR INDEMNITY INTEREST
Also known as Legal Interest – That which the law directs to be charged in the absence of
any agreement as to the rate between the parties, or when there are actual and compensatory
damagesimposed by the Court.
The Usury Law (Act No. 2566) – an act fixing rates of interests upon loans and declaring the
effect of receiving or taking usurious rates and for other purposes.
CB Circular No. 905 abolished interest rate ceilings. With the promulgation of such circular,
usury has become ―legally inexistent‖ as the parties can now legally agree on any interest
that may be charged on the loan.
Although usury is legally inexistent, courts will not hesitate to declare void ―excessive,
iniquitous, unconscionable, exorbitant‖ interest.

Elements of Usury
1. A loan or forbearance of money
2. An understanding between parties that the loan shall and may be returned
3. An unlawful intent to take more than the legal rate for the use of money or its
equivalent
4. The taking or agreeing to take for the use of the loan of something in excess of
what is allowed by law.

6
Q: With regard to an award of interest in the concept of actual and compensatory
damages, please state the guidelines regarding the manner of computing legal interest in
the following situations:
1. When the obligation is breached and it consists in the payment of a sum of money like
a loan or forbearance of money;
2. When the obligation does not constitute a loan or forbearance ofmoney. Consider the
issuance of BSP-MB Circular No. 799, which became effective on July 1, 2013. (2016
Bar)
A:
1. When the obligation is breached and it consists in the payment of sum of money like a
loan or forbearance of money, in the absence of stipulation, the rate of interest shall be
the legal rate of 6% per annum, (Art. 2209, CC) which was increased to 12% per NB
Circular No. 905, series of 1982 to be computed from default. The twelve percent (12%)
per annum legal interest shall apply only until June 30, 2013. From July 1, 2013, the
new rate of six percent (6%) per annum shall be the prevailing rate of interest when
applicable. (Nacar v. Gallery Frames, 703 SCRA 439 [2013], applying BSP-MB
Circular No. 799)
2. The interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable uncertainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially, but when such certainty cannot be so reasonably established
at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged. (Nacar v. Gallery
Frames, 703 SCRA 439 [2013])
Q: A, upon request, loaned his passenger jeepney to B to enable B to bring his sick wife
from Paniqui, Tarlac to the Philippine General Hospital in Manila for treatment. On the
way back to Paniqui, after leaving his wife at the hospital, people stopped the passenger
jeepney. B stopped for them and allowed them to ride on board, accepting payment from
them just as in the case of ordinary passenger jeepneys plying their route. As B was
crossing Bamban, there was an onrush of lahar from Mt. Pinatubo. The jeep that was
loaned to him waswrecked. 1) What do you call the contract that was entered into by A
and B with respect to the passenger jeepney that was loaned by A to B to transport the
latter‘s sick wife to Manila? 2) Is B obliged to pay A for the use of the passenger
jeepney? 3) Is B liable to A for the loss of the jeepney? (1993 Bar)
A:
1) The contract is called ―commodatum‖. (Art. 1933, Civil Code)
2) No, B is not obliged to pay A for the use of the passenger jeepney because
commodatum is essentially gratuitous. (Art. 1933, Civil Code) 3) Yes, because B
devoted the thing to a purpose different from that for which it has been loaned. (Art.
1942, par. 2 Civil Code)
Q: Distinguish briefly but clearly between Mutuum and commodatum. (2004 Bar)
A: In mutuum, the object borrowed must be a consumable thing the ownership of which
is transferred to the borrower who incurs the obligation to return the same consumable to
the lender in an equal amount, and of the same kind and quality. In commodatum, the
object borrowed is usually a non-consumable thing the ownership of which is not
transferred to the borrower who incurs the obligation to return the very thing to the
lender.
Q: Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with
Tito, with the understanding that the latter could use it for one year for his personal or
family use while Pedro works in Riyadh. He did not tell Tito that the brakes of the van
were faulty. Tito had the van tuned up and the brakes repaired. He spent a total amount
of P15,000.00. After using the vehicle for two weeks, Tito discovered that it consumed
too much fuel. To make up for the expenses, he leased it to Annabelle. Two months
later, Pedro returned to the Philippines and asked Tito to return the van. Unfortunately,
while being driven by Tito, the van was accidentally damaged by a cargo truck without
his fault. a) Who shall bear the P15,000.00 spent for the repair of the van?Explain. b)
Who shall bear the costs for the van's fuel, oil and other materials while it was with
Tito? Explain. c) Does Pedro have the right to retrieve the van even before the lapse of
one year? Explain. d) Who shall bear the expenses for the accidental damage caused by
the cargo truck, granting that the truck driver and truck owner are insolvent? Explain.
(2005 Bar)
A:
a) The contract between Pedro and Tito is one of commadatum. Of the P15,000.00
spent, Pedro, the bailor, shall bear the expenses for the repair of the faulty brakes, they
being extraordinary expenses incurred due to the non-disclosure by the bailor of the
defect or fault; Tito, on the other hand, shall shoulder that part of the P15,000.00 spent
for the tune-up, said expense being ordinary for the use and preservation of the van.
b) The costs for the fuel and other materials are considered ordinary expenses, and
consequently Tito, the bailee, shall shoulder them. (Art. 1941, CivilCode)
c) No, Pedro cannot demand the return of the van until after the expiration of the
oneyear period stipulated. However, if in the meantime he should have urgent need of
the van, he may demand its return or temporary use.
d) Both Tito and Pedro shall bear equally the costs of the extraordinary expenses, having
been incurred on the occasion of actual use of the van by Tito, the bailee, even though he
acted withoutfault.
7
Q: Distinguish usufruct from commodatum. (1995, 1996, 1997, 1998, 2017 Bar)
A: Usufruct is a right given to a person (usufructuary) to enjoy the property of another
with the obligation of preserving its form and substance. (Art. 562, CivilCode)
On the other hand, commodatum is acontract by which one of the parties (bailor)
delivers to another (bailee) something not consumable so that the latter may use it for a
certain time and return it. In usufruct the usufructuary gets the right to the use and to the
fruits of the same, while in commodatum, the bailee only acquires the use of the thing
loaned but notits fruits. Usufruct may be constituted on the whole or a part of the fruits
of the thing. (Art. 564, Civil Code) It may even be constituted over consumables like
money. (Alunan v. Veloso, 52 Phil. 545)
On the other hand, in commodatum, consumable goods may be subject thereof only
when the purpose of the contract is not the consumption of the object, as when it is
merely for exhibition. (Art. 1936, CivilCode)
Q: In the province, a farmer couple borrowed money from the local merchant. To
guarantee payment, they left the Torrens Title of their land with the merchant, for him to
hold until they pay the loan. Is there a – a) Contract of pledge b) Contract of mortgage c)
Contract of antichresis, or d) None of the above? Explain. (1996, 1997, 1998, 2017 Bar)
A: None of the above. There is no pledge because only movable property may be
pledged. (Art. 2094) If at all, there was a pledge of the paper or document constituting
the Torrens Title, as a movable by itself, but not of the land which the title represents.
There is no mortgage because no deed or contract was executed in the manner required
by law for a mortgage. (Arts. 2085 to 2092; Arts. 2124 to 2131)
There is no contract of antichresis because no right to the fruits of the property was
given to the creditor. (Art. 2132) A contract of simple loan was entered into with
security arrangement agreed upon by the parties which is not one of those mentioned
above.
Q: The parties in a contract of loan of money agreed that the yearly interest rate is 12%
and it can be increased if there is a law that would authorize the increase of interest
rates. Suppose OB, the lender, would increase by 5% the rate of interest to be paid by
TY, the borrower, without a law authorizing such increase, would OB‘s action be just
and valid? Why? Has TY have a remedy against the imposition of the rate increase?
Explain. (2001, 2004 Bar)
A: OB's action is not just and valid. The debtor cannot be required to pay the increase in
interest there being no law authorizing it, as stipulated in the contract of loan. Increasing
the rate in the absence of such law violates the principle of mutuality of contracts under
Art. 1308.
Q: In order to secure a bank loan, XYZ Corporation surrendered its deposit certificate,
with a maturity date of 01 September 1997 to the bank. The corporation defaulted on the
due repayment of the loan, prompting the bank to encash the deposit certificate. XYZ
Corporation questioned the above action taken by the bank as being a case of pactum
commissorium. The bank disagrees. What is youropinion? (1997Bar)
A: There is no pactum commissorium here. Deposits of money in banks and similar
institutions are governed by the provisions on simple loans. (Art. 1980) The relationship
between the depositor and a bank is one of creditor and debtor. Basically this is a matter
of compensation as all the elements of compensation are present in this case. (BPI v.
CA, G.R. No. 104612, May 10,1994)
Q: X, who has a savings deposit with Y Bank in the sum of P1,000,000.00 incurs a loan
obligation with the said Bank in the sum of P800000.00 which has become due. When X
tries to withdraw his deposit, Y Bank allows only P200,000.00 to be withdrawn, less
service charges, claiming that compensation has extinguished its obligation under the
savings account to the concurrent amount of X‘s debt. X contends that compensation is
improper when one of the debts, as here, arises from a contract of deposit. Assuming
that the promissory note signed by X to evidence the loan does not provide for
compensation between said loan and his savings deposit, who is correct? (1998 Bar)
A: Y Bank is correct. Art. 1287 of the Civil Code does not apply. All the requisites of
Art. 1279, Civil Code are present. In the case of Gullas v. PNB (62 Phil. 519), the
Supreme Court held: ―The Civil Code contains provisions regarding compensation (set
off) and deposit. These portions of Philippine Law provide that compensation shall take
place when two persons are reciprocally creditor and debtor of each other. In this
connection, it has been held that the relation existing between a depositor and a bank is
that of creditor and debtor. xxx As a general rule, a bank has a right of set off of the
deposits in its hands for the payment of any indebtedness to it on the part of a
depositor.‖ Hence, compensation took place between the mutual obligations of X and Y
Bank.
DEPOSIT
Obligations of a Depositary
A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keepingit and of returning the same. (Art. 1962, CC) 1. Keep the thing safely
2. Return the thing to the depositor, heirs,successors or person
designated in the contract, when required(Art. 1972, CC), together with
Principal Purpose- Safekeeping of the thing; if safekeeping is NOT the principal
all its products, accessories and accessions. (Art. 1983, CC) at the place
purpose, or is only an accessory obligation, there is NO DEPOSIT but some other
designated when deposit was made. Otherwise, where the thing may be
contract. (Art. 1962, CC)
(Art. 1987, CC).
XPNs to return on demand:there is no obligation to return on demand
Consideration
when (a) the thing is judicially attached while in the depositary‘s
A deposit is generally gratuitous, XPN:
possession, or (b) when depositary is notified of the opposition of a third
1. If there is an agreement to the contrary
person (Art. 1988, CC)
2. When the depositary is engaged in the business of storing goods (Art.
3. Bear the expenses for preservation of the thing deposited if the deposit
1965, CC)
is onerous(Art. 1992. CC)
Parties
1. Depositor: the person who delivers, or formally transfers, gives, or yields
Depositary NOT LIABLE FOR LOSS
possession or control of the movable property for purposes of safekeeping
2. Depositary: the person who receives it
GR: The depositary is NOT liable in the event of loss. The required degree of care
however, is greater if the deposit is for compensation.
XPNs:
1. Loss is through his fault or negligence(Art. 1170, CC)or the negligence of
KINDS OF DEPOSIT
his employee (Art. 1973), even if the thing was insured(Art. 2207, CC)
2. Loss while in his possession, ordinarily raises presumption of fault on his
part.
A.EXTRAJUDICIAL
3. Loss arose from the character of the thing deposited, and the depositary
was notified of, or was aware of such character at the time of the
constitution of the deposit (Art. 1993, CC)
4. Loss is through a fortuitous event, and if
1. Necessary Deposit
a. It is stipulated that depositary will beliable;
b. Depositary uses the thing withoutdepositor‘s permission;
Made in compliance with a legal obligation, or on the occasion of any calamity, or by
c. Depositary delays its return; or
travelers with common carriers(Arts.1734-1735, CC), or by travelers in hotels and
d. Depositary allows others to use it. (Art. 1979, CC)
inns(Arts.1996-2004, CC)
5. Loss when depositary uses the thing
XPN: Use with permission or forpreservation
1. Deposit by Travelers in Hotels and Inns- Before keepers of hotels or
6. Loss when depositary deposits the thingwith a third person
inns may be held responsible as depositaries with regard to the effects of
XPN: if deposit with a third person is allowed
their guests, the following must concur:
XPN to the XPN: if such third person is manifestly careless or unfit (Art.
a. Keepers or their employees have previously been informed
1973, CC);
about the effects brought by the guests; and
b. The latter have taken the precautions prescribed regarding 7. Loss occurs and the depositary receives money/replacement, he must
deliver such to the depositor (Art. 1990, CC)
their safekeeping. (Art. 1998, CC)

When Hotel-Keeper Liable- Regardless of the amount of care exercised, Authority of Depositary
1. Depositary may change way of deposit if he may reasonably presume that
the hotel-keeper is liable when—
the depositor would consent if he knew the situation. He is to notify the
a. The loss or injury to personal property iscaused by his
depositor thereof and wait for the latter‘s decision, unless delay would
servants or employees aswell as by strangers (Art. 2000,
cause danger. (Art. 1974, CC)
CC).
2. Depositary is required to collect on interest earned by certificates,
b. The loss is caused by the act of a thief or robber done
bonds, securities and instruments when it becomes due. (Art 1975, CC)
without the use of arms andirresistible force. (Art. 2001, CC)
3. Depositary cannot make use of the thing deposited unless with
When Hotel-Keeper NOT Liable
depositor’s consent or its preservation requires its use. (Art 1977, CC)
a. The loss or injury is caused by force majeure, like flood, fire,
4. Depositary may return the thing to the depositor even before the time
(Art.2000, CC)theft or robbery by a stranger—not the hotel-
designated, if there is justifiable reason not to keep it.
keeper‘s servant or employee—with the use of firearms or
irresistible force (Art.2001, CC) XPN: when the deposit is for valuable consideration (Art. 1989, CC)
XPN: Hotel-keeper is guilty of fault or negligence in failing
to provide against the loss or injury from his cause. Obligations of a Depositor
1. Depositor is obliged to reimburse the depositary for expenses incurred
(Arts.1170 and 1174, CC)
for preservation in a gratuitous deposit. (Art.1992, CC)
b. The loss is due to the acts of the guests, his family, servants,
2. Depositor is obliged to pay losses incurred due to the character of thing
visitors (Art.2002, CC)
c. The loss arises from the character of the things brought into deposited. (Art. 1993, CC)
XPNs:
the hotel (Art. 2002, CC)
a. Depositor was not aware nor expected to know of the
dangerous character of the thing;
The hotel-keeper cannot free himself from responsibility by posting notices to the
b. Depositor notified the depositary of such dangerous
effect that he is not liable for the articles brought by the guest. Such kind of stipulation
character;
shall be VOID. (Art. 2003, CC)
c. Depositary was aware of the danger without advice from the
depositor.

Authority of Depositor
a. When there are two or more depositors and they are not solidary and
2. Voluntary Deposit
the thing admits of division, one CANNOT demand more than his share
(Art. 1985, CC).
The deposit itself is a real contract, as it is not perfected until the delivery of the thing.
b. If he should lose his capacity to contract after having made the deposit, the
(Art. 1968, CC) A contract to deposit, or an agreement to constitute a deposit, is
thing cannot be returned except to persons who may have administration
consensual and binding.
of his property and rights. (Art. 1986, CC).
A deposit may be made by two or more persons (who believe that they are entitled to the
thing deposited with a third person). The third person is to deliver the thing to the one to Right of Retention
The depositary may retain the thing until the full payment of what may be due him by
whom it belongs. (Art. 1968, CC)
reason of the deposit (Art. 1994, CC)
How Entered Into: Orally or in writing(Art. 1969, CC)
How Perfected: The deposit is perfected upon delivery, which is made by the will of
the depositor. (Arts. 1963 and 1968, CC) B. JUDICIAL

obligation arises as a consequence of a law allowing the issuance of a judicial order

Extinguishment
constituting a deposit
1. Loss or destruction of thing deposited, or
Judicial Sequestration
2. In case of a gratuitous deposit, upon the death of either the depositor or
Takes place when an attachment or seizure of property in litigation is ordered. (Arts.
depositary(Art. 1995). The depositary is not obliged tocontinue with the
2005- 2009, CC) It is the only type of deposit that may involve immovable property.
contract of deposit
3. By other modes provided in the CC, e.g.novation, merger, etc.
Deposit Or Depositary Propertyof Sequestered- A person is appointed by the court
(Art. 2007)with the obligations—
1. To take care of the property with thediligence of a good father of the
family. (Art.2008, CC)
2. To continue in his responsibility until thecontroversy which give rise
thereto isended unless the court so orders. (Art. 2007, CC)

8
BAR QUESTIONS ON GUARANTY AND SURETYSHIP (1997, 2010)
Q: What is the difference between "guaranty" and "suretyship"? (2010 Bar)
A: Guaranty and Suretyship distinguished:
1. The obligation in guaranty is secondary; whereas, in suretyship, itis
primary.
2. In guaranty, the undertaking is to pay if the principal debtor cannot pay;
whereas, in suretyship, the undertaking is to pay if the principal debtor
does not pay.
3. In guaranty, the guarantor is entitled to the benefit of excussion;
whereas, in suretyship the surety is not entitled.
4. Liability in guaranty depends upon an independent agreement to pay the
obligations of the principal if he fails to do so; whereas, in suretyship, the
surety assumes liability as a regular party.
5. The Guarantor insures the solvency of the principal debtor; whereas, the
surety insures thedebt.
6. In a guaranty, the guarantor is subsidiarily liable; whereas, in a
suretyship, the surety binds himself solidarity with the principal debtor.
(Art. 2047)
Q: AB sold to CD a motor vehicle for and in consideration of P120,000, to be paid in
twelve monthly equal instalments of P10,000.00, each instalment being due and payable
on the 15th day of each month starting January 1997. To secure the promissory note, CD
(a) executed a chattel mortgage on the subject motor vehicle, and (b) furnished a surety
bond issued by Philamlife. CD failed to pay more than two (2) instalments. AB went
after the surety but he was only able to obtain three-fourths (3/4) of the total amount still
due and owing from CD. AB seeks your advice on how he might, if at all recover the
deficiency. How would you counsel AB? (1997 Bar)
A: Yes, he can recover the deficiency. The action of AB to go after the
surety bond cannot be taken to mean a waiver of his right to demand
payment for the whole debt. The amount received from the surety is only
payment pro tanto, and an action may be maintained for a deficiencydebt.
Q: Bruce is the registered owner, of a parcel of land with a building thereon and is in
peaceful possession thereof. He pays the real estate taxes and collects the rentals
therefrom. Later, Catalino, the only brother of Bruce, filed a petition where he,
misrepresenting to be the attorney-in-fact of Bruce and falsely alleging that the
certificate of title was lost, succeeded in obtaining a second owner‘s duplicate copy of
the title and then had the same transferred in his name through a simulated deed of sale
in his favor. Catalino then mortgaged the property to Desiderio who had the mortgage
annotated on the title. Upon learning of the fraudulent transaction, Bruce filed a
complaint against Catalino and Desiderio to have the title of Catalino and the mortgage
in favor of Desiderio declared null and void. Will the complaint prosper, or will the title
of Catalino and the mortgage to Desiderio be sustained? (1991 Bar)
A: Yes, the complaint for the annulment of Catalino‘s Title will prosper.
In the first place, the second owner‘s copy of the title secured by him form
the Land Registration Court is void ab initio, the owner‘s copy thereof
having never been lost let alone the fact that said second owner‘s copy of
the title was fraudulently procured and improvidently issued by the Court.
In the second place, the Transfer Certificate of Title procured by Catalino
is equally null and void, it having been issued on the basis of a simulated
or forged Deed of Sale. A forged deed is an absolute nullity and conveys
notitle. The mortgage in favor of Desiderio is likewise null and void
because the mortgagor is not the owner ofthe mortgaged property. While
itmay be true that under the ―Mirror Principle‖ of the Torrens System of
Land Registration, a buyer or mortgagee has the right to rely on what
appears on the Certificate of Title, and in the absence of anything to excite
suspicion, is under no obligation to look beyond the certificate and
investigate the mortgagor‘s title, this rule does not find application in the
case at hand because here, Catalino‘s title suffers from two fatal
infirmities,namely: 1. The fact that it emanated from a forged deed of a
simulatedsale; 2. The fact that it was derived from a fraudulently procured
or improvidently issued second owner‘s copy, the real owner‘s copy being
still intact and in the possession of the true owner, Bruce. The mortgage to
Desiderio should be cancelled without prejudice to his right to go after
Catalino and/or the government for compensation from the assurance fund.
Q: In 1982, Steve borrowed P400,000.00 from Danny, collateralized by a pledge of
shares of stock of Concepcion Corporation worth P800,000.00. In 1983, because of the
economic crisis, the value of the shares pledged fell to only P100,000.00. Can Danny
demand that Steve surrender the other shares worth P700,000.00? (1994 Bar)
A: No. Bilateral contracts cannot be changed unilaterally. A pledge is only
a subsidiary contract, and Steve is still indebted to Danny for the amount
of P400,000.00 despite the fall in the value of the stocks pledged.
Q: Distinguish a contract of chattel mortgage from a contract of pledge. (1999 Bar)
A: In a contract of CHATTEL MORTGAGE, possession belongs to the
creditor, while in a contract of PLEDGE, possession belongs to the debtor.
A chattel mortgage is a formal contract while a pledge is a realcontract.
A contract of chattel mortgage must be recorded in a public instrument to
bind third persons while a contract of pledge must be in a public
instrument containing description of the thing pledged and the date thereof
to bind third persons.
9
Q: Are the right of redemption and the equity of redemption given by law to a mortgagor
the same? Explain. (1999 Bar)
A: The equity of redemption is different from the right of redemption.
EQUITY OF REDEMPTION is the right of the mortgagor after judgment
in a judicial foreclosure proceedings, within a period of not less than 90
days, before the sale or confirmation of the sale, to pay into the court the
amount of the judgment debt. On the other hand,
RIGHT OF REDEMPTION is the right of the mortgagor, after the sale of
the mortgaged property, to redeem the property by paying to the purchaser
in the sale or for him to the sheriff who made the sale, the amount paid by
him, with interest, within one year from the sale. There is no right of
redemption, only equity of redemption, in a judicial foreclosure under the
Rules of Court.
Q: Olivia owns a vast mango plantation which she can no longer properly manage due to
a lingering illness. Since she is indebted to Peter in the amount of P500, 000.00 she asks
Peter to manage the plantation and apply the harvest to the payment of her obligation to
him, principal and interest, until her indebtedness shall have been fully paid. Peter
agrees. 1. What kind of contract is entered into between Olivia and Peter? Explain. 2.
What specific obligations are imposed by law on Peter as a consequence of their
contract? 3. Does the law require any specific form for the validity of their contract?
Explain 4. May Olivia reacquire the plantation before her entire indebtedness shall have
been fully paid? Explain. (1995 Bar)
A:
1. A contract of antichresis was entered into between Olivia and Peter.
Under Art. 2132, by a contract of antichresis the creditor acquires the right
to receive the fruits of an immovable of his debtor, with the obligation to
apply them to the payment of the interest, and thereafter to the principal of
his credit.
2. Peter must pay taxes and charges upon the land and bear the necessary
expenses for preservation and repair which he may deductfromthe
fruits.(Art. 2135)
3. The amount of the principal and interest must be specified in writing,
otherwise the antichresis will be void. (Art. 2134)
4. No. Art. 2136 specifically provides that the debtor cannot reacquire the
enjoyment of the immovable without first having totally paid what he
owes the creditor. However, it is potestative on the part of the creditor to
do so in order to exempt him from his obligation under Art. 2135, the
debtor cannot re-acquire the enjoyment unless Peter compels Olivia to
enter again the enjoyment of the property.
Q: X constructed a house on a lot which he was leasing from Y. Later, X executed a
chattel mortgage over said house in favor of Z as security for a loan obtained from the
latter. Still later, X acquired ownership of the land where his house was constructed,
after which he mortgaged both house and land in favor of a bank, which mortgage was
annotated on the Torrens Certificate of Title. When X failed to pay his loan to the bank,
the latter, being the highest bidder at the foreclosure sale, foreclosed the mortgage and
acquired X‘s house and lot. Learning of the proceedings conducted by the bank, Z is
now demanding that the bank reconvey to him X‘s house or pay X‘s loan to him plus
interests. Is Z‘s demand against the bank valid and sustainable? Why? (1994, 2003Bar)
A: No, Z‘s demand is not valid. A building is immovable or real property
whether it is erected by the owner of the land, by a usufructuary, or by a
lessee. It may be treated as a movable by the parties to chattel mortgage
but such is binding only between them and not on third parties.
(Evangelista v. Alto Surety Col, Inc., G.R. No. L11139, April 23, 1958) In
this case, since the bank is not a party to the chattel mortgage, it is not
bound by it, as far as the Bank is concerned, the chattel mortgage, does not
exist. Moreover, the chattel mortgage is void because it was not
registered. Assuming that it is valid, it does not bind the Bank because it
was not annotated on the title of the land mortgaged to the bank. Z cannot
demand that the Bank pay him the loan Z extended to X, because the Bank
was not privy to such loan transaction.
LEASE

1. Definition
3. Obligations of Parties
Scope- The contract of lease may be of things, or of work and service. (Art. 1642, CC)

Lease of Things- In the lease of things, one of the parties binds himself to give to
another theenjoyment or use of a thing for a price certain, and for a period, which may OBLIGATIONS OF A LESSOR
be definite or indefinite. However, no lease for more than 99 years shall be valid. (Art.
1. To deliver the thing which is the object of the contract in such a condition
1642, CC)
as to render it fit for the use intended;
2. To make on the same during the lease all the necessary repairs, unless
Lease of Work and Service- In the lease of work or service, one of the parties binds
there is a stipulation to the contrary;
himself to execute a piece of work or to render to the other some service for a price
3. To maintain the lessee in the peaceful and adequate enjoyment of the
certain, but the relation of principal and agent does not exist between them. (Art. 1644,
lease(Art. 1654, CC)
CC)
4. If lessee makes improvements in good faith, without altering form or
substance, lessor, upon the termination of the lease, shall pay the lessee
Limitation- Consumable goods cannot be the subject matter of a contract of lease,
1/2 of the value of the improvements at that time. If payment is refused,
except when they are merely to be exhibited or when they are accessory to an
industrial establishment. (Art. 1645, CC) lessee may remove the improvements, even though the principal thing
may suffer damage thereby. (Art. 1678, CC)
Record in the Registry of the Property- If the lease is to be recorded in the Registry of
NOT: If the thing leased istotally destroyed by a fortuitous event, the lease is
property, the following persons CANNOT constitute the same without proper authority:
EXTINGUISHED. If the destruction is partial, the lessee may choose between
1. The husband with respect to the wife‘sparaphernal real estate;
1. Proportional reduction of the rent and,
2. The father or guardian as to the property of a minor or ward;
2. A rescission of the lease (Art. 1655, CC)
3. And the Manager without special power (Art. 1647, CC)
In cases of business or industrial establishment, the lessor may continue engaging in the
Every lease of real estate may be recorded in the Registry of Property. Unless a lease is
same business or industry to which the lessee devotes the thing leased, unless there is a
recorded, it shall NOT be binding upon third persons. (Art. 1648, CC)
stipulation to the contrary. (Art. 1656, CC)

Lessor is NOT obliged to answer for a mere act of trespass which a third person may
2. Who are Qualified or Disqualified?
cause; however he or she shall have a direct action against the intruder. (Art 1664, CC)
Those Disqualified- The persons disqualified to buy referred to in Articles 1490 and
Prohibited Acts By the Lessor- Lessor cannot alter the form of the thing leased in such
1491, are also disqualified to become lessees of the things mentioned therein (Art. 1646,
a way as to impair the use to which the thing is devoted.
CC)

Those disqualified under Art. 1490

The husband and wife cannot sell property, except for
a. When a separation of property was agreed upon in the
marriage settlements; or OBLIGATIONS OF A LESSEE
1. To pay the price of the lease according to the terms stipulated;
b. When there has been a judicial separation of property under
Art. 191. 2. To use the thing leased as a diligent father of a family, devoting it to the
use stipulated;
Those disqualified under Article 1941
NOTE: In the absence of stipulation, the diligence required is to that
which may be inferred from the nature of the thing leased, according to the
The following persons cannot acquire by purchase, even at a public or judicial auction,
custom of the place;
either in person or through themediation of another:
3. To pay expenses for the deed of lease (Art. 1657, CC)
1. The guardian-The property of the person or persons who may be under
4. To notify the lessor of usurpation or untoward act which any third person
his guardianship;
may or will commit (Art. 1663, CC)
2. Agents- The property whoseadministration or sale may have been
5. To advise the lessor of need for repairs, to return the property leased upon.
intrusted to them, unless the consent of the principal have been given;
3. Executors and administrators- The property of the estate undertheir
NOTE: If the lessor fails to make any urgent repairs, lessee may order the
administration;
4. Public officers and employees- The property of the State or of any repairs at the lessor‘s cost. Lessee shall be liable for any damages caused
by his own negligence
subdivision thereof, or of any government owned or controlled
6. Lessee is obliged to tolerate the need for urgent repairs made during his
corporation, or institution, the administration ofwhich has been intrusted to
lease.
them; this provision shall apply to judges and government experts who, in
any manner whatsoever take part in the sale;
NOTE: If repairs last more than 40 days, rent may be REDUCED. If the
5. Justices, judges, prosecuting attorneys, clerks of superior and inferior
work is of such nature to render the dwelling uninhabitable, lessee may
courts, and other officers and employees connected with the
RESCINDthe contract (Art. 1662, CC)
administration of justice- The property and rights in litigation or levied
7. To Return the thing leased upon termination of lease just as he received it,
upon an execution before the court within those jurisdiction or territory
except for impairment due to lapse of time, ordinary wear and tear or
they exercise their respective functions this prohibition includes the act of
inevitable causes
acquiring by assignment and shall apply to lawyers, with respect to the
property and rights which may be the object of any litigation in which they
NOTE: In the absence of stipulation, the law presumes that the lessee had
may be the object of any litigation in which they may take part by virtue of
received it in good condition (Art. 1666, CC)
their profession
8. To be Responsible for the loss or deterioration of the thing leased, unless
6. Others specially disqualified by law
he proves it is without his fault (Art. 1667, CC)

Q: A leased his house to B with a condition that the leased premises shall be used for residential NOTE: This does not apply to cases when destruction is caused by natural
purposes only. B subleased the house to C who used it as a warehouse for fabrics. Upon calamity
learning this, A demanded that C stop using the house as a warehouse, but C ignored the 9. Tobeliableforanydeteriorationcaused by members of his household, guests
demand, A then filed an action for ejectment against C, who raised the defense that there is no or visitors (Art. 1668, CC)
privity of contract between him and A, and that he has not been remiss in the payment of rent.
Will the action prosper? (2000 Bar)
A: Yes, the action will prosper. Under Art. 1651, the sublessee is bound to the lessor for all acts
which refer to the use and preservation of the thing leased in the manner stipulated between the
lessor and thelessee.

Q: May a lessee sublease the property leased without the consent of the lessor, and what are the
respective liabilities of the lessee and sub-lessee to the lessor in case of such sublease? (1999
Bar)
A: Yes, provided that there is no express prohibition against subleasing. Under the law, when in
the contract of lease of things there is no express prohibition, the lessee may sublet the thing
leased without prejudice to his responsibility for the performance of the contract toward the 4.Payment
lessor. (Art. 1650) In case there is a sublease of the premises being leased, the sublessee is
bound to the lessorfor all the acts which refer to the use and preservation of the thing leased in In the absence of stipulation, Article 1251 shall be observed as regards the place; and
the manner stipulated between the lessor and the lessee. (Art. 1651) The sublessee is with respect to the time, the custom of the place shall be followed.
subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall
not be responsible beyond the amount ofthe rent due from him.(Art. 1652) As to the lessee, the GR: Payment shall be made in the place designated in the obligation.
latter shall still be responsible to the lessor for the rents; bring to the knowledge of the lessor XPN: There being no express stipulation and if the undertaking is to deliver a
every usurpation or untoward act which any third person may have committed or may be openly determinate thing, the payment shall be made where the thing might be at the moment
preparing to carry out upon the thing leased; advise the owner the need for all repairs; to return
the obligation was constituted.
the thing leased upon the termination of the lease just as he received it, save what has been lost
or impaired by the lapse of time or by ordinary wear and tear or from an inevitable cause; In any other case the place of payment shall be the domicile of the debtor.
responsible for the deterioration or loss of the thing leased, unless he proves thatittook
placewithout his fault.

10
5.Termination
1. By the expiration of the period (Art. 1669);
2. By the total loss of the thing;
3. By the resolution of the right of the lessor,such as when the lessor is
usufructuaryand the usufruct is terminated;
4. By the will of the purchaser or transferee ofthe things;
5. By rescission due to nonperformance ofthe obligations of one of the
parties (Art. 1659, CC)- The aggrieved party may either ask forthe
rescission of the contract and indemnification for damages, OR only ask
for indemnification for damages (the contract remains in force).
6. If a dwelling place or any other building intended for human habitation is
in such a condition that its use brings imminent and serious danger to life
or health (Art. 1660, CC)- To terminate the lease, the lessee must notify
the lessor, even if at the time the contract was perfected the former knew
of the dangerous condition or waived the right to rescind the lease on
account of this condition.
6. Renewal
Implied renewal of lease(tacit reconduccion)
1. Occurs if at the end of the contract, the lessee continues enjoying the thing
leased for 15 days with the lessor‘s acquiescence (Art. 1670, CC)
2. Period of new lease: Unless a notice to the contrary by either party has
previously been given, it is understood that there is an implied new lease
for the time established in Art. 1682 and 1687.
3. The other terms of the original contract shall be revived.
4. Obligations contracted by a third person for the security of the principal
contract shallcease with respect to the new lease. (Art. 1672, CC)
7. Unlawful Detainer
If the lessee continues enjoying the thing after the expiration of the contract, over the
lessor's objection, he is subject to the responsibilities of a possessor in bad faith. (Art.
1671, CC)
In ejectment cases where an appeal is taken, a preliminary mandatory injunction may
be granted to restore the lessor in possession if the higher court is satisfied that:
1. the lessee's appeal is frivolous or dilatory, or
2. the lessor's appeal is prima facie meritorious, by motion filed within 10
days from the time the appeal is perfected. (Art. 1674, CC)
Causes for judicial ejection of the lessee(Art. 1673)
1. When the period agreed upon, or that which is fixed for the duration of
leases under Articles 1682 and 1687, has expired
2. Art. 1682: When the duration of the lease of rural land has NOT been
fixed
a. The duration is for all the time necessary to gather the fruits
of the estate which it may yield in 1 year, or which it may
yield once, although two or more years have to elapse for the
purpose.
3. Art. 1687: If the period for the lease has NOT been fixed
a. The duration is from year to year, if the rent is annual; from
month to month, if it is monthly; from week to week, if it is
weekly; and from day to day, if it is to be paid daily.
b. In case of monthly rent, and there is no period for the lease,
the courts may fix a longer term if the lessee was in
possession for over 1 year.
c. In case of weekly rent, the courts may fix a longer term ifthe
lessee was in possessionfor over 6 months.
d. In case of daily rent, the courts may fix a longer period if the
lessee was in possession for over 1 month.
4. Lack of payment
5. Violation of any of the conditions in the contract
6. When the lessee devotes the thing leased to any use or service not
stipulated which causes its deterioration, or if he does not observe his
obligations in Art. 1657
Right to repurchase (Art. 1677)- The purchaser in a sale with the right of redemption
cannot make use of the power to eject the lessee until the end of the period for the
redemption.
8.Transfer of Lease
GR: The lessee cannot assign the lease without the consent of the lessor.
XPN: There is a stipulation to the contrary. (Art. 1649, CC)
Rights of a Purchaser of Land Under a Lease (Art. 1676, CC)
GR: The purchaser of a piece of land which is under a lease that is NOT recorded in
theRegistry of Property may terminate the lease.
XPN:
1. There is a stipulation to the contrary in the contract of sale; or
2. When the purchaser knows of the existence of the lease.
If the buyer makes use of this right, the lessee may demand:
1. That he be allowed to gather the fruits of the harvest which corresponds to
the current agricultural year; and
2. That the vendor indemnifies him for damages suffered.
If the sale is fictitious, for the purpose of extinguishing the lease, the supposed vendee
cannot make use of the right to terminate the lease.
1. The sale is presumed to be fictitious if at the time the supposed vendee
demands the termination of the lease, the sale is not recorded in the
Registry of Property.
11
9. Sub-Lease
GR: When in the contract of lease of things there is no express prohibition, the lessee may
sublet the thing leased, in whole or in part, without prejudice to his responsibility for the
performance of the contract toward the lessor. (Art. 1650, CC)
Liability of sublessee - Without prejudice to his obligation toward the sublessor, the sublessee
is bound to the lessor for all acts which refer to the use and preservation of the thing leased in
the manner stipulated between the lessor and the lessee. (Art. 1651, CC)
The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the
sublessee shall not be responsible beyond the amount of rent due from him, in accordance with
the terms of the sublease, at the time of the extra-judicial demand by the lessor.
Payments of rent in advance by the sublessee shall be deemed not to have been made, so far as
the lessor's claim is concerned, unless said payments were effected in virtue of the custom of the
place. (Art. 1652, CC)
10. Warranties
GR: In a contract of sale, there is an implied warranty on the part of the seller that:
1. He has a right to sell the thing at the time when the ownership is to pass, and that
the buyer shall from that time have and enjoy the legal and peaceful possession
of the thing; and
2. The thing shall be free from any hidden faults or defects, or any charge or
encumbrance not declared or known to the buyer.
XPN: Unless a contrary intention appears (Art. 1547, CC)
NOTE: Art. 1547 shall not be held to render liable a sheriff, auctioneer, mortgagee, pledgee, or
other person professing to sell by virtue of authority in fact or law, for the sale of a thing in
which a third person has a legal or equitable interest.
Eviction(Art. 1548, CC)- Eviction shall take place whenever by a final judgment based on a
right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or
of a part of the thing purchased.
The vendor shall answer for the eviction even though nothing has been said in the contract on
the subject.
The contracting parties, however, may increase, diminish, or suppress this legal obligation of
the vendor.
Warranty against Defects(Art. 1676, CC)
GR: The vendor shall be responsible for warranty against the hidden defects which the thing
sold may have:
1. Should they render it unfit for the use forwhich it is intended; or
2. Should they diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a
lower price for it.
XPN Said vendor shall not be answerable for:
1. Patent defects;
2. Those which may be visible; or
3. For those which are not visible if the vendee is an expert who, by reason of his
trade or profession, should have known them.
The provisions governing warranty, contained in the Title on Sales, shall be applicable to
the contract of lease. (Art. 1653(1), CC)
Where Return of the Price is Required(Art. 1653(2), CC)- Reduction shall be made in
proportion to the time during which the lessee enjoyed the thing.
Presumption of Good Condition(Art. 1666, CC)
GR: In the absence of a statement concerning the condition of the thing at the time the lease
was constituted, the law presumes that the lessee received it in good condition.
XPN: There is proof to the contrary.
Q: Adela and Beth are co-owners of a parcel of land. Beth sold her undivided share of the
property to Xandro, who promptly notified Adela of the sale and furnished the latter a copy of
the deed of absolute sale. When Xandro presented the deed for registration, the register of deeds
also notified Adela of the sale, enclosing a copy of the deed with the notice. However, Adela
ignored the notices. A year later, Xandro filed a petition for the partition of the property. Upon
receipt of summons, Adela immediately tendered the requisite amount for the redemption.
Xandro contends that Adela lost her right of redemption after the expiration of 30 days from her
receipt of the notice of the sale given by him. May Adela still exercise her right of redemption?
Explain. (2001, 2002 Bar)
A: Yes, Adela may still exercise her right of redemption notwithstanding the lapse of more than
30 days from notice of the sale given to her because Art. 1623 of the New Civil Code requires
that the notice in writing of the sale must come from the prospective vendor or vendor as the
case may be. In this case, the notice of the sale was given by the vendee and the Register of
Deeds. The period of 30 days never tolled. She can stillavailofthat right.
Q: Krystal owns a parcel of land covered by TCT No. 12345 in Angeles City. Due to severe
financial constraints, Krystal was forced to sell the property to RBP Corporation, a foreign
corporation based in South Korea. Subsequently, RBP Corporation sold the property to Gloria,
one of its most valued clients. Wanting her property back, Krystal, learning of the transfer of the
property from RBP Corporation to Gloria, sued both of them in the Regional Trial Court (RTC)
for annulment of sale and for reconveyance. She alleged that the sale by RBP Corporation to
Gloria was void because RBP Corporation was a foreign corporation prohibited by the
Constitution from acquiring and owning lands in the Philippines. Will Krystal‘s suit for
annulment of sale and reconveyance prosper? Explain your answer. (2017 Bar)
A: Krystal‘s suit will not prosper. The Supreme Court consistently ruled that if land is invalidly
transferred to an alien who subsequently becomes a Filipino citizen or transfers it to a Filipino,
the flaw in the original transaction is considered cured and the title of the transferee is rendered
valid. In this case, RBP, being a foreign corporation is prohibited from acquiring private land,
making the sale of Krystal to RBP void ab initio. However, the subsequent transfer to a Filipino
citizen cured the defect, making Gloria‘s title valid and defeating Krystal‘s action for annulment
and reconveyance.
Q: A leased a parcel of land to B for a period of two years. The lease contract did not
contain any express prohibition against the assignment of the leasehold or the subleasing
of the leased premises. During the third year of the lease, B subleased the land to C. In
turn, C, without A's consent, assigned the sublease to D. A then filed an action for the
rescission of the contract of lease on the ground that B has violated the terms and
conditions of the lease agreement. If you were the judge, how would you decide the
case, particularly with respect to the validity of:
a) B‘s sublease to C? and
b) C‘sassignmentofthesubleasetoD? Explain your answers. (1990 Bar)
A:
a) B's sublease to C is valid. Although the original period of two years for the lease
contract has expired, the lease continued with the acquiescence of the lessor during the
third year. Hence, there has been an implied renewal of the contract of lease. Under Art.
1650, the lessee may sublet the thing leased, in whole or in part, when the contract of
lease does not contain any express prohibition (Arts. 1650, 1670). A's action for
rescission should not prosper on this ground.
b) C's assignment of the sublease to D is not valid. Under Art. 1649, the lessee cannot
assign the lease without the consent of the lessor, unless there is a stipulation to the
contrary. There is no such stipulation in the contract. If the law prohibits assignment of
the lease without the consent of the lessor, all the more would the assignment of a
sublease be prohibited without such consent. This is a violation of the contract and is a
valid ground for rescission byA.
Q: In January 1993, Four-Gives Corporation leased the entire twelve floors of the GQS
Towers Complex, for a period of ten years at a monthly rental of P3,000,000.00. There
is a provision in the contract that the monthly rentals should be paid within the first five
days of the month. For the month of March, May, June, October and December 1993,
the rentals were not paid on time with some rentals being delayed up to ten days. The
delay was due to the heavy paper work involved in processing the checks. FourGives
Corporation also subleased five of the twelve floors to wholly-owned subsidiaries. The
lease contract expressly prohibits the assignment of the lease contract or any portion
thereof. The rental value of the building has increased by 50% since its lease to Four-
Gives Corporation. 1. Can the building owner eject Four-Gives Corporation on grounds
of the repeated delays in the payment of the rent? 2. Can the building owner ask for the
cancellation of the contract for violation of the provision against assignment? (1994 Bar)
A:
1. No. The building owner cannot eject FourGives Corporation on the ground of
repeated delays in the payment of rentals. The delay in the payment of the rentals is
minimal and cannot be made the basis of an ejectment suit. The delay was due to the
heavy paperwork involved in processing the checks. It would be otherwise if the lease
contract stated that in the payment of rentals within the first five days of the month, time
is of the essence or that the lessee will be in delay if he falls to pay within the agreed
period without need of demand. In this case he can judicially eject the tenant on the
ground of lack of payment of the price stipulated after a demand to vacate(Art. 1673[2]).
2. No, the lessor cannot have the lease cancelled for alleged violation of the provision
against assignment. The lessee did not assign the lease, or any portion thereof, to the
subsidiaries. It merely subleased some floors to its subsidiaries. Since the problem does
not state that the contract of lease contains a prohibition against sublease, the sublease is
lawful, the rule being that in the absence of an express prohibition a lessee may sublet
the thing leased, in whole or in part, without prejudice to his/its responsibility to the
lessor for the performance of the contract.
Q: Under a written contract dated December 1, 1989, Victor leased his land to Joel for a
period of five (5) years at a monthly rental of P1, 000.00, to be increased to P1,200.00
and P1,500.00 on the third and fifth year, respectively. On January 1, 1991, Joel
subleased the land to Conrad for a period of two (2) years at a monthly rental of
P1,500.00. On December 31, 1992, Joel assigned the lease to his compadre, Ernie, who
acted on the belief that Joel was the rightful owner and possessor of the said lot. Joel has
been faithfully paying the stipulated rentals to Victor. When Victor learned on May 18,
1992 about the sublease and assignment, he sued Joel, Conrad and Ernie for rescission
of the contract of lease and fordamages. a) Will the action prosper? If so, against whom?
Explain. b) In case of rescission, discuss the rights and obligations of the parties. (2005
Bar)
A:
a) Yes, the action for rescission of the lease will prosper because Joel cannot assign the
lease to Ernie without the consent of Victor (Art. 1649, Civil Code). But Joel may sublet
to Conrad because there is no express prohibition. (Art. 1650, Civil Code; Alipio v.
Court of Appeals, 341 SCRA 441 [2000]) Victor can rescind the contract of lease with
Joel, and the assignment of the lease to Ernie, on the ground of violation of law and of
contract. The sub-lease to Conrad remained valid for two (2) years from January 1, 1991
and had not yet lapsed when the actionwas filed on May 15, 1992.
b) In case of rescission, the rights and obligations of the parties should be as follows: At
the time that Victor filed suit on May 15, 1992, the assignment had not yet lapsed. It
would lapse on December 1, 1994, the very same date that the 50-year basic lease would
expire. Since the assignment is void, Victor can get the property back because of the
violation of the lease. Both Joel and Ernie have to surrender possession and are liable for
damages. But Conrad has not yet incurred any liability on the sublease which still
subsisted at the time of the filing of the action on May 15,1992. Ernie can file a cross-
claim against Joel for damages on account of the rescission of the contract of
assignment. Conrad can file a counter-claimagainstVictor fordamages for lack of cause
of action at the time of the filing of thesuit.
12
Q: A had a 4-storey building which was constructed by Engineer B. After 5 years, the
building developed cracks and its stairway eventually gave way and collapsed, resulting
to injuries to some lessees. Who should the lessees sue for damages? (2010 Bar)
A: The lessees may proceed against A for breach of contract, and against B for tort or
statutory liability. Under Article 1654 (2) of the New Civil Code, the lessor is obliged to
make all the necessary repairs in order to keep the leased property suitable for the use to
which it has been devoted. Consequently, under Article 1659 NCC the proprietor of a
building or structure is responsible for the damages resulting from its total or partial
collapse, if it is due to the lack of necessary repairs. Under Article 1723 NCC, the
engineer or architect who drew up the plans and specifications for a building is liable for
damages if within 15 years from the completion of the structure, the same should
collapse by reason of a defect in those plans and specifications, or due to the defects in
the ground. This liability may be enforced against the architect or engineer even by a
third party who has no privity of contract with the architect or engineer under Article
2192 NCC.
Q: Under what circumstances would an implied new lease or a tacita reconduccion
arise? (1999 Bar)
A: An implied new lease or tacita reconduccion arises if at the end of the contract the
lessee should continue enjoying the thing leased for 15 days with the acquiescence of the
lessor, and unless a notice to the contrary by either parties has previously been given.
(Art. 1670) In short, in order that there may be tacita reconduccion there must be
expiration of the contract; there must be continuation of possession for 15 days or more;
and there must be no prior demand to vacate.
Q: On January 1, 1980, Nestor leased the fishpond of Mario for a period of three years at
a monthly rental of P1,000.00, with an option to purchase the same during the period of
the lease for the price of P500,000.00. After the expiration of the three-year period,
Mario allowed Nestor to remain in the leased premises at the same rental rate. On June
15, 1983, Nestor tendered the amount of P500,000.00 to Mario and demanded that the
latter execute a deed of absolute sale of the fishpond in his favor. Mario refused, on the
ground that Nestor no longer had an option to buy the fishpond. Nestor filed an action
for specific performance. Will the action prosper or not? Why? (2001Bar)
A: No, the action will not prosper. The implied renewal of the lease on a month-to-
month basis did not have the effect of extending the life of the option to purchase which
expired at the end of the original lease period. The lessor is correct in refusing to sell on
the ground that the option had expired.
Q: TX filed a suit for ejectment against BD for non-payment of condominium rentals
amounting to P150,000. During the pendency of the case, BD offered and TX accepted
the full amount due as rentals from BD, who then filed a motion to dismiss the ejectment
suit on the ground that the action is already extinguished. Is BD‘s contention correct?
Why or why not? Reason. (2004Bar)
A: BD's contention is not correct. TX can still maintain the suit for ejectment. The
acceptance by the lessor of the payment by the lessee of the rentals in arrears even
during the pendency of the ejectment case does not constitute a waiver or abandonment
of the ejectment case. (Spouses Clutario v. CA, G.R. No. 76656, December 11,1992)
Q: A vacant lot several blocks from the center of the town was leased by its owner to a
young businessman B, for a term of fifteen (15) years renewal upon agreement of the
parties. After taking possession of the lot, the lessee built thereon a building of mixed
materials and a store. As the years passed, he expanded his business, earning more
profits. By the tenth (10th) year of his possession, he was able to build a three (3) – story
building worth at least P300,000.00/ Before the end of the term of the lease, B
negotiated with the landowner for its renewal, but despite their attempts to do so, they
could not agree on the new conditions for the renewal. Upon the expiration of the term
of the lease, the landowner asked B to vacate the premises and remove his building and
other improvements. B refused unless he was reimbursed for necessary and useful
expenses. B claimed that he was a possessor and builder in good faith, with right of
retention. This issue is now before the court for resolution in a pending litigation. a)
What are the rights of B? b) What are the rights of the landowner? (1990 Bar)
A:
a) B has the right to remove the building and other improvements unless the landowner
decides to retain the building at the time of the termination of the lease and pay the
lessee one-half of the value of the improvements at that time. The lessee may remove the
building even though the principal thing may suffer damage, but B should not cause any
more impairment upon the property leased than is necessary. The claim of B that he ws a
possessor and builder in good faith with the right of retention is not tenable. B is not a
builder in good faith, because as lessee he does not claim ownership over the property
leased.
b) The landowner/lessor may refuse to reimburse ½ of the value of the improvements
and require the lessee to remove the improvements. (Art. 1678, Civil Code) Q:
Bartolome constructed a chapel on the land of Eric. What are Batolome‘s rights if he
were a lessee of the land? (1996Bar) A: The owner of the land, as lessor, can acquire the
improvement by paying for one-half of its value. Should the lessor refuse to reimburse
said amount, the lessee may remove the improvement, even though the principal thing
may suffer damage thereby (Art. 1678, NCC). Special Rules for Lease of Rural/Urban
Lands (2000 Bar)
Q: In 1995, Mark leased the rice land of Narding in Nueva Ecija for an annual rental of
P1,000.00 per hectare. In 1998, due to the El Niño phenomenon, the rice harvest fell to
only 40% of the average harvest for the previous years. Mark asked Narding for a
reduction of the rental to P500.00 per hectare for that year but the latter refused. Is Mark
legally entitled to such reduction? (2000Bar)
A: No, Mark is not entitled to a reduction. Under Art.1680, the lessee of a rural land is
entitled to a reduction of the rent only in case of loss of more than 1/2 of the fruits
through extraordinary and unforeseen fortuitous events. While the drought brought about
by the "ElNiño" phenomenon may be classifiedas extraordinary, it is not considered as
unforeseen.