LIM v.
COURT OF APPEALS
Conditional Contract of Sale | October 31, 1990 | J. Regalado
Nature of Case: Indefinite (potestative) renewal of lease contract
Digest maker: Narciso Nario III
SUMMARY: Lim (lessor) and Dy (lessee) entered into a lease agreement for 3
years. Upon its expiry, Dy refused to vacate. A compromise agreement was
entered into, featuring a condition that allowed a renewal of the lease every three
years with a 20% rate increase “so as long as [Dy] needed the premises and can
meet and pay the said increases.” The lease continued for another 6 years, after
which Lim refused a renewal and Dy again refused to vacate. The MTC, RTC and
CA all held for Dy, stating that the compromise agreement was valid for being a
resolutory condition permitted by Article 1465. The SC reversed and invalidated
the condition, stating that it was actually a purely potestative one, prohibited by
Article 1308, that left the effectivity of the lease to the sole will of Dy.
DOCTRINE: A stipulation leaving the effectivity and enjoyment of leasehold
rights to one of the parties is a purely potestative condition, not a resolutory
condition (which is permitted under Article 1465), and is invalid under Article
1308.
FACTS:
 In 1976, petitioner Francisco Lao Lim (Lim) and respondent Benito
Villavicencio Dy (Dy) entered into a contract of lease wherein Lim leased
property to Dy for a period of three years.
 After the period expired, Dy refused to vacate the premises, leading to Lim
filing an ejectment suit.
 The suit was settled via a judicially-approved compromise agreement,
Paragraph 3 of which stated:
o “That the term of the lease shall be renewed every three years
retroacting from October 1979 to October 1982, after which the
above-named rental shall be raised automatically by 20& every
three years so as long as defendant [Dy] needed the premises and
can meet and pay the said increases, the defendant to give notice of
his intent to renew sixty (60) days before the expiration of the
term.”
 The lease was renewed from October 1979 to October 1982, and again from
October 1982 to October 1985.
 On April 17, 1985, Lim informed Dy of his intention to no longer renew the RULING:
contract, effective October 1985. However, on August 5, 1985, Dy informed
Lim of his intention to renew. A second ejectment suit soon followed.
 MTC: DISMISSED the suit on the grounds that (1) the lease contract had not return the possession of the leased premises subject of the present action to petitioner
expired; and (2) the compromise agreement constituted res judicata.
 RTC: AFFIRMED the MTC.
 CA: AFFIRMED the RTC, holding that (1) the stipulation allowing Dy to immediately executory. SO ORDERED.
stay as long as he needed to was a valid resolutory condition, and thus
beyond the ambit of Article 1308 of the Civil Code; and (2) the compromise
constituted res judicata.
ISSUE/S & RATIO:
1. W/N the stipulation was valid – NO
 Article 1308: “The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.”
 The SC held that the stipulation allowing Dy to stay “for as long as he
needed the premises and could pay” was a purely potestative condition
that left the effectivity and enjoyment of the lease exclusively to the will of
Dy. Additionally, it was held to be a suspensive condition because the
renewal of the lease was also reliant on Dy’s will.
 It was NOT a resolutory condition because it was not a condition that
terminated the lease.
 The clause that allowed the lease to be renewed via Dy informing Lim 60
days before the expiry was to be read in accordance with the first part of the
paragraph. The 60-day period was contingent on a mutual agreement being
reached beforehand.
o This interpretation adheres to the principle of interpreting
reciprocal contracts in a manner that serves both parties’ interests.
Leaving the effectivity of the lease to the will of one party is clearly
violative of this principle, and is void under Article 1308.
 The clause “for as long as defendant needed the premises…” was to be
interpreted as provided for only one lease period. It did not confer the right
of guaranteed renewal for periods beyond that which was agreed upon.
2. W/N the case is barred by res judicata – NO
 The MTC, RTC and CA all erred in holding that the case was in res judicata.
 For res judicata to hold, 4 requisites must concur: (1) a final judgment; (2)
jurisdiction; (3) judgment on the merits; and (4) identity of parties, subject
matter, and cause of action between the two cases.
 The fourth requisite is lacking, as there is no identity of subject matter and
cause of action.
o The subject matter in the first case is the original lease contract; the
second was the lease contract created under the terms of the
compromise agreement.
o The cause of action in the first case is the refusal to vacate under the
original contract; the second was the refusal to vacate under the
compromise agreement.
WHEREFORE, the decision of respondent Court of Appeals is REVERSED
and SET ASIDE. Private respondent is hereby ordered to immediately vacate and
and to pay the monthly rentals due thereon in accordance with the compromise
agreement until he shall have actually vacated the same. This judgment is