Unjust Enrichment in Lease Agreements When a Burnt Building Doesnt Excuse Rent

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When a building constructed on leased property burns down, can the lessee stop paying rent? This question was at the heart of a 2015 Supreme Court decision that clarified the obligations of parties in a lease agreement where rent was to be paid through the construction of a building.

The case of Spouses Golez v. Nemeño (G.R. No. 178317, September 23, 2015) involved a lease contract where the lessees built a commercial building on the lessor's property instead of paying cash rent. When the building was destroyed by fire, the lessees argued they should no longer pay rent. The Supreme Court disagreed, ruling that the destruction of the building does not excuse the lessee from paying for the use of the leased property.

The Facts of the Case

In 1989, Meliton Nemeño leased a portion of his commercial lot in Molave, Zamboanga del Sur to Spouses Ricardo and Elena Golez. Under their contract, the Golezes would construct a building worth P143,823.00 on the property. Instead of paying the P2,000.00 monthly rent in cash, the rent would be applied to pay for the building's cost. Once fully paid, ownership of the building would transfer to Nemeño.

On May 23, 1992, the building burned down. Nemeño demanded payment of accumulated rentals, but the Golezes refused, arguing that the building's destruction extinguished their obligation under Article 1262 of the Civil Code, which provides that an obligation to deliver a determinate thing is extinguished if the thing is lost without the debtor's fault.

The Issue

The central question was whether the lessees were still liable to pay rent for the period they occupied the leased property, even though the building they constructed as payment had been destroyed by fire.

The Supreme Court's Ruling

The Supreme Court ruled that the Golezes must pay back rentals for the period they actually possessed the property. The Court reasoned that the contract was fundamentally one of lease, with a modified payment scheme. The destruction of the building did not erase the lessees' obligation to compensate the lessor for the use of his property.

The Court applied the doctrine of unjust enrichment, which prevents a person from profiting inequitably at another's expense. If the Golezes were excused from paying rent simply because the building burned down, they would have enjoyed free use of the property for years without any compensation to the owner. This would constitute unjust enrichment.

However, the Court modified the amount of damages. The lower courts had ordered the Golezes to pay the full contract amount of P143,823.00. The Supreme Court reduced this to back rentals at P2,000.00 per month from June 1, 1989 to May 23, 1992 — the period the Golezes actually occupied the property. The Court noted that ordering payment equivalent to the full building cost would itself constitute unjust enrichment in favor of the lessor.

Damages and Other Claims

The Court also deleted the awards for moral, temperate, and exemplary damages. These damages were not properly pleaded in the complaint nor proven during trial. The Court noted that both parties were prevented from presenting evidence on whether the fire was intentional, and the criminal case for arson against Ricardo Golez had been dismissed.

The Court likewise denied the Golezes' counterclaim for an unpaid loan. Under the Rules of Court, possession of a promissory note by the debtor is prima facie evidence that the obligation has been paid. The letters presented by the Golezes failed to overcome this presumption.

Practical Takeaways

• A lease is a lease, regardless of payment method. Even if rent is paid through construction or improvements, the lessee must compensate the lessor for the use of the property.
• Destruction of the improvement does not extinguish rent obligations. Article 1262 applies to obligations to deliver a determinate thing, but it does not excuse a lessee from paying for actual use and enjoyment of leased premises.
• Unjust enrichment cuts both ways. Courts will not allow either party to benefit inequitably. Rent is due only for the period of actual possession.
• Damages must be pleaded and proven. Claims for moral, temperate, or exemplary damages require specific allegations in the complaint and supporting evidence during trial.
• Possession of a promissory note by the debtor raises a presumption of payment that is difficult to overcome without conclusive evidence.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.