The Supreme Court has affirmed that lease renewal options require mutual consent from both lessor and lessee. Unless explicitly stated otherwise in the lease agreement, neither party can unilaterally impose an extension. This decision clarifies that the terms of a lease, including its duration, are generally for the benefit of both parties, ensuring fairness and mutual agreement in contractual relationships.

Option to Renew: Can a Lease Be Extended Without Lessor’s Consent?

This case, LL and Company Development and Agro-Industrial Corporation v. Huang Chao Chun and Yang Tung Fa, arose from a dispute over the extension of a lease contract. LL and Company, the lessor, filed an unlawful detainer case against Huang Chao Chun and Yang Tung Fa, the lessees, alleging that the lease contract had expired and that the lessees had failed to pay the required rentals. The lessees argued that they were entitled to renew the contract based on a clause providing an “option to renew.” The central legal question before the Supreme Court was whether this clause allowed the lessees to unilaterally extend the lease, or whether it required mutual agreement between the lessor and the lessees.

The factual backdrop involves an amended lease contract entered into by LL and Company with Huang Chao Chun and Yang Tung Fa in August 1991, modifying a prior agreement. Key provisions included a five-year lease term commencing on September 15, 1991, expiring on September 16, 1996, and a clause granting an “option to renew.” When the initial term concluded, LL and Company sought to terminate the lease, citing non-payment of rentals and the expiration of the contract. The lessees, however, insisted on their right to renew, leading to the legal battle that reached the Supreme Court. The Metropolitan Trial Court (MeTC) initially ruled in favor of the lessees, a decision affirmed by the Regional Trial Court (RTC), which was then upheld by the Court of Appeals (CA). The appellate courts cited principles of justice and equity, arguing that the lessees should be allowed to renew the lease due to the significant improvements they had made on the property.

However, the Supreme Court reversed these decisions, emphasizing that the power of courts to extend a lease term is discretionary and must respect the parties’ freedom to contract. The Court noted that Article 1675 of the Civil Code excludes cases falling under Article 1673, which allows a lessor to judicially eject a lessee upon the expiration of the agreed-upon lease period. In this case, the lease contract explicitly provided a fixed term of five years. According to Article 1669 of the Civil Code, such a lease ceases “on the day fixed, without need of a demand.” The Supreme Court found that the MeTC, by extending the lease, effectively created a new contract for the parties, an action beyond its authority. Citing Bacolod-Murcia Milling v. Banco Nacional Filipino, the Court reiterated that it is not the court’s role to alter a contract or supply material stipulations.

Building on this principle, the Supreme Court addressed the lessees’ claim of an automatic renewal. The lower courts had relied on previous rulings, such as Koh v. Ongsiaco and Cruz v. Alberto, which construed an “option to renew” in favor of the lessee. However, the Supreme Court explicitly overturned these precedents, citing Fernandez v. CA, which held that a lease period is generally for the benefit of both parties unless the contract clearly states otherwise. As stated in Fernandez v. CA:

“It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease must be deemed to have been agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone… We hold that the above-quoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are overruled.”

The Court further referenced Heirs of Amando Dalisay v. Court of Appeals and Article 1196 of the Civil Code, underscoring that lease renewals require mutual agreement. The Supreme Court highlighted several factors indicating that the petitioner did not intend to renew the lease. First, LL and Company had sent a letter demanding that the lessees vacate the premises due to non-payment of rentals. Second, the disagreement over increased rental rates precluded any possibility of mutual renewal. Third, the fact that the lessor allowed the lessee to introduce improvements on the property was merely an adherence to the terms allowing for improvements, which would become the lessor’s property at the end of the lease.

Addressing the argument that ejecting the lessees after only five years was unfair given the value of their improvements, the Supreme Court emphasized that the lessees entered the contract knowing the specified five-year lease period. The Court acknowledged the principle of freedom to contract, stating that parties are free to enter into any stipulations, provided they are not illegal or against public morals. The Supreme Court also addressed the issue of non-payment of rentals. It reiterated that while mere failure to pay rentals does not automatically make possession unlawful, it becomes so when a valid demand to vacate is made by the lessor. Citing Article 1256 of the Civil Code, the Court noted that if a creditor refuses to accept payment without just cause, the debtor must consign the payment to be released from responsibility.

Respondents should have deposited in a bank or with judicial authorities the rent based on the previous rate. In the instant case, respondents failed to pay the rent from October 1993 to March 1998 or for four (4) years and three (3) months, this is in contradiction with the provisions of the Civil Code which only allows instances in which the lessee may suspend payment of rent; namely, in case the lessor fails to make the necessary repairs or to maintain the lessee in peaceful and adequate enjoyment of the property leased. The failure of the lessees to adhere to these statutory requirements further justified their ejectment.

FAQs

What was the key issue in this case?	The primary issue was whether a lease contract’s “option to renew” clause allowed the lessee to unilaterally extend the lease, or if it required mutual agreement from both the lessor and the lessee.
What did the Supreme Court decide regarding the lease renewal?	The Supreme Court ruled that the “option to renew” clause requires mutual agreement between the lessor and the lessee. Unless explicitly stated otherwise, neither party can unilaterally impose an extension.
Why did the Supreme Court overturn the lower courts’ decisions?	The Supreme Court overturned the lower courts because they had incorrectly interpreted the “option to renew” clause as favoring the lessee, and because the extension of the lease effectively created a new contract without the lessor’s consent.
What is the significance of Article 1669 of the Civil Code in this case?	Article 1669 states that if a lease is made for a determinate time, it ceases upon the day fixed without the need for demand. This was crucial because the lease contract had a fixed term, which expired before the attempted renewal.
What previous rulings did the Supreme Court overturn in this decision?	The Supreme Court expressly overruled the previous rulings in Koh v. Ongsiaco and Cruz v. Alberto, which had construed “option to renew” clauses in favor of the lessee.
What should a lessee do if the lessor refuses to accept rental payments?	According to Article 1256 of the Civil Code, the lessee should consign the payment to a bank or judicial authorities to be released from responsibility.
Can a lessor unilaterally increase the rental rate upon renewal?	No, the Supreme Court held that a unilateral increase in the rental rate is not allowed unless there is mutual agreement and compliance with any conditions specified in the contract, such as presenting increased real estate taxes.
What is the practical implication of this ruling for lease contracts?	The ruling reinforces the importance of clear and explicit language in lease contracts regarding renewal options, emphasizing that mutual agreement is generally required for any extension.

In conclusion, the Supreme Court’s decision in LL and Company Development and Agro-Industrial Corporation v. Huang Chao Chun and Yang Tung Fa underscores the necessity of mutual agreement in lease renewals, ensuring that both lessors and lessees are bound by the terms they initially agreed upon. This ruling provides clarity and reinforces the principle of freedom to contract, preventing unilateral actions that could undermine the balance of rights and obligations in lease agreements.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: LL and Company Development and Agro-Industrial Corporation, G.R. No. 142378, March 07, 2002