The Supreme Court clarified that lessors cannot retroactively shift the burden of Value Added Tax (VAT) to lessees if they initially chose to absorb it. Additionally, the Court confirmed that rental adjustments based on extraordinary inflation require an official declaration, emphasizing that a general decline in currency value isn’t sufficient justification. This decision protects lessees from unexpected cost increases and ensures that lease agreements are interpreted based on the parties’ original intentions and prevailing economic conditions.

Ramon’s Rent: Can Almeda Impose New Taxes and Inflation Adjustments?

Bathala Marketing Industries, Inc. (lessee), represented by Ramon H. Garcia, renewed its lease contract with Ponciano L. Almeda (lessor) in May 1997. The lease covered a portion of the Almeda Compound for a monthly rental of P1,107,348.69. The contract stipulated that any increases in property assessment or new taxes would be borne by the lessee, and it also addressed potential adjustments due to extraordinary inflation or devaluation. However, a dispute arose after Ponciano’s death, when his successors, Eufemia and Romel Almeda (petitioners), attempted to impose Value Added Tax (VAT) and increase the rental by 73%, citing extraordinary inflation. Bathala Marketing refused, arguing that the original rental already included VAT and that extraordinary inflation did not exist. This disagreement led to a legal battle focused on interpreting the lease contract’s clauses and the applicability of Article 1250 of the Civil Code.

The heart of the matter revolved around two key provisions in the lease agreement. First, the provision stated that the rental rate was based on the present rate of assessment on the property. It also stated that should the assessment increase or any new tax, charge or burden be imposed by authorities, the LESSEE shall pay, when the rental herein provided becomes due, the additional rental or charge corresponding to the portion hereby leased. Second, it states, in case an extraordinary inflation or devaluation of Philippine Currency should supervene, the value of Philippine peso at the time of the establishment of the obligation shall be the basis of payment. These clauses became points of contention when the lessors sought to pass on the VAT and significantly increase the rental amount.

In February 1998, Bathala Marketing filed an action for declaratory relief to clarify these provisions, while the Almedas initially filed an ejectment case, then dismissed it, and refiled it in the Metropolitan Trial Court of Makati. The Regional Trial Court (RTC) ruled in favor of Bathala Marketing, declaring that they were not liable for VAT or rental adjustments due to the absence of extraordinary inflation. The Court of Appeals (CA) affirmed this decision, modifying it only by deleting the order for the restitution of excess payments made by Bathala Marketing, as declaratory relief actions typically do not include affirmative reliefs beyond declarations of rights. Petitioners elevated the case to the Supreme Court, raising questions regarding the applicability of Article 1250 of the Civil Code and the propriety of declaratory relief given the alleged breach of contract.

The Supreme Court affirmed the Court of Appeals’ decision, underscoring several crucial points of law. First, the Court addressed the propriety of the declaratory relief action. It emphasized that for such an action to be valid, there must be no existing breach of the contract at the time of filing. The Court found that Bathala Marketing continued to pay the stipulated rental amount, fulfilling their obligations and thereby justifying the declaratory relief action. Citing Panganiban v. Pilipinas Shell Petroleum Corporation and Teodoro, Jr. v. Mirasol, the Supreme Court differentiated the present case, noting that unlike those cases, there was no prior breach of contract that would preclude the action for declaratory relief.

Concerning the VAT liability, the Supreme Court agreed with the lower courts that the Almedas could not pass on the VAT to Bathala Marketing. The Court stated that under Republic Act (RA) 7716, lessors have the option to shift the VAT burden to lessees but must exercise this option at the outset. As the original lessor, Ponciano Almeda, did not charge VAT when the contract was renewed in 1997, he effectively waived the right to do so. This inaction estopped the petitioners from subsequently imposing the VAT. The court emphasized that the sixth condition of the lease contract applied only to new taxes imposed after the contract’s effectivity, and since the VAT law had been in effect since 1994, it did not qualify as a new tax under the agreement.

Finally, the Court addressed the claim for rental adjustment based on extraordinary inflation or devaluation. Although the contract mentioned “extraordinary inflation or devaluation,” the Court aligned this with Article 1250 of the Civil Code, which refers to “extraordinary inflation or deflation.” Article 1250 of the Civil Code states:

“In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.”

The Supreme Court emphasized that extraordinary inflation exists when there is an unusual or unforeseen decrease or increase in the purchasing power of the Philippine currency, beyond the common fluctuations in its value. Referencing several prior cases, the Court stated that the decline in the peso’s value over recent decades does not constitute the extraordinary phenomenon contemplated by Article 1250. Absent an official declaration of extraordinary inflation by competent authorities, the effects of Article 1250 are not to be applied. Therefore, the Court denied the petitioners’ claim for rental adjustment.

FAQs

What was the main issue in this case?	The main issue was whether the lessor could retroactively impose VAT and adjust rental rates due to extraordinary inflation, based on the terms of their lease agreement and Article 1250 of the Civil Code.
Can a lessor pass on VAT to the lessee after the lease contract has been in effect?	No, the lessor cannot retroactively pass on VAT to the lessee if the original lessor did not impose it when the contract was renewed. The option to shift the VAT burden must be exercised at the outset.
What constitutes extraordinary inflation or deflation under Article 1250 of the Civil Code?	Extraordinary inflation or deflation refers to an unusual or unforeseen decrease or increase in the purchasing power of the currency, beyond common fluctuations, which was not reasonably foreseeable by the parties.
Does a general decline in the value of the Philippine peso qualify as extraordinary inflation?	No, a general decline in the peso’s value over time does not automatically qualify as extraordinary inflation. There must be an official declaration by competent authorities.
What is the significance of the contract’s wording regarding “extraordinary inflation or devaluation”?	Although the contract used the term “devaluation,” the Court interpreted it in harmony with Article 1250’s “deflation,” finding that the parties intended to adhere to the principles outlined in the Civil Code.
When is an action for declaratory relief appropriate?	An action for declaratory relief is appropriate when there is a question about the validity or construction of a document, and there has been no breach of the contract at the time of filing the petition.
What must lessors do to ensure they can pass on VAT to lessees in the future?	To ensure they can pass on VAT to lessees, lessors must clearly state the VAT imposition and include it in the original lease agreement or its renewal, exercising their option to shift the tax burden at the outset.
Was Bathala Marketing in breach of contract when it filed for declaratory relief?	No, Bathala Marketing was not in breach because it continued to pay the stipulated rental amount, thereby fulfilling its obligations under the contract during the dispute.

This case reinforces the principle that contractual obligations should be interpreted based on the original intent of the parties and existing legal frameworks. It serves as a reminder for lessors to clearly stipulate VAT responsibilities and to understand the requirements for claiming rental adjustments due to extraordinary inflation. The decision also protects lessees from unforeseen financial burdens imposed retroactively or without proper legal basis.

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: Eufemia Almeda and Romel Almeda v. Bathala Marketing Industries, Inc., G.R. No. 150806, January 28, 2008