ASG Law

Tag: Right of Accession

  • Cooperative Tax Exemptions: Land Leases and Machinery Assessments Under Philippine Law

    The Supreme Court has clarified that real property tax exemptions for cooperatives extend to leased lands, benefiting lessees. Additionally, the Court ruled that certain road equipment and mini-haulers used in a palm oil plantation qualify as real property for tax purposes, based on the Local Government Code’s definition of ‘machinery.’ This decision provides clarity on the scope of cooperative tax exemptions and the classification of machinery in real property taxation.

    Plantation Paradox: Can a Cooperative’s Tax Shield Extend to a Palm Oil Lessee’s Equipment?

    Filipinas Palm Oil Plantation Inc. (Filipinas) leased land from NGPI-NGEI Cooperatives, which are composed of Comprehensive Agrarian Reform Law beneficiaries. The Provincial Assessor of Agusan del Sur assessed real property taxes on Filipinas’ properties within the plantation, including standing oil palm trees, plantation roads, residential areas, and haulers. Filipinas contested these assessments, arguing that as a lessee of a tax-exempt cooperative, it should also benefit from the exemption. The Local Board of Assessment Appeals (LBAA) and the Central Board of Assessment Appeals (CBAA) partially sided with Filipinas, but the Provincial Assessor appealed, leading to this Supreme Court decision. The core legal question was whether the tax exemption granted to cooperatives extends to their lessees and whether certain equipment should be classified as taxable real property.

    The Supreme Court addressed the issue of whether the tax exemption privilege of NGPI-NGEI extends to Filipinas as the lessee of the cooperative’s land. Citing Section 234(d) of the Local Government Code, the Court emphasized that all real property owned by duly registered cooperatives is exempt from real property tax. The Court noted that the law does not distinguish or limit the exemption based on whether the property is used by the cooperative itself or leased to another party. There is no provision in the law suggests that the real property tax exemption only applies when the property is directly used by the cooperative, thus it extends to the lessee Filipinas.

    In its analysis, the Supreme Court distinguished this case from Mactan Cebu International Airport Authority v. Ferdinand J. Marcos, clarifying that the latter did not pertain to tax exemptions extended to cooperatives. The Court stated that the Local Government Code did not withdraw the exemption granted to cooperatives. Therefore, the exemption applies regardless of whether the land is leased, benefiting the cooperative’s lessee.

    Regarding the roads constructed by Filipinas within the leased area, the Court referenced the case of Bislig Bay Lumber Company, Inc. v. Provincial Government of Surigao. In that case, a road constructed by a timber concessionaire on public land was deemed exempt from real property tax because it benefited not only the company but also the public. The Court applied this principle to Filipinas, noting that the roads in question were also used by the members of NGPI-NGEI and the public.

    Additionally, the Court pointed out that under Articles 440 and 445 of the Civil Code, the roads had become permanent improvements on the land owned by NGPI-NGEI by right of accession.

    Article 440. The ownership of property gives the right by accession to everything which is produced thereby, or which is incorporated or attached thereto, either naturally or artificially.

    Article 445. Whatever is built, planted or sown on the land of another and the improvements or repairs made thereon, belong to the owner of the land.

    Even though Filipinas constructed the roads, the ownership of these improvements belonged to NGPI-NGEI as the landowner. The lease agreement between Filipinas and NGPI-NGEI also stipulated that all fixed and permanent improvements, such as roads, would accrue to the lessor upon termination of the lease without reimbursement. Therefore, NGPI-NGEI, as the owner of the roads, would be liable for real property taxes if not for their express exemption under the Local Government Code.

    The Supreme Court then addressed the classification of road equipment and mini haulers. The Court analyzed Section 199(o) of the Local Government Code, which defines “machinery” as real property subject to real property tax. This section includes machines, equipment, and mechanical contrivances, whether or not attached to the real property, if they are directly and exclusively used to meet the needs of a particular industry or business.

    SECTION 199. Definition of Terms. — When used in this Title, the term:
    . . . .
    (o) “Machinery” embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily, to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes[.]

    The Court clarified that the definition of machinery under the Local Government Code prevails over Article 415(5) of the Civil Code. In Manila Electric Company v. City Assessor, the Supreme Court held that the Local Government Code, as a special law granting local government units the power to impose real property tax, takes precedence over the Civil Code, a general law governing property and property relations. The road equipment and mini haulers were deemed essential for Filipinas’ palm oil plantation operations, classifying them as machinery subject to real property tax.

    The Court emphasized that transportation is indispensable for Filipinas’ operations, as it involves harvesting fruits from palm trees and converting them into oil through a milling plant. The road equipment and mini haulers are physical facilities for production, directly and exclusively used to meet the needs of Filipinas’ operations. Despite Filipinas’ claim that the equipment was no longer vital due to the use of outside equipment, the Court stated that this factual issue was not raised before the lower courts and could not be considered on appeal.

    Therefore, the Supreme Court concluded that while the tax exemption for cooperatives extends to lessees like Filipinas, the road equipment and mini haulers should be assessed with real property taxes, aligning with the Local Government Code’s definition of machinery.

    FAQs

    What was the key issue in this case? The central issues were whether a cooperative’s real property tax exemption extends to its lessee and whether road equipment and mini haulers qualify as taxable real property under the Local Government Code.
    Does the real property tax exemption for cooperatives apply to leased land? Yes, the Supreme Court ruled that the tax exemption extends to all real property owned by duly registered cooperatives, regardless of whether the property is leased to another party. The exemption benefits the cooperative’s lessee.
    Are roads constructed by the lessee on cooperative land taxable? No, roads constructed by the lessee on the land are not taxable as they become permanent improvements accruing to the landowner (the cooperative). Since the cooperative is tax-exempt, no real property tax is due.
    How does the court define “machinery” for real property tax purposes? The court uses the definition in Section 199(o) of the Local Government Code, which includes machines, equipment, and mechanical contrivances used directly and exclusively for an industry, whether or not permanently attached to the real property.
    Are road equipment and mini haulers considered taxable real property? Yes, the Supreme Court classified the road equipment and mini haulers as machinery used in the palm oil plantation’s operations, making them subject to real property tax. The classification is based on their use and indispensability to the business.
    What if the equipment is no longer essential to the business? The Supreme Court noted that the argument of the equipment no longer vital to the company’s operation was not raised before the lower courts, so it could not be considered on appeal.
    Which law prevails: the Civil Code or the Local Government Code? In this case, the Local Government Code, as a special law granting local government units the power to impose real property tax, prevails over the Civil Code, which is a general law governing property relations.
    How does the right of accession affect this case? The right of accession means that any improvements made to the land, such as roads, become the property of the landowner (the cooperative). This is significant because it means the roads are owned by a tax-exempt entity.

    In conclusion, this decision clarifies the scope of tax exemptions for cooperatives and provides guidance on classifying machinery for real property tax purposes. The ruling emphasizes the importance of the Local Government Code in determining what constitutes taxable real property and how exemptions are applied.

    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: Provincial Assessor of Agusan del Sur v. Filipinas Palm Oil Plantation, Inc., G.R. No. 183416, October 05, 2016

  • Bad Faith Building: No Reimbursement for Improvements Made Against Owner’s Wishes

    The Supreme Court ruled that builders in bad faith, who construct on another’s land despite being warned against it, are not entitled to reimbursement for useful improvements. This decision clarifies the rights of landowners and the responsibilities of those who build on property without a clear legal basis, reinforcing the principle that improvements made against the owner’s explicit wishes do not create a right to compensation beyond the recovery of expenses for preservation.

    Building on Shifting Sands: When Tolerance Turns to Trespass

    The case revolves around a property dispute between the Spouses Aquino and the Spouses Aguilar. The Aquinos owned a house and lot in Makati City, which was occupied by Josefina Aguilar, Teresa Aquino’s sister, and her family since 1981. Initially, this occupation was with the Aquinos’ consent, who were residing in the United States at the time. However, the situation evolved when the Aguilars demolished the existing house and constructed a three-story building in its place, occupying a portion of it for two decades without paying rent.

    In 2003, the Aquinos, needing the property for a family member, demanded that the Aguilars vacate the premises. This demand led to a legal battle, culminating in the Supreme Court’s decision. The Aguilars argued they had contributed to the improvement of the property and the construction of the building, expecting exclusive use of a portion in return, thus claiming rights as co-owners and builders in good faith. This claim was central to the dispute, determining whether they were entitled to compensation for their contributions.

    The Metropolitan Trial Court (MeTC) ruled in favor of the Aquinos, stating their right to possess the property as registered owners. The MeTC deemed the Aguilars as builders in bad faith, not entitled to reimbursement. This decision was based on a letter from 1983 where the Aquinos had already advised the Aguilars against constructing improvements, as they intended to sell the property. This initial warning played a crucial role in determining the Aguilars’ status as builders in bad faith.

    The Regional Trial Court (RTC) affirmed the MeTC’s decision, emphasizing that the Aguilars’ stay was by mere tolerance. The RTC highlighted the 1983 letter as evidence that the Aquinos never consented to the construction. Dissatisfied, the Aguilars elevated the case to the Court of Appeals (CA), which also concluded that they were not co-owners or builders in good faith. However, the CA introduced a modification, stating the Aguilars should be reimbursed for necessary and useful expenses incurred, relying on Articles 1678 and 546 of the Civil Code.

    The Supreme Court, in its analysis, addressed the CA’s ruling on reimbursement. The Court clarified that **Article 1678 of the Civil Code** applies specifically to lessees making improvements on leased property, not to those occupying property by mere tolerance without a contractual right. This distinction is crucial as it limits the scope of reimbursement for improvements made on another’s property.

    The Supreme Court referred to the case of Calubayan v. Pascual, emphasizing that the analogy between a tenant whose lease has expired and a person occupying land by tolerance lies only in their implied obligation to vacate upon demand. The Court in Calubayan v. Pascual stated:

    To begin with, it would appear that although the defendant is regarded by the plaintiffs as a “squatter” his occupancy of the questioned premises had been permitted or tolerated even before the Philippine Realty Corporation sold the lots to the plaintiffs…The status of defendant is analogous to that of a lessee or tenant whose term of lease has expired but whose occupancy continued by tolerance of the owner. In such a case, the unlawful deprivation or withholding of possession is to be counted from the date of the demand to vacate.

    This analogy does not extend to conferring the status and rights of a lessee regarding reimbursement for improvements, especially given the Aguilars’ failure to prove any lease contract or agreement with the Aquinos. The core issue was whether the Aguilars acted in good faith. The MeTC, RTC, and CA all found the Aguilars to be builders in bad faith. This finding was critical because it significantly altered the Aguilars’ rights concerning the improvements they introduced.

    The Supreme Court also clarified that in some cases, it has allowed the application of Article 448 to a builder who has constructed improvements on the land of another with the consent of the owner. In these instances, the owners knew and approved of the construction, leading the Court to deem the structures built in good faith, despite the builders knowing they were constructing on another’s land. However, this principle did not apply in the case, as the Aquinos prohibited the Aguilars from building on the property. The MeTC explained:

    Likewise, in a letter dated 15 July 1983 sent by plaintiffs to the defendants marked as Exhibit “2” of defendants’ Position Paper, Teresa Aquino made known to the defendants not to construct on the premises as she planned to sell the same when the value of the property shall increase (sic). Defendants are undoubtedly builders in bad faith for despite the prohibition made upon them, they continued their construction activities upon respondents’ property.

    The Supreme Court emphasized that the Aguilars had been warned not to build on the land as early as 1983. This warning was a critical piece of evidence, demonstrating that the Aquinos had explicitly prohibited the Aguilars from constructing improvements. Consequently, the Supreme Court applied **Articles 449 and 450 of the Civil Code** concerning builders in bad faith. Article 449 states:

    He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown without right of indemnity.

    Article 450 further elaborates:

    The owner of the land on which anything has been built, planted or sown in bad faith may demand the demolition of the work, or that the planting or sowing be removed, in order to replace things in their former condition at the expense of the person who built, planted or sowed; or he may compel the builder or planter to pay the price of the land, and the sower the proper rent.

    However, the Supreme Court also acknowledged that, pursuant to **Article 452 of the Civil Code**, a builder in bad faith is entitled to reimbursement for necessary expenses incurred for the preservation of the land. The Court stated that the Aguilars were similarly entitled to this reimbursement, but, being builders in bad faith, they do not have the right of retention over the premises.

    The practical implications of this case are significant, particularly concerning property rights and construction on another’s land. The ruling underscores the importance of obtaining explicit consent from the property owner before undertaking any construction or improvements. It also highlights the risks associated with proceeding without such consent. The Supreme Court ordered the Aguilars to vacate the property immediately upon the decision’s finality and pay the Aquinos P7,000 monthly rental from the date of demand (October 22, 2003) until the finality of the decision.

    FAQs

    What was the key issue in this case? The key issue was whether the Spouses Aguilar, who built a structure on land owned by the Spouses Aquino with the latter’s initial consent but subsequent prohibition, were entitled to reimbursement for the improvements they made.
    What does it mean to be a builder in bad faith? A builder in bad faith is someone who constructs on another’s land knowing they do not have the right to do so, or after being informed not to build. This status affects their rights regarding reimbursement for improvements.
    Are builders in bad faith entitled to any compensation? Yes, builders in bad faith are entitled to reimbursement for necessary expenses incurred for the preservation of the land. However, they do not have the right to retain possession of the property until reimbursed.
    What is the significance of the 1983 letter in this case? The 1983 letter, where the Aquinos advised the Aguilars against constructing on the property, was crucial evidence. It demonstrated that the Aguilars were aware of the Aquinos’ intentions and proceeded with construction despite explicit prohibition.
    How does Article 1678 of the Civil Code relate to this case? Article 1678, which concerns reimbursement for improvements made by a lessee, was deemed inapplicable because the Aguilars were not lessees but occupants by mere tolerance. The Supreme Court clarified that the rights of lessees do not automatically extend to those occupying property without a contractual agreement.
    What are the rights of the landowner when someone builds in bad faith? The landowner has the right to appropriate what has been built on the property without any obligation to pay indemnity. They can also demand the demolition of the work at the builder’s expense or compel the builder to pay the price of the land.
    Can consent to occupy land be revoked? Yes, consent to occupy land can be revoked. Once the landowner demands that the occupant vacate, the occupant’s continued possession becomes unlawful, potentially leading to liability for damages.
    What is the key takeaway for property owners from this ruling? Property owners should promptly and clearly communicate any restrictions on land use to prevent misunderstandings and potential claims. Written communication, like the 1983 letter, can serve as crucial evidence in property disputes.

    This case serves as a stark reminder of the importance of clear communication and legal compliance in property matters. The Supreme Court’s decision reinforces the principle that unauthorized construction on another’s land, especially after an explicit prohibition, carries significant legal consequences. It underscores the need for individuals to seek legal advice and obtain proper consent before undertaking any construction activities on property they do not own.

    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: Spouses Crispin Aquino and Teresa V. Aquino vs. Spouses Eusebio Aguilar and Josefina V. Aguilar, G.R. No. 182754, June 29, 2015