Land Bank of the Philippines v. R.T. Katigbak Construction Corp.

THIRD DIVISION

[G.R. No. 236517. December 5, 2018.]

LAND BANK OF THE PHILIPPINES, petitioner, vs. R.T. KATIGBAK CONSTRUCTION CORP. AND SPOUSES RICARDO T. KATIGBAK AND ALICE KATIGBAK, respondents.

NOTICE

Sirs/Mesdames :

Please take notice that the Court, Third Division, issued a Resolution datedDecember 5, 2018, which reads as follows:

"G.R. No. 236517 — (LAND BANK OF THE PHILIPPINES, petitioner, v. R.T. KATIGBAK CONSTRUCTION CORP. AND SPOUSES RICARDO T. KATIGBAK AND ALICE KATIGBAK, respondents). — Parol evidence may be admitted if the party invoking it can establish: "first, that the existence of any of the four (4) exceptions [under Rule 130, Section 9 of the Revised Rules on Evidence] has been put in issue in a party's pleading or has not been objected to by the adverse party; and second, that the parol evidence sought to be presented serves to form the basis of the conclusion proposed by the presenting party." 1

This is a Petition for Review on Certiorari, 2 praying that the July 20, 2017 Decision 3 and January 10, 2018 Resolution 4 of the Court of Appeals be reversed and set aside. 5 The Court of Appeals affirmed with modification the July 27, 2015 Joint Decision 6 of the Regional Trial Court of Antipolo City, which found the Land Bank of the Philippines' (Land Bank) pre-termination of the Contract of Lease 7 (Lease Contract) unlawful and declared the foreclosure sale of respondents' property as void. 8

Sometime in May 1996, R.T. Katigbak Construction Corp. (Katigbak Corp.) bought a piece of land along Ortigas Avenue extension corner Sunrise Drive, Cainta, Rizal through the Land Bank lending facility. 9 Katigbak Corp. planned to build a seven (7)-story commercial building on the lot. 10

On May 17, 1996, Katigbak Corp. and Land Bank entered into a Loan Agreement, 11 where Katigbak Corp. borrowed P14.7 million for the payment of the lot and the construction of the first three (3) floors of the proposed commercial building. 12 The loan was secured by a Real Estate Mortgage 13 on the lot, including all its existing and future improvements. 14

On June 11, 1996, Katigbak Corp. and Land Bank entered into a 15-year Agreement to Lease 15 (Lease Agreement), where the bank will rent the first three (3) floors of the proposed commercial building. 16 When the construction of the building was about to be completed, the parties entered into a Lease Contract on October 1, 1996, in accordance with their Lease Agreement. 17

On March 21, 1997, Katigbak Corp. and Land Bank amended the Loan Agreement, 18 increasing the loan from P14.7 million to P21.9 million, or an additional P7.2 million. 19 Of it, P1.9 million was used to reimburse the additional cost to build the first three (3) floors, while the remaining P5.3 million was used to build the fourth to sixth floors of the building. 20 The additional loan was coterminous with the existing P14.7 million loan. 21 CAIHTE

On June 6, 1997, Katigbak Corp. executed a Deed of Assignment of Rentals, 22 where it assigned, transferred, and conveyed to Land Bank the lease rentals of the building as "payment/amortization of its loan with the [Land Bank]." 23

Since Land Bank would transfer to its newly purchased office, it sent Katigbak Corp. a Notice of Termination 24 of their Lease Contract on April 10, 2007, effective August 15, 2007. 25 It cited Paragraph 2 of the Lease Contract:

2. TENOR — The Lease shall be for a period of [15] years to commence on the date of delivery renewable upon such terms and conditions as may be agreed upon by both parties. In the event [that] the LESSEE desire[s] to renew this Contract under this paragraph, the LESSOR shall be notified in writing at least three (3) months before expiration of this Lease. It is further understood and mutually agreed upon that in the event the LESSEE shall decide to transfer its office in order to render better services to its clients or to agrarian reform beneficiaries and/or in the pursuit of its agrarian reform mission or should decide to acquire its own Branch bank site through the purchase of an existing building and real estate property or through the construction of its own building to house its bank branch office in its realty or on a rented land, this [Lease Contract] shall become automatically terminated upon ninety (90) days prior written notice to the LESSOR and subject to the provisions of this Contract with regard to the improvements that may have been introduced to the Leased Premises by the LESSEE. In this instance, LESSEE shall likewise be entitled to a refund of the remaining unapplied/unused advance rentals/deposit provided for under paragraph 4 hereof. 26 (Underscoring in the original)

In its April 30, 2007 Letter, 27 Katigbak Corp., through counsel, wrote:

We have to remind you that more than 10 years ago, Land Bank embarked on a branch expansion program which utilized what they called "outside partners[."] The program was designed to establish 300 branches in three (3) years, to make Land Bank ready and competitive to hold government deposits because [the Philippine National Bank] was then being privatized. Because of [the Commission on Audit] and strict budgetary rules, Land Bank could only establish 20 or so branches during the first full year of the expansion program. Land Bank had to use another approach using "outside partners[."] [Katigbak Corp.] was one [1] among the hundreds of clients targeted to be outside partners and induced and persuaded to buy a lot on which a branch site was established, presently the Cainta Branch. The new strategy was to help the "outside partner" acquire a lot or built (sic) the structure with loans from the bank, and the repayment of the term loans were to be matched with the rentals of the lease. Par. 2 of the Lease Contract dated October 1, 1996 (termination clause) was originally not part of the [L]ease [A]greement but was inserted in the final draft of the [Lease Contract] simply for accounting purposes only, i.e., to prevent the transaction from being booked as a "capital lease" which would have meant booking of two [2] types of expenses, affecting the bottom line (net income of the bank), considering the branches intended to be established. [Katigbak Corp.] would not have agreed with the arrangement with the bank and would not have signed the [Lease Contract], which was solely prepared by the bank and presented to [Katigbak Corp.] for signing after the bank had already occupied the leased premises — if it were not for the assurance that the pre-termination clause was for accounting purposes only and would never be exercised. 28

Katigbak Corp. claimed that it would be jeopardized by the pre-termination of the Lease Contract "since the payment of the loan will be cut, thereby endangering the property mortgaged to the bank by foreclosure in case of default." 29 It alleged that the Notice of Termination (referred to in its letter as Notice of Pre-Termination) breached the terms and violated the spirit and intent of the Lease Contract. Since Land Bank pre-terminated the Lease Contract, Katigbak Corp. demanded payment for the lease's unexpired portion, an estimated P58,932,958.21, which would be applied to its loans with Land Bank and the rest of the rentals. 30 HEITAD

In its May 23, 2007 Letter, 31 Land Bank maintained that it was not guilty of any breach of contract in either its spirit and intent or its terms and conditions. 32 It denied getting outside partners or that the pre-termination clause was merely for accounting. It also noted that it had already paid Katigbak Corp. a lease rental of P81,526,101.65, which was more than sufficient to settle the corporation's loans with it. It claimed that it complied with the pre-termination clause of the Lease Contract, and could not be faulted for exercising its right. 33

On August 22, 2007, Katigbak Corp. and Spouses Ricardo and Alice Katigbak (Katigbak Corp., et al.) filed before the Regional Trial Court a Complaint 34 against Land Bank for Specific Performance with Damages. The case was docketed as Civil Case No. 07-8273. 35

Katigbak Corp., et al., alleged that Land Bank wanted to increase its branch network to meet the government's banking requirements; thus, the bank had to be physically present in all parts of the country. It came up with a branch expansion program, where 300 additional branches would be built within three (3) years. Due to strict budget rules and Commission on Audit directives, the bank only built 20 branches in the first year. To remedy this, the bank thought of a new strategy that uses outside partners. 36 Katigbak Corp., et al., further narrated:

The new scheme was simply to persuade then existing, targeted Land Bank clients (who either had sites on which branches could be built, or who were owners of existing buildings that could be refurbished to become bank branches) to apply for loans with [Land Bank], with the understanding that the proceeds of the loans would be used to build structures on, or fix up, the properties so that [Land Bank] could then enter into a lease agreement with them to utilize these properties as branches, lending centers, and/or regional offices. The basic approach was to match the term of the lease and the loan, so that the client would not have to worry about amortization of the loan, such that the rent would be the source of payment. It was intended to benefit both parties. 37

Katigbak Corp., et al., claimed that the corporation was tapped to be an outside partner. Land Bank persuaded it to buy the lot along Ortigas Avenue extension. It was even offered a loan for the building's construction, which would be based on the bank's building requirements. The loan offer of P14.7 million had a 15-year term and would be secured by a mortgage on the lot and the execution of a Surety by Spouses Ricardo and Alice Katigbak (Spouses Katigbak). 38 It stated:

Among others, to convince [Katigbak Corp., et al.], [Land Bank] presented a computation covering a fifteen (15)[-]year repayment schedule of the P14.7 [million] loan, so that by the end of the fifteenth year, the principal amount of the loan, together with the interest, would have been fully paid through the application of the rent over three (3) floors and mezzanine of the building. [Katigbak Corp., et al.] were convinced with the arrangement because of the firm assurance of [Land Bank]'s top management, for the former not to worry because the repayment of the loans and interest would come from [Land Bank] in the form of rental payments with its yearly escalation. 39

Katigbak Corp., et al., further narrated that the Lease Agreement and the subsequent Lease Contract were executed. 40 However, there was a new provision on the Lease Contract, which read: ATICcS

TERM — The Lease shall be for a period of fifteen (15) years[,] to commence on the date of delivery[,] renewable upon such terms and conditions as may be agreed upon by both parties.

In the event [that] the LESSEE desire[s] to renew this Contract under this paragraph, the LESSOR shall be notified in writing at least three (3) months before expiration of this Lease.

It is further understood and mutually agreed upon that in the event the LESSEE shall decide to transfer its office in order to render better services to its clients or to agrarian reform beneficiaries and/or in the pursuit of its agrarian reform mission or should decide to acquire its own Branch bank site through the purchase of an existing building and real estate property or branch office in its realty or on a rented land, this [Lease Contract] shall become automatically terminated upon ninety (90) days prior written notice to the LESSOR and subject to the provisions of this Contract with regard to the improvements that may have been introduced to the Leased Premises by the LESSEE. In this instance, LESSEE shall likewise be entitled to a refund of the remaining unapplied/unused advance rentals/deposit provided for under paragraph 4 hereof. 41 (Emphasis in the original)

Katigbak Corp., et al., protested the inclusion of Paragraph 2, or the pre-termination clause, saying that they would not have agreed to enter into the loan/lease arrangement if the 15-year term could be pre-terminated. However, Land Bank's top management told them that the clause was merely for accounting and would never be exercised. 42 Katigbak Corp., et al., were thus "constrained to sign the [Lease Contract] which was exclusively prepared by [Land Bank]." 43

Katigbak Corp., et al., stated that they filed the Complaint when Land Bank pre-terminated the Lease Contract and refused to pay the unexpired portion of the rent. They argued that the Lease Contract was coterminous with the term of the Loan Contract, notwithstanding the pre-termination clause. Pre-terminating the Lease Contract will cut off their only source of payment for their bank loan, and will lead to a default on their loan. Consequently, their mortgage will be foreclosed. 44

Katigbak Corp., et al., prayed for: (1) the award of P58,055,116.61, representing the rent for the Lease Contract's unexpired portion plus interest; (2) P1 million as moral damages for each of the Spouses Katigbak; (3) P500,000.00 as exemplary damages; (4) attorney's fees equivalent to 10% of the total amount due; (5) P1.5 million as litigation expenses; and (6) costs of suit. 45

In its Answer, 46 Land Bank admitted facilitating the acquisition of the lot, but denied inducing Katigbak Corp., et al., into buying it. It also admitted that it provided funds for the building's construction. However, the provision of funds was based on the approval of Katigbak Corp., et al.'s loan application, not on the bank's alleged offer. On the presentation of the amortization schedule, Land Bank contended that part of its standard operating procedure in loan processing was to present an amortization schedule to the borrower. It added that it had already paid the total amount of P81,526,101.65 as lease payment, which was more than the loan it extended to Katigbak Corp., et al., including interest and other charges. 47

Land Bank argued that the Lease Contract was distinct from the Loan Contract. 48 The former was "a consensual contract executed by the parties for their mutual benefits and advantages." 49 It denied having blanket authority in pre-terminating the Lease Contract since this act was "subject to specified reasons or purposes only and under certain conditions after observance of stipulated procedure[.]" 50 It also denied assuring Katigbak Corp., et al., that the pre-termination clause was only for accounting, or that it was merely a pro-forma requirement, or a matter of form. 51 It maintained that Katigbak Corp., et al., were not constrained to sign the Lease Contract as they "voluntarily, knowingly[,] and consciously conformed to and executed the subject [Lease Contract], all the provisions of which are vibrant and operative stipulations[.]" 52 TIADCc

Land Bank averred that Katigbak Corp., et al., had no cause of action against it. In pre-terminating the Lease Contract, it was merely exercising its right under the pre-termination clause, as it was only able to do so after acquiring its own office. It added that the Lease Agreement's terms were only the minimum requirements, and did not preclude other terms and conditions, which may be agreed upon by the parties. 53

Land Bank argued that it did not stress upon Katigbak Corp., et al., that it would not avail of its right to pre-terminate the Lease Contract, or that its term was matched with the Loan Contract's term. Further, neither the Lease Contract nor the Loan Contract mentioned that the bank sought and used outside partners to increase the number of its branches or lending centers. The rental assignments executed by Katigbak Corp., et al., in favor of the bank were merely to secure their loan, in addition to the mortgage and surety agreements. It asserted that Katigbak Corp., et al., failed to present any document showing that they objected to the terms and conditions of the Contracts, or that they sought to reform them. Lastly, Land Bank invoked the application of the parol evidence rule. 54

By way of counterclaim, Land Bank demanded from Katigbak Corp., et al.: (1) the refund of P2,168,256.00 as security deposit plus legal interest; (2) P493,451.65 as excess rental payment plus legal interest; (3) P300,000.00 as moral damages; (4) P200,000.00 as litigation expenses; and (5) exemplary damages. It also prayed that Katigbak Corp., et al.'s Complaint against it be dismissed, and for Katigbak Corp., et al., to pay attorney's fees and the costs of suit. 55

Subsequently, trial ensued. 56

During the pendency of Civil Case No. 07-8273, at the trial stage, Land Bank filed a Petition for Foreclosure Sale 57 over the lot and building. 58 The property was eventually sold to Land Bank as the winning bidder in the foreclosure sale on January 28, 2010. The Clerk of Court and Ex-officio Sheriff issued a Certificate of Sale in favor of the bank on March 17, 2010. 59

Katigbak Corp., et al., discovered the foreclosure of their mortgage. Before the redemption period expired, they filed a Complaint 60 and an Amended Complaint 61 for Annulment of Foreclosure Sale, Damages, and Injunction against Land Bank, the Clerk of Court and Ex-officio Sheriff of the Regional Trial Court of Antipolo City, and the Register of Deeds of Binangonan, Rizal. The case was docketed as Civil Case No. 10-9093. 62

Katigbak Corp., et al., contended that the foreclosure was premature since Civil Case No. 07-8273 was pending before the trial court. They argued that the rental payments could have been used to fully pay the loan if Land Bank did not pre-terminate the Lease Contract. They prayed for the annulment of the foreclosure sale and the recovery of damages. They also prayed that an injunctive order be issued to prevent the consolidation of ownership of the mortgaged property by the bank. 63

The trial court issued a Temporary Restraining Order and subsequently granted a Preliminary Injunction. Civil Case No. 07-8273 and Civil Case No. 10-9093 were then consolidated and tried jointly. 64

On August 31, 2010, Land Bank filed its Answer 65 in Civil Case No. 10-9093. It reiterated that the Loan Contract and the Lease Contract were distinct from each other, and not indispensably linked. Thus, the pendency of Civil Case No. 07-8273 has no effect on its right to foreclose the mortgage in the Loan Contract. 66 Land Bank prayed for the Complaint's dismissal and the award of P300,000.00 as moral damages, P300,000.00 as litigation expenses, attorney's fees, and costs of suit. 67

Joint trial then ensued. 68 AIDSTE

In its July 27, 2015 Joint Decision, 69 the Regional Trial Court of Antipolo City ruled in favor of Katigbak Corp. 70 In finding for complainant corporation, it looked into the evidence presented, as well as the contemporaneous and subsequent acts of Katigbak Corp. and Land Bank. 71 It was convinced that "the loan and the lease [were] really connected, if not inseparably intertwined despite the fact that the basic Loan Agreement and the [Lease Contract] by themselves did not refer to each other." 72 It also found that Land Bank had ill-motive and dishonest intentions when it breached the Lease Contract. Consequently, its pre-termination of the Lease Contract was unlawful. 73

The dispositive portion of the Regional Trial Court of Antipolo City's Joint Decision read:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of [Katigbak Corp., et al.] and against [Land Bank], ordering the latter as follows:

1. In Civil Case No. 07-8273 —

a. [Land Bank] to pay [Katigbak Corp., et al.] the sum of PESOS: FORTY[-]EIGHT MILLION TWO HUNDRED EIGHTY[-]ONE THOUSAND SEVEN HUNDRED SEVENTY[-]SEVEN AND 51/100 (Php48,281,777.51), representing the rent for the unexpired portion of the lease, net of taxes, the loan balances, and the security deposit, plus interest at 12% per annum, from date of filing of the case on 22 August 2007 until fully paid;

b. [Land Bank] to pay [Katigbak Corp., et al.] the sum of FIVE HUNDRED THOUSAND (Php500,000) PESOS each as moral damages, and another TWO HUNDRED FIFTY THOUSAND (Php250,000)PESOS each as exemplary damages;

2. In Civil Case No. 10-9093 —

a. Declaring the Foreclosure Sale conducted [on 28] January 2010 and the Certificate of Sale dated 17 March 2010 issued pursuant thereto, null and void and are hereby set aside; AaCTcI

b. Further ordering the Register of Deeds of the Province of Rizal to cancel the annotation of the Certificate of Sale dated 17 March 2010 on TCT No. 631808;

3. In both cases —

a. [Land Bank] to pay [Katigbak Corp., et al.] the sum of 10% of the total amount due from [Land Bank], as and for attorney's fees;

b. [Land Bank] to pay [Katigbak Corp., et al.] the sum of ONE MILLION SIX HUNDRED THOUSAND (Php1,600,000.00) PESOS as reimbursement of litigation expenses;

c. [Land Bank] to pay the costs of suit.

SO ORDERED. 74 (Emphasis in the original)

On March 22, 2016, Land Bank filed an Appeal 75 before the Court of Appeals, assailing the July 27, 2015 Joint Decision of the Regional Trial Court of Antipolo City. It reiterated its argument that if the lease and loan were coterminous, then other forms of loan security would not be needed, as rentals would be the only payment source of Katigbak Corp., et al.'s loan. 76 It further noted that Katigbak Corp., et al.'s refusal to lower the rental escalation rate and reduce the monthly rent forced it to exercise its right under the Lease Contract's pre-termination clause. 77

Katigbak Corp., et al., also rehashed their earlier arguments. They insisted that they have a cause of action against Land Bank since they established that the Loan Contract and the Lease Contract were intertwined and coterminous, and that the pre-termination clause was merely pro-forma. Thus, its right was violated when Land Bank pre-terminated the Lease Contract. 78

Assuming that the Loan Contract and the Lease Contract were distinct from each other, Katigbak Corp., et al., argued that "the pre-termination clause [was] still invalid for violating the mutuality of contracts." 79 It further noted:

[The pre-termination clause gave Land Bank] unbridled authority to terminate the [Lease Contract] and [Katigbak Corp., et al. were] left without any recourse or authority on the matter. That whether or not the termination will render better service to its clients or to agrarian reform beneficiaries and/or in the pursuit of its agrarian reform mission or [Land Bank] desires to acquire its own Branch bank site through the purchase of an existing building and real estate property or through the construction of its own building to house its bank branch office in its realty or on a rented land, are matters left to the sole discretion of [Land Bank]. 80 (Emphasis in the original)

Katigbak Corp., et al., further contended that even if the pre-termination clause did not violate the mutuality principle of contracts, it was still ineffective for being made in bad faith. In its November 15, 2005 Letter to Katigbak Corp., et al., Land Bank cited a Malacañang directive as reason for pre-terminating the Lease Contract. However, this directive was neither offered in evidence nor was it indicated as a reason in the pre-termination clause. 81

In its July 20, 2017 Decision, 82 the Court of Appeals denied the Appeal but modified the amount of moral and exemplary damages. 83 It ruled that the Regional Trial Court of Antipolo City was justified in applying the exception to the parol evidence rule "to ascertain the true intent of the parties, which shall prevail over the letter of the document." 84 It found that based on testimonial and documentary evidence presented before the Regional Trial Court of Antipolo City, the parties intended for the loan and the lease to be coterminous "such that the lease cannot be pre-terminated as payment[,] for the loan will come from the lease rental payments." 85 Hence, when Land Bank pre-terminated the Lease Contract, it committed a breach of contract. 86 The Court of Appeals also found the breach to be in bad faith when Land Bank pre-terminated the Lease Contract on grounds not in the pre-termination clause. 87

The dispositive portion of the Court of Appeals July 20, 2017 Decision read:

WHEREFORE, the appeal is Denied.

The Joint Decision dated July 27, 2015 of the Regional Trial Court, Branch 71, Antipolo City in Civil Case Nos. 07-8273 and 10-9093 is AFFIRMED with MODIFICATION as to the amount of moral and exemplary damages. The amount of moral damages awarded to [Spouses Katigbak], each, is hereby reduced to P100,000.00; and the amount of exemplary damages awarded to [Spouses Katigbak], each, is likewise reduced to P100,000.00.

SO ORDERED. 88 (Citation omitted)

Land Bank moved for reconsideration, 89 which was denied for lack of merit in the Court of Appeals January 10, 2018 Resolution. 90

Thus, Land Bank filed before this Court a Petition for Review on Certiorari91 against Katigbak Corp., et al. Petitioner argues that the testimonies of Edna Famorca and Felixberto Bustos cannot bind it as they no longer work for it when they testified in court. Thus, their statements were their personal opinion, not petitioner's official statements. It also points out that the credibility of the former officers are tainted since they are close friends of Spouses Katigbak. 92

Petitioner stresses that the Lease Contract and the Loan Contract are "two [2] independent contracts, both having their own separate terms and conditions." 93 If they were coterminous, additional security would not have been needed since the rent would pay for the loan. This, petitioner avers, would result to an absurd situation where it would lend money to its borrowers and later on provide them with funds to pay petitioner. 94

Petitioner blames respondents for its pre-termination of the Lease Contract and consequent mortgage of the properties. If respondents agreed to lower the rent, petitioner would not have invoked the pre-termination clause. 95 SDHTEC

Since the Lease Contract's pre-termination was an exercise of petitioner's right under Paragraph 2 of the Lease Contract, respondents have no cause of action against it. 96 Their right to pre-terminate was also exercised in good faith:

The decision of [petitioner] to invoke and actually exercise its right to pre-terminate the cont[r]act was made possible by the fact that it was able to acquire its own office premises[,] which was prompted by the continuing need to provide better services to its clients and to heed the government's directive to its agencies including government-owned and controlled corporations to reduce operational costs. These reasons as well as the actual exercise of the right to pre-terminate were in accordance with the specified purposes, conditions[,] and procedure in the [Lease Contract]. 97

Petitioner contends that it merely asserted its right as creditor-mortgagee when it foreclosed the properties. It also faithfully observed the procedure in foreclosing the mortgage. 98

Petitioner prays that the July 20, 2017 Decision and January 10, 2018 Resolution of the Court of Appeals be reversed and set aside. It further prays: (1) that the Complaints in Civil Cases No. 07-8273 and No. 10-9093 be dismissed; (2) that the security deposit and excess rent plus legal interest be returned to petitioner; and (3) that it be awarded moral and exemplary damages, attorney's fees, litigation expenses, and costs of suit. 99 Should the assailed judgments be affirmed, petitioner prays that the award of back rentals be applied first to the unpaid portion of respondents' loan. 100

In their Comment, 101 respondents counter that the issues raised in the Petition were mostly questions of fact, which were already passed upon by the Regional Trial Court of Antipolo City and the Court of Appeals. Since petitioner failed to show that the Court of Appeals misapprehended or overlooked significant and undisputed facts, its findings should be respected. 102

Respondents also aver that since the case does not fall under the parol evidence rule, the lower courts "were correct in considering parol evidence to determine the true intent of the parties when they executed the [Loan Agreement] and [Lease Agreement]." 103 They further claim that they were able to show that the parties agreed and intended for the Loan Agreement and the Lease Contract to be coterminous, and that the latter's pre-termination clause is merely pro-forma. 104

Respondents assert that petitioner is liable for rent on the unexpired portion of the lease when it was pre-terminated. 105 Moreover, the Court of Appeals correctly declared that respondents were not in default on their loan obligation. Petitioner, then, had no basis to foreclose the property. As a consequence, the foreclosure sale and the Certificate of Sale are void. 106 In addition, the Court of Appeals correctly ruled that respondents were "not legally obliged to refund the security deposit and the excess in rental payments[.]" 107

Lastly, respondents maintain that they were correctly awarded moral and exemplary damages, attorney's fees, litigation expenses, and costs of suit, since petitioner acted in bad faith when it pre-terminated the Lease Contract. 108

This Court resolves the following issues:

First, whether or not the Lease Contract expresses the true intent of the parties, and thus, is covered by the parol evidence rule; and

Second, whether or not petitioner committed a breach in its Lease Contract when it decided to pre-terminate it. AScHCD

The Petition is denied.

I

Rule 130, Section 9 of the Revised Rules on Evidence provides for the parol evidence rule, which states:

RULE 130

Rules of Admissibility

xxx xxx xxx

3. Parol Evidence Rule

SECTION 9. Evidence of written agreements. — When the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement.

However, a party may present evidence to modify, explain or add to the terms of the written agreement if he puts in issue in his pleading:

(a) An intrinsic ambiguity, mistake or imperfection in the written agreement;

(b) The failure of the written agreement to express the true intent and agreement of the parties thereto;

(c) The validity of the written agreement; or

(d) The existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement.

The term "agreement" includes wills. (Emphasis in the original)

The parol evidence rule has been thoroughly explained in Sps. Paras v. Kimwa Construction and Development Corp.: 109

Per this rule, reduction to written form, regardless of the formalities observed, "forbids any addition to, or contradiction of, the terms of a written agreement by testimony or other evidence purporting to show that different terms were agreed upon by the parties, varying the purport of the written contract."

This rule is animated by a perceived wisdom in deferring to the contracting parties' articulated intent. In choosing to reduce their agreement into writing, they are deemed to have done so meticulously and carefully, employing specific — frequently, even technical — language as are appropriate to their context. From an evidentiary standpoint, this is also because "oral testimony . . . coming from a party who has an interest in the outcome of the case, depending exclusively on human memory, is not as reliable as written or documentary evidence. Spoken words could be notoriously unreliable unlike a written contract which speaks of a uniform language." As illustrated in Abella v. Court of Appeals:

Without any doubt, oral testimony as to a certain fact, depending as it does exclusively on human memory, is not as reliable as written or documentary evidence. "I would sooner trust the smallest slip of paper for truth," said Judge Limpkin of Georgia, "than the strongest and most retentive memory ever bestowed on mortal man." This is especially true in this case where such oral testimony is given by . . . a party to the case who has an interest in its outcome, and by . . . a witness who claimed to have received a commission from the petitioner. AcICHD

This, however, is merely a general rule. Provided that a party puts in issue in its pleading any of the four (4) items enumerated in the second paragraph of Rule 130, Section 9, "a party may present evidence to modify, explain or add to the terms of the agreement[.]" Raising any of these items as an issue in a pleading such that it falls under the exception is not limited to the party initiating an action. In Philippine National Railways v. Court of First Instance of Albay, this court noted that "if the defendant set up the affirmative defense that the contract mentioned in the complaint does not express the true agreement of the parties, then parol evidence is admissible to prove the true agreement of the parties[.]" Moreover, as with all possible objections to the admission of evidence, a party's failure to timely object is deemed a waiver, and parol evidence may then be entertained.

Apart from pleading these exceptions, it is equally imperative that the parol evidence sought to be introduced points to the conclusion proposed by the party presenting it. That is, it must be relevant, tending to "induce belief in [the] existence" of the flaw, true intent, or subsequent extraneous terms averred by the party seeking to introduce parol evidence.

In sum, two (2) things must be established for parol evidence to be admitted: first, that the existence of any of the four (4) exceptions has been put in issue in a party's pleading or has not been objected to by the adverse party; and second, that the parol evidence sought to be presented serves to form the basis of the conclusion proposed by the presenting party. 110 (Emphasis in the original, citations omitted)

Here, respondents were able to put in their Complaint in Civil Case No. 07-8273 the failure of the Lease Contract to express the true intent of the parties. Paragraphs 14 to 17 state:

14. On 11 June 1996, the herein parties entered into [a Lease Agreement] . . . formalizing their agreement. According to this agreement, the plaintiff would construct a seven (7)[-story] building on the above-described parcel of land, while [Land Bank] would lease from [Katigbak Corp.] the ground floor, mezzanine, second, and third floors (all covering a total floor area of NINE HUNDRED SEVENTY-SIX POINT TWENTY-FIVE {976.25} sq. m., more or less) of the commercial building proposed to be constructed. Per par. 2 (c) of the [Lease Agreement], the contract would be for a period of fifteen (15) years.

15. When the building was completed and the leased premises turned over to [Land Bank], the latter presented [Katigbak Corp., et al.] for their signature a [Lease Contract] dated October 1, 1996 . . . While this document embodied almost entirely the same terms and conditions contained in the first [Lease Agreement] dated June 11, 1996, there were obviously new provisions inserted therein that were not included, or even differed from, the first document.

16. Among the new provisions in this [Lease Contract] was the second par. of main par. 2, stating that:

"2. TERM — The Lease shall be for a period of fifteen (15) years[,] to commence on the date of delivery[,] renewable upon such terms and conditions as may be agreed upon by both parties.

"In the event [that] the LESSEE desire[s] to renew this Contract under this paragraph, the LESSOR shall be notified in writing at least three (3) months before expiration of this Lease. TAIaHE

"It is further understood and mutually agreed upon that in the event the LESSEE shall decide to transfer its office in order to render better services to its clients or to agrarian reform beneficiaries and/or in the pursuit of its agrarian reform mission or should decide to acquire its own Branch bank site through the purchase of an existing building and real estate property or branch office in its realty or on a rented land, this [Lease Contract] shall become automatically terminated upon ninety (90) days prior written notice to the LESSOR and subject to the provisions of this Contract with regard to the improvements that may have been introduced to the Leased Premises by the LESSEE. In this instance, LESSEE shall likewise be entitled to a refund of the remaining unapplied/unused advance rentals/deposit provided for under paragraph 4 hereof."

17. Inasmuch as the latter contract (particularly the second part of par. 2 thereof) was obviously disadvantageous to [Katigbak Corp., et al.] (the adverted paragraph gave blanket authority to the bank to pre-terminate the [L]ease [C]ontract any time to the detriment of [Katigbak Corp., et al.]), [Katigbak Corp., et al.] objected to the inclusion of the pre-termination clause because they would not have entered into this loan/lease agreement with a pre-termination clause and a 15-year term loan. [Land Bank]'s top management, however, interposed that the subject provision was "only for accounting purposes[,"] to avoid these transactions being booked as financing leases, which [Katigbak Corp., et al.] understood to mean that [Land Bank] wanted to avoid the setting up of two (2) expense accounts, one [1] for asset depreciation, and another, for loan amortizations, which in view of the magnitude of the branch expansion would affect the bottom line of [Land Bank]'s financial statements. [Spouses Katigbak] strongly registered their disagreement because the rentals were the only source of the loan repayments, but were prevailed upon due to the firm assurance of [Land Bank]'s top management that the pre-termination clause was just a pro[-]forma requirement and will never be exercised. Thus, [Katigbak Corp., et al.] were constrained to sign the [Lease Contract] which was exclusively prepared by [Land Bank]. 111 (Emphasis in the original)

The crux of respondents' Complaint is their allegation that it was understood by the parties that the Loan Contract and the Lease Contract were intertwined. Simply put, they understood that petitioner's rental payment would be used to pay for respondents' loan. Respondents only signed the Lease Contract because of the assurance from petitioner's officers that the pre-termination clause "was just a pro[-]forma requirement and will never be exercised." 112 This is mainly why respondents went to court for relief.

Petitioner even felt it necessary to address these issues in its Answer. Paragraphs 12 to 15 state:

12. Paragraph 14 is admitted.

13. [Land Bank] admits the allegations in paragraph 15 only insofar as they relate to the existence of a [Lease Contract] dated October 1, 1996. That said contract was merely presented to [Katigbak Corp., et al.] for their signature and that it contained new provisions inserted are denied, the truth of the matter being those set forth in the Special and Affirmative Defenses hereof. cDHAES

14. The allegation in paragraph 16 to the effect that the provisions of the [Lease Contract] quoted therein are among its new provisions is hereby denied, the truth being that those provisions are original provisions of a separate [Lease Contract] dated October 1, 1996. The rest of the averments in paragraph 16 is admitted.

15. [Land Bank] most emphatically denies the allegations set forth in paragraph 17, the truth being that the subject [Lease Contract] is a consensual contract executed by the parties for their mutual benefits and advantages. The allegation that [Land Bank] has blanket authority to pre-terminate the lease contract is denied for being inaccurate and erroneous, the truth being that the very wordings of the subject clause indicate that the exercise thereof by [Land Bank] is subject to specified reasons or purposes only and under certain conditions after observance of stipulated procedure, thus such authority cannot be said to be blanket or unlimited. Further, [Katigbak Corp., et al.]'s averment that the pre-termination clause was for accounting purposes only is specifically denied, the truth being that there was no such impression of assurance made by [Land Bank] as shown by the lack of any document evidencing this allegation. Finally, that [Katigbak Corp., et al.] disagreed to the pre-termination clause which was allegedly claimed to being just a pro-forma requirement and that they were merely constrained to sign the contract are specifically denied, the truth being that [Katigbak Corp., et al.] voluntarily, knowingly[,] and consciously conformed to and executed the subject [Lease Contract], all the provisions of which are vibrant and operative stipulations and not merely pro-forma . . . The rest of the allegations in paragraph 17 is denied for lack of knowledge or information sufficient to form a belief as to the truth or correctness thereof. 113

Since respondents successfully put in issue the Lease Contract's failure to express the true intent of the parties, this case falls under the second exception in Rule 130, Section 9 of the Revised Rules on Evidence. Thus, respondents' testimonial and documentary parol evidence, which would prove the parties' true intent, may be admitted and considered.

II

On the second issue, a scrutiny of the case records reveals that respondents established that the Loan Contract and the Lease Contract were coterminous, and that petitioner was liable to respondents for breach of contract when it pre-terminated the Lease Contract. As the Court of Appeals found:

Apart from the [Lease Contract], records are bereft of evidence showing that the parties agreed to a pre-termination clause. On the contrary, records are replete with evidence proving that it was the intent of the parties that [Katigbak Corp.'s] loan payment and [Land Bank's] lease shall be [coterminous] such that the lease cannot be pre-terminated as payment[,] for the loan will come from the lease rental payments.

The [Land Bank] internal memorandum dated April 22, 1996 states that [Land Bank] will finance, through a loan in the amount of P14.7 million for a term of 15 years, [Katigbak Corp.'s] acquisition of the lot and the structure thereon of a seven-[story] building, certain areas of which [Land Bank] will lease. The [Lease Agreement] dated June 11, 1996 states that the term of the lease is 15 years. As also stated therein, the Agreement is to remain effective and enforceable (for 15 years). The only instance the Agreement will be void is if the building is not completed or the leased premises is not delivered to the satisfaction of [Land Bank]. Nothing of the nature of the afore-quoted pre-termination clause in the [Lease Contract] was ever contemplated in either of the [Land Bank] internal memorandum or the [Lease Agreement]. ASEcHI

Moreover, Edna Famorca, a former officer of [Land Bank] who was involved in the subject transactions pursuant to [Land Bank's] expansion program, explained why the [Lease Agreement] did not contain a pre-termination clause. She testified that: the [Lease Agreement] simply contained the salient features of the lease as approved at the Head Office (of [Land Bank]) and such salient features did not carry a pre-termination clause; another salient feature is the 15-year lease period determined by [Land Bank] to be the same period for the payment of [Katigbak Corporation's] loan; [Land Bank] likewise made it clear to [Katigbak Corp., et al.] that the loan will be paid from the rents from the 15-year lease; on the strength of [Land Bank's] representations, the [Lease Agreement] was executed; when the [Lease Agreement] was signed, and the [L]oan [A]greement was approved, [Katigbak Corp., et al.] proceeded with the construction of the building; when the building was almost completed, [Land Bank] started to occupy it; thereafter, the [Lease Contract] was executed; [Katigbak Corp., et al.] took up the matter of the pre-termination clause contained in the [Lease Contract] with her and she said that she did not think that [Land Bank] would exercise it; when she elevated the matter to Felixberto Bustos, then Executive Vice-President of [Land Bank], the latter told her that there is no way [Land Bank] would exercise the pre-termination clause as payment for the loan would come from the rental income; she then relayed what Felixberto Bustos told her to [Katigbak Corp., et al.]; further, [Land Bank] gave [Katigbak Corp., et al.] the assurance that it would not pre-terminate the [Lease Contract] as it is merely a pro-forma.

Felixberto Bustos, former [Land Bank] Executive Vice-President, testified that the pre-termination clause was merely pro-forma and such fact was conveyed to [Katigbak Corp., et al.]. The 15-year loan is secured by the 15-year lease and by the end of the term, the principal amount of the loan together with interest would have been fully paid through the application of the rental payments. Further, in his exact words, "[a]nybody that is of sound mind would not agree on the insertion of the pre-termination clause because it would give the bank blanket authority to pre-terminate the lease contract and the source of payment could be terminated anytime. Obviously once the document has the pre-termination clause, we have to convey it to the party that the pre-termination was just a pro[-]forma and was made only for accounting purposes but it would never be imposed by Land Bank."

That the lease and loan are related transactions is further bolstered by the testimony of Eleanor Quicoy, [a Land Bank] employee, who was involved in the processing of [Katigbak Corp.'s] loan. Her testimony is to the effect that the main purpose of the loan is to finance the construction of a building that will be leased by [Land Bank]. 114 (Emphasis in the original, citations omitted)

The testimonies of petitioner's officers corroborate respondents' allegation that the loan and the lease were coterminous, and that the pre-termination clause was never intended to be exercised. Petitioner cannot disown the statements of its former officers since their testimonies were (related to their acts when they were still employed with it. They had personal knowledge of both the lease and the loan transactions, and were directly dealing with respondents. They assured respondents that the pre-termination clause was merely pro-forma. Respondents had no reason to distrust them as they were then high-ranking officers. Thus, they were compelled to sign the pre-termination clause on the promise that it would never be exercised.

Further, legal interest rates are added, and the interest rate already imposed on the award given to respondents is modified consistent with this Court's ruling in Nacar v. Gallery Frames, et al. 115 The amount of P48,281,777.51 to be paid to respondents shall bear legal interest at the rate of 12% per annum counted from August 22, 2007, the Complaint's filing date, until June 30, 2013, and at 6% per annum from July 1, 2013 until fully paid. All other awards shall earn 6% legal interest per annum from the date of finality of this judgment until fully paid.

WHEREFORE, the Petition is DENIED. The July 20, 2017 Decision and January 10, 2018 Resolution of the Court of Appeals in CA-G.R. CV No. 105723 are AFFIRMED with the following MODIFICATIONS: ITAaHc

1. In Civil Case No. 07-8273 —

a. Petitioner Land Bank of the Philippines is ordered to pay respondents R.T. Katigbak Construction Corp., and Spouses Ricardo T. Katigbak and Alice Katigbak the sum of Forty-Eight Million Two Hundred Eighty-One Thousand Seven Hundred Seventy-Seven Pesos and Fifty-One Centavos (P48,281,777.51), representing the rent for the unexpired portion of the lease, net of taxes, the loan balances, and the security deposit, plus interest at twelve percent (12%) per annum from August 22, 2007, the date of filing of the Complaint, until June 30, 2013, and six percent (6%) per annum from July 1, 2013 until fully paid;

b. Petitioner is ordered to pay respondents the sum of One Hundred Thousand Pesos (P100,000.00) each as moral damages, and another One Hundred Thousand Pesos (P100,000.00) each as exemplary damages, plus interest at six percent (6%) per annum from the date of finality of this judgment until fully paid;

2. In Civil Case No. 10-9093 —

a. The foreclosure sale conducted on January 28, 2010 and the Certificate of Sale issued on March 17, 2010 are declared void and are set aside;

b. The Register of Deeds of the Province of Rizal is ordered to cancel the annotation of the Certificate of Sale dated March 17, 2010 on TCT No. 631808;

3. In both cases —

a. Petitioner is ordered to pay respondents the sum of ten percent (10%) of the total amount due from petitioner, as and for attorney's fees;

b. Petitioner is ordered to pay respondents the sum of One Million Six Hundred Thousand Pesos (P1,600,000.00) as reimbursement of litigation expenses;

c. Petitioner is ordered to pay the costs of suit; and

d. All awards shall earn the annual six percent (6%) interest rate from the date of finality of this judgment until fully paid. cSaATC

SO ORDERED."

Very truly yours,

WILFREDO V. LAPITAN

Division Clerk of Court

 

Footnotes

1.Sps. Paras v. Kimwa Construction and Development Corp., 757 Phil. 582, 592 (2015) [Per J. Leonen, Second Division].

2.Rollo, pp. 30-77.

3.Id. at 78-93. The Decision was penned by Associate Justice Henri Jean Paul B. Inting and concurred in by Associate Justices Ramon R. Garcia and Leoncia R. Dimagiba of the Fourteenth Division of the Court of Appeals, Manila.

4.Id. at 94-95. The Resolution was penned by Associate Justice Henri Jean Paul B. Inting and concurred in by Associate Justices Ramon R. Garcia and Ricardo R. Rosario of the Special Former Fourteenth Division of the Court of Appeals, Manila.

5.Id. at 70.

6.Id. at 489-501. The Joint Decision was penned by Judge Kevin Narce B. Vivero of the Regional Trial Court, Branch 71, Antipolo City.

7.Id. at 253-259.

8.Id. at 500-501.

9.Id. at 78-79.

10.Id. at 150.

11.Id. at 150-154.

12.Id. at 150.

13.Id. at 239-240.

14.Id. at 239.

15.Id. at 241-244.

16.Id. at 241-242.

17.Id. at 253 and 258.

18.Id. at 155-157.

19.Id. at 155.

20.Id. at 156.

21.Id.

22.Id. at 264-265.

23.Id. at 264.

24.Id. at 271-272.

25.Id.

26.Id. at 271.

27.Id. at 267-268.

28.Id.

29.Id. at 268.

30.Id.

31.Id. at 269-270.

32.Id. at 269.

33.Id. at 269-270.

34. Id. at 273-285.

35. Id. at 273.

36. Id. at 274-275.

37. Id. at 275.

38. Id. at 275-276.

39. Id. at 277.

40. Id. at 277-278.

41. Id. at 278.

42. Id. at 278-279.

43. Id. at 279.

44. Id. at 280-281.

45. Id. at 281-282.

46. Id. at 124-139.

47. Id. at 125-126.

48. Id. at 124.

49. Id. at 127.

50. Id.

51. Id.

52. Id.

53. Id. at 129-130.

54. Id. at 131-132.

55. Id. at 132-134.

56. Id. at 491.

57. Id. at 342-345.

58. Id. at 491.

59. Id.

60. Id. at 192-205.

61. Id. at 220-233.

62. Id. at 192.

63. Id. at 491.

64. Id.

65. Id. at 360-374.

66. Id. at 491.

67. Id. at 373.

68. Id.

69. Id. at 489-501.

70. Id. at 500-501.

71. Id. at 489-501.

72. Id. at 496-497.

73. Id. at 499.

74. Id. at 500-501.

75. Id. at 502-538.

76. Id. at 526.

77. Id. at 529-531.

78. Id. at 584.

79. Id.

80. Id. at 587.

81. Id. at 588-590.

82. Id. at 78-93.

83. Id. at 92-93.

84. Id. at 87.

85. Id. at 88.

86. Id. at 90.

87. Id. at 90-92.

88. Id. at 92-93.

89. Id. at 607-617.

90. Id. at 94-95.

91. Id. at 30-77.

92. Id. at 48-49.

93. Id. at 53.

94. Id. at 53-56.

95. Id. at 54-60.

96. Id. at 62-63.

97. Id. at 62.

98. Id. at 65.

99. Id. at 70.

100. Id. at 71.

101. Id. at 788-843.

102. Id. at 799-803.

103. Id. at 807.

104. Id.

105. Id. at 829.

106. Id. at 836-837.

107. Id.

108. Id. at 829-836 and 838-839.

109. 757 Phil. 582 (2015) [Per J. Leonen, Second Division].

110. Id. at 590-592.

111. Rollo, pp. 101-103.

112. Id. at 102-103.

113. Id. at 127.

114. Id. at 87-89.

115. 716 Phil. 267, 282-283 (2013) [Per J. Peralta, En Banc].