In a commercial lease dispute, the Supreme Court affirmed the necessity of written consent for waiving contractual rights, specifically concerning rental escalation clauses and the substitution of debtors in lease agreements. The Court emphasized that the failure to insist on strict performance of contract terms does not imply a waiver of rights. Moreover, any modification or novation of the lease agreement, such as substituting a new debtor, requires the express written consent of the creditor to be valid, especially when the contract includes a non-waiver clause.

From Fast Food to Legal Feast: How a Lease Dispute Highlights Contractual Rigidity

Food Fest Land, Inc. (Food Fest) and Joyfoods Corporation (Joyfoods) found themselves in a legal battle with Romualdo, Teodoro, and Felipe Siapno over a leased property in Dagupan City. The dispute arose from a Contract of Lease entered in 1997, where Food Fest leased land from the Siapnos for a fast-food restaurant. The lease included a provision for a 10% annual escalation of rent, which was observed for the first five years. However, from the sixth to the tenth year, the escalation clause was not strictly enforced. This led to disagreements, especially when Joyfoods, as an assignee of the lease, sought to pre-terminate the contract, prompting the Siapnos to seek unpaid rent balances.

The central legal question was whether the conduct of the Siapnos in not strictly enforcing the rental escalation clause constituted a waiver of their rights and whether Food Fest could be released from its obligations after assigning the lease to Joyfoods. The Regional Trial Court (RTC) and the Court of Appeals (CA) both ruled in favor of the Siapnos, ordering Food Fest and Joyfoods to pay the unpaid balance. The petitioners then appealed to the Supreme Court, questioning the amount of the unpaid balance and the extent of their liabilities.

The Supreme Court, in its analysis, focused on two critical aspects: the amount of the unpaid balance and the liability of Food Fest after the assignment of its rights and obligations under the lease. Regarding the unpaid balance, Food Fest and Joyfoods argued that an unwritten agreement had suspended the rental escalation clause indefinitely from the sixth year onwards, thus reducing the amount owed. The Court, however, rejected this argument, emphasizing that factual findings of lower courts are generally binding and that there was no credible evidence of such an agreement. The Court cited its limitations as an appellate court and the proper scope of appeals by certiorari, affirming the lower courts’ findings due to the lack of evidence supporting the alleged agreements.

“This Court, as has often been said, is not a trier of facts,” the Supreme Court stated, underscoring the principle that appellate courts primarily review errors of law rather than re-evaluating factual findings unless specific exceptions apply. These exceptions, such as when the trial court’s findings are reversed by the CA or are manifestly mistaken, were not present in this case.

Concerning the liability of Food Fest, the petitioners argued that the assignment of rights and obligations to Tucky Foods and later to Joyfoods should have released Food Fest from its obligations under the Contract of Lease. The Supreme Court addressed this by discussing the concept of novation, particularly the substitution of a debtor. Novation requires the creditor’s consent for the substitution of a new debtor to be valid.

Article 1293 of the Civil Code is explicit: “Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.” This consent is crucial because the substitution of a debtor could impair the creditor’s ability to recover the debt, especially if the new debtor is less financially stable. The court in De Cortes v. Venturanza expounded on this, stating that the creditor’s consent is necessary because “[t]he substitution of another in place of the debtor may prevent or delay the fulfillment or performance of the obligation by reason of the inability or insolvency of the new debtor”.

However, the Contract of Lease included a non-waiver clause, dictating that any waiver of rights must be expressed in writing. The Court found that the assignment of lease rights, in this case, could not be deemed a release of Food Fest’s obligations because the respondents had not provided written consent as stipulated in the contract. The non-waiver clause highlighted the contractual intention to maintain strict adherence to the terms unless explicitly altered in writing.

Moreover, the Court emphasized that even without the non-waiver clause, the mere acceptance of rental payments from Joyfoods did not imply consent to release Food Fest from its obligations. “The well-settled rule is that novation is never presumed,” the Court declared, citing Ajax Marketing Development Corporation v. Court of Appeals. To effect a subjective novation, the old debtor must be expressly released from the obligation, and the new debtor must assume their place. Without such release, the third party becomes merely a co-debtor or surety.

The Court also tied the non-waiver clause to the concept of novation, stating that “novation by the substitution of the person of the debtor implies a waiver on the part of the creditor of his right to enforce the obligation as against the original debtor.” This waiver, according to the Court, must be express, citing Testate Estate of Lazaro Mota v. Serra, reinforcing the principle that waivers are not presumed and must be clearly demonstrated. Therefore, because the non-waiver clause in the Contract of Lease specifically required any waiver to be in writing, the absence of a written consent to the substitution meant that Food Fest remained liable alongside Joyfoods.

The decision reinforces the principle of contractual rigidity, highlighting that parties are bound by the terms they agree to and that waivers must be clear and express, especially when specified in the contract. This case underscores the importance of adhering to contractual terms and the necessity of written consent for modifications or waivers of rights.

FAQs

What was the key issue in this case?	The key issue was whether the rental escalation clause in a lease agreement was validly waived and whether the original lessee was released from liability after assigning the lease to another party.
Why did the Supreme Court uphold the lower courts’ decisions?	The Supreme Court upheld the lower courts’ decisions because there was no credible evidence of a written agreement to suspend the rental escalation clause, and the lessor’s consent to the substitution of the debtor was not given in writing, as required by the contract’s non-waiver clause.
What is novation, and how does it apply to this case?	Novation is the extinguishment of an obligation by replacing it with a new one. In this case, the petitioners argued for novation by substitution of the debtor, but the Court found that the lessors did not expressly consent to release the original lessee, Food Fest, from its obligations.
What is the significance of the non-waiver clause in the lease agreement?	The non-waiver clause required any waiver of rights to be expressed in writing. This clause was crucial because it prevented the petitioners from arguing that the lessors had implicitly waived their right to enforce the rental escalation clause or release the original lessee from liability.
Can a creditor’s consent to the substitution of a debtor be implied?	While consent to the substitution of a debtor can sometimes be implied, the non-waiver clause in this contract required express written consent. The Court emphasized that mere acceptance of payments from the new lessee did not imply a release of the original lessee’s obligations.
What is the effect of assigning a lease agreement to another party?	Assigning a lease agreement to another party does not automatically release the original lessee from their obligations unless the lessor expressly consents to the substitution in writing, especially if the lease agreement contains a non-waiver clause.
What does this case teach about contractual obligations?	This case emphasizes the importance of adhering to contractual terms and the necessity of written consent for modifications or waivers of rights. It reinforces the principle of contractual rigidity, highlighting that parties are bound by the terms they agree to unless changes are made with clear, express agreement, especially with a non-waiver clause present.
What is the main takeaway of Food Fest Land, Inc. vs. Siapno?	The main takeaway is that parties to a contract are bound by its terms, and waivers of rights must be clear and express, particularly when the contract stipulates such requirements. Simply accepting payments from a third party does not release the original obligor from their duties unless there’s an explicit agreement to that effect.

This case clarifies the necessity of written consent when waiving contractual rights or substituting parties in lease agreements. The Supreme Court’s decision underscores the importance of express agreements and adherence to contractual terms to avoid disputes.

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: FOOD FEST LAND, INC. vs. ROMUALDO C. SIAPNO, G.R. No. 226088, February 27, 2019