The Supreme Court clarified that while lease contracts can be modified by subsequent agreements, proving such changes requires clear evidence, especially when contradicting written terms. This ruling underscores the importance of documenting all contractual changes in writing to avoid disputes. It also serves as a caution to parties in a contract to solidify agreements, as verbal agreements are hard to prove.

Can a Handshake Trump a Signed Lease? Examining Contract Modification

In Jocelyn Modomo and Dr. Romy Modomo v. Spouses Moises P. Layug, Jr., the central issue revolved around whether a written lease contract could be altered by a subsequent oral agreement. The Spouses Layug, as lessors, initially entered into a lease agreement with Spouses Modomo, outlining specific terms for rental payments, including an escalation clause and responsibility for real estate taxes. The Modomos later claimed that an oral agreement modified these terms, reducing the monthly rental fee and eliminating the escalation and tax payment obligations.

The Metropolitan Trial Court (MeTC) and Regional Trial Court (RTC) both ruled in favor of the Layugs, upholding the original terms of the written contract. These courts relied heavily on the Parole Evidence Rule, which generally prohibits the introduction of oral evidence to contradict the terms of a written agreement. The Court of Appeals (CA) affirmed these decisions, emphasizing that novation, or the modification of an obligation, is never presumed and must be clearly established.

The Supreme Court, in its analysis, differentiated between total and partial novation. Total novation occurs when an old obligation is completely extinguished by a new one, while partial or modificatory novation involves changes to some of the principal conditions of the obligation while the original contract remains in effect. The Court cited Article 1291 of the Civil Code, which outlines how obligations may be modified.

ART. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Building on this legal foundation, the Court acknowledged that the monthly rental fee had indeed been modified through a subsequent verbal agreement. This conclusion was supported by the Statements of Account issued by the Layugs, which consistently reflected the reduced rental fee of Php150,000.00, instead of the original Php170,000.00. Even the final demand letter from the Layugs used the lower rental amount as the basis for calculating the unpaid balance. The Court emphasized that novation must be clearly proven and cannot be based on presumptions.

However, the Court found no sufficient evidence to support the claim that the escalation clause and real estate tax obligations were also modified. The original Contract of Lease and subsequent written Addenda clearly stipulated these conditions. The Court pointed out that the parties had executed written Addenda to modify the lease terms, indicating that they were aware of the importance of documenting such changes in writing. This approach contrasts with the Modomos’ claim that a simple verbal agreement eliminated these key provisions.

The Court addressed the Modomos’ argument that the Layugs were estopped from denying the partial novation due to their acceptance of the reduced rental payments. Estoppel in pais arises when one party’s actions or representations lead another party to believe certain facts exist, and the latter relies on that belief to their detriment. In this case, the Court found that the Layugs had consistently objected to the deficient payments, as evidenced by their letters to the Modomos. Therefore, the principle of estoppel did not apply.

The Supreme Court also dismissed the Modomos’ claim for reimbursement for improvements made on the leased property. The Court noted that the Modomos had demolished the improvements, depriving the Layugs of the option to appropriate them. This action precluded the Modomos from seeking reimbursement under Article 1678 of the Civil Code.

Analyzing the monetary awards, the Court found errors in the computation of rental arrearages and compensation for the reasonable use of the leased premises. The Court clarified that the additional award for monthly payment for reasonable use and occupation of the leased premises should commence not from the filing of the complaint for ejectment on July 23, 2008, but from January 2009, since the award for rental arrearages already incorporated unpaid rental fees for the entire year of 2008, extending until December 2008.

The Supreme Court also adjusted the applicable interest rate. The Court pointed out that since the rental arrearages and unpaid real estate taxes do not constitute a loan or forbearance of money, the proper interest rate is 6% per annum, not 12%. This adjustment reflects the Court’s commitment to applying the correct legal principles in determining monetary obligations.

In conclusion, the Supreme Court’s decision serves as a reminder of the importance of documenting all contractual agreements in writing. While oral agreements can modify contracts, proving such modifications requires clear and convincing evidence. This case also illustrates the limitations of estoppel and the need for consistent conduct when enforcing contractual rights.

FAQs

What was the key issue in this case?	The key issue was whether a written lease contract could be modified by a subsequent oral agreement regarding rental fees, escalation clauses, and real estate tax payments. The court had to determine if the alleged oral modifications were valid and enforceable.
What is the Parole Evidence Rule?	The Parole Evidence Rule generally prevents parties from introducing oral evidence to contradict or vary the terms of a written agreement. This rule aims to preserve the integrity and certainty of written contracts by preventing disputes based on unreliable oral recollections.
What is novation, and what are its types?	Novation is the substitution or alteration of an obligation by a subsequent one, which can be total (extinguishing the old obligation) or partial/modificatory (changing some conditions). For novation to occur, there must be a clear intent to extinguish or modify the original obligation.
How did the court apply the principle of estoppel in this case?	The court found that estoppel did not apply because the lessors (Spouses Layug) had consistently objected to the lessees’ (Spouses Modomo) deficient payments, as evidenced by their letters. Therefore, there was no false representation or concealment of material facts by the lessors.
Were the lessees entitled to reimbursement for improvements they made on the property?	No, the lessees were not entitled to reimbursement because they had demolished the improvements, depriving the lessors of the option to appropriate them. This action prevented the lessees from claiming reimbursement under Article 1678 of the Civil Code.
What evidence did the court consider in determining whether the lease contract was modified?	The court considered Statements of Account issued by the lessors, the final demand letter, and the lessors’ own statements in their pleadings. These pieces of evidence supported the finding that the monthly rental fee had been modified.
What was the final ruling of the Supreme Court?	The Supreme Court granted the petition in part, affirming the Court of Appeals’ decision with modifications. The Court upheld the validity of the original contract terms regarding escalation and real estate tax payments but acknowledged the modification of the monthly rental fee.
What is the significance of written agreements in contract law?	Written agreements provide a clear and reliable record of the parties’ intentions, which is crucial in resolving disputes. They are generally given more weight than oral agreements due to the Parole Evidence Rule.

This case underscores the necessity of clear, written documentation when modifying contractual agreements. Parties should ensure that all changes are properly recorded to avoid future disputes. The Modomo vs. Layug case illustrates how Philippine courts balance the need for contractual certainty with the possibility of subsequent modifications. This balance ensures fairness and predictability in commercial relationships.

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: JOCELYN MODOMO AND DR. ROMY MODOMO, VS. SPOUSES MOISES P. LAYUG, JR., G.R. No. 197722, August 14, 2019