The Supreme Court clarified the extent to which verbal agreements can modify written lease contracts. It ruled that while evidence showed a reduction in monthly rental fees through a verbal agreement, other clauses related to escalation and tax payments remained enforceable under the original written contract. This decision underscores the importance of documenting all contractual changes in writing to avoid disputes.

Lease Terms in Dispute: Can a Handshake Trump a Signed Agreement?

This case revolves around a dispute between Spouses Modomo (the lessees) and Spouses Layug (the lessors) regarding a leased property in Makati City. A written Contract of Lease was established in 2005, outlining terms such as monthly rental fees, annual escalations, and real estate tax responsibilities. However, a disagreement arose when the Spouses Modomo claimed that subsequent verbal agreements had altered some of these terms, specifically regarding the monthly rental amount, the escalation clause, and the responsibility for paying real estate taxes.

The central legal question is whether these alleged verbal agreements effectively modified the original written Contract of Lease. The Spouses Modomo argued that the subsequent verbal agreements with Spouses Layug served to amend the initial contract, primarily concerning the reduction of monthly rental payments from Php170,000.00 to Php150,000.00, coupled with the elimination of the escalation clause and the real estate tax provision. The Spouses Layug, however, contended that while the rental amount was indeed modified, the other provisions remained intact. This case underscores the intricacies of contract law, particularly the enforceability of verbal agreements in the presence of a written contract.

The Metropolitan Trial Court (MeTC), Regional Trial Court (RTC), and Court of Appeals (CA) all initially ruled in favor of Spouses Layug, ordering Spouses Modomo to surrender the property and pay significant rental arrearages. These lower courts primarily relied on the Parole Evidence Rule, which generally prohibits the introduction of evidence to vary the terms of a written agreement. The Supreme Court, however, took a nuanced approach, acknowledging a partial modification of the contract while upholding key provisions of the original written agreement.

The Supreme Court’s analysis hinged on Article 1291 of the Civil Code, which addresses how obligations can be modified. The Court distinguished between total and modificatory novation, explaining that obligations may be modified by changing their object or principal conditions. Justice Caguioa noted that the Civil Code admits of “imperfect or modificatory novation where the original obligation is not extinguished but modified or changed in some of the principal conditions of the obligation.”

However, the Court emphasized that novation is never presumed, and the animus novandi, or intent to novate, must be clear. The burden of proving novation lies with the party alleging it. In this case, the Court found sufficient evidence to support the modification of the monthly rental fee based on the consistent billing statements from Spouses Layug reflecting the reduced amount of Php150,000.00. Furthermore, Spouses Layug themselves acknowledged this modification in their Comment to the Petition, stating that “the rental rate of [Php]170,000.00 was modified by the parties and a novation of the principal condition of the [C]ontract of [L]ease was thereby effected.”

Despite acknowledging the modification of the rental fee, the Court found no similar evidence to support the modification of the escalation clause or the real estate tax provision. The Court emphasized that the parties had previously executed two written Addenda to modify the Contract of Lease, suggesting that any further modifications would also have been documented in writing. Unlike the modification of the monthly rental fee, which was supported by documentary evidence and admissions, the alleged modification of the escalation and tax provisions was based solely on the self-serving statements of Spouses Modomo.

The Court also addressed the argument of estoppel in pais, which Spouses Modomo raised, claiming that Spouses Layug should be prevented from denying the partial novation due to their acceptance of the reduced monthly payments. The Court rejected this argument, citing letters from Spouses Layug to Spouses Modomo objecting to the deficient payments. These letters contradicted any claim of silence or acquiescence, which are essential elements for establishing estoppel.

Regarding the claim for reimbursement for useful improvements made to the leased property, the Court denied this claim because Spouses Modomo had already demolished the improvements, thereby depriving Spouses Layug of the option to appropriate them. The Court highlighted that Spouses Modomo did not contest the demolition of the leased premises, leaving no basis for reimbursement of non-existent improvements.

Finally, the Supreme Court adjusted the computation of rental arrearages and compensation for the reasonable use of the property. The Court also addressed the interest rates, correcting the rate to 6% per annum as the arrearages and taxes did not constitute a loan or forbearance of money. The final judgment ordered Spouses Modomo to pay rental arrearages, unpaid real estate taxes, compensation for reasonable use of the property, and attorney’s fees, all with adjusted interest rates and timelines.

FAQs

What was the key issue in this case?	The key issue was whether verbal agreements could modify the terms of a written lease contract, specifically concerning rental fees, escalation clauses, and real estate tax payments.
Did the Supreme Court find that the lease contract was modified?	Yes, the Supreme Court found a partial modification. The monthly rental fee was reduced through a verbal agreement, but the escalation and tax payment clauses remained enforceable under the original written contract.
What is the Parole Evidence Rule?	The Parole Evidence Rule generally prevents parties from introducing evidence to contradict or vary the terms of a written agreement that is clear and unambiguous. This rule played a significant role in the court’s analysis.
What is ‘animus novandi’ and why is it important?	Animus novandi refers to the intent to novate or modify an existing obligation. It’s crucial because novation is never presumed and must be clearly established, either through express agreement or actions.
What is estoppel in pais and did it apply in this case?	Estoppel in pais is a legal principle that prevents a party from denying facts that they have previously represented or concealed, leading another party to rely on those representations to their detriment. The Court ruled that it did not apply here.
Why were the Spouses Modomo not reimbursed for the improvements they made?	The Spouses Modomo were not reimbursed because they had already demolished the improvements, depriving the lessors of the option to appropriate them. Reimbursement was for non-existent improvements.
What interest rate was applied to the unpaid amounts?	The Supreme Court applied a 6% per annum interest rate, clarifying that the debt did not constitute a loan or forbearance of money, for which a 12% rate had been previously applied.
What is the practical implication of this ruling?	The practical implication is that parties should always document any modifications to written contracts in writing to avoid disputes over enforceability. Verbal agreements alone may not suffice to alter the terms.

This case reinforces the importance of formalizing contractual modifications in writing. While verbal agreements can sometimes be recognized, relying on them is risky, especially when the original contract is detailed and in writing. The ruling serves as a reminder for parties to ensure that all agreements are clearly documented to prevent future disputes and ensure clarity in contractual obligations.

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. AND FELISARIN E. LAYUG, G.R. No. 197722, August 14, 2019