86 Broadway Centrum Condominium Corp. v. Tropical Hut - DIGEST

Broadway Centrum Condominium Corporation vs. Tropical Hut Food Market, Inc.
, and CA
GR No. 79642 || July 5, 1993 || Ponente: Feliciano, J. || Topic: Novation (Requisites)
Facts:
On Nov. 28, 1980, petitioner Broadway Centrum Condominium Corporation (Broadway) and
private respondent Tropical Hut Food Market, Inc. (Tropical) executed a contract of lease. Broadway, as
lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum Commercial Complex for
10 years from Feb. 1, 1981 to Feb. 1, 1991, renewable for a like period upon the mutual agreement of both
parties. The rental provision provides:
The lessee agrees to pay the lessor a basic monthly rental of P120,000 during the first 3
years allowing 2 months grace period on rental for renovation from Dec. 1, 1980 to Jan.
31, 1981. The basic rent will be increased to P140,000 during the next 3 years then
P165,000 for the last 4 years. The 1st payment is to be made in advance on or before Dec.
1, 1980 and succeeding payments to be made without necessity of the services of a collector
w/in the 1st 5 days of the month.
No problems were experienced on the first year but on the following year, Tropical wrote to
Broadway stating that Tropical’s rental payments were equal to 7.31% of its actual sales, which was based
merely on Tropical’s sales projections of P120,000 a day (which it obviously did not meet); the current rate
was too high considering its other branches paid rent below the normal 1.5% of sales. Tropical proposed to
reduce the rent to P50,000 or 2% of their monthly sales whichever was higher up to the end of the 3rd year
of the contract. Broadway responded stating that Tropical’s financial trouble was within the control of its
management and offered several suggestions to improve sales. In the meantime, Broadway offered a
counterproposal consisting of a conditional reduction of the rental by P20,000 for a limited period of 4
months, to be repaid spread over the last 6 months of the years only if a target 15% of sales is achieved. The
proposal emphasized that any reduction in rent was merely a temporary suspension of the original rate and
was not an amendment thereto.
Officers of both parties met and it was found that Tropical’s low sales was a result of the temporary
closure of Dona Juana Rodriguez Ave. (a major thoroughfare adjacent to Broadway) due to a road expansion
project. Broadway’s president, Mrs. Orosa was aware of this and finally made formal the provisional and
temporary agreement to reduce the monthly fees to 2% of Tropical’s gross receipts or P60,000, whichever
was higher. Again, it was emphasized that said agreement was not an amendment to the contract. Also, an
area of 466.56 square meters was to be returned by the next month. Months later, Dona Juana Rodriguez
Ave. had reopened; Broadway informed Tropical that the concession could no longer be extended and, in
light of the cessation of its business constraints, increased rent gradually from P80,000 effective Jan. 1983,
to P100,000 on April 1993 until further notice. In a letter dated Jan. 4, 1983, a Mr. Que of Tropical appealed
to Broadway to maintain the provisional rates until sales increased, but Broadway refused, arguing that they
sustained losses as well. Tropical continued renegotiating but was turned down. In its desire to keep Tropical
as a tenant, Broadway extended the P100,000 rent increase to July of the same year. Tropical’s last
counteroffer was not accepted and Broadway urged them to pay immediately to minimize the 2% penalty on
delayed payments. On May 5, 1983, Mr. Gue of Tropical argued that Broadway cannot arbitrarily and
unilaterally increase rent, which is a matter that should be mutually agreed upon. On the same day, Mrs.
Orosa responded with dismay, reiterating that the provisional agreement was not an amendment to the
contract and was done merely in assistance; she demanded the payment for their back accounts amounting to
P100,000 lest paragraph 5 of the contract be implemented.
A week later, Tropical filed a complaint before the RTC of QC seeking a restraining order or
preliminary injunction to prevent Broadway from invoking Sec 5 of the contract and asking the court to
decree that the provisional agreement be implemented while Tropical’s sales remain low. Pending the case,
Broadway increased rent to P140,000 to which Tropical reacted by filing a supplemental complaint with the
Trial Court raising WON the agreement dated April 20, 1982 novated the Nov. 28, 1980 lease contract. The
court judged in favor of Tropical, making the writ of preliminary injunction permanent, reducing the rental
agreement until able to pay, declaring the Nov. 1980 contract partially novated/modified by the provisional
agreement, and fixing the monthly rentals to the reduced area of the leased premises. On appeal, the CA
affirmed the decision, stating that the reduction of the leased space constituted valuable consideration for
reduction of rental while Tropical’s sales remained low.
Issue(s):
i. WON the letter-agreement dated April 20, 1982 had novated the Contract of Lease dated Nov 28,
1980
Ruling:
SC:
The SC ruled that the express provision stating that the letter-agreement was “provisional and
temporary x x x and should not be interpreted as amendment to the contract” provide that such instrument
did not extinguish nor modify the Contract of Lease.
i. With regard the validity of the novation of the original Contract of Lease through the letter-
agreement:
a. Novation is the extinguishment of an obligation by the substitution with a subsequent one,
which terminates it, either by changing its object or principal conditions or by substituting a
new debtor, or by subrogating a 3rd person to the rights of the creditor. Novation is never
presumed; the will to novate must appear by express agreement of both parties.
i. Clearly, Broadway’s constant emphasis that the “provisional and temporary agreement
should not be interpreted as amendment to the contract” meant that it could terminate
the reduced concessional rates at any time without the consent of Tropical.
ii. The notarized lease of contract of Nov. 1980 made it clear that the provisional
agreement was not an alteration or waiver of the Lease Contract itself. Also,
negotiations before the execution of the letter-agreement indicated clearly that they
were negotiating a temporary/provisional reduction and Tropical itself proposed a
change only up to the end of the 3rd year. Over the course of the grueling
renegotiations, Mrs. Orosa repeatedly stressed that the provisions were not
amendments and were merely offered as an assistance.
iii. The court found that Tropical’s theory that Broadway had agreed to maintain the
reduced rent so long as sales stayed low was merely an afterthought or means to avoid
liability.
b. The CA’s finding that the surrender of the 466.56 square meters by Tropical constituted
valuable consideration does not hold. Broadway reduced rent by 50% while the portion of the
leased space was reduced only by 15%, hence no presumption can be made that the returned
space was a consideration for the reduction in rent. Moreover, rent was not specified on a per
square meter basis.
Doctrine:
One of the requisites for novation is the intent and capacity of the parties to extinguish or modify
the previous valid obligation. Where there is an express provision stating the lack of intent, then novation
cannot be applied.
Additional Notes:

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