Philippine National Bank vs. Court of First Instance of Rizal

A contractual option to extend a lease that is conditioned on the lessee extending its corporate term in accordance with law does not vest if the lessee corporation fails to extend its term and is automatically dissolved by operation of law upon the expiration of the period fixed in its articles of incorporation, and no quo warranto proceeding is required to effect such dissolution.

Private respondents Chung Siong Pek and Victoria Ching Geng Ty owned three parcels of land in Pasig, Metro Manila. On March 1, 1954, they entered into a contract of lease with Philippine Blooming Mills, Co., Inc. (PBM), a corporation incorporated on January 19, 1952, with a corporate term of twenty-five years. The lease was for an initial term of twenty years from the date of the contract and was “extendable for another term of twenty years at the option of the LESSEE should its term of existence be extended in accordance with law.” The contract stipulated that the lessee would construct buildings and improvements and would remove all such improvements before the termination of the lease. To secure loans, PBM assigned its leasehold rights and mortgaged the improvements to Philippine National Bank (PNB); these transactions were duly annotated on the landowners’ certificates of title. In 1981, the landowners moved for cancellation of the annotations on the ground that the lease had expired because PBM had failed to extend its corporate term in accordance with law.

• The Lease and Its Terms: On March 1, 1954, private respondents, as registered owners of three parcels of land in Pasig, Metro Manila, entered into a contract of lease with Philippine Blooming Mills, Co., Inc. (PBM). PBM had been incorporated on January 19, 1952 with a corporate term of twenty-five (25) years. The lease was for an initial period of twenty (20) years from the date of the contract and “is extendable for another term of twenty years at the option of the LESSEE should its term of existence be extended in accordance with law.” The lessee agreed to use the property as a factory site, to construct buildings and improvements, and “before the termination of the lease to remove all such buildings and improvements.”

• Improvements and Annotations: PBM introduced buildings, machineries, and other useful improvements on the land. These constructions were registered with the Registry of Deeds of Rizal and annotated on the certificates of title as Entry No. 85213/T-No. 43338.

• Assignment and Mortgages to PNB: On October 11, 1963, PBM executed a deed of assignment in favor of Philippine National Bank (PNB), conveying all its rights and interests under the lease, in consideration of loans extended by PNB. The assignment was annotated as Entry No. 85215/T-No. 32843. Subsequently, PBM executed a real estate mortgage for P100,000.00 (annotated as Entry No. 85214/T-No. 43338) and an addendum to real estate mortgage for an additional P1,590,000.00 (annotated as Entry No. 870971/T-No. 32843) over the improvements constructed on the leased premises.

• PBM’s Corporate Dissolution: PBM’s 25-year corporate term expired on January 19, 1977, without the corporation having extended its term in accordance with law. Its three-year period for winding up and liquidation under Section 122 of the Corporation Code expired on January 19, 1980.

• Motion to Cancel Annotations: On October 7, 1981, private respondents filed a motion in the original registration proceedings, docketed as LRC Case No. R-2744, to cancel the annotations of the leasehold assignment, inclusion of improvements, and the real estate mortgages. They argued that the lease had expired due to the failure of PBM and/or its assignee to exercise the option to renew the second 20-year lease commencing on March 1, 1974, and due to PBM’s failure to extend its corporate existence. The motion further alleged that since PBM did not remove its improvements before the expiration of the lease, those improvements should accrue to the landowners.

• Postal Certification and Entry of Judgment: After the trial court ordered cancellation on April 22, 1982 and denied PNB’s motion for reconsideration on June 28, 1982, private respondents moved for entry of final judgment. The trial court granted entry, relying on a postmaster’s certification that three registry notices containing the June 28, 1982 order had been sent to PNB’s counsel at the address of record. PNB alleged that its counsel never actually received the notices and that the building’s receiving section might have received them but failed to forward them.

• Lack of Notice and Finality: PNB maintained that the trial court gravely abused its discretion in ordering entry of final judgment because it had no notice or knowledge of the June 28, 1982 order denying its motion for reconsideration. While the Bureau of Posts certified that three registry notices were sent to its counsel’s address, there was no proof of actual receipt; the notices could have been received by the building’s receiving section but were never forwarded to the Legal Department.

• Jurisdiction of the SEC: PNB argued that the motion to cancel annotations, which raised as an issue the corporate existence of PBM, fell within the exclusive jurisdiction of the Securities and Exchange Commission under Presidential Decree No. 902-A, as amended.

• Improper Collateral Attack: PNB contended that the cancellation of annotations would amount to a collateral attack on PBM’s due incorporation, which cannot be done legally.

• Exercise of Option and Acquiescence: PNB asserted that the lease did not expire because PBM exercised its option to renew the lease, and private respondents acquiesced to PBM’s continued occupation of the premises beyond March 1, 1974.

• Ownership of Improvements: PNB submitted that the trial court’s ruling that ownership over the improvements passed to private respondents upon expiration of the lease violated both the law and the contract between the parties.

• Expiration of Lease and Corporate Dissolution: Private respondents argued that the initial 20-year lease ended on March 1, 1974, and that the option to extend for another 20 years was never validly exercised because PBM failed to extend its corporate term in accordance with law. They maintained that PBM’s corporate life ended on January 19, 1977, without any extension, resulting in the automatic dissolution of the corporation and the extinguishment of the option to renew.

• Accrual of Improvements: Respondents contended that under the express terms of the contract, PBM was obligated to remove its improvements before the termination of the lease. Its failure to do so meant that the improvements accrued to the landowners as owners of the land, rendering the annotations of the assignment and mortgages proper for cancellation.

• Validity of Service and Finality: Whether the trial court gravely abused its discretion in treating its April 22, 1982 order as final and executory, given PNB’s claim that it did not receive notice of the June 28, 1982 order denying its motion for reconsideration.

• Jurisdiction: Whether the respondent court had jurisdiction over the motion to cancel annotations, or whether exclusive jurisdiction lay with the Securities and Exchange Commission because the motion involved the issue of PBM’s corporate existence.

• Renewal of Lease and Corporate Term: Whether the lease contract was validly extended for a second 20-year term in light of PBM’s failure to extend its corporate term in accordance with law.

• Ownership of Improvements: Whether ownership of the improvements constructed by PBM on the leased premises passed to the landowners upon termination of the lease, and whether the annotations of the assignment and mortgages in favor of PNB should be cancelled.

• Validity of Service and Finality: The trial court did not gravely abuse its discretion. Under Section 8, Rule 13 of the Rules of Court, service by registered mail is complete upon actual receipt, but if the addressee fails to claim the mail within five days from the first notice of the postmaster, service takes effect at the expiration of such time. The postmaster’s certification that three registry notices were sent to petitioner’s counsel at his address of record constituted the best evidence of the sending of the first notice. The presumption that official duty was regularly performed was not overcome by a bare denial of receipt, especially where counsel admitted that the notices could have been received by the building’s receiving section. The June 28, 1982 order was therefore validly served and became final.

• Jurisdiction: The respondent court properly exercised jurisdiction. The motion sought cancellation of annotations on land titles based on the expiration of the lease — a civil action well within the court’s jurisdiction. The fact that PBM’s corporate term had expired was merely a factual basis for the termination of the lease; it did not convert the matter into one falling under the exclusive jurisdiction of the SEC as enumerated in Presidential Decree No. 902-A. The motion did not seek a declaration of corporate dissolution, which occurs automatically by operation of law upon expiration of the corporate term without need for any quo warranto proceeding.

• Renewal of Lease and Corporate Term: The lease was not validly extended. The contract provided that the option to extend for another 20 years could be exercised only “should its term of existence be extended in accordance with law.” PBM’s corporate term of 25 years expired on January 19, 1977, without any extension having been effected. Under Section 11 of the Corporation Code, a corporation that fails to extend the period fixed in its articles of incorporation is dissolved ipso facto upon the expiration of that period; no quo warranto proceeding is needed because the dissolution is by limitation of the articles. Since the condition for the exercise of the option remained unfulfilled, the option lapsed, and the lease could not be extended beyond its initial term.

• Ownership of Improvements: The improvements rightfully accrued to the landowners, and the cancellation of the annotations was proper. While Article 1678 of the Civil Code gives a lessee the right to remove useful improvements if the lessor refuses to reimburse half their value, the parties’ contract stipulated that the lessee was to remove all improvements before termination. PNB, as assignee of PBM, succeeded to the obligations of the lessee and could not acquire rights greater than those of its assignor. Its failure to remove the improvements before the lease was terminated constituted a waiver of its rights and interests over them, validating the cancellation of the corresponding annotations.

• Ipso Facto Dissolution upon Expiration of Corporate Term — Upon the expiration of the period fixed in the articles of incorporation, in the absence of compliance with the legal requisites for extension, a corporation ceases to exist and is dissolved ipso facto. No quo warranto proceeding under Rule 66 of the Rules of Court is necessary to effect such dissolution because the termination occurs by operation of law and not through involuntary dissolution on the grounds enumerated in said rule. The corporation continues as a body corporate for three years thereafter solely for winding up its affairs under Section 122 of the Corporation Code. In this case, PBM’s expiration in 1977 and its failure to extend its term automatically dissolved it, thereby preventing the fulfillment of the condition for lease renewal.

• Service by Registered Mail and Presumption of Official Duty — Under Section 8, Rule 13 of the Rules of Court, service by registered mail is deemed complete upon actual receipt or, if the addressee fails to claim the mail within five days from the first notice of the postmaster, service takes effect at the expiration of such time. The postmaster’s certification that registry notices were sent is the best evidence of the fact of sending, and a mere denial of receipt cannot overcome the presumption that official duty was regularly performed, absent clear and convincing evidence to the contrary. Here, the postmaster’s certification that three registry notices were sent to counsel’s address of record was sufficient to establish valid service.

• Primacy of Contractual Stipulations on Improvements — Article 1678 of the Civil Code, which grants a lessee the right to remove useful improvements or recover half their value, applies only in the absence of a contrary stipulation. Where the lease contract expressly obligates the lessee to remove the improvements before termination, that stipulation governs; the lessee’s failure to comply results in the loss of its rights over the improvements, which are deemed waived. PNB, as assignee, was bound by PBM’s obligation to remove the improvements and could not claim any right over them upon termination of the lease.

• “The contract of lease expressly provides that the term of the lease shall be twenty years from the execution of the contract but can be extended for another period of twenty years at the option of the lessee should the corporate term be extended in accordance with law. Clearly, the option of the lessee to extend the lease for another period of twenty years can be exercised only if the lessee as corporation renews or extends its corporate term of existence in accordance with the Corporation Code which is the applicable law.”

• “Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance with the legal requisites for the extension of the period, the corporation ceases to exist and is dissolved ipso facto … There is no need for the institution of a proceeding for quo warranto to determine the time or date of the dissolution of a corporation because the period of corporate existence is provided in the articles of incorporation.”

• “Petitioner PNB, as assignee of PBM succeeded to the obligation of the latter under the contract of lease. It could not possess rights more than what PBM had as lessee under the contract. Hence, petitioner was duty bound to remove the improvements before the expiration of the period of lease … Its failure to do so when the lease was terminated was tantamount to a waiver of its rights and interests over the improvements on the leased premises.”

• Barrameda v. Castillo, L-27211, July 6, 1977, 78 SCRA 1 — Cited for the rule that the postmaster’s certification is the best evidence that the first notice of registered mail was sent to the addressee, a prerequisite for applying the five-day constructive service rule under Rule 13.

• Aportadera, Sr. v. Court of Appeals, G.R. No. 41358, March 16, 1988, 158 SCRA 695 — Relied upon for the presumption that the postmaster regularly performed his official duty to send notices of registered mail, and that such presumption prevails over a bare denial of receipt.

• Feraren v. Santos, April 27, 1982, 113 SCRA 707 — Invoked by the trial court and affirmed on review, reiterating the principle that the presumption of regularity in the performance of official duty by the postmaster must be overcome by clear evidence, which PNB failed to present.

• Article 1678, Civil Code — Provides the general rule that a good-faith lessee who makes useful improvements may recover half their value or remove them upon the lessor’s refusal to pay. The Court applied this provision only by way of contrast, holding that it yields to the specific stipulation in the lease requiring the lessee to remove improvements before termination.

• Section 11, Corporation Code (B.P. Blg. 68 — Governs the duration of a corporate term and the requirements for its extension. The Court interpreted this provision in holding that PBM was automatically dissolved when the fixed period expired without an extension being made.

• Section 122, Corporation Code — Provides that a dissolved corporation continues as a body corporate for three years for purposes of winding up. The Court noted the expiration of this three-year period on January 19, 1980, confirming that all corporate acts for the continuation of business had ceased.

• Section 8, Rule 13, Rules of Court — Governs service by registered mail. The Court applied this rule to determine that the June 28, 1982 order was validly served by operation of the constructive service rule after PNB failed to claim the registered mail within five days from the postmaster’s first notice.

• Presidential Decree No. 902-A, as amended — Enumerates the cases over which the Securities and Exchange Commission has exclusive jurisdiction. The Court found that the motion to cancel annotations on land titles did not fall within any of the enumerated categories, thus confirming the trial court’s jurisdiction.

Cruz, Griño-Aquino, and Bellosillo, JJ., concur.