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  • Writer's pictureZiggurat Realestatecorp

Reimbursement for improvements by lessee

Can a Lessee claim reimbursement for the value of the building/structures that he/she will construct on the land, upon the expiration of the lease?


In the case of Samuel Parilla, et al. vs. Dr. Prospero Pilar (GR 167680, Nov. 30, 2006), penned by Associate Justice Conchita Carpio-Morales, the Supreme Court held the following, in relation to Article 1678 of the New Civil Code of the Philippines:


"The right of the lessor upon the termination of a lease contract with respect to useful improvements introduced on the leased property by a lessee is covered by Article 1678 which reads:


"Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary.


"The modification introduced in the above-quoted paragraph of Article 1678 on partial reimbursement was intended to prevent unjust enrichment of the lessor which now has to pay one-half of the value of the improvements at the time the lease terminates because the lessee has already enjoyed the same, whereas the lessor could enjoy them indefinitely thereafter.


"Petitioners' claim for reimbursement of the alleged entire value of the improvements does not thus lie under Article 1678. Not even for one-half of such alleged value, there being no substantial evidence, e.g., receipts or other documentary evidence detailing costs of construction. Besides, by petitioners' admission, of the structures they originally built – the billiard hall, restaurant, sari-sari store and a parking lot, only the "bodega-like" sari-sari store and the parking lot now exist.


"At all events, under Article 1678, it is the lessor who is given the option, upon termination of the lease contract, either to appropriate the useful improvements by paying one-half of their value at that time, or to allow the lessee to remove the improvements.


This option solely belongs to the lessor as the law is explicit that "should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby." It appears that the lessor has opted not to reimburse."


It is clear from the foregoing discussion that as a lessee, you will be entitled to reimbursement for the value of the improvements that you will construct on the land only if the lessor opts to appropriate them as his or her own at the end of your lease contract.


Even then, you will only be entitled to reimbursement or payment for only one-half of the value of such improvements as provided under Article 1678 of the New Civil Code.


Should your lessor refuse to reimburse you, then your only option is to remove the improvements that you constructed on the land.


Again, the option whether to pay reimbursement or allow the removal of the improvements belongs to the lessor.


Thus, whether you will receive reimbursement or not will depend on the choice of your lessor.

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