UP Law BGC Eve 2024 BROADWAY CENTRUM CONDOMINIUM

CORPORATION vs. TROPICAL HUT FOOD MARKET,

INC.
OBLICON Art. 1292 NCC 1993 Felician0
Novation
SUMMARY DOCTRINE
Broadway and Tropical Hut entered in a contract of If objective novation is to take place, it is essential
lease. No problem arose in the first year of the lease, that the new obligation expressly declare that the old
however, due to low sales because of the closure of obligation to be extinguished, or that now obligation
the avenue where Tropical is located, Tropical be on every point incompatible with the old one.
proposed to Broadway to lower the monthly rental. Novation is never presumed; it must be established
Broadway agreed to the proposal (letter agreement) either by the discharge of use old debt by the express
but only for a limited period of 4 months. When the terms of the new agreement, or by the acts of the
road was completed, Broadway informed Tropical parties whose intention to dissolve the old obligation
that it is increasing its rental fee. Series of as a consideration of the emergence of the new one
negotiations thereafter ensued. The parties however must be clearly manifested.
failed to reach an agreement. Tropical files a
complaint in Court basically arguing that Broadway
has no right to unilaterally increase the rent because
their letter agreement novated the Lease Contract,
therefore it is still entitled to the lower rent. Court
held that the letter agreement did not novate the
Lease Contract.

FACTS
 Nov. 28, 1980 - Broadway and Tropical entered into a contract of lease for a period of 10 years, "renewable
for a like period upon the mutual agreement of both parties" for a portion of a complex owned by
Broadway.
 There were no problems during the first year. After a year however, Tropical wrote to Broadway…
o stating that Tropical's rental payments to Broadway were equivalent to 7.31% of Tropical's sales,
while "[Tropical's] gross profit, rate [was] only 10%."
o the rental specified in that contract had been "based merely on [Tropical's) projections that
[Tropical] could reach an average sale of P120,000.00 a day;" however, Tropical's total sales
projection for 1982 was only P23,000,000.00. This would mean again a rental rate of 6.08% of
sales "which is too high for Tropical Hut-Broadway considering that the present rental rates of
other Tropical branches are even below the normal rate of 1.5% on sales." Accordingly. Tropical
made the following proposal to Broadway:
 [Tropical] would therefore propose to reduce the present monthly rental to
P50,000.00 or 2.0% of their monthly sales whichever is higher, up to the end of
the third year after which it shall again be subject to renegotiations.
 Broadway made the following counter-proposal consisting of conditional reduction of the stipulated rental
by P20,000.00 for a limited period of four (4) months.
o It is understood, however, that any reduction in rental extended is merely a temporary
suspension of the original rate of rental stipulated in our contract of lease and not an
amendment thereto.
 Officers of Tropical met with the President of Broadway and during this conference, Tropical's officers
recounted the "low sales volume" that the Tropical Supermarket in the Broadway Centrum was
experiencing, apparently as a result of the temporary closure of Doña Juana Rodriguez Avenue.
 Broadway approved the provisional and temporary agreement which provides:
o reduction of your monthly rental on the basis of 2% of gross receipts or P60,000.00 whichever is
higher.
o This Provisional arrangement should not be interpreted as amendment to the lease
contract entered into between us.
 Months later, the road expansion project at the Doña Juana Rodriguez Avenue was completed. Broadway
recalled the provisional concession, thus:
o After careful deliberation, we regret that this concession can no longer be extended in its present
form. We, therefore, advising that we shall increase the monthly rental to P100,000.00.
o This increase, however, shall be implemented gradually as follows: P80,000.00 effective January,
1983 and P100,000.00 effective April, 1993 until further notice.
o The rates are lower than the rate originally fixed.
 A series of negotiations ensued thereafter. Broadway and Tropical failed to reach an agreement.
 Broadway then sent Tropical a final demand letter for the increased rent with the threat that it will invoke
paragraph 5 of their lease contract. (not stated in the case)
 Tropical filed a Complaint before the Regional Trial Court, Quezon City, seeking a restraining order or
preliminary injunction to prevent Broadway from invoking and implementing Section 5 of their Lease
Contract and asking the court to decree that the, rental provided for in the letter-agreement of 20 April
1982 "should subsist while the low volume of sales [of Tropical] still continues."
 While the case was pending, Broadway informed Tropical that it is increasing its rental for the next 3 years
to 140,000 per month.
 Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the issue
of whether or not the letter-agreement dated 20 April 1982 had novated the Lease Contract
of 28 November 1980.
 RTC and CA both ruled that the letter agreement novated the Lease Contract.

RATIO

W/N the letter-agreement dated 20 April 1982 had novated the Lease Contract of 28 November
1980.
No.

Novation is the extinguishment of an obligation by the substitution of that obligation with a subsequent one,
which terminates it, either by:
 changing its object or principal conditions or (objective or real)
 by substituting a now debtor in place of the old one, or (subjective or personal)
 by subrogating a third person to the rights of the creditor.

If objective novation is to take place, it is essential that the new obligation expressly declare that the old obligation
to be extinguished, or that now obligation be on every point incompatible with the old one. Novation is never
presumed; it must be established either by the discharge of use old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the
emergence of the new one must be clearly manifested.

Applying the above principles to the case at bar, it is entirely clear to the court that the letter-agreement of 20
April 1992 did not extinguish or alter the obligations of respondent Tropical and the rights of petitioner Broadway
under their lease contract dated 28 November 1980.

1. the letter-agreement of 20 April 1982 was, by its own terms, a " provisional and temporary agreement to a
reduction of [Tropical's] monthly rental —."
2. the formal notarized Lease Contract of 28 November 1980 made it clear that a temporary and provisional
concessional reduction of rentals which Broadway might grant to Tropical was not to be construed as
alteration or waiver of any; of the terms of the Lease Contract itself.
3. the course of negotiations between Broadway and Tropical before the execution of their letter-agreement
of 20 April 1982, quite clearly indicated that what they were negotiating was a temporary and provisional
reduction of rentals
4. the course of discussions between Broadway and Tropical, as disclosed in their correspondence, after
execution of the 20 April 1982 letter-agreement, shows that the reduction of rentals agreed upon in the
letter-agreement was not to persist, for the rest of the life of the ten (10)-year Contract of Lease.

Under both the Civil Code and our case law on novation and as well the express terms of the 28 November 1980
Contract of Lease, only evidence of the clearest and most explicit kind will suffice for that purpose.

FALLO

We conclude that the Court, of Appeals fell into reversible error when it affirmed the decision of the trial court.
We believe and so hold that the letter-agreement of 20 April 1982 did not constitute a novation, Whether partial
or total, of the 28 November 1980 Contract of Lease between Broadway and Tropical.