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G.R. No. 157480, 06 May 2005
PAGCOR leased some hotel space from Pryce
Corp. (Pryce) in Cagayan de Oro City to put up
a casino. It is fraught with problems from the
start as frequent protests by locals and civic
leaders plagued the casino.
subsequently advised to stop operations by no
less than the President of the Philippines.
PAGCOR stopped paying the rent after ceasing
operations despite the fact that the lease
contract had not yet expired. Pryce sent
several letters demanding the unpaid balance
to no avail. After exhausting all possible
options, Pryce decided to exercise its
contractual right to terminate the lease contract
and to claim the supposedly forfeited deposits
of PAGCOR. This right to forfeiture was
stipulated in the contract as a penalty.
Is Pryce entitled to the unpaid rentals by
Although the contract falls under one of those
exceptions where both the actual damages and
the penalty may be claimed by virtue of the
provision which states that aside from the
payment of the rentals corresponding to the
remaining term of the lease, the lessee shall
also be liable 'for any and all damages, actual
or consequential, resulting from such default
and termination of this contract. The right to
claim the forfeiture of the future rentals may not
be exercised by Pryce, as such penalty would
be unconscionable and iniquitous.
question of whether a penalty is reasonable or
iniquitous is addressed to the sound discretion
of the courts. To be considered in fixing the
amount of penalty are factors such as, but not
limited to, the type, extent and purpose of the
penalty; the nature of the obligation; the mode
of the breach and its consequences; the
supervening realities; the standing and
relationship of the parties; and the like. In this
case, PAGCOR's breach was occasioned by
events that, although not fortuitous in law, were
in fact real and pressing.
From the CA's factual findings, which are not

contested by either party, we find that

PAGCOR conducted a series of negotiations
and consultations before entering into the
contract. It did so not only with Pryce, but also
with local government officials, who assured it
that the problems were surmountable.
Likewise, PAGCOR took pains to contest the
consequently declared them unconstitutional.
On top of these developments, the gaming
corporation was advised by the Office of the
President to stop the games in Cagayan de
Oro City, prompting the former to cease
operations prior to September 1993.Also worth
mentioning is the CA's finding that PAGCOR's
casino operations had to be suspended for
days on end since their start in December
1992; and indefinitely from July 15, 1993, upon
the advice of the Office of the President, until
the formal cessation of operations in
September 1993. Needless to say, these
interruptions and stoppages meant that
PAGCOR suffered a tremendous loss of
expected revenues, not to mention the fact that
it had fully operated under the Contract only for
a limited time.
While petitioner's right to a stipulated penalty is
affirmed, we consider the claim for future
rentals to the tune of Php 7,037,835.40 to be
highly iniquitous. The amount should be
equitably reduced.

G.R. No. 172384, 12 September 2007
Florentino is a lessee of Supervalue (SM).
Florentino is the owner of Empanada Royale, a
food cart business entered into a contract of
lease with SM. The contract was good for 4
months and after the end of the contract, both
parties had the option to either renew or
terminate the contract. Florentino and SM was
able to renew the contract several times that it
even lasted for a year. However, SM
terminated the contract with Florentino for the
following violations: failure to open on two
separate occasions; closing before mall closing
time ;introducing a new variety of empanada
without the approval of SM. The store
management then ordered the foreclosure of
the space and along with it were the personal
belongings of the petitioner. Florentino
demanded for the return of her personal
belongings and of the security deposit that she
has given SM.
1. Whether or not Florentino can claim for
reimbursement on the improvements
that she has made?
2. Whether or not Florentino is entitled to
claim for the security bond that she has
(1) Florentino is no longer entitled for
reimbursment on the improvements that she
has done on her stall.
Article 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 of
the improvements at that time. Should the
lessor refused to reimburse said amount the

lessee may remove the improvements, even

though the principal thing may suffer damages
thereby. He shall not, however, cause any
more impairment upon the property leased
than is necessary."
As stated in Geminiano vs CA: "Being mere
lessees, the private respondents knew that
their occupation of the premises would
continue only for the life of the lease. Plainly,
they cannot be considered as possessors nor
builders in good faith"
(2) Florentino is entitled to half of the security
deposits made with SM because it would
unconscionable for the former to be imposed
such penalty.
Obligations with Penal clause:
Article 1226: In obligations with penal clause,
the penalty shall substitute the indemnity for
damages and the payment of interests in case
of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be
paid if the obligor refuses to pay the penalty or
is guilty of fraud in the fulfillment of the
The penalty may be enforced only when it is
demandable in accordance with the provisions
of this code.
As a rule the courts are not in the liberty to
ignore the freedoms of the parties to agree on
such terms and conditions.The courts may
equitably reduce a stipulated penalty in the
contracts in two instances:
1. if the principal obligation has been
partly or ireegularly complied with;
2. If there has been no compliance if the
penalty is iniquitous or unconscionable in
accordance with Article 1229:
Article 1229: The judge shall equitably reduce
the penalty when the principal obligation has
been partly or irregularly complied with by the
debtor. Even if there has been no
performance, the penalty may also be reduced
by the courts if it is iniquitous or