Florentino

v. Supervalue
559 Phil 577 | GR No. 172384 | 12 September 2007 | Chico-Nazario, J.

When Courts May

Reduce Penalty

Princess Trisha Joy Z. Uy | Law 122-Obligations and Contracts | Grp3

Courts may reduce penalty when the obligation has been partially
complied with, or when the penalty is unconscionable.

Facts:

! Florentino is the sole proprietor of Empanada Royale, while the respondent is a corporation which
leases stalls and commercial store spaces in SM.
! Both parties executed 3 contracts to lease cart-type stalls in SM, each with a term of 4 months
renewable upon agreement.
! When the contracts expired, the parties renewed.
! A month before the renewal expires, PET received 2 letters from RESP. One charges them of violating
the Contract of Lease by not opening on December 16 and 26 of 1999; Increasing their price without
consulting the RESP; and frequently closing early because of the lack of supply, which violates the
terms of the contract. The second letter was to inform the PET that RESP would not be renewing their
contract.
! The RESP confiscated the equipment and personal belongings of the PET found in the stall after the
contract expired.
! PET demanded, through a letter, that the RESP release the equipment and personal belongings and to
return the security deposit (192k). A month later, the PET sent another letter demanding the same. The
RESP still refused to comply.
! PET filed an action for Specific Performance, Sum of Money and Damages in the RTC.
! PET claims that RESP had always verbally represented that the contract would be renewed, and so the
PET introduced improvements in the store space (200k). PET further avers that RESP refuses to give
back the security deposit, personal belongings and equipment without reason even after repeated
demands. PET prays for actual, moral and exemplary damages plus attorneys fees.
! RESP reiterated that PET violated their contract and is also liable for electricity and water bills and
claims that the confiscation of the items was in the exercise of its retaining lien because PET failed to
settle obligations.
! RTC found for petitioner. CA modified, and found that RESP was justified in forfeiting the security
deposit.

Issue/Ratio:
WON PET is entitiled to get back her security deposit. YES, but only half.

Section 18. TERMINATION. Any breach, non-performance or non- observance of the terms and
conditions herein provided shall constitute default which shall be sufficient ground to terminate this
lease, its extension or renewal. In which event, the LESSOR shall demand that LESSEE immediately
vacate the premises, and LESSOR shall forfeit in its favor the deposit tendered without prejudice to any
such other appropriate action as may be legally authorized.

! This is a penal clause.

! Penal clause accessory undertaiking to assume greater liability in case of breach. It is placed in the
terms to insure performance, provide for liquidated damages and strengthen coercive force.
! Courts may reduce penalty in two instances: (1) if the principal obligation has been partly or irregularly
complied with; and (1) even if there has been no compliance if the penalty is iniquitous or
unconscionable.
! The forfeiture of the security deposit, in this case, is excessive since the breaches were not of such
degree that the respondent was unduly prejudiced. RESP should reimburse half of the deposit.
! It has been a practice that lessees improve the leased spaces, no misrepresentation from the lessor
induced the lessee from doing as such. To be entitled to reimbursement for improvements, Art. 1678
should be read together with 448 and 546, the PET must be considered a builder in good faith. A
builder in good faith is one who is unaware of any flaw in his title to the land, in this case, this is not
true, the PET knows she was only a lessee.