Letter to a Lawyer

Dear Attorney,

I am currently renting a small commercial space from a property owner in the Philippines under a verbal agreement—no written contract was ever signed. Over time, I invested in improvements to the property, such as replacing the old roofing and fixing structural issues that the owner did not attend to. All of this was done with the owner’s knowledge, and at one point we discussed that if they ever forced me to leave against my will, I would be allowed to remove or dismantle the improvements that I personally funded.

However, recently, the owner has repeatedly demanded that I vacate the premises. While I am now prepared to leave due to the constant pressure, I want to remove the improvements or return the property to its original state to reclaim at least some of the materials I invested in. The owner, however, insists that I restore the property exactly as it was before my renovations, which may be practically impossible because the original materials were already deteriorated and are no longer available.

I would like to know what rights I have under Philippine law to either remove the improvements I made or to be compensated for them. Is there a possibility that I could legally demand payment from the owner for the value of these improvements, or must I leave them behind without compensation? How does the absence of a written lease contract and the verbal nature of our agreement affect my legal standing and any potential claims against the owner?

Your guidance would be greatly appreciated.

Sincerely,
A Concerned Commercial Lessee

Comprehensive Legal Article on Philippine Law Regarding Lessee’s Improvements and Termination of Verbal Lease Agreements

Introduction

In the Philippine legal system, landlord-tenant relationships are generally governed by the Civil Code of the Philippines and other related statutes and jurisprudence. While most disputes arising from lease agreements are addressed through written contracts, it is not uncommon, especially in smaller commercial setups, for parties to enter into purely verbal agreements. These arrangements, although valid under certain conditions, often lead to confusion and disputes later on, especially when it comes to the termination of the lease and the handling of improvements made by the tenant (the lessee).

This article aims to provide a meticulous, all-encompassing examination of the legal principles governing verbal lease agreements, tenants’ rights and obligations when making improvements, and possible remedies when the landlord demands that the tenant vacate. It will also cover the classification of improvements, the limitations and requirements for their removal, and potential strategies for dispute resolution. Although each case’s circumstances vary, a thorough understanding of the applicable Philippine laws and jurisprudence will help guide both tenants and landlords in making informed decisions.

I. Validity of Verbal Lease Agreements Under Philippine Law

Nature of a Verbal Lease Agreement:
Under Philippine law, there is no absolute requirement that a lease contract must be in writing to be enforceable, except when the lease period exceeds one year. Articles 1648 and 1650 of the Civil Code allow oral leases for shorter terms or indefinite periods. Such agreements are considered consensual contracts, effective upon the concurrence of the parties’ consent, and subject to general principles of contract law.
Term and Notice in Verbal Leases:
In the absence of a fixed period, the law typically deems the lease to be from month to month (or a similar short period), depending on how rents are paid. Under Article 1687 of the Civil Code, if the lease period is not specified, courts may fix the duration or consider it a month-to-month tenancy. As a result, the lessor or the lessee may terminate it upon proper notice—commonly at least 15 days to one month’s written notice, depending on local custom and the circumstances of the lease.
Disputes Arising from Verbal Arrangements:
Because no written contract sets forth the rights and obligations, controversies often arise as to what was agreed upon, particularly regarding improvements, renewal options, or conditions for termination. In such cases, courts rely on the parties’ testimony, any documentary evidence (such as receipts for rent or materials), and the general provisions of the Civil Code. A well-documented trail of communications (even text messages or emails) can help establish the terms that were verbally agreed upon.

II. Classification of Improvements Made by the Lessee

Under Philippine law, improvements on leased property are generally classified into three categories: necessary, useful, and ornamental (or luxurious) improvements. This classification is crucial because it determines whether and to what extent the lessee may remove or be reimbursed for such improvements.

Necessary Improvements:
Necessary improvements are those without which the property would deteriorate or be subject to damage. They ensure the preservation and integrity of the leased premises. For instance, replacing a severely damaged roof or reinforcing a compromised structural component to prevent the building from collapsing can be considered a necessary improvement. Under certain circumstances, the lessor is obliged to keep the property fit for the use intended. If the lessee undertakes these improvements, the law may grant the right to reimbursement or at least the right to retain possession until reimbursed, depending on the nature of the expense and what was agreed upon.
Useful Improvements:
Useful improvements are those that enhance the value or utility of the property but are not strictly necessary. For example, installing additional shelving, upgrading electrical wiring for better functionality, or replacing a partially damaged roof with a more durable material could be seen as a useful improvement. In principle, useful improvements might not be reimbursable unless stipulated in the contract or agreed upon by the landlord and tenant. However, the tenant usually retains the right to remove such improvements if this can be done without causing substantial damage to the property.
Ornamental or Luxurious Improvements:
Ornamental improvements are those made solely for decoration or luxury, such as putting in expensive lighting fixtures or luxury tiles that are not necessary for the property’s basic use. Unless otherwise agreed, these improvements generally remain the property of the tenant, but the tenant must remove them upon termination of the lease if the lessor so demands, and such removal must not cause damage to the property.

III. Rights and Obligations of the Lessee in Removing Improvements

General Rule on Removal of Improvements:
Under the Civil Code (Articles 1678 and related provisions), the lessee may remove the improvements they have introduced if these can be removed without causing damage to the leased property. The law seeks to maintain a fair balance: the tenant should not be deprived of their investment in removable improvements, but the landlord should not suffer property damage as a result of their removal.
Conditions for Removing Improvements:
- Non-Damaging Removal: The improvement must be removable without materially altering or damaging the essential structure of the leased premises. For instance, if the tenant installed removable shelves, counters, or light fixtures that can be uninstalled without damaging walls or ceilings, these can be taken away.
- Lack of Prohibition in the Lease Agreement: If the lease agreement—written or verbal—prohibits the tenant from removing any improvements, this clause will generally be respected. Without a written contract, if the landlord previously consented or gave the impression that improvements could be withdrawn, the tenant may argue that such an agreement exists.
- Reasonable Restoration: If partial damage is unavoidable, the tenant should restore the affected area to a reasonably acceptable state. Complete restoration to the exact original condition may be impossible, especially if original materials are no longer available or if the property has aged.
Reimbursement and Compensation:
In the event that the improvements are classified as necessary or useful and the lessor benefitted from them (for example, a significantly improved roof that increases the property’s value and utility), the lessee may have a claim for reimbursement. Article 1678 of the Civil Code allows the lessee to be reimbursed for necessary improvements if they were made with the lessor’s consent. For useful improvements, while not always mandated, courts sometimes allow partial reimbursement, especially if there was an understanding or verbal agreement to that effect. The key is to prove that the improvements were made with the knowledge and implicit or explicit approval of the lessor.

IV. Returning the Property to Its Original Condition

Legal Standard for Restoration:
The lessor’s demand that the lessee restore the property to its original condition may be complicated by the fact that the original materials may no longer exist or may have been in such poor condition that they were discarded. Philippine courts and legal doctrine acknowledge that it may be impossible to revert the property precisely to its pre-lease state, especially after many years and when improvements have been integrated into the structure.

In such cases, the law typically requires only a reasonable standard of restoration. The tenant must ensure that the property is in a condition suitable for its intended use, factoring in normal wear and tear. If the landlord demands exact restoration to a previous deteriorated state, this may be considered unreasonable. The tenant’s duty generally extends to leaving the premises in a condition that does not render the property less valuable than when leased, aside from normal wear and tear that accrues over time.
Equitable Considerations:
Courts may look into the equities of the situation. If the landlord refused to shoulder the cost of necessary repairs and the tenant had to step in, it would be unfair to force the tenant to restore the property to a worse condition than when leased or to leave behind significant improvements without any form of compensation. Judges may rely on the principles of equity to ensure that neither party obtains an unconscionable advantage.

V. Enforceability of Verbal Agreements on Improvements

Proving Verbal Agreements:
The lack of a written lease complicates matters. However, Philippine courts may consider various forms of evidence: testimonies of neighbors, text messages between the parties, receipts for construction materials, photographs documenting the state of the property before and after improvements, and other circumstantial evidence. If the tenant can establish a verbal agreement that “if forced to leave, they can remove improvements,” the court may uphold this agreement and allow removal or require compensation.
Burden of Proof:
The tenant claiming a right (like reimbursement or the right to remove improvements) bears the burden of proof. It is crucial to present credible evidence of the landlord’s knowledge and consent to these changes. Without such evidence, the tenant’s claims may be weakened.

VI. Remedies and Dispute Resolution

Negotiation and Compromise:
Before resorting to litigation, both parties are encouraged to negotiate. The tenant can propose a fair settlement, such as partial reimbursement for the improvements that cannot be removed, or permission to remove all removable fixtures without restoring the property to its old, substandard state. A mutually beneficial compromise can save both parties time and legal expenses.
Mediation and Arbitration:
If negotiation fails, mediation before the barangay (local government unit) or a private mediator may help resolve the dispute amicably. The Katarungang Pambarangay Law encourages disputants to seek settlement at the barangay level before filing a court case. If the parties agree, arbitration clauses may also be invoked for a quicker, less formal resolution.
Filing a Civil Case:
Should amicable means fail, the tenant may file a civil case for damages, reimbursement, or enforcement of the verbal agreement. The lessor may likewise file an unlawful detainer or ejectment case if the tenant refuses to vacate. In court proceedings, the judge will consider the evidence presented and apply the relevant provisions of the Civil Code and jurisprudence.

a. Ejectment (Unlawful Detainer): The landlord may initiate an unlawful detainer suit if the tenant overstays after the lease termination. In such cases, the tenant can raise as a defense any breaches by the landlord or rights to improvements.

b. Claims for Damages or Reimbursement: The tenant can file a case seeking compensation for improvements, provided they have evidence of consent or necessity. The court’s decision may order the lessor to pay the tenant a certain amount for the improvements or allow the tenant to remove them.
Practical Considerations:
Filing suit can be time-consuming and expensive. Often, the value of the improvements might not justify protracted litigation. However, if significant sums are at stake or if the landlord is acting in bad faith, legal action may be warranted.

VII. Relevant Philippine Laws and Jurisprudence

Civil Code Provisions on Lease:
- Articles 1642–1688: Outline the basic framework for lease agreements, including obligations of lessors and lessees.
- Article 1678: Particularly relevant for reimbursement and improvements.
- Article 1673: Deals with cases where the lessor may eject the lessee.
Jurisprudence:
Philippine courts have decided numerous cases regarding improvements and verbal lease agreements. Although factual nuances differ, general trends indicate that courts strive for fairness and equity, upholding valid verbal agreements when sufficiently proven and ensuring that the property owner does not unjustly benefit from the lessee’s investments without compensation.

VIII. Strategic Tips for Tenants and Landlords

For Tenants:
- Obtain written consent before making major improvements.
- Keep all receipts, photographs, and communication records related to improvements.
- Seek a fair arrangement upon termination—if possible, negotiate a settlement.
For Landlords:
- Communicate clear expectations regarding improvements at the start of the lease.
- If the tenant makes significant changes, consider drafting a memorandum of agreement acknowledging these improvements and specifying rights upon termination.
- Maintain open lines of communication to prevent disputes from escalating.

IX. Conclusion

In the Philippines, verbal lease agreements are recognized but can be fraught with uncertainty, especially when it comes to improvements made by the tenant. Philippine law seeks to balance the rights of both parties, allowing tenants to remove improvements or claim reimbursement under certain circumstances, while also respecting the landlord’s property rights.

A tenant who has invested in necessary or useful improvements, with the landlord’s knowledge or acquiescence, may have equitable grounds to request removal or compensation. While the landlord might insist on a return to the property’s original condition, practicality and fairness guide the courts in assessing the feasibility and reasonableness of such requests.

The key to a favorable outcome lies in thorough documentation, open communication, and, if possible, reaching a compromise before pursuing litigation. When negotiations break down, formal legal recourse remains available. By understanding the legal framework and obligations, both tenants and landlords can better protect their interests and mitigate the risks associated with verbal lease arrangements in the Philippines.