Legal Lease: The Things You Need To Know In Leasing Real Property 

In our last article, we shared the steps on how to become a homeowner. While owning a property is a lifelong dream for most of us, the steep cost of living makes it more difficult for others to save money for their own houses or business spaces. There is also a growing number of digital nomads, who prefer transient arrangements compatible to the ever-changing demands of business.  As a practical solution, many resort to leasing properties for residential or commercial use. Despite this common practice, the legal knowledge of many Filipino and foreign nationals residing in the Philippines on leasing contracts is often limited to rental costs and periods of lease. To many lessees and even lessors, the terms and conditions are nothing but legal mumbo jumbo. Given its significance, a basic understanding of the laws on leases is a must.

Definition

As legally defined, lease is a contract whereby the lessor temporarily allows another person to use his property in consideration of rental payments.¹ The parties are free to agree on the terms and conditions of the lease contract,² unless these terms and conditions are contrary to law, morals, good customs, public order, or public policy.³

Ultimately, a lease contract is the law between the parties, binding them with respective rights and obligations enforceable under the law. Thus, a lease contract must be well-drafted so as to reflect the intent of the parties, and to foster trust, transparency, and security in long-term and even short-term lease arrangement. 

Here are some key stipulations you must know about in leasing real properties.

Period

If the period of lease was fixed for a definite period, the effectivity of the lease contract ends on the date agreed upon; the lessor is not required to demand for the lessee to return the possession of the property to him or her. ⁴

If the parties fail to fix the period of lease, in case of urban lands, the payment of rent determines the period of lease. If rent is paid annually, the lease period is one year. If the rent is paid monthly, the lease period is one month. The same rule applies if the rent is paid weekly or daily.⁵

Notice to Vacate

As a rule, a notice or demand to vacate is not needed to terminate a lease contract.⁶ Upon the expiration of the lease contract, the tenant who continues to occupy the property becomes a deforciant, or someone who is unlawfully withholding the property from the lessor. Upon a demand to vacate, the lessor may file a case to lawfully eject the lessee from the premises.⁷

However, where the lessor consented to the occupation of the leased premises for fifteen (15) days even after the expiration of contract, the lease is deemed renewed with a period based on the frequency or period of payment and whose other terms are revived.⁸ If, however, the lessor sent a notice to vacate after the expiration of lease, such notice shall terminate the implied renewal and the lessee must vacate the premises.⁹

In a tricky situation where the lessor sold the real property to another without the lessee’s knowledge, the purchaser may terminate the lease except when there is a stipulation contrary to the contract of sale between the lessor and the purchaser, or the purchaser knows of the existence of lease.¹⁰ Further, a lease of real property not recorded in the Registry of Deeds is not binding upon third persons,¹¹ which may include a purchaser buying the real property in good faith.

Rent

While lessors are allowed to increase rent, this is not without limit for certain properties.

For lessors of residential units in the National Capital Region or other highly urbanized cities with a maximum rent of P10,000.00 and all residential units in all other areas with a maximum rent of P5,000.00, they can only increase rent annually, it shall shall not exceed  seven percent (7%),¹² if that the leased premises is occupied by the same lessee.¹³ The lessor cannot demand more than one (1) month advance rent, or two (2) months deposit.¹⁴

To reiterate, the Rent Control Act only covers residential units within the abovementioned rent threshold. 

Residential units with rent above the threshold and commercial units, therefore, are not regulated by the said law. However, this does not give them a blanket authority to unreasonably increase rent as courts can intervene in fixing the rent to uphold fairness and equity.¹⁵

Subleasing

The lessee may sublease the leased premises even without the permission of the lessor, if there is no express prohibition in the contract.¹⁶ Nonetheless, the lessor and the lessee are still bound by the rights and obligations in their lease contract.¹⁷ The sublessee, in turn, is subsidiarily liable to the lessor for any rent due from the lessee but not beyond the amount fixed in the sublease agreement.¹⁸ Moreover, the sublessee does not have any direct action against the lessee.¹⁹

So, while subleasing is allowed, sublessees must still take note of potential risks and liabilities of entering such an arrangement.

Rights of Heirs

Finally, the rights and obligations of the parties in a lease contract may be transmitted to the heirs of the parties ²⁰ unless the rights and obligations of the parties are not transmissible by its nature, by stipulation, or by provision of law.²¹

Legal Proof

As the ink dries on the lease contract, its implications ripple through time. Lessors and lessees are encouraged to future-proof their lease contracts to ensure a mutually beneficial arrangement. AJA Law is here to provide the much needed support to maneuver the intricacies of leasing and find solutions to controversies arising therefrom. 

Prepared by: Reinalyn L. Domasig

FOOTNOTES