2022 Civil Law, Q18

[This item has two questions.] Jungkook, who owns a building, leases the same to Gel with the following terms: (i) the lease is for a period of ten years; (ii) the yearly rental is Php 1,200,000.00 payable within the first ten days of the current year; and (iii) in case of breach of any of the provisions of the lease, Gel is liable to pay Jungkook five monthly rentals and attorney’s fees. Five years into the lease, Gel sends a notice to terminate the lease and offers to pay five monthly rentals. Despite Jungkook’s objections, Gel vacates the premises. Jungkook sues Gel for the rentals due for the remaining five years of the lease. Gel takes the position that her liability should only be limited to five monthly rentals and attorney’s fees.

Quick check

What is the primary statutory purpose of a penal clause in an obligation under Article 1226 of the Civil Code?

Under Article 1226 of the Civil Code, when may a creditor recover damages in addition to the stipulated penalty?

How does the presence of a valid penal clause affect a lessor's claim for unearned future rentals upon premature lease termination?

In a ten-year lease contract with a penal clause of five monthly rentals for breach, what is the lessee's total liability for unilaterally vacating on the fifth year?

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Why was Jungkook barred from collecting rentals for the remaining five unexpired years of the lease from Gel?

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1. Penal Clause Concept
Under Article 1226 of the Civil Code, a penal clause is an accessory obligation attached to a principal obligation to enforce performance and fix the amount of damages in case of breach. It serves a dual purpose: a coercive purpose to encourage performance, and a compensatory purpose to liquidate damages in advance. Upon the occurrence of a breach, the penalty automatically substitutes the indemnity for damages and payment of interest, relieving the creditor from the burden of proving actual loss sustained.

2. Exclusivity of Penalty
As a general rule under Article 1226 of the Civil Code, a creditor cannot demand fulfillment of the principal obligation and payment of the penalty simultaneously, nor recover damages beyond the stipulated penalty amount. Unless the contract expressly reserves the creditor's right to collect additional damages or unearned future rentals alongside the penalty, or unless the debtor acts fraudulently, the creditor is strictly bound by the agreed penal amount as the exclusive measure of recovery for breach of contract.

3. Lease Contract Breach
In fixed-term lease agreements, premature termination by the lessee constitutes a contractual breach. While the lessor may ordinarily seek full enforcement of the lease period or compensation for lost rentals, an express penal clause alters this remedy. When the lease contract explicitly provides for a specific monetary penalty in case of default or unilateral termination, the lessor's recovery is limited to the agreed penalty and stipulated attorney's fees, preventing the recovery of unearned future rentals.

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