SECOND DIVISION

[G.R. No. 125683. March 2, 1999.]

EDEN BALLATAN and SPS. BETTY MARTINEZ and CHONG

CHY LING, petitioners, vs. COURT OF APPEALS, GONZALO GO,
WINSTON GO, LI CHING YAO, ARANETA INSTITUTE OF
AGRICULTURE and JOSE N. QUEDDING, respondents.

Jose A. Dizon for petitioners.

Jose C. Guico, Jr. Law Offices for private respondent Li Ching Yao.
Rogelio E. Subong for Gonzalo Go and Winston S. Go.
Rogelio R. Nacorda for private respondent Quedding.
Macario O. Directo for Araneta Institute of Agriculture.

SYNOPSIS

This is a petition for review on certiorari of the decision of the Court of

Appeals affirming the dismissal of the third-party complaint against Araneta
Institute of Agriculture (AIA) but reinstated the complaint against respondents
Li Ching Yao and Jose N. Quedding. The appellate court found that it was the
erroneous survey by respondent Quedding that triggered the discrepancies in
the lot areas and it was this survey that respondent Winston Go relied upon in
constructing his house on his father's land. Thus, instead of ordering
respondents Go to demolish their improvements on the subject land, the
appellate court ordered them to pay petitioner Efren Ballatan, and respondent
Yao to pay respondents Go, a reasonable amount for that portion of the lot
which they encroached, the value to be fixed at the time of taking. It also
ordered respondent Quedding to pay respondents Go attorney's fees for his
erroneous survey. ECAaTS

The Supreme Court held that the Court of Appeals correctly dismissed the
third-party complaint against AIA. The claim that the discrepancy in the lot
areas was due to AIA's fault was not proved. The Court likewise ruled that all
the parties herein are presumed to have acted in good faith. Their rights must
therefore be determined in accordance with Article 448 of the Civil Code. Article
448 has been applied to improvements or portions of improvements built by
mistaken belief on land belonging to the adjoining owner. Thus, petitioners, as
owners of Lot No. 24, may choose to purchase the improvement made by
respondents Go on their land, or sell to respondents Go the subject portion. If
buying the improvement is impractical as it may render the Go's house useless,
then petitioners may sell to respondents Go that portion of Lot No. 24 on which
their improvement stands. If the Go's are unwilling or unable to buy the lot,
then they must vacate the land and, until they vacate, they must pay rent to
petitioners. Petitioners, however, cannot compel respondents Go to buy the
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 land if its value is considerably more than the portion of their house
constructed thereon. If the value of the land is much more than the Go's
improvement, then respondents Go must pay reasonable rent. If they do not
agree on the terms of the lease, then they may go to Court to fix the same. In
the event that petitioners elect to sell to respondents Go the subject portion of
their lot, the price must be fixed at the prevailing market value at the time of
payment. The Court likewise held that Article 448 of the Civil Code applies to
respondents Go as owners and possessors of their land and respondent Li
Ching Yao as builder of the improvement that encroached on thirty-seven (37)
square meters of respondents Go's land. DHSaCA

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; ACTIONS; REAL ACTIONS;

DOCKET AND FILING FEES; PAYMENT THEREOF, A REQUISITE BEFORE THE
COURT ACQUIRES JURISDICTION OVER THE ACTION AND CLAIM FOR DAMAGES.
— The third-party complaint in the instant case arose from the complaint of
petitioners against respondents Go. The complaint filed was for accion
publiciana, i.e., the recovery of possession of real property which is a real
action. The rule in this jurisdiction is that when an action is filed in court, the
complaint must be accompanied by the payment of the requisite docket and
filing fees. In real actions, the docket and filing fees are based on the value of
the property and the amount of damages claimed, if any. If the complaint is
filed but the fees are not paid at the time of filing, the court acquires
jurisdiction upon full payment of the fees within a reasonable time as the court
may grant, barring prescription. Where the fees prescribed for the real action
have been paid but the fees of certain related damages are not, the court,
although having jurisdiction over the real action, may not have acquired
jurisdiction over the accompanying claim for damages. Accordingly, the court
may expunge those claims for damages, or allow, on motion, a reasonable time
for amendment of the complaint so as to allege the precise amount of damages
and accept payment of the requisite legal fees. If there are unspecified claims,
the determination of which may arise after the filing of the complaint or similar
pleading, the additional filing fee thereon shall constitute a lien on the
judgment award. The same rule also applies to third-party claims and other
similar pleadings.
2. ID.; ID.; ID.; COMPLAINT; THIRD-PARTY COMPLAINT; DISMISSAL
THEREOF, PROPER IN CASE AT BAR. — We hold that the Court of Appeals
correctly dismissed the third-party complaint against AIA. The claim that the
discrepancy in the lot areas was due to AIA's fault was not proved. The
appellate court, however, found that it was the erroneous survey by Engineer
Quedding that triggered these discrepancies. And it was this survey that
respondent Winston Go relied upon in constructing his house on his father's
land. He built his house in the belief that it was entirely within the parameters
of his father's land. In short, respondents Go had no knowledge that they
encroached on petitioners' lot. They are deemed builders in good faith until the
time petitioner Ballatan informed them of their encroachment on her property.
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 3. CIVIL LAW; DAMAGES; ATTORNEY'S FEES; ADDITIONAL FILING FEE
ON CLAIM THEREOF DEEMED TO CONSTITUTE A LIEN ON THE JUDGMENT
AWARD. — Contrary to petitioners' claim, the Court of Appeals did not err in
awarding damages despite the Go's failure to specify the amount prayed for
and pay the corresponding additional filing fees thereon. The claim for
attorney's fees refers to damages arising after the filing of the complaint
against the Go's. The additional filing fee on this claim is deemed to constitute
a lien on the judgment award.
4. ID.; PROPERTY; OWNERSHIP; RIGHT OF ACCESSION; GOOD FAITH IS
ALWAYS PRESUMED; BURDEN OF PROOF LIES UPON HIM WHO ALLEGES BAD
FAITH. — Respondent Li Ching Yao built his house on his lot before any of the
other parties did. He constructed his house in 1982, respondents Go in 1983,
and petitioners in 1985. There is no evidence, much less, any allegation that
respondent Li Ching Yao was aware that when he built his house he knew that
a portion thereof encroached on respondents Go's adjoining land. Good faith is
always presumed, and upon him who alleges bad faith on the part of a
possessor rests the burden of proof. All the parties are presumed to have acted
in good faith. Their right must, therefore, be determined in accordance with the
appropriate provisions of the Civil Code on property.
5. ID.; ID.; ID.; ID.; RIGHT OF THE OWNER OF THE LAND WHEN
IMPROVEMENT WAS BUILT BY A MISTAKEN BELIEF ON HIS LAND. — Article 448
of the Civil Code has been applied to improvements or portions of
improvements built by mistaken belief on land belonging to the adjoining
owner. Petitioners, as owners of Lot No. 24, may choose to purchase the
improvement made by respondents Go on their land, or sell to respondents Go
the subject portion. If buying the improvement is impractical as it may render
the Go's house useless, then petitioners may sell to respondents Go that
portion of Lot No. 24 on which their improvement stands. If the Go's are
unwilling or unable to buy the lot, then they must vacate the land and, until
they vacate, they must pay rent to petitioners. Petitioners, however, cannot
compel respondents Go to buy the land if its value is considerably more than
the portion of their house constructed thereon. If the value of the land is much
more than the Go's improvement, then respondents Go must pay reasonable
rent. If they do not agree on the terms of the lease, then they may go to court
to fix the same.
6. ID.; ID.; ID,; ID.; WHEN THE OWNER OF THE LAND ELECTS TO SELL
THE LAND OR BUY THE IMPROVEMENT, THE PURCHASE PRICE MUST BE FIXED
AT PREVAILING MARKET VALUE AT THE TIME OF PAYMENT. — In the event that
petitioners elect to sell to respondents Go the subject portion of their lot, the
price must be fixed at the prevailing market value at the time of payment. The
Court of Appeals erred in fixing the price at the time of taking, which is the time
the improvements were built on the land. The time of taking is determinative of
just compensation in expropriation proceedings. The instant case is not for
expropriation. It is not a taking by the state of private property for a public
purpose upon payment of just compensation. This is a case of an owner who
has been paying real estate taxes on his land but has been deprived of the use
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 of a portion of this land for years. It is but fair and just to fix compensation at
the time of payment. Article 448 and the same conditions abovestated also
apply to respondents Go as owners and possessors of their land and
respondent Li Ching Yao as builder of the improvement that encroached on
thirty-seven (37) square meters of respondents Go's land. aEcDTC

DECISION

PUNO, J : p

This is a petition for review on certiorari of the decision of the Court of

Appeals dated March 25, 1996 in CA-G.R. CV No. 32472 entitled "Eden Ballatan,
et al., plaintiffs-appellees v. Gonzalo Go and Winston Go, appellants and third-
party plaintiffs-appellants v. Li Ching Yao, et al., third-party defendants ." 1
The instant case arose from a dispute over forty-two (42) square meters
of residential land belonging to petitioners. The parties herein are owners of
adjacent lots located at Block No. 3, Poinsettia Street, Araneta University
Village, Malabon, Metro Manila. Lot No. 24, 414 square meters in area, is
registered in the name of petitioners Eden Ballatan and spouses Betty Martinez
and Chong Chy Ling. 2 Lots Nos. 25 and 26, with an area of 415 and 313 square
meters respectively, are registered in the name of respondent Gonzalo Go, Sr. 3
On Lot No. 25, respondent Winston Go, son of Gonzalo Go, Sr., constructed his
house. Adjacent to Lot No. 26 is Lot No. 27, 417 square meters in area, and is
registered in the name of respondent Li Ching Yao. 4

In 1985, petitioner Ballatan constructed her house on Lot No. 24. During
the construction, she noticed that the concrete fence and side pathway of the
adjoining house of respondent Winston Go encroached on the entire length of
the eastern side of her property. 5 Her building contractor informed her that the
area of her lot was actually less than that described in the title. Forthwith,
Ballatan informed respondent Go of this discrepancy and his encroachment on
her property. Respondent Go, however, claimed that his house, including its
fence and pathway, were built within the parameters of his father's lot; and that
this lot was surveyed by Engineer Jose Quedding, the authorized surveyor of
the Araneta Institute of Agriculture (AIA), the owner-developer of the
subdivision project.
Petitioner Ballatan called the attention of the AIA to the discrepancy of the
land area in her title and the actual land area received from them. The AIA
authorized another survey of the land by Engineer Jose N. Quedding. cdasia

In a report dated February 28, 1985, Engineer Quedding found that the lot
area of petitioner Ballatan was less by a few meters and that of respondent Li
Ching Yao, which was three lots away, increased by two (2) meters. Engineer
Quedding declared that he made a verification survey of Lots Nos. 25 and 26 of
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 respondents Go in 1983 and allegedly found the boundaries to have been in
their proper position. He, however, could not explain the reduction in Ballatan's
area since he was not present at the time respondents Go constructed their
boundary walls. 6

On June 2, 1985, Engineer Quedding made a third relocation survey upon

request of the parties. He found that Lot No. 24 lost approximately 25 square
meters on its eastern boundary, that Lot No. 25, although found to have
encroached on Lot No. 24, did not lose nor gain any area; that Lot No. 26 lost
some three (3) square meters which, however, were gained by Lot No. 27 on its
western boundary. 7 In short, Lots Nos. 25, 26 and 27 moved westward to the
eastern boundary of Lot No. 24.
On the basis of this survey, on June 10, 1985, petitioner Ballatan made a
written demand on respondents Go to remove and dismantle their
improvements on Lot No. 24. Respondents Go refused. The parties, including Li
Ching Yao, however, met several times to reach an agreement on the matter.
Failing to agree amicably, petitioner Ballatan brought the issue before the
barangay. Respondents Go did not appear. Thus, on April 1, 1986, petitioner
Ballatan instituted against respondents Go Civil Case No. 772-MN for recovery
of possession before the Regional Trial Court, Malabon, Branch 169. The Go's
filed their "Answer with Third-Party Complaint" impleading as third-party
defendants respondents Li Ching Yao, the AIA and Engineer Quedding.

On August 23, 1990, the trial court decided in favor of petitioners. It

ordered the Go's to vacate the subject portion of Lot No. 24, demolish their
improvements and pay petitioner Ballatan actual damages, attorney's fees and
the costs of the suit. It dismissed the third-party complaint against: (1) AIA after
finding that the lots sold to the parties were in accordance with the technical
description and verification plan covered by their respective titles; (2) Jose N.
Quedding, there being no privity of relation between him and respondents Go
and his erroneous survey having been made at the instance of AIA, not the
parties; and (3) Li Ching Yao for failure to prove that he committed any wrong
in the subject encroachment. 8 The court made the following disposition:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and against the defendants, ordering the latter:

1. To demolish and remove all improvements existing and

encroaching on plaintiff's lot;

2. To clear, vacate and deliver possession of the encroached

area to the plaintiffs;

3. To pay plaintiffs jointly and severally the following:

a) P7,800.00 for the expenses paid to the surveyors;
b) P5,000.00 for plaintiffs' transportation;

4. To pay plaintiffs, jointly and severally, attorney's fees

equivalent to 25% of the current market value of the subject matter in
litigation at the time of execution; and
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 5. To pay the costs of suit.

The third-party complaint filed by third-party plaintiff Gonzalo Go

and Winston Go against third-party defendants Araneta Institute of
Agriculture, Jose N. Quedding and Li Ching Yao is hereby DISMISSED,
without pronouncement as to costs.
SO ORDERED."

Respondents Go appealed. On March 25, 1996, the Court of Appeals

modified the decision of the trial court. It affirmed the dismissal of the third-
party complaint against the AIA but reinstated the complaint against Li Ching
Yao and Jose Quedding. Instead of ordering respondents Go to demolish their
improvements on the subject land, the appellate court ordered them to pay
petitioner Ballatan, and respondent Li Ching Yao to pay respondents Go, a
reasonable amount for that portion of the lot which they encroached, the value
to be fixed at the time of taking. It also ordered Jose Quedding to pay
respondents Go attorney's fees of P5,000.00 for his erroneous survey. The
dispositive portion of the decision reads: cdt

"WHEREFORE, premises considered, the decision appealed from

is hereby AFFIRMED insofar as the dismissal of the third-party
complaint against Araneta Institute of Agriculture is concerned but
modified in all other aspects as follows:
1) Defendants-appellants are hereby ordered to pay plaintiffs-
appellees the reasonable value of the forty-two (42) square meters of
their lot at the time of its taking;
2) Third-party defendant Li Ching Yao is hereby ordered to
pay defendants-appellants the reasonable value of the thirty-seven
(37) square meters of the latter's lot at the time of its taking; and

3) Third-party defendant Jose N. Quedding is hereby ordered

to pay to defendants-appellants the amount of P5,000.00. as attorney's
fees.
LET THE RECORD of the case be remanded to the Regional Trial
Court of Malabon for further proceedings and reception of evidence for
the determination of the reasonable value of Lots Nos. 24 and 26.
SO ORDERED." 9

Hence, this petition. Petitioners allege that:

"RESPONDENT COURT OF APPEALS ERRED ON QUESTIONS OF
LAW AND GRAVELY ABUSED ITS DISCRETION AMOUNTING TO LACK OF
JURISDICTION WHEN:
1. IT APPLIED EQUITY OR EQUITABLE SOLUTIONS TO THE
INSTANT CASE IN UTTER DISREGARD AND IN VIOLATION OR GROSS
IGNORANCE OF EXISTING LAWS AND JURISPRUDENCE VESTING BASIC
PROPERTY RIGHTS TO HEREIN PETITIONERS. RESPONDENT COURT HAS
NO POWER TO APPLY/USE EQUITY IN THE PRESENCE OF EXISTING
LAWS TO THE CONTRARY.

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 2. UNDER THE GUISE OF APPLYING EQUITY BUT IN EFFECT A
VERY APPARENT PARTIALITY AND FAVOR TO RESPONDENTS GO, IT
ORDERED PAYMENT OF THE ENCROACHED AREA AT THE VALUE AT THE
TIME OF ITS TAKING AND NOT THE VALUE AT THE TIME OF PAYMENT,
THEREBY ENRICHING THE GO'S BUT DEPRIVING PETITIONERS OF THE
FRUITS OR INCREASE IN VALUE OF THEIR PROPERTY TO WHICH THEY
ARE ENTITLED UNDER THE LAW AS THE REGISTERED OWNERS WITH
TORRENS TITLE IN THEIR NAMES.

3. WHEN IT DID NOT DISMISS THE THIRD-PARTY COMPLAINT

DUE TO NON-PAYMENT OF ANY FILING OR DOCKET FEE.

4. WHEN IT DENIED PETITIONERS THE RECOVERY OF THE

NECESSARY EXPENSES IN PROTECTING THEIR RIGHTS IN THIS CASE."
10

Petitioners question the admission by respondent Court of Appeals of the

third-party complaint by respondents Go against the AIA, Jose Quedding and Li
Ching Yao. Petitioners claim that the third-party complaint should not have
been considered by the Court of Appeals for lack of jurisdiction due to third-
party plaintiffs' failure to pay the docket and filing fees before the trial court. cda

The third-party complaint in the instant case arose from the complaint of
petitioners against respondents Go. The complaint filed was for accion
publiciana, i.e., the recovery of possession of real property which is a real
action. The rule in this jurisdiction is that when an action is filed in court, the
complaint must be accompanied by the payment of the requisite docket and
filing fees. 11 In real actions, the docket and filing fees are based on the value
of the property and the amount of damages claimed, if any. 12 If the complaint
is filed but the fees are not paid at the time of filing, the court acquires
jurisdiction upon full payment of the fees within a reasonable time as the court
may grant, barring prescription. 13 Where the fees prescribed for the real action
have been paid but the fees of certain related damages are not, the court,
although having jurisdiction over the real action, may not have acquired
jurisdiction over the accompanying claim for damages. 14 Accordingly, the court
may expunge those claims for damages, or allow, on motion, a reasonable time
for amendment of the complaint so as to allege the precise amount of damages
and accept payment of the requisite legal fees. 15 If there are unspecified
claims, the determination of which may arise after the filing of the complaint or
similar pleading, the additional filing fee thereon shall constitute a lien on the
judgment award. 16 The same rule also applies to third-party claims and other
similar pleadings. 17
In the case at bar, the third-party complaint filed by respondents Go was
incorporated in their answer to the complaint. The third-party complaint sought
the same remedy as the principal complaint but added a prayer for attorney's
fees and costs without specifying their amounts, thus:
"ON THE THIRD PARTY COMPLAINT
1. That summons be issued against Third-Party Defendants
Araneta Institute of Agriculture, Jose N. Quedding and Li Ching Yao;

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 2. That after hearing, they be sentenced to indemnify the
Third-Party Plaintiffs for whatever is adjudged against the latter in
favor of the Plaintiffs;
3. That Third-Party Defendants be ordered to pay attorney's
fees as may be proved during trial;
4. That Third-Party Defendants be ordered to pay the costs.
Other just and equitable reliefs are also prayed for." 18

The Answer with Third-Party Complaint was admitted by the trial court
without the requisite payment of filing fees, particularly on the Go's prayer for
damages. 19 The trial court did not award the Go's any damages. It dismissed
the third-party complaint. The Court of Appeals, however, granted the third-
party complaint in part by ordering third-party defendant Jose N. Quedding to
pay the Go's the sum of P5,000.00 as attorney's fees.

Contrary to petitioners' claim, the Court of Appeals did not err in awarding
damages despite the Go's failure to specify the amount prayed for and pay the
corresponding additional filing fees thereon. The claim for attorney's fees refers
to damages arising after the filing of the complaint against the Go's. The
additional filing fee on this claim is deemed to constitute a lien on the judgment
award. 20

The Court of Appeals found that the subject portion is actually forty-two
(42) square meters in area, not forty-five (45), as initially found by the trial
court; that this forty-two (42) square meter portion is on the entire eastern side
of Lot No. 24 belonging to petitioners; that on this said portion is found the
concrete fence and pathway that extends from respondent Winston Go's house
on adjacent Lot No. 25; that inclusive of the subject portion, respondents Go did
not gain nor lose any portion of Lots Nos. 25 and 26; that instead, Lot No. 27,
on which respondent Li Ching Yao built his house, encroached on the land of
respondents Go, gaining in the process thirty-seven (37) square meters of the
latter's land. 21
We hold that the Court of Appeals correctly dismissed the third-party
complaint against AIA. The claim that the discrepancy in the lot areas was due
to AIA's fault was not proved. The appellate court, however, found that it was
the erroneous survey by Engineer Quedding that triggered these discrepancies.
And it was this survey that respondent Winston Go relied upon in constructing
his house on his father's land. He built his house in the belief that it was
entirely within the parameters of his father's land. In short, respondents Go had
no knowledge that they encroached on petitioners' lot. They are deemed
builders in good faith 22 until the time petitioner Ballatan informed them of
their encroachment on her property. 23

Respondent Li Ching Yao built his house on his lot before any of the other
parties did. 24 He constructed his house in 1982, respondents Go in 1983, and
petitioners in 1985. 25 There is no evidence, much less, any allegation that
respondent Li Ching Yao was aware that when he built his house he knew that
a portion thereof encroached on respondents Go's adjoining land. Good faith is
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 always presumed, and upon him who alleges bad faith on the part of a
possessor rests the burden of proof. 26
All the parties are presumed to have acted in good faith. Their rights
must, therefore, be determined in accordance with the appropriate provisions
of the Civil Code on property. LLphil

Article 448 of the Civil Code provides:

"Art. 448 . The owner of the land on which anything has been
built, sown or planted in good faith, shall have the right to appropriate
as his own the works, sowing or planting, after payment of the
indemnity provided for in Articles 546 and 548, 27 or to oblige the one
who built or planted to pay the price of the land, and the one who
sowed the proper rent. However, the builder or planter cannot be
obliged to buy the land if its value is considerably more than that of the
building or trees. In such case, he shall pay reasonable rent, if the
owner of the land does not choose to appropriate the building or trees
after proper indemnity. The parties shall agree upon the terms of the
lease and in case of disagreement, the court shall fix the terms
thereof."

The owner of the land on which anything has been built, sown or planted in
good faith shall have the right to appropriate as his own the building,
planting or sowing, after payment to the builder, planter or sower of the
necessary and useful expenses, and in the proper case, expenses for pure
luxury or mere pleasure. The owner of the land may also oblige the builder,
planter or sower to purchase and pay the price of the land. If the owner
chooses to sell his land, the builder, planter or sower must purchase the
land, otherwise the owner may remove the improvements thereon. The
builder, planter or sower, however, is not obliged to purchase the land if its
value is considerably more than the building, planting or sowing. In such
case, the builder, planter or sower must pay rent to the owner of the land. If
the parties cannot come to terms over the conditions of the lease, the court
must fix the terms thereof. The right to choose between appropriating the
improvement or selling the land on which the improvement stands to the
builder, planter or sower, is given to the owner of the land. 28
Article 448 has been applied to improvements or portions of
improvements built by mistaken belief on land belonging to the adjoining
owner. 29 The facts of the instant case are similar to those in Cabral v. Ibañez,
30 to wit:

"[P]laintiffs Geronima Zabala and her husband Justino Bernardo,

constructed their house in the belief that it was entirely within the area
of their own land without knowing at that time that part of their house
was occupying a 14-square meter portion of the adjoining lot belonging
to the defendants, and that the defendants Bernardo M. Cabral and
Mamerta M. Cabral were likewise unaware of the fact that a portion of
plaintiff's house was extending and occupying a portion of their lot with
an area of 14 square meters. The parties came to know of the fact that
part of the plaintiff's house was occupying part of defendant's land
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 when the construction of plaintiff's house was about to be finished,
after a relocation of the monuments of the two properties had been
made by the U.S. Army through the Bureau of Lands, according to their
'Stipulation of Facts,' dated August 17, 1951."

On the basis of these facts, we held that:

"The Court, therefore, concludes that the plaintiffs are builders in
good faith and the relative rights of the defendant Mamerta Cabral as
owner of the land and of the plaintiffs as owners of the building is
governed by Article 361 of the Civil Code (Co Tao v. Joaquin Chan
Chico, 46 Off. Gaz. 5514). Article 361 of the old Civil Code has been
reproduced with an additional provision in Article 448 of the new Civil
Code, approved June 18, 1949." 31

Similarly, in Grana and Torralba v. Court of Appeals, 32 we held that:

"Although without any legal and valid claim over the land in
question, petitioners, however, were found by the Court of Appeals to
have constructed a portion of their house thereon in good faith. Under
Article 361 of the old Civil Code (Article 448 of the new), the owner of
the land on which anything has been built in good faith shall have the
right to appropriate as his own the building, after payment to the
builder of necessary or useful expenses, and in the proper case,
expenses for pure luxury or mere pleasure, or to oblige the builder to
pay the price of the land. Respondents, as owners of the land, have
therefore the choice of either appropriating the portion of petitioners'
house which is on their land upon payment of the proper indemnity to
petitioners, or selling to petitioners that part of their land on which
stands the improvement. It may here be pointed out that it would be
impractical for respondents to choose to exercise the first alternative,
i.e., buy that portion of the house standing on their land, for in that
event the whole building might be rendered useless. The more
workable solution, it would seem, is for respondents to sell to
petitioners that part of their land on which was constructed a portion of
the latter's house. If petitioners are unwilling or unable to buy, then
they must vacate the land and must pay rentals until they do so. Of
course, respondents cannot oblige petitioners to buy the land if its
value is considerably more than that of the aforementioned portion of
the house. If such be the case, then petitioners must pay reasonable
rent. The parties must come to an agreement as to the conditions of
the lease, and should they fail to do so, then the court shall fix the
same." 33
In light of these rulings, petitioners, as owners of Lot No. 24, may choose
to purchase the improvement made by respondents Go on their land, or sell to
respondents Go the subject portion. If buying the improvement is impractical as
it may render the Go's house useless, then petitioners may sell to respondents
Go that portion of Lot No. 24 on which their improvement stands. If the Go's are
unwilling or unable to buy the lot, then they must vacate the land and, until
they vacate, they must pay rent to petitioners. Petitioners, however, cannot
compel respondents Go to buy the land if its value is considerably more than
the portion of their house constructed thereon. If the value of the land is much
more than the Go's improvement, then respondents Go must pay reasonable
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 rent. If they do not agree on the terms of the lease, then they may go to court
to fix the same.

In the event that petitioners elect to sell to respondents Go the subject

portion of their lot, the price must be fixed at the prevailing market value at the
time of payment. The Court of Appeals erred in fixing the price at the time of
taking, which is the time the improvements were built on the land. The time of
taking is determinative of just compensation in expropriation proceedings. The
instant case is not for expropriation. It is not a taking by the state of private
property for a public purpose upon payment of just compensation. This is a
case of an owner who has been paying real estate taxes on his land but has
been deprived of the use of a portion of this land for years. It is but fair and just
to fix compensation at the time of payment. 34
Article 448 and the same conditions abovestated also apply to
respondents Go as owners and possessors of their land and respondent Li
Ching Yao as builder of the improvement that encroached on thirty-seven (37)
square meters of respondents Go's land. cdll

IN VIEW WHEREOF, the decision of respondent Court of Appeals is

modified as follows:
(1) Petitioners are ordered to exercise within thirty (30) days from
finality of this decision their option to either buy the portion of respondents Go's
improvement on their Lot No. 24, or sell to said respondents the portion of their
land on which the improvement stands. If petitioners elect to sell the land or
buy the improvement, the purchase price must be at the prevailing market
price at the time of payment. If buying the improvement will render
respondents Go's house useless, then petitioners should sell the encroached
portion of their land to respondents Go. If petitioners choose to sell the land but
respondents Go are unwilling or unable to buy, then the latter must vacate the
subject portion and pay reasonable rent from the time petitioners made their
choice up to the time they actually vacate the premises. But if the value of the
land is considerably more than the value of the improvement, then respondents
Go may elect to lease the land, in which case the parties shall agree upon the
terms of the lease. Should they fail to agree on said terms, the court of origin is
directed to fix the terms of the lease.

From the moment petitioners shall have exercised their option,

respondents Go shall pay reasonable monthly rent up to the time the parties
agree on the terms of the lease or until the court fixes such terms.

(2) Respondents Go are likewise directed to exercise their rights as

owners of Lots Nos. 25 and 26, vis-a-vis respondent Li Ching Yao as builder of
the improvement that encroached on thirty seven (37) square meters of
respondents Go's land in accordance with paragraph one abovementioned.
(3) The Decision of the Court of Appeals ordering Engineer Quedding,
as third-party defendant, to pay attorney's fees of P5,000.00 to respondents Go
is affirmed. The additional filing fee on the damages constitutes a lien on this
award.
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 (4) The Decision of the Court of Appeals dismissing the third-party
complaint against Araneta Institute of Agriculture is affirmed.
SO ORDERED.

Bellosillo, Mendoza, Quisumbing and Buena, JJ., concur.

Footnotes

1. Penned by Justice Celia Lipana-Reyes and concurred in by Justices Alfredo L.

Benipayo and Corona Ibay-Somera.
2. Exhibit "A," Folder of Plaintiffs' Exhibits.

3. Exhibits "1" and "2," Folder of Defendants Go's Exhibits.

4. Exhibit "1," Folder of Defendant Li Ching Yao's Exhibits; Exhibit "4-a," Folder
of Exhibits of Araneta Institute of Agriculture.

5. Exhibit "D," Folder of Plaintiffs' Exhibits.

6. Exhibit "1," Folder of Exhibits-Quedding.

7. Exhibit "5," Folder of Defendants Go's Exhibits; Decision of the Court of

Appeals, p. 3, Rollo , p. 25.

8. Decision of the trial court, p. 11, Court of Appeals, Rollo , p. 86.

9. Rollo , p. 44.
10. Petition, p. 4, Rollo , p. 6.
11. Tacay v. RTC of Tagum, Davao del Norte, 180 SCRA 433, 444 [1989]; Sun
Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274, 285 [1989]; see also
Manchester Development Corporation v. Court of Appeals, 149 SCRA 562,
568-569 [1987].

12. Tacay v. RTC of Tagum, Davao del Norte, supra, at 440, 444 — a real action
may be commenced or prosecuted without an accompanying claim for
damages.

13. Id.
14. Original Dev't. and Construction Corp. v. Court of Appeals, 202 SCRA 753,
760 [1991].

15. Tacay, supra, at 444; Original Dev't. and Construction Corp. v. Court of
Appeals, supra, at 760.
16. Original Development Corporation v. Court of Appeals, supra, at 761.
17. Tacay, supra, at 441-442; Sun Insurance Office Ltd. v. Asuncion, 170 SCRA
274, 285 [1989].
18. Answer with Third Party Complaint, p. 7, Records, p. 37.

19. Order dated May 30, 1986, Records, p. 49.

20. In Sun Insurance Office, Ltd. (SIOL) v. Asuncion, supra, at 279, it was held
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 that the Manchester rule and its clarifications are procedural rules and may
be applied retroactively to actions pending and undetermined at the time of
their passage. The instant case was pending at the time Manchester was
promulgated in 1987.

21. Decision of the Court of Appeals, pp. 15-16, Rollo , pp. 37-38.
22. Article 526, Civil Code provides:

"Art. 526 . He is deemed a possessor in good faith who is not

aware that there exists in his title or mode of acquisition any flaw that
invalidates it."
23. Article 528, Civil Code provides:

"Art. 528 . Possession acquired in good faith does not lose this
character except in the case and from the moment facts exist which show
that the possessor is not unaware that he possesses the thing improperly or
wrongfully."
24. Decision of the Court of Appeals, p. 16, Rollo , p. 38.

25. Id., at pp. 16-17, Rollo , pp. 38-39.

26. Article 527, Civil Code.

27. Articles 546 and 548 provide:

"Art. 546 . Necessary expenses shall be refunded to every possessor;

but only the possessor in good faith may retain the thing until he has been
reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith

with the same right of retention, the person who has defeated him in the
possession having the option of refunding the amount of the expenses or of
paying the increase value which the thing may have acquired by reason
thereof."

"Art. 548 . Expenses for pure luxury or mere pleasure shall not be
refunded to the possessor in good faith; but he may remove the ornaments
with which he has embellished the principal thing if it suffers no injury
thereby, and if his successor in the possession does not prefer to refund the
amount expended."

28. Grana & Torralba v. Court of Appeals, 109 Phil. 260, 263 [1960]; Acuña v.
Furukawa Plantation Co., 93 Phil. 957, 961 [1953]; Aringo v. Arena, 14 Phil.
263, 269 [1909].
29. Grana and Torralba v. Court of Appeals, 109 Phil. 260, 263 [1960]; Miranda
v. Fadullon, 97 Phil. 801 [1955]; Cabral v. Ibañez, 98 Phil. 140 [1955].
30. 98 Phil. 140 [1955].
31. Id., at 142.
32. 109 Phil. 260 [1960].

33. Id., at 263-264.

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 34. See Cabral v. Ibañez, supra, at 143, where this Court gave the owner of the
land thirty days to elect either to purchase the improvement or sell the land;
and once having elected, the case was reset for admission of evidence on the
value of the improvement, or the value of the land. This implies that the price
of the land or improvement was fixed definitely not at the time of taking; see
also Aringo v. Arena, supra, at 270.

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