Sales Right of first refusal onwards | Norma Bates 1

RIGHT OF FIRST REFUSAL III. It is mutually agreed by the parties that this Contract of
Lease shall be in full force and effect for a period of ten (10)
years counted from the effectivity of the payment of rental as
provided under sub-paragraph (b) of Article I, with option to
PUP vs. Golden
renew for another ten (10) years with the mutual consent of
Facts: NDC is a GOCC and had in its disposal in the early both parties. In no case should the rentals be increased by
60s, a 10 hectare property in Sta Mesa Manila. In 1977 NDC more than 100% of the original amount fixed.
entered into a Contract of lease with Golden Horizon Realty
over a portion of the property for a period of ten (10) years,
renewable for another ten (10) years. Lessee shall also have the option to purchase the area
leased, the price to be negotiated and determined at the time
the option to purchase is exercised.
In 1978 a second contract fo lease was executed between
NDC and GHRC also renewable upon mutual consent after
the expiration of the ten (10)-year lease period. In addition,
GHRC as lessee was granted the "option to purchase the
area leased, the price to be negotiated and determined at
the time the option to purchase is exercised."

In 1988, before the expiration of the 10 year period under teh

2nd lease contract, GHRC wrote a letter (august 12, 1988) to
NDC indicating its exercise of the option to renew for anotehr
10 years but after sending a second letter, NDC still did not
respond but continued to accept rental payments.

Then GHRC discovered that NDC decided to secretly

dispose teh property to a third party for which GHRC files a
complaitn for specific performance.

Then PRes Aquino issued Memo order 214 transferrign the Option ROFR
whole NDC compound to the national gov’t which in turn
would convey the same to PUP. The order of conveyance An option is a contract by a contractual grant, not of
would automatically result in the cancellation of NDC’s which the owner of the the sale of a property, but
obligation with the government. property agrees with of the first priority to buy
another person that the the property in the event
latter shall have the right the owner sells the
to buy the former’s same.28 As
In 2001, in the case of PUP vs CA, the court declared the property at a fixed price distinguished from an
sale to PUP by NDC of firestone’s leased property violative within a certain time. option contract, in a right
of firestone’s ROFR. Thus, the court gave FIRESTONE of first refusal, while the
CERAMICS, INC., six (6) months from receipt of the object might be made
approved survey to exercise its right to purchase the leased determinate, the exercise
property and ordered Polytechnic University of the It is a condition offered or
of the right of first refusal
Philippines to reconvey the property to FIRESTONE contract by which the
would be dependent not
CERAMICS, INC., in the exercise of its right of first refusal owner stipulates with
only on the owner’s
upon payment of the purchase price thereof. another that the latter
eventual intention to
shall have the right to buy
enter into a binding
the property at a fixed
juridical relation with
price within a certain
another but also on
time, or under, or in
terms, including the
ISSUE: Was GHRC’s ROFR violated? compliance with certain
price, that are yet to be
terms and conditions; or
firmed up.
which gives to the owner
of the property the right
RULING: YES to sell or demand a sale.

The second lease contract contained the following provision: It binds the party, who
has given the option, not
to enter into the principal
Sales Right of first refusal onwards | Norma Bates 2

contract with any other In this case, Records showed that during the hearing on the
person during the period application for a writ of preliminary injunction, respondent
designated, and, within adduced in evidence a letter of Antonio A. Henson dated 15
that period, to enter into July 1988 reviewing a proposed memorandum order
such contract with the submitted to President Corazon C. Aquino transferring the
one to whom the option whole NDC Compound, including the premises leased by
was granted, if the latter respondent, in favor of petitioner PUP.
should decide to use the
option
Respondent thus timely exercised its option to purchase on
August 12, 1988. However, considering that NDC had been
negotiating through the National Government for the sale of
the property in favor of PUP as early as July 15, 1988 without
first offering to sell it to respondent and even when
respondent communicated its desire to exercise the option to
purchase granted to it under the lease contract, it is clear that
NDC violated respondent’s right of first refusal.
As the option to purchase clause in the second lease
contract has:

1. no definite period within which the leased premises will be Under the premises, the matter of the right of refusal not
offered for sale to respondent lessee and having been carried over to the impliedly renewed
month-to-month lease after the expiration of the second lease
2. the price is made subject to negotiation and determined contract on October 21, 1988 becomes irrelevant since at the
only at the time the option to buy is exercised, time of the negotiations of the sale to a third party, petitioner
PUP, respondent’s right of first refusal was still subsisting.

It is obviously a mere right of refusal, usually inserted in

lease contracts to give the lessee the first crack to buy the Firestone case This case
property in case the lessor decides to sell the same. That
respondent was granted a right of first refusal under the date of the expiration of Lease contracts here
second lease contract appears not to have been disputed by the lease contract in said expired September 1988
petitioners. case is December 31,
1989

issuance of Memorandum Order No. 214 on January

What petitioners assail is the CA’s erroneous conclusion that 6, 1989
such right of refusal subsisted even after the expiration of
the original lease period, when respondent was allowed to
continue staying in the leased premises under an implied
renewal of the lease and without the right of refusal carried Another contention
over to such month-to-month lease.
As to petitioners’ argument that respondent’s right of first
refusal can be invoked only with respect to the second lease
contract which expressly provided for the option to purchase
Petitioner’s contention: by the lessee, and not in the first lease contract which
contained no such clause,
No right of refusal was violated by the sale of the property in
favor of PUP pursuant to Memorandum Order No. 214.

SC: we sustain the RTC and CA in finding that the second

contract, covering an area of 3,222.80 square meters, is
SC: Wrong! interrelated to and inseparable from the first contract over
2,407 square meters. The structures built on the leased
premises, which are adjacent to each other, form part of an
When a lease contract contains a right of first refusal, integrated system of a commercial complex leased out to
the lessor has the legal duty to the lessee not to sell the manufacturers, fabricators and other businesses.
leased property to anyone at any price until after the
lessor has made an offer to sell the property to the
lessee and the lessee has failed to accept it. Only after Petitioners submitted a sketch plan and pictures taken of the
the lessee has failed to exercise his right of first priority could driveways, in an effort to show that the leased premises can
the lessor sell the property to other buyers under the same be used separately by respondent, and that the two (2) lease
terms and conditions offered to the lessee, or under terms contracts are distinct from each other.34 Such was a
and conditions more favorable to the lessor. desperate attempt to downplay the commercial purpose of
respondent’s substantial improvements which greatly
contributed to the increased value of the leased premises. To
Sales Right of first refusal onwards | Norma Bates 3

prove that petitioner NDC had considered the leased

premises as a single unit, respondent submitted evidence
showing that NDC issued only one (1) receipt for the rental
payments for the two portions.35 Respondent further
presented the blueprint plan prepared by its witness, Engr.
Alejandro E. Tinio, who supervised the construction of the
structures on the leased premises, to show the building
concept as a one-stop industrial site and integrated
commercial complex.
Sales Right of first refusal onwards | Norma Bates 4

ANG YU ASUNCION VS. CA November 15, 1990: While the case was pending
consideration by this Court, the Cu Unjieng spouses
executed a Deed of Sale transferring the subject
petitioner to
Facts: Asuncion et al alleged in a complaint for specific
performance that they are tenants or lessees of petitioner Buen Realty and Development Corporation.
residential and commercial spaces owned by Cu Unjieng
(defendant).

Petitioner Buen Realty and Development Corporation, as

the new owner of the subject property, wrote a letter to
1. that they have occupied said spaces since 1935 and the lessees demanding that the latter vacate the
have been religiously paying the rental and complying premises.
with all the conditions of the lease contract;

August 30, 1991: the RTC ordered the Cu Unjiengs to

2. that on several occasions before October 9, 1986, execute the necessary Deed of Sale of the property in
defendants informed Assuncion et al that they are litigation in favor of plaintiffs Ang Yu Asuncion, Keh Tiong
offering to sell the premises and are giving them priority and Arthur Go for the consideration of P15 Million pesos
to acquire the same; in recognition of petitioners’ right of first refusal and that a
new Transfer Certificate of Title be issued in favor of the
buyer.
3. that during the negotiations, Bobby Cu Unjieng offered
a price of P6-million while plaintiffs made a counter offer
of P5-million; that plaintiffs thereafter asked the The court also set aside the title issued to Buen Realty
defendants to put their offer in writing to which request Corporation for having been executed in bad faith. On
defendants acceded; September 22, 1991, the Judge issued a writ of
execution.

4. that in reply to defendant's letter, Assuncion et. Al.

wrote them on October 24, 1986 asking that they specify
the terms and conditions of the offer to sell; that when
plaintiffs did not receive any reply, they sent another Issue:
letter dated January 28, 1987 with the same request;

Ruling:
5. that since defendants failed to specify the terms and
conditions of the offer to sell and because of information
received that defendants were about to sell the property,
An unconditional mutual promise to buy and sell, as long
plaintiffs were compelled to file the complaint to compel
as the object is made determinate and the price is fixed,
defendants to sell the property to them.
can be obligatory on the parties, and compliance
therewith may accordingly be exacted.5

The RTC found that Cu Unjiengs’ offer to sell was never

accepted by the petitioners (Ang Yu) for the reason that
An accepted unilateral promise which specifies the thing
they
to be sold and the price to be paid, when coupled with a
did not agree upon the terms and conditions of the valuable consideration distinct and separate from the
proposed price, is what may properly be termed a perfected
contract of option. This contract is legally binding, and in
sale, hence, there was no contract of sale at all. The sales, it conforms with the second paragraph of Article
Court of 1479 of the Civil Code, viz:

Appeals affirmed the decision of the lower court.

Art. 1479. . . .

This decision was brought to the Supreme Court by

petition for review on certiorari which subsequently
denied the appeal on May 6, 1991 “for insufficiency in An accepted unilateral promise to buy or to sell a
form and substance”. determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price. (1451a)6

(Referring to the first case filed by Ang Yu)

Sales Right of first refusal onwards | Norma Bates 5

Observe, however, that the option is not the contract of offer under Article 13199 of the same Code. An option or
sale itself. The optionee has the right, but not the an offer would require, among other things,10 a clear
obligation, to buy. Once the option is exercised timely, i.e., certainty on both the object and the cause or
the offer is accepted before a breach of the option, a consideration of the envisioned contract. In a right of first
bilateral promise to sell and to buy ensues and both refusal, while the object might be made determinate, the
parties are then reciprocally bound to comply with their exercise of the right, however, would be dependent not
respective undertakings. only on the grantor's eventual intention to enter into a
binding juridical relation with another but also on terms,
including the price, that obviously are yet to be later
firmed up. Prior thereto, it can at best be so described as
Where a period is given to the offeree within which to
merely belonging to a class of preparatory juridical
accept the offer, the following rules generally govern:
relations governed not by contracts (since the essential
elements to establish the vinculum juris would still be
indefinite and inconclusive) but by, among other laws of
(1) If the period is not itself founded upon or supported general application, the pertinent scattered provisions of
by a consideration, the offeror is still free and has the the Civil Code on human conduct.
right to withdraw the offer before its acceptance, or, if an
acceptance has been made, before the offeror's coming
to know of such fact, by communicating that withdrawal to
Even on the premise that such right of first refusal has
the offeree .
been decreed under a final judgment, like here, its breach
cannot justify correspondingly an issuance of a writ of
execution under a judgment that merely recognizes its
The right to withdraw, however, must not be exercised existence, nor would it sanction an action for specific
whimsically or arbitrarily; otherwise, it could give rise to a performance without thereby negating the indispensable
damage claim under Article 19 of the Civil Code which element of consensuality in the perfection of contracts.
ordains that "every person must, in the exercise of his
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and
It is not to say, however, that the right of first refusal
good faith."
would be inconsequential for, such as already intimated
above, an unjustified disregard thereof, given, for
instance, the circumstances expressed in Article 1912 of
(2) If the period has a separate consideration, a the Civil Code, can warrant a recovery for damages.
contract of "option" is deemed perfected, and it would be
a breach of that contract to withdraw the offer during the
agreed period. The option, however, is an independent
The final judgment in Civil Case No. 87-41058, it must be
contract by itself, and it is to be distinguished from the
stressed, has merely accorded a "right of first refusal" in
projected main agreement (subject matter of the option)
favor of petitioners. The consequence of such a
which is obviously yet to be concluded. If, in fact, the
declaration entails no more than what has heretofore
optioner-offeror withdraws the offer before its acceptance
been said. In fine, if, as it is here so conveyed to us,
(exercise of the option) by the optionee-offeree, the latter
petitioners are aggrieved by the failure of private
may not sue for specific performance on the proposed
respondents to honor the right of first refusal, the remedy
contract ("object" of the option) since it has failed to reach
is not a writ of execution on the judgment, since there is
its own stage of perfection.
none to execute, but an action for damages in a proper
forum for the purpose.

The optioner-offeror, however, renders himself liable for

damages for breach of the option. In these cases, care
Furthermore, whether private respondent Buen Realty
should be taken of the real nature of the consideration
Development Corporation, the alleged purchaser of the
given, for if, in fact, it has been intended to be part of the
property, has acted in good faith or bad faith and whether
consideration for the main contract with a right of
or not it should, in any case, be considered bound to
withdrawal on the part of the optionee, the main contract
respect the registration of the lis pendens in Civil Case
could be deemed perfected; a similar instance would be
No. 87-41058 are matters that must be independently
an "earnest money" in a contract of sale that can
addressed in appropriate proceedings. Buen Realty, not
evidence its perfection (Art. 1482, Civil Code).
having been impleaded in Civil Case No. 87-41058,
cannot be held subject to the writ of execution issued by
respondent Judge, let alone ousted from the ownership
In the law on sales, the so-called "right of first refusal" is and possession of the property, without first being duly
an innovative juridical relation. Needless to point out, it afforded its day in court.
cannot be deemed a perfected contract of sale under
Article 1458 of the Civil Code. Neither can the right of first
refusal, understood in its normal concept, per se be
brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an EQUATORIAL REALTY v. MAYFAIR (1996)
Sales Right of first refusal onwards | Norma Bates 6

Mr. Yang replied that he would let Mr. Pascal know his
decision. On August 23, 1974, Mayfair replied through a
Facts: Carmelo owned a parcel of land with two storey letter:
building constructed in Manila. In 1967, Carmelo entered
into a Contract of Lease with Mayfair to lease a portion of It appears that on August 19, 1974 your Mr. Henry Pascal
Carmelo’s property. informed our clients’ Mr. Henry Yang through the
telephone that your company desires to sell the
above-mentioned CM Recto Avenue property. (Attach
‘A PORTION OF THE SECOND FLOOR of the paragraph 8)
two-storey building, situated at C.M. Recto Avenue,
Manila, with a floor area of 1,610 square meters. Carmelo did not reply to this letter. On September 18,
1974, Mayfair sent another letter to Carmelo purporting to
express interest in acquiring not only the leased premises
but ‘the entire building and other improvements if the
THE SECOND FLOOR AND MEZZANINE of the
price is reasonable. However, both Carmelo and
two-storey building, situated at C.M. Recto Avenue,
Equatorial questioned the authenticity of the second
Manila, with a floor area of 150 square meters,’ for use by
letter.
Mayfair as a motion picture theater and for a term of
twenty (20) years.
Four years later, on July 30, 1978, Carmelo sold its entire
Mayfair constructed on the leased property a movie C.M. Recto Avenue land and building, which included the
house known as ‘Maxim Theatre.’ Two years later, on leased premises housing the ‘Maxim’ and ‘Miramar’
March 31, 1969, Mayfair entered into a second contract theatres, to Equatorial by virtue of a Deed of Absolute
of lease with Carmelo for the lease of another portion of Sale, for the total sum of P11,300,000.00.
Carmelo’s property, to wit:
Action. Mayfair instituted the action for specific
performance and annulment of the sale of the leased
premises to Equatorial.
‘A PORTION OF THE SECOND FLOOR of the
two-storey building, situated at C.M. Recto Avenue,
Manila, with a floor area of 1,064 square meters. Carmelo alleged that it had informed Mayfair of its desire
to sell and offered the same to Mayfair, but the latter
THE TWO (2) STORE SPACES AT THE GROUND answered that it was interested only in buying the areas
FLOOR and MEZZANINE of the two-storey building under lease, which was impossible, since it was not a
situated at C.M. Recto Avenue, Manila, with a floor area condominium.
of 300 square meters and bearing street numbers 1871
and 1875,’ for similar use as a movie theater and for a • That the option to purchase invoked by Mayfair is lack
similar term of twenty (20) years. Mayfair put up another and void for the lack of consideration.
movie house known as ‘Miramar Theatre’ on this leased
property. Equatorial pleaded that the option is void for lack of
consideration and is unenforceable by reason of its
Both contract of lease provides identically worded impossibility of performance because the leased
paragraph 8 which states that: premises could not be sold separately from the other
portions of the land and building.
That if the lessor should desire to sell the leased
premises, the lessee shall be given 30-days exclusive Pre-Trial Stipulations
option to purchase the same.
1. That there was a deed of sale of the contested
In the event, however, that the leased premise is sold to premises by Carmelo to Equatorial.
someone other than the lessee, the lessor is bound ad
obligated, as it hereby binds and obligates itself, to 2. In both contracts the stipulation granting the plaintiff
stipulate in the Deed of Sale thereof that the purchaser exclusive option to purchase the leased premises should
shall recognize this lease and be bound by all the terms the lessor desire to sell the same.
and conditions thereof.
3. That the two buildings are not condominium.
Sometime in August 1974, Mr. Henry Pascal of Carmelo
informed Mr. Henry Yang, President of Mayfair, through a 4. That the amounts stipulated
telephone conversation that Carmelo was desirous of
selling the entire Claro M. Recto property. Mr. Pascal told
5. xxx
Mr. Yang that a certain Jose Araneta was offering to buy
the whole property for US$1,200,000 and Mr. Pascal
6. That there was no consideration specified in the option
asked Mr. Yang if the latter was willing to buy the
to buy embodied in the contract
property for P6-7 Million Pesos.

7. That Carmelo owned the land

Sales Right of first refusal onwards | Norma Bates 7

8. The leased premises are the portions occupied by the main agreement which is yet to concluded. If in fact, the
theaters. optioner-offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter
9. That what was sold by Carmelo to Equatorial is the may not sue for specific performance on the proposed
land and the two buildings erected thereon. contract (‘object’ of the option) since it has failed to reach
its own stage of perfection. The optioner-offeror, however,
TRIAL COURT DECISION: After assessing the evidence, renders himself liable for damages for breach of the
the court decided to dismiss the complaint and ordering option.
Mayfair to pay Equatorial P35,000 per month for the use
of areas not covered by the contract. P70K and P55K and IN THE CASE: There is nothing in the identical
dismissing crossclaim. Paragraphs “8” of the June 1, 1967 and March 31, 1969
contracts which would bring them into the ambit of the
The trial court adjudged the identically worded paragraph usual offer or option requiring an independent
8 found in both aforecited lease contracts to be an option consideration.
clause which however cannot be deemed to be binding
on Carmelo because of lack of distinct consideration The Court of Appeals is correct in stating that Paragraph
therefor. 8 was incorporated into the contracts of lease for the
benefit of Mayfair which wanted to be assured that it shall
The plaintiff cannot compel defendant Carmelo to comply be given the first crack or the first option to buy the
with the promise unless the former establishes the property at the price which Carmelo is willing to accept. It
existence of a distinct consideration. In other words, the is not also correct to say that there is no consideration in
promisee has the burden of proving the consideration. an agreement of right of first refusal. The stipulation is
part and parcel of the entire contract of lease. The
consideration for the lease includes the consideration for
It follows that plaintiff cannot compel defendant Carmelo
the right of first refusal.
& Bauermann to sell the C.M. Recto property to the
former.
The respondent Court of Appeals was correct in
ascertaining the true nature of the aforecited paragraph 8
pay and return to Equatorial the amount of P11.3M. Court
to be that of a contractual grant of the right of first refusal
of Appeals differentiated between Article 1324 and Article
to Mayfair.
1479 of the Civil Code, analyzed their application to the
facts of this case, and concluded that since paragraph 8
of the two lease contracts does not state a fixed price for What Was Agreed and What was Violated?
the purchase of the leased premises, which is an
essential element for a contract of sale to be perfected, What Carmelo and Mayfair agreed to, by executing the
what paragraph 8 is, must be a right of first refusal and two lease contracts, was that Mayfair will have the right of
not an option contract. first refusal in the event Carmelo sells the leased
premises. It is undisputed that Carmelo did recognize this
Issue right of Mayfair, for it informed the latter of its intention to
sell the said property in 1974. There was an exchange of
letters evidencing the offer and counter-offers made by
1. Define the nature, scope and efficacy of paragraph 8
both parties.
stipulated in the two contracts of lease.

Carmelo, however, did not pursue the exercise to its

2. Determine the rights and obligations of Carmelo and
logical end. While it initially recognized Mayfair’s right of
Mayfair, as well as Equatorial in the aftermath of the sale
first refusal, Carmelo violated such right when without
by Carmelo of the entire property to Equatorial.
affording its negotiations with Mayfair the full process to
ripen to at least an interface of a definite offer and a
It is Not an Option Clause but a
possible corresponding acceptance within the “30 day
exclusive option” time granted Mayfair, Carmelo
Contract of A Right of First Refusal abandoned negotiations, kept a low profile for some time,
and then sold, without prior notice to Mayfair the entire
Where a period is given to the offeree within which to CM Recto property to Equatorial.
accept the offer, the following rules generally govern:
Buyer in Bad Faith; Rescissible
1. If the period is not itself founded upon or supported by
a consideration, the offeror is still free and has the right to Since Equatorial is a buyer in bad faith, this finding
withdraw the offer before its acceptance, or if an renders the sale to it of the property in question
acceptance has been made, before the offeror knew he rescissible. Equatorial was aware of the lease contracts
communicated the withdrawal to the offeree. because its lawyers had, prior to the sale, studied the
said contracts. As such, Equatorial cannot tenably claim
2. If the period has a separate consideration, a contract of to be a purchaser in good faith, and, therefore, rescission
option is deemed perfected, and it would be a breach of lies.
that contract to withdraw the offer during the agreed
period. The option however, is an independent contract
by itself, and itis to be distinguished from the projected
Sales Right of first refusal onwards | Norma Bates 8

While it may be true that the acquisition by third person in rescinded. Carmelo is ordered to return to Equatorial
lawful possession is an obstacle for an action for Realty the purchase price
rescission. The rule however is nor applicable for
Equatorial here is in bad faith because it was aware of
the lease and the right to first refusal of Mayfair. It also
cannot state that it was not aware, because if it had
studied the Contracts of Lease then it would have
stumbled upon paragraph 8.

Carmelo acted in bad faith when it sold the entire

property to Equatorial without informing Mayfair, a clear
violation of Mayfair’s rights. While there was a series of
exchanges of letters evidencing the offer and
counter-offers between the parties, Carmelo abandoned
the negotiations without giving Mayfair full opportunity to
negotiate within the 30-day period.

Accordingly, even as it recognizes the right of first refusal,

this Court should also order that Mayfair be authorized to
exercise its right of first refusal under the contract to
include the entirety of the indivisible property. The
boundaries of the property sold should be the boundaries
of the offer under the right of first refusal.

As also earlier emphasized, the contract of sale between

Equatorial and Carmelo is characterized by bad faith,
since it was knowingly entered into in violation of the
rights of and to the prejudice of Mayfair. Equatorial
admitted that its lawyers had studied the contract of lease
prior to the sale. Equatorial’s knowledge of the
stipulations therein should have cautioned it to look
further into the agreement to determine if it involved
stipulations that would prejudice its own interests.

Since Mayfair has a right of first refusal, it can exercise

the right only if the fraudulent sale is first set aside or
rescinded. The facts of case and considerations of justice
and equity require that we order rescission here and now.

The sale of the subject real property by Carmelo to

Equatorial should now be rescinded considering that
Mayfair, which had substantial interest over the subject
property, was prejudiced by the sale of the subject
property to Equatorial without Carmelo conferring to
Mayfair every opportunity to negotiate within the 30-day
stipulated period.

The damages which Mayfair suffered are in terms of

actual injury and lost opportunities. The fairest solution
would be to allow Mayfair to exercise its right of first
refusal at the price which it was entitled to accept or
reject which is P11,300,000.00. This is clear from the
records.

According to Law Not on Human Relations

It is Paragraph 8 on the right of first refusal which created

the obligation. It should be enforced according to the law
on contracts instead of the panoramic and indefinite rule
on human relations.

HELD: The petition is denied and the Deed of Absolute

Sale between Equatorial and Carmelo is hereby