THIRD DIVISION

[G.R. No. 140479. March 8, 2001.]

ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN ,

petitioners, vs . PATERNO INQUING, IRENE GUILLERMO, FEDERICO
BANTUGAN, FERNANDO MAGBANUA and LIZZA TIANGCO ,
respondents.

DECISION

GONZAGA-REYES , J : p

This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking reversal of the Decision 1 of the Court of Appeals dated June 25, 1999 in CA-
G.R. CV No. 53963. The Court of Appeals decision reversed and set aside the Decision 2
dated May 13, 1996 of Branch 217 of the Regional Trial Court of Quezon City in Civil
Case No. Q-93-18582. EHaASD

The case was originally led on December 10, 1993 by Paterno Inquing, Irene
Guillermo and Federico Bantugan, herein respondents, against Rosencor Development
Corporation (hereinafter "Rosencor"), Rene Joaquin, and Eufrocina de Leon. Originally,
the complaint was one for annulment of absolute deed of sale but was later amended
to one for rescission of absolute deed of sale. A complaint for intervention was
thereafter led by respondents Fernando Magbanua and Danna Lizza Tiangco. The
complaint-in-intervention was admitted by the trial court in an Order dated May 4, 1994.
3

The facts of the case, as stated by the trial court and adopted by the appellate
court, are as follows:
"This action was originally for the annulment of the Deed of Absolute Sale
dated September 4, 1990 between defendants Rosencor and Eufrocina de Leon
but later amended (sic) praying for the rescission of the deed of sale.
Plaintiffs and plaintiffs-intervenors averred that they are the lessees since
1971 of a two-story residential apartment located at No. 150 Tomas Morato Ave.,
Quezon City covered by TCT No. 96161 and owned by spouses Faustino and
Cresencia Tiangco. The lease was not covered by any contract. The lessees were
renting the premises then for P150.00 a month and were allegedly verbally
granted by the lessors the pre-emptive right to purchase the property if ever they
decide to sell the same.

Upon the death of the spouses Tiangcos in 1975, the management of the
property was adjudicated to their heirs who were represented by Eufrocina de
Leon. The lessees were allegedly promised the same pre-emptive right by the heirs
of Tiangcos since the latter had knowledge that this right was extended to the
former by the late spouses Tiangcos. The lessees continued to stay in the
premises and allegedly spent their own money amounting from P50,000.00 to
P100,000.00 for its upkeep. These expenses were never deducted from the rentals
which already increased to P1,000.00.
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 In June 1990, the lessees received a letter from Atty. Erlinda Aguila
demanding that they vacate the premises so that the demolition of the building be
undertaken. They refused to leave the premises. In that same month, de Leon
refused to accept the lessees' rental payment claiming that they have run out of
receipts and that a new collector has been assigned to receive the payments.
Thereafter, they received a letter from Eufrocina de Leon offering to sell to them
the property they were leasing for P2,000,000.00. . . .
The lessees offered to buy the property from de Leon for the amount of
P1,000,000.00. De Leon told them that she will be submitting the offer to the other
heirs. Since then, no answer was given by de Leon as to their offer to buy the
property. However, in November 1990, Rene Joaquin came to the leased premises
introducing himself as its new owner.

In January 1991, the lessees again received another letter from Atty. Aguila
demanding that they vacate the premises. A month thereafter, the lessees
received a letter from de Leon advising them that the heirs of the late spouses
Tiangcos have already sold the property to Rosencor. The following month Atty.
Aguila wrote them another letter demanding the rental payment and introducing
herself as counsel for Rosencor/Rene Joaquin, the new owners of the premises.

The lessees requested from de Leon why she had disregarded the pre-
emptive right she and the late Tiangcos have promised them. They also asked for
a copy of the deed of sale between her and the new owners thereof but she
refused to heed their request. In the same manner, when they asked Rene Joaquin
a copy of the deed of sale, the latter turned down their request and instead Atty.
Aguila wrote them several letters demanding that they vacate the premises. The
lessees offered to tender their rental payment to de Leon but she refused to
accept the same.
In April 1992 before the demolition can be undertaken by the Building
O cial, the barangay interceded between the parties herein after which Rosencor
raised the issue as to the rental payment of the premises. It was also at this
instance that the lessees were furnished with a copy of the Deed of Sale and
discovered that they were deceived by de Leon since the sale between her and
Rene Joaquin/Rosencor took place in September 4, 1990 while de Leon made the
offer to them only in October 1990 or after the sale with Rosencor had been
consummated. The lessees also noted that the property was sold only for
P726,000.00.

The lessees offered to reimburse de Leon the selling price of P726,000.00

plus an additional P274,000.00 to complete their P1,000,000.00 earlier offer.
When their offer was refused, they led the present action praying for the
following: a) rescission of the Deed of Absolute Sale between de Leon and
Rosencor dated September 4, 1990; b) the defendants Rosencor/Rene Joaquin be
ordered to reconvey the property to de Leon; and c) de Leon be ordered to
reimburse the plaintiffs for the repairs of the property, or apply the said amount
as part of the price for the purchase of the property in the sum of P100,000.00. 4

After trial on the merits, the Regional Trial Court rendered a Decision 5 dated May
13, 1996 dismissing the complaint. The trial court held that the right of redemption on
which the complaint was based was merely an oral one and as such, is unenforceable
under the law. The dispositive portion of the May 13, 1996 Decision is as follows:
"WHEREFORE, in view of the foregoing, the Court DISMISSES the instant
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 action. Plaintiffs and plaintiffs-intervenors are hereby ordered to pay their
respective monthly rental of P1,000.00 per month reckoned from May 1990 up to
the time they leave the premises. No costs. cADaIH

SO ORDERED." 6

Not satisfied with the decision of the trial court, respondents herein filed a Notice
of Appeal dated June 3, 1996. On the same date, the trial court issued an Order for the
elevation of the records of the case to the Court of Appeals. On August 8, 1997,
respondents filed their appellate brief before the Court of Appeals.
On June 25, 1999, the Court of Appeals rendered its decision 7 reversing the
decision of the trial court. The dispositive portion of the June 25, 1999 decision is as
follows:
"WHEREFORE, premises considered, the appealed decision (dated May 13,
1996) of the Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93-
18582 is hereby REVERSED and SET ASIDE. In its stead, a new one is rendered
ordering:

(1) The rescission of the Deed of Absolute Sale executed between the
appellees on September 4, 1990;

(2) The reconveyance of the subject premises to appellee Eufrocina de Leon;

(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina de
Leon, to afford the appellants thirty days within which to exercise their
right of first refusal by paying the amount of ONE MILLION PESOS
(P1,000,000.00) for the subject property; and

(4) The appellants to, in turn, pay the appellees back rentals from May 1990
up to the time this decision is promulgated.

No pronouncement as to costs.

SO ORDERED." 8

Petitioners herein led a Motion for Reconsideration of the decision of the Court
of Appeals but the same was denied in a Resolution dated October 15, 1999. 9
Hence, this petition for review on certiorari where petitioners Rosencor
Development Corporation and Rene Joaquin raise the following assignment of errors 1 0
:
I.
THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE RESCISSION
OF THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA DE LEON AND
PETITIONER ROSENCOR.
II.

THE COURT OF APPEALS COMMITTED MANIFEST ERROR IN MANDATING THAT

EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY TO
EXERCISE THEIR RIGHT OF FIRST REFUSAL.
III.

THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT

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 RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL DESPITE
PETITIONERS' RELIANCE ON THEIR DEFENSE BASED ON THE STATUTE OF
FRAUDS.

Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and
Crescencia Tiangco, did not appeal the decision of the Court of Appeals.
At the onset, we note that both the Court of Appeals and the Regional Trial Court
relied on Article 1403 of the New Civil Code, more speci cally the provisions on the
statute of frauds, in coming out with their respective decisions. The trial court, in
denying the petition for reconveyance, held that right of rst refusal relied upon by
petitioners was not reduced to writing and as such, is unenforceable by virtue of the
said article. The Court of Appeals, on the other hand, also held that the statute of frauds
governs the "right of rst refusal" claimed by respondents. However, the appellate court
ruled that respondents had duly proven the same by reason of petitioners' waiver of the
protection of the statute by reason of their failure to object to the presentation of oral
evidence of the said right.
Both the appellate court and the trial court failed to discuss, however, the
threshold issue of whether or not a right of rst refusal is indeed covered by the
provisions of the New Civil Code on the statute of frauds. The resolution of the issue on
the applicability of the statute of frauds is important as it will determine the type of
evidence which may be considered by the trial court as proof of the alleged right of rst
refusal. DIEACH

The term "statute of frauds" is descriptive of statutes which require certain

classes of contracts to be in writing. This statute does not deprive the parties of the
right to contract with respect to the matters therein involved, but merely regulates the
formalities of the contract necessary to render it enforceable. Thus, they are included in
the provisions of the New Civil Code regarding unenforceable contracts, more
particularly Art. 1403, paragraph 2. Said article provides, as follows:
"Art. 1403. The following contracts are unenforceable, unless they are
ratified:
xxx xxx xxx

(2) Those that do not comply with the Statute of Frauds as set forth in
this number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum thereof,
be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents:
a) An agreement that by its terms is not to be performed within
a year from the making thereof;
b) A special promise to answer for the debt, default, or
miscarriage of another;
c) An agreement made in consideration of marriage, other than
a mutual promise to marry;
d) An agreement for the sale of goods, chattels or things in
action, at a price not less than ve hundred pesos, unless the buyer accept
and receive part of such goods and chattels, or the evidences, or some of
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 them, of such things in action, or pay at the time some part of the purchase
money; but when a sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale, of the amount and kind
of property sold, terms of sale, price, names of purchasers and person on
whose account the sale is made, it is a sufficient memorandum;

e) An agreement for the leasing of a longer period than one

year, or for the sale of real property or of an interest therein;

f) A representation to the credit of a third person."

The purpose of the statute is to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witnesses by
requiring certain enumerated contracts and transactions to be evidenced by a writing
signed by the party to be charged. 1 1 Moreover, the statute of frauds refers to speci c
kinds of transactions and cannot apply to any other transaction that is not enumerated
therein. 1 2 The application of such statute presupposes the existence of a perfected
contract. 1 3
The question now is whether a "right of rst refusal" is among those enumerated
in the list of contracts covered by the Statute of Frauds. More speci cally, is a right of
rst refusal akin to "an agreement for the leasing of a longer period than one year, or for
the sale of real property or of an interest therein" as contemplated by Article 1403, par.
2(e) of the New Civil Code.
We have previously held that not all agreements "affecting land" must be put into
writing to attain enforceability 1 4 . Thus, we have held that the setting up of boundaries
1 5 , the oral partition of real property 1 6 , and an agreement creating a right of way 1 7 are
not covered by the provisions of the statute of frauds. The reason simply is that these
agreements are not among those enumerated in Article 1403 of the New Civil Code.
A right of rst refusal is not among those listed as unenforceable under the
statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil
Code presupposes the existence of a perfected, albeit unwritten, contract of sale. 1 8 A
right of rst refusal, such as the one involved in the instant case, is not by any means a
perfected contract of sale of real property. At best, it is a contractual grant, not of the
sale of the real property involved, but of the right of rst refusal over the property
sought to be sold 1 9 .
It is thus evident that the statute of frauds does not contemplate cases involving
a right of rst refusal. As such, a right of rst refusal need not be written to be
enforceable and may be proven by oral evidence.
The next question to be ascertained is whether or not respondents have
satisfactorily proven their right of rst refusal over the property subject of the Deed of
Absolute Sale dated September 4, 1990 between petitioner Rosencor and Eufrocina de
Leon.
On this point, we agree with the factual ndings of the Court of Appeals that
respondents have adequately proven the existence of their right of rst refusal.
Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testi ed that they
were promised by the late spouses Faustino and Crescencia Tiangco and, later on, by
their heirs a right of rst refusal over the property they were currently leasing should
they decide to sell the same. Moreover, respondents presented a letter 2 0 dated
October 9, 1990 where Eufrocina de Leon, the representative of the heirs of the
spouses Tiangco, informed them that they had received an offer to buy the disputed
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 property for P2,000,000.00 and offered to sell the same to the respondents at the
same price if they were interested. Verily, if Eufrocina de Leon did not recognize
respondents' right of rst refusal over the property they were leasing, then she would
not have bothered to offer the property for sale to the respondents.
It must be noted that petitioners did not present evidence before the trial court
contradicting the existence of the right of rst refusal of respondents over the disputed
property. They only presented petitioner Rene Joaquin, the vice-president of petitioner
Rosencor, who admitted having no personal knowledge of the details of the sales
transaction between Rosencor and the heirs of the spouses Tiangco 2 1 . They also
dispensed with the testimony of Eufrocina de Leon 2 2 who could have denied the
existence or knowledge of the right of rst refusal. As such, there being no evidence to
the contrary, the right of rst refusal claimed by respondents was substantially proven
by respondents before the lower court. ESDcIA

Having ruled upon the question as to the existence of respondents' right of rst
refusal, the next issue to be answered is whether or not the Court of Appeals erred in
ordering the rescission of the Deed of Absolute Sale dated September 4, 1990 between
Rosencor and Eufrocina de Leon and in decreeing that the heirs of the spouses Tiangco
should afford respondents the exercise of their right of rst refusal. In other words,
may a contract of sale entered into in violation of a third party's right of rst refusal be
rescinded in order that such third party can exercise said right?
The issue is not one of first impression.
In Guzman, Bocaling and Co., Inc. vs. Bonnevie 2 3 , the Court upheld the decision
of a lower court ordering the rescission of a deed of sale which violated a right of rst
refusal granted to one of the parties therein. The Court held:
". . . Contract of Sale was not voidable but rescissible. Under Article 1380 to
1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be
subsequently rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the Bonnevies for they had
substantial interests that were prejudiced by the sale of the subject property to the
petitioner without recognizing their right of rst priority under the Contract of
Lease.
According to Tolentino, rescission is a remedy granted by law to the
contracting parties and even to third persons, to secure reparations for damages
caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of
said contract. It is a relief allowed for the protection of one of the contracting
parties and even third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferent right created by the contract.
Rescission implies a contract which, even if initially valid, produces a lesion or
pecuniary damage to someone that justifies its invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the
contract is an obstacle to the action for its rescission where it is shown that such
third person is in lawful possession of the subject of the contract and that he did
not act in bad faith. However, this rule is not applicable in the case before us
because the petitioner is not considered a third party in relation to the Contract of
Sale nor may its possession of the subject property be regarded as acquired
lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale.
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 Moreover, the petitioner cannot be deemed a purchaser in good faith for the
record shows that it categorically admitted that it was aware of the lease in favor
of the Bonnevies, who were actually occupying the subject property at the time it
was sold to it. Although the Contract of Lease was not annotated on the transfer
certi cate of title in the name of the late Jose Reynoso and Africa Reynoso, the
petitioner cannot deny actual knowledge of such lease which was equivalent to
and indeed more binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of
another without notice that some other person has a right to or interest in such
property without and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person in
the property. Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another. Tested by these principles, the petitioner
cannot tenably claim to be a buyer in good faith as it had notice of the lease of
the property by the Bonnevies and such knowledge should have cautioned it to
look deeper into the agreement to determine if it involved stipulations that would
prejudice its own interests."

Subsequently 2 4 in Equatorial Realty and Development, Inc. vs. Mayfair Theater,

Inc. 2 5 , the Court, en banc, with three justices dissenting, 2 6 ordered the rescission of a
contract entered into in violation of a right of rst refusal. Using the ruling in Guzman
Bocaling & Co. , Inc. vs. Bonnevie as basis, the Court decreed that since respondent
therein had a right of rst refusal over the said property, it could only exercise the said
right if the fraudulent sale is first set aside or rescinded. Thus:
"What Carmelo and Mayfair agreed to, by executing the two lease
contracts, was that Mayfair will have the right of rst refusal in the event Carmelo
sells the leased premises. It is undisputed that Carmelo did recognize this 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
both parties. Carmelo, however, did not pursue the exercise to its logical end.
While it initially recognized Mayfair's right of rst refusal, Carmelo violated such
right when without affording its negotiations with Mayfair the full process to ripen
to at least an interface of a de nite offer and a possible corresponding
acceptance within the "30-day exclusive option" time granted Mayfair, Carmelo
abandoned negotiations, kept a low pro le for some time, and then sold, without
prior notice to Mayfair, the entire Claro M. Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this nding renders the sale to it of
the property in question, rescissible. We agree with respondent Appellate Court
that the records bear out the fact that Equatorial was aware of the lease contracts
because its lawyers had, prior to the sale, studied the said contracts. As such,
Equatorial cannot tenably claim that to be a purchaser in good faith, and,
therefore, rescission lies.
cDHCAE

xxx xxx xxx

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. In fact, as correctly
observed by the Court of Appeals, 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.
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 Since Mayfair had a right of rst refusal, it can exercise the right only if the
fraudulent sale is rst set aside or rescinded. All of these matters are now before
us and so there should be no piecemeal determination of this case and leave
festering sores to deteriorate into endless litigation. The facts of the case and
considerations of justice and equity require that we order rescission here and
now. Rescission is a relief allowed for the protection of one of the contracting
parties and even third persons from all injury and damage the contract may cause
or to protect some incompatible and preferred right by the contract. The sale of
the subject real property 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 stipulate period." 2 7

In Parañaque Kings Enterprises, Inc. vs. Court of Appeals, 2 8 the Court held that
the allegations in a complaint showing violation of a contractual right of " rst option or
priority to buy the properties subject of the lease" constitute a valid cause of action
enforceable by an action for speci c performance. Summarizing the rulings in the two
previously cited cases, the Court a rmed the nature of and concomitant rights and
obligations of parties under a right of first refusal. Thus:
"We hold however, that in order to have full compliance with the
contractual right granting petitioner the rst option to purchase, the sale of the
properties for the amount of P9,000,000.00, the price for which they were nally
sold to respondent Raymundo, should have likewise been offered to petitioner.
The Court has made an extensive and lengthy discourse on the concept of,
and obligations under, a right of rst refusal in the case of Guzman, Bocaling &
Co. vs. Bonnevie. In that case, under a contract of lease, the lessees (Raul and
Christopher Bonnevie) were given a "right of rst priority" to purchase the leased
property in case the lessor (Reynoso) decided to sell. The selling price quoted to
the Bonnevies was 600,000.00 to be fully paid in cash, less a mortgage lien of
P100,000.00. On the other hand, the selling price offered by Reynoso to and
accepted by Guzman was only P400,000.00 of which P137,500.00 was to be paid
in cash while the balance was to be paid only when the property was cleared of
occupants. We held that even if the Bonnevies could not buy it at the price quoted
(P600,000.00), nonetheless, Reynoso could not sell it to another for a lower price
and under more favorable terms and conditions without rst offering said
favorable terms and price to the Bonnevies as well. Only if the Bonnevies failed to
exercise their right of rst priority could Reynoso thereafter lawfully sell the
subject property to others, and only under the same terms and conditions
previously offered to the Bonnevies.
xxx xxx xxx
This principle was reiterated in the very recent case of Equatorial Realty vs.
Mayfair Theater, Inc . which was decided en banc. This Court upheld the right of
rst refusal of the lessee Mayfair, and rescinded the sale of the property by the
lessor Carmelo to Equatorial Realty "considering that Mayfair, which had
substantial interest over the subject property, was prejudiced by its sale to
Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate
within the 30-day stipulated period"

In that case, two contracts of lease between Carmelo and Mayfair provided
"that if the LESSOR should desire to sell the leased premises, the LESSEE shall be
given 30 days exclusive option to purchase the same." Carmelo initially offered to
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 sell the leased property to Mayfair for six to seven million pesos. Mayfair
indicated interest in purchasing the property though it invoked the 30-day period.
Nothing was heard thereafter from Carmelo. Four years later, the latter sold its
entire Recto Avenue property, including the leased premises, to Equatorial for
P11,300,000.00 without priorly informing Mayfair. The Court held that both
Carmelo and Equatorial acted in bad faith: Carmelo for knowingly violating the
right of rst option of Mayfair, and Equatorial for purchasing the property despite
being aware of the contract stipulation. In addition to rescission of the contract of
sale, the Court ordered Carmelo to allow Mayfair to buy the subject property at the
same price of P11,300,000.00.

In the recent case of Litonjua vs. L&R Corporation, 2 9 the Court, also citing the
case of Guzman, Bocaling & Co. vs. Bonnevie, held that the sale made therein in
violation of a right of rst refusal embodied in a mortgage contract, was rescissible.
Thus:
"While petitioners question the validity of paragraph 8 of their mortgage
contract, they appear to be silent insofar as paragraph 9 thereof is concerned.
Said paragraph 9 grants upon L & R Corporation the right of rst refusal over the
mortgaged property in the event the mortgagor decides to sell the same. We see
nothing wrong in this provision. The right of rst refusal has long been
recognized as valid in our jurisdiction. The consideration for the loan mortgage
includes the consideration for the right of rst refusal. L & R Corporation is in
effect stating that it consents to lend out money to the spouses Litonjua provided
that in case they decide to sell the property mortgaged to it, then L & R
Corporation shall be given the right to match the offered purchase price and to
buy the property at that price. Thus, while the spouses Litonjua had every right to
sell their mortgaged property to PWHAS without securing the prior written consent
of L & R Corporation, they had the obligation under paragraph 9, which is a
perfectly valid provision, to notify the latter of their intention to sell the property
and give it priority over other buyers. It is only upon the failure of L & R
Corporation to exercise its right of rst refusal could the spouses Litonjua validly
sell the subject properties to the others, under the same terms and conditions
offered to L & R Corporation.

What then is the status of the sale made to PWHAS in violation of L&R
Corporation's contractual right of rst refusal? On this score, we agree with the
Amended Decision of the Court of Appeals that the sale made to PWHAS is
rescissible. The case of Guzman, Bocaling & Co. v. Bonnevie is instructive on this
point. cSHATC

xxx xxx xxx

It was then held that the Contract of Sale there, which violated the right of
first refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of rst
refusal granted to L & R Corporation over the subject properties since the Deed of
Real Estate Mortgage containing such a provision was duly registered with the
Register of Deeds. As such, PWHAS is presumed to have been noti ed thereof by
registration, which equates to notice to the whole world.
xxx xxx xxx
All things considered, what then are the relative rights and obligations of
the parties? To recapitulate: the sale between the spouses Litonjua and PWHAS is
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 valid, notwithstanding the absence of L & R Corporation's prior written consent
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its
tender of the redemption price, as successor-in-interest of the spouses Litonjua,
within the one-year period should have been accepted as valid by the L & R
Corporation. However, while the sale is, indeed, valid, the same is rescissible
because it ignored L & R Corporation's right of first refusal."

Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract
of sale entered into in violation of a right of rst refusal of another person, while valid, is
rescissible.
There is, however, a circumstance which prevents the application of this doctrine
in the case at bench. In the cases cited above, the Court ordered the rescission of sales
made in violation of a right of rst refusal precisely because the vendees therein could
not have acted in good faith as they were aware or should have been aware of the right
of rst refusal granted to another person by the vendors therein. The rationale for this
is found in the provisions of the New Civil Code on rescissible contracts. Under Article
1381 of the New Civil Code, paragraph 3, a contract validly agreed upon may be
rescinded if it is "undertaken in fraud of creditors when the latter cannot in any manner
collect the claim due them." Moreover, under Article 1385, rescission shall not take
place "when the things which are the object of the contract are legally in the possession
of third persons who did not act in bad faith." 3 0
It must be borne in mind that, unlike the cases cited above, the right of rst
refusal involved in the instant case was an oral one given to respondents by the
deceased spouses Tiangco and subsequently recognized by their heirs. As such, in
order to hold that petitioners were in bad faith, there must be clear and convincing
proof that petitioners were made aware of the said right of rst refusal either by the
respondents or by the heirs of the spouses Tiangco.
It is axiomatic that good faith is always presumed unless contrary evidence is
adduced. 3 1 A purchaser in good faith is one who buys the property of another without
notice that some other person has a right or interest in such a property and pays a full
and fair price at the time of the purchase or before he has notice of the claim or interest
of some other person in the property. 3 2 In this regard, the rule on constructive notice
would be inapplicable as it is undisputed that the right of rst refusal was an oral one
and that the same was never reduced to writing, much less registered with the Registry
of Deeds. In fact, even the lease contract by which respondents derive their right to
possess the property involved was an oral one.
On this point, we hold that the evidence on record fails to show that petitioners
acted in bad faith in entering into the deed of sale over the disputed property with the
heirs of the spouses Tiangco. Respondents failed to present any evidence that prior to
the sale of the property on September 4, 1990, petitioners were aware or had notice of
the oral right of first refusal.
Respondents point to the letter dated June 1, 1990 3 3 as indicative of petitioners'
knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila demanded that
respondent Irene Guillermo vacate the structure they were occupying to make way for
its demolition.
We fail to see how the letter could give rise to bad faith on the part of the
petitioner. No mention is made of the right of rst refusal granted to respondents. The
name of petitioner Rosencor or any of its o cers did not appear on the letter and the
letter did not state that Atty. Aguila was writing in behalf of petitioner. In fact, Atty.
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 Aguila stated during trial that she wrote the letter in behalf of the heirs of the spouses
Tiangco. Moreover, even assuming that Atty. Aguila was indeed writing in behalf of
petitioner Rosencor, there is no showing that Rosencor was aware at that time that
such a right of first refusal existed.
EITcaH

Neither was there any showing that after receipt of this June 1, 1990 letter,
respondents noti ed Rosencor or Atty. Aguila of their right of rst refusal over the
property. Respondents did not try to communicate with Atty. Aguila and inform her
about their preferential right over the disputed property. There is even no showing that
they contacted the heirs of the spouses Tiangco after they received this letter to
remind them of their right over the property.
Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de
Leon, where she recognized the right of rst refusal of respondents, as indicative of the
bad faith of petitioners. We do not agree. Eufrocina de Leon wrote the letter on her own
behalf and not on behalf of petitioners and, as such, it only shows that Eufrocina de
Leon was aware of the existence of the oral right of rst refusal. It does not show that
petitioners were likewise aware of the existence of the said right. Moreover, the letter
was made a month after the execution of the Deed of Absolute Sale on September 4,
1990 between petitioner Rosencor and the heirs of the spouses Tiangco. There is no
showing that prior to the date of the execution of the said Deed, petitioners were put on
notice of the existence of the right of first refusal.
Clearly, if there was any indication of bad faith based on respondents' evidence, it
would only be on the part of Eufrocina de Leon as she was aware of the right of rst
refusal of respondents yet she still sold the disputed property to Rosencor. However,
bad faith on the part of Eufrocina de Leon does not mean that petitioner Rosencor
likewise acted in bad faith. There is no showing that prior to the execution of the Deed
of Absolute Sale, petitioners were made aware or put on notice of the existence of the
oral right of rst refusal. Thus, absent clear and convincing evidence to the contrary,
petitioner Rosencor will be presumed to have acted in good faith in entering into the
Deed of Absolute Sale over the disputed property.
Considering that there is no showing of bad faith on the part of the petitioners,
the Court of Appeals thus erred in ordering the rescission of the Deed of Absolute Sale
dated September 4, 1990 between petitioner Rosencor and the heirs of the spouses
Tiangco. The acquisition by Rosencor of the property subject of the right of rst refusal
is an obstacle to the action for its rescission where, as in this case, it was shown that
Rosencor is in lawful possession of the subject of the contract and that it did not act in
bad faith. 3 4
This does not mean however that respondents are left without any remedy for
the unjusti ed violation of their right of rst refusal. Their remedy however is not an
action for the rescission of the Deed of Absolute Sale but an action for damages
against the heirs of the spouses Tiangco for the unjusti ed disregard of their right of
first refusal 3 5 .
WHEREFORE, premises considered, the decision of the Court of Appeals dated
June 25, 1999 is REVERSED and SET ASIDE. The Decision dated May 13, 1996 of the
Quezon City Regional Trial Court, Branch 217 is hereby REINSTATED insofar as it
dismisses the action for rescission of the Deed of Absolute Sale dated September 4,
1990 and orders the payment of monthly rentals of P1,000.00 per month reckoned
from May 1990 up to the time respondents leave the premises.
SO ORDERED.
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 Melo, Panganiban and Sandoval-Gutierrez, JJ., concur.
Vitug, J., in the result; I reiterate the Court's opinion in Ang Yu vs. CA (238 SCRA
602).

Footnotes
1. Penned by Associate Justice Ramon Mabutas, Jr. and concurred in by Associate
Justices Hilarion L. Aquino and Wenceslao I. Agnir. Jr.

2. Penned by Judge Gil P. Fernandez, Sr.

3. RTC Records, p. 80.

4. Rollo, pp. 37-39.

5. Annex "F" of Petition; Rollo, pp. 73-77.
6. Rollo, p. 77.
7. Annex "A" of Petition; Rollo, pp. 36-49.
8. Rollo, pp. 48-49.
9. Annex "B" of Petition; Rollo, pp. 50-51.

10. Rollo, p. 17.

11. Asia Production Co., Inc., et al. vs. Pano, et al., 205 SCRA 458.
12. Western Mindanao Lumber Co. vs. Medalla, 79 SCRA 708; Cruz vs. J.M. Tuazon, 76
SCRA 543.
13. Villanueva vs. Court of Appeals, 267 SCRA 89.
14. Victorino Hernandez vs. Court of Appeals, 160 SCRA 321.
15. Ibid.
16. Simprosa Vda. De Espina vs. Abaya, 196 SCRA 312.
17. Western Mindanao Lumber Co. vs. Medalla, supra.
18. Villanueva vs. Court of Appeals, supra.
19. Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., 264 SCRA 483.
20. Exhibit "B"; RTC Records, p. 177.
21. T.S.N., October 05, 1995, p. 33.

22. RTC Records, p. 199.

23. 206 SCRA 668.

24. Previous to this case, the Court en banc promulgated the case of Ang Yu Asunscion vs.
Court of Appeals, 238 SCRA 602. In this case, the Court refused to rescind a contract of
sale which violated the right of first refusal of petitioner therein. The Court characterized
a right of first refusal as belonging to a class of preparatory juridical relations governed
not by contracts but by, among other laws of general application, the pertinent scattered
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 provisions of the Civil Code on human conduct. The Court held that the breach of the
right of first refusal granted to a party cannot justify the issuance of a writ of execution,
nor would it sanction an action for specific performance as the indispensable element of
consensuality in contracts would be negated. As such, the remedy of a person aggrieved
by an unjustified disregard of his right of first refusal is not an action for the rescission
of the contract but an action for recovery of damages under Article 19 of the Civil Code.
On the issue of whether or not the alleged purchaser of the property therein acted in
good or bad faith in purchasing the property subject to the right of first refusal, the Court
held that the matter should be independently addressed in appropriate proceedings.

25. 264 SCRA 483.

26. namely Justices Flerida Ruth P. Romero, Jose C. Vitug and Justo P. Torres.
27. In their dissent, the three justices concurred with the ruling that the stipulation in the
contract involves a right of first refusal. However, they disagreed with the ruling of the
Court regarding the rescissible nature of the contract entered into in violation of the said
right, citing the case of Ang Yu Asunscion vs. Court of Appeals, supra, as precedent.
28. 268 SCRA 727.

29. 320 SCRA 405.

30. Guzman, Bocaling and Co. vs. Bonnevie, supra, citing Cordovero and Alcazar vs.
Villaruz and Borromeo, 46 Phil. 473.
31. Heirs of Severa P. Gregorio vs. Court of Appeals, 300 SCRA 565.
32. Co vs. Court of Appeals, 196 SCRA 705.
33. Exhibit "G", RTC Records, p. 181.

34. Guzman, Bocaling & Co. vs. Bonnevie, supra.

35. Ang Yu Asunscion vs. Court of Appeals, supra.

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