G.R. No. 111538.

 February 26, 1997. *

PARAÑAQUE KINGS ENTERPRISES, INCORPORATED, petitioner, vs. COURT OF

APPEALS, CATALINA L. SANTOS, represented by her attorney-in-fact, LUZ B. PROTACIO,
and DAVID A. RAYMUNDO, respondents.
Actions; Pleadings and Practice; Procedural Rules; When noncompliance with the Rules was not
intended for delay or did not result in prejudice to the adverse party, dismissal of appeal on mere
technicalities—in cases where appeal is a matter of right—may be stayed, in the exercise of the court’s
equity jurisdiction.—We first dispose of the procedural issue raised by respondents, particularly
petitioner’s failure to file twelve (12) copies of its brief. We have ruled that when non-compliance with
the Rules was not intended for delay or did not result in prejudice to the adverse party, dismissal of appeal
on mere technicalities—in cases where appeal is a matter of right—may be stayed, in the exercise of the
court’s equity jurisdiction. It does not appear that respondents were unduly prejudiced by petitioner’s
nonfeasance. Neither has it been shown that such failure was intentional.
Same; Words and Phrases; Questions of Law and Questions of Fact; There is a question of law in
a given case when the doubt or difference arises as to what the law is on a certain state of facts, and
there is a question of fact when the doubt or difference arises as to the truth or the falsehood of alleged
facts.—We do not agree with respondents’ contention that the issue involved is purely factual. The
principal legal question, as stated earlier, is whether the complaint filed by herein petitioner in the lower
court states a valid cause of action. Since such question assumes the facts alleged in the complaint as true,
it follows that the determination thereof is one of law, and not of facts. There is a question of law in a
given case when the doubt or difference arises as to what the law is on a certain state of facts, and there is
a question of fact when the doubt or difference arises as to the truth or the falsehood of alleged facts.
Same; Cause of Action, Elements of.—A cause of action exists if the following elements are present:
(1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2)
an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or
omission on the part of such defendant violative of the right of plaintiff or constituting a breach of the
obligation of defendant to the plaintiff for which the latter may maintain an action for recovery of
damages.
Same; Same; To sustain a motion to dismiss for lack of cause of action, the complaint must show
that the claim does not exist, rather than that a claim has been defectively stated, or is ambiguous,
indefinite or uncertain.—In determining whether allegations of a complaint are sufficient to support a
cause of action, it must be borne in mind that the complaint does not have to establish or allege facts
proving the existence of a cause of action at the outset; this will have to be done at the trial on the merits
of the case. To sustain a motion to dismiss for lack of cause of action, the complaint must show that the
claim for relief does not exist, rather than that a claim has been defectively stated, or is ambiguous,
indefinite or uncertain.
Contracts; Sales; Right of First Refusal; In order to have full compliance with the contractual right
granting a party the first option to purchase, the sale of the properties for the price for which they were
finally sold to a third person should have likewise been first offered to the former.—We hold, however,
that in order to have full compliance with the contractual right granting petitioner the first option to
purchase, the sale of the properties for the amount of P9 million, the price for which they were finally
sold to respondent Raymundo, should have likewise been first offered to petitioner.
Same; Same; Same; There should be identity of terms and conditions to be offered to the buyer
holding a right of first refusal (or the first option to buy) if such right is not to be rendered illusory.—Of
course, under their contract, they specifically stipulated that the Bonnevies could exercise the right of first
priority, “all things and conditions being equal.” This Court interpreted this proviso to mean that there
should be identity of terms and conditions to be offered to the Bonnevies and all other prospective buyers,
with the Bonnevies to enjoy the right of first priority. We hold that the same rule applies even without the
same proviso if the right of first refusal (or the first option to buy) is not to be rendered illusory.
Same; Same; Same; The basis of the right of first refusal must be the current offer to sell of the
seller or offer to purchase of any prospective buyer.—From the foregoing, the basis of the right of first
refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer. Only
after the optionee fails to exercise its right of first priority under the same terms and within the period
contemplated, could the owner validly offer to sell the property to a third person, again, under the same
terms as offered to the optionee.
Statutes; Urban Land Reform Law (P.D. 1517); In the absence of allegations in the complaint that
the prerequisites for the availment of benefits under P.D. 1517 have been complied with, the complaint
fails to state a cause of action.—Without probing into whether petitioner is rightfully a beneficiary under
said law, suffice it to say that this Court has previously ruled that under Section 6 of P.D. 1517, “the
terms and conditions of the sale in the exercise of the lessee’s right of first refusal to purchase shall be
determined by the Urban Zone Expropriation and Land Management Committee. Hence, x x x certain
prerequisites must be complied with by anyone who wishes to avail himself of the benefits of the decree.”
There being no allegation in its complaint that the prerequisites were complied with, it is clear that the
complaint did fail to state a cause of action on this ground.
Contracts; Assignments; A deed of assignment need not be very specific as to which rights and
obligations were passed on to the assignee if it is understood in the general provision that all specific
rights and obligations contained in the contract of lease are those referred to as being assigned.—One of
such rights included in the contract of lease and, therefore, in the assignments of rights was the lessee’s
right of first option or priority to buy the properties subject of the lease, as provided in paragraph 9 of the
assigned lease contract. The deed of assignment need not be very specific as to which rights and
obligations were passed on to the assignee. It is understood in the general provision aforequoted that all
specific rights and obligations contained in the contract of lease are those referred to as being assigned.
Needless to state, respondent Santos gave her unqualified conformity to both assignments of rights.
Actions; Pleadings and Practice; Motions to Dismiss; While in the resolution of a motion to
dismiss, the truth of the facts alleged in the complaint are theoretically admitted, such admission is
merely hypothetical and only for the purpose of resolving the motion—in case of denial, the movant is not
deprived of the right to submit its own case and to submit evidence to rebut the allegations in the
complaint, and neither will the grant of the motion by a trial court and the ultimate reversal thereof by an
appellate court have the effect of stifling such right.—While the lower courts erred in dismissing the
complaint, private respondents, however, cannot be denied their day in court. While, in the resolution of a
motion to dismiss, the truth of the facts alleged in the complaint are theoretically admitted, such
admission is merely hypothetical and only for the purpose of resolving the motion. In case of denial, the
movant is not to be deprived of the right to submit its own case and to submit evidence to rebut the
allegations in the complaint. Neither will the grant of the motion by a trial court and the ultimate reversal
thereof by an appellate court have the effect of stifling such right. So too, the trial court should be given
the opportunity to evaluate the evidence, apply the law and decree the proper remedy. Hence, we remand
the instant case to the trial court to allow private respondents to have their day in court.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

     Gancayco Law Offices for petitioner.
     Delfin R. Supapo, Jr. for private respondent D.A. Raymund.
     M.B. Tomacruz Law Office for private respondent.

PANGANIBAN, J.:

Do allegations in a complaint showing violation of a contractual right of “first option or priority

to buy the properties subject of the lease” constitute a valid cause of action? Is the grantee of
such right entitled to be offered the same terms and conditions as those given to a third party who
eventually bought such properties? In short, is such right of first refusal enforceable by an action
for specific performance? These questions are answered in the affirmative by this Court in
resolving this petition for review under Rule 45 of the Rules of Court challenging the
Decision  of the Court of Appeals  promulgated on March 29, 1993, in CA-G.R. CV No.
1 2

34987 entitled “Parañaque Kings Enterprises, Inc. vs. Catalina L. Santos, et al.,” which

affirmed the order  of September 2, 1991, of the Regional Trial Court of Makati, Branch
3

57,  dismissing Civil Case No. 91-786 for lack of a valid cause of action.

4

Facts of the Case

On March 19, 1991, herein petitioner filed before the Regional Trial Court of Makati a
complaint,  which is reproduced in full below:
5

“Plaintiff, by counsel, respectfully states that:

1. 1.Plaintiff is a private corporation organized and existing under and by virtue of the laws of the
Philippines, with principal place of business of (sic) Dr. A. Santos Avenue, Parañaque, Metro
Manila, while defendant Catalina L. Santos, is of legal age, widow, with residence and postal
address at 444 Plato Street, Ct., Stockton, California, USA, represented in this action by her
attorney-in-fact, Luz B. Protacio, with residence and postal address at No. 12, San Antonio
Street, Magallanes Village, Makati, Metro Manila, by virtue of a general power of attorney.
Defendant David A. Raymundo, is of legal age, single, with residence and postal address at
1918 Kamias Street, Dasmariñas Village, Makati, Metro Manila, where they (sic) may be served
 with summons and other court processes. Xerox copy of the general power of attorney is hereto
attached as Annex ‘A.’
2. 2.Defendant Catalina L. Santos is the owner of eight (8) parcels of land located at (sic)
Parañaque, Metro Manila with transfercertificate of title Nos. S-19637, S-19638 and S-19643 to
S-19648. Xerox copies of the said title (sic) are hereto attached as Annexes ‘B’ to ‘I,’
respectively.

1. 3.On November 28, 1977, a certain Frederick Chua leased the above-described property from
defendant Catalina L. Santos, the said lease was registered in the Register of Deeds. Xerox copy
of the lease is hereto attached as Annex ‘J.’
2. 4.On February 12, 1979, Frederick Chua assigned all his rights and interest and participation in
the leased property to Lee Ching Bing, by virtue of a deed of assignment and with the
conformity of defendant Santos, the said assignment was also registered. Xerox copy of the deed
of assignment is hereto attached as Annex ‘K.’
3. 5.On August 6, 1979, Lee Ching Bing also assigned all his rights and interest in the leased
property to Parañaque Kings Enterprises, Incorporated by virtue of a deed of assignment and
with the conformity of defendant Santos, the same was duly registered. Xerox copy of the deed
of assignment is hereto attached as Annex ‘L.’
4. 6.Paragraph 9 of the assigned leased (sic) contract provides among others that:

1. ‘9.That in case the properties subject of the lease agreement are sold or encumbered, Lessors shall
impose as a condition that the buyer or mortgagee thereof shall recognize and be bound by all
the terms and conditions of this lease agreement and shall respect this Contract of Lease as if
they are the LESSORS thereof and in case of sale, LESSEE shall have the first option or priority
to buy the properties subject of the lease’;

1. 7.On September 21, 1988, defendant Santos sold the eight parcels of land subject of the lease to
defendant David Raymundo for a consideration of FIVE MILLION (P5,000,000.00) PESOS.
The said sale was in contravention of the contract of lease, for the first option or priority to buy
was not offered by defendant Santos to the plaintiff. Xerox copy of the deed of sale is hereto
attached as Annex ‘M.’
2. 8.On March 5, 1989, Defendant Santos wrote a letter to the plaintiff informing the same of the
sale of the properties to defendant Raymundo, the said letter was personally handed by the
attorney-in-fact of defendant Santos. Xerox copy of the letter is hereto attached as Annex ‘N.’
3. 9.Upon learning of this fact plaintiff’s representative wrote a letter to defendant Santos,
requesting her to rectify the error and consequently realizing the error, she had it reconveyed to
her for the same consideration of FIVE MILLION (P5,000,000.00) PESOS. Xerox copies of the
letter and the deed of reconveyance are hereto attached as Annexes ‘O’ and ‘P.’

1. 10.Subsequently the property was offered for sale to plaintiff by the defendant for the sum of
FIFTEEN MILLION (P15,000,000.00) PESOS. Plaintiff was given ten (10) days to make good
of the offer, but therefore (sic) the said period expired another letter came from the counsel of
defendant Santos, containing the same tenor of (sic) the former letter. Xerox copies of the letters
are hereto attached as Annexes ‘Q’ and ‘R.’
2. 11.On May 8, 1989, before the period given in the letter offering the properties for sale expired,
plaintiff’s counsel wrote counsel of defendant Santos offering to buy the properties for FIVE
MILLION (P5,000,000.00) PESOS. Xerox Copy of the letter is hereto attached as Annex ‘S.’
3. 12.On May 15, 1989, before they replied to the offer to purchase, another deed of sale was
executed by defendant Santos (in favor of) defendant Raymundo for a consideration of NINE
MILLION (P9,000,000.00) PESOS. Xerox copy of the second deed of sale is hereto attached as
Annex ‘T.’
4. 13.Defendant Santos violated again paragraph 9 of the contract of lease by executing a second
deed of sale to defendant Raymundo.
5. 14.It was only on May 17, 1989, that defendant Santos replied to the letter of the plaintiff’s offer
to buy or two days after she sold her properties. In her reply she stated among others that the
period has lapsed and the plaintiff is not a privy (sic) to the contract. Xerox copy of the letter is
hereto attached as Annex ‘U.’
6. 15.On June 28, 1989, counsel for plaintiff informed counsel of defendant Santos of the fact that
plaintiff is the assignee of all rights and interest of the former lessor. Xerox copy of the letter is
hereto attached as Annex ‘V.’
7. 16.On July 6, 1989, counsel for defendant Santos informed the plaintiff that the new owner is
defendant Raymundo. Xerox copy of the letter is hereto attached as Annex ‘W.’
 8. 17.From the preceding facts it is clear that the sale was simulated and that there was a collusion
between the defendants in the sales of the leased properties, on the ground that when plaintiff
wrote a letter to defendant Santos to rectify the error, she immediately have (sic) the property
reconveyed it (sic) to her in a matter of twelve (12) days.

1. 18.Defendants have the same counsel who represented both of them in their exchange of
communication with plaintiff’s counsel, a fact that led to the conclusion that a collusion exist
(sic) between the defendants.
2. 19.When the property was still registered in the name of defendant Santos, her collector of the
rental of the leased properties was her brother-in-law David Santos and when it was transferred
to defendant Raymundo the collector was still David Santos up to the month of June, 1990.
Xerox copies of cash vouchers are hereto attached as Annexes ‘X’ to ‘HH,’ respectively.
3. 20.The purpose of this unholy alliance between defendants Santos and Raymundo is to mislead
the plaintiff and make it appear that the price of the leased property is much higher than its
actual value of FIVE MILLION (P5,000,000.00) PESOS, so that plaintiff would purchase the
properties at a higher price.
4. 21.Plaintiff has made considerable investments in the said leased property by erecting a two (2)
storey, six (6) doors commercial building amounting to THREE MILLION (P3,000,000.00)
PESOS. This considerable improvement was made on the belief that eventually the said
premises shall be sold to the plaintiff.
5. 22.As a consequence of this unlawful act of the defendants, plaintiff will incurr (sic) total loss of
THREE MILLION (P3,000,000.00) PESOS as the actual cost of the building and as such
defendants should be charged of the same amount for actual damages.
6. 23.As a consequence of the collusion, evil design and illegal acts of the defendants, plaintiff in
the process suffered mental anguish, sleepless nights, bismirched (sic) reputation which entitles
plaintiff to moral damages in the amount of FIVE MILLION (P5,000,000.00) PESOS.
7. 24.The defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner and
as a deterrent to the commission of similar acts, they should be made to answer for exemplary
damages, the amount left to the discretion of the Court.
8. 25.Plaintiff demanded from the defendants to rectify their unlawful acts that they committed, but
defendants refused and failed to comply with plaintiffs just and valid and (sic) demands.
9. Xerox copies of the demand letters are hereto attached as Annexes ‘KK’ to ‘LL,’ respectively.

1. 26.Despite repeated demands, defendants failed and refused without justifiable cause to satisfy
plaintiff’s claim, and was constrained to engaged (sic) the services of undersigned counsel to
institute this action at a contract fee of P200,000.00, as and for attorney’s fees, exclusive of cost
and expenses of litigation.

PRAYER

WHEREFORE, it is respectfully prayed, that judgment be rendered in favor of the plaintiff and
against defendants and ordering that:

1. a.The Deed of Sale between defendants dated May 15, 1989, be annulled and the leased
properties be sold to the plaintiff in the amount of P5,000,000.00;
2. b.Dependants (sic) pay plaintiff the sum of P3,000,000.00 as actual damages;
3. c.Defendants pay the sum of P5,000,000.00 as moral damages;
4. d.Defendants pay exemplary damages left to the discretion of the Court;
5. e.Defendants pay the sum of not less than P200,000.00 as attorney’s fees.

Plaintiff further prays for other just and equitable reliefs plus cost of suit.”
Instead of filing their respective answers, respondents filed motions to dismiss anchored on the
grounds of lack of cause of action, estoppel and laches.
On September 2, 1991, the trial court issued the order dismissing the complaint for lack of a
valid cause of action. It ratiocinated thus:
“Upon the very face of the plaintiff’s Complaint itself, it therefore indubitably appears that the defendant
Santos had verily complied with paragraph 9 of the Lease Agreement by twice offering the properties for
sale to the plaintiff for P15 M. The said offers, however, were plainly rejected by the plaintiff which
scorned the said offer as “RIDICULOUS.” There was therefore a definite refusal on the part of the
plaintiff to accept the offer of defendant Santos. For in acquiring the said properties back to her name,
and in so making the offers to sell both by herself (attorney-in-fact) and through her counsel, defendant
Santos was indeed conscientiously complying with her obligation under paragraph 9 of the Lease
Agreement. x x x
x x x      x x x      x x x
This is indeed one instance where a Complaint, after barely commencing to create a cause of action,
neutralized itself by its subsequent averments which erased or extinguished its earlier allegations of an
impending wrong. Consequently, absent any actionable wrong in the very face of the Complaint itself, the
plaintiff’s subsequent protestations of collusion is bereft or devoid of any meaning or purpose. x x x
The inescapable result of the foregoing considerations point to no other conclusion than that the
Complaint actually does not contain any valid cause of action and should therefore be as it is hereby
ordered DISMISSED. The Court finds no further need to consider the other grounds of estoppel and
laches inasmuch as this resolution is sufficient to dispose the matter.”
6

Petitioners appealed to the Court of Appeals which affirmed in toto the ruling of the trial court,
and further reasoned that:
“x x x Appellant’s protestations that the P15 million price quoted by appellee Santos was reduced to P9
million when she later resold the leased properties to Raymundo has no valid legal moorings because
appellant, as a prospective buyer, cannot dictate its own price and forcibly ram it against appellee Santos,
as owner, to buy off her leased properties considering the total absence of any stipulation or agreement as
to the price or as to how the price should be computed under paragraph 9 of the lease contract, x x x.”7

Petitioner moved for reconsideration but was denied in an order dated August 20, 1993. 8

Hence this petition. Subsequently, petitioner filed an “Urgent Motion for the Issuance of
Restraining Order and/or Writ of Preliminary Injunction and to Hold Respondent David A.
Raymundo in Contempt of Court.”  The motion sought to enjoin respondent Raymundo and his
9

counsel from pursuing the ejectment complaint filed before the barangay captain of San Isidro,
Parañaque, Metro Manila; to direct the dismissal of said ejectment complaint or of any similar
action that may have been filed; and to require respondent Raymundo to explain why he should
not be held in contempt of court for forum-shopping. The ejectment suit initiated by respondent
Raymundo against petitioner arose from the expiration of the lease contract covering the
property subject of this case. The ejectment suit was decided in favor of Raymundo, and the
entry of final judgment in respect thereof renders the said motion moot and academic.
Issue
The principal legal issue presented before us for resolution is whether the aforequoted complaint
alleging breach of the contractual right of “first option or priority to buy” states a valid cause of
action.
Petitioner contends that the trial court as well as the appellate tribunal erred in dismissing the
complaint because it in fact had not just one but at least three (3) valid causes of action, to wit:
(1) breach of contract, (2) its right of first refusal founded in law, and (3) damages.
Respondents Santos and Raymundo, in their separate comments, aver that the petition should
be denied for not raising a question of law as the issue involved is purely factual—whether
respondent Santos complied with paragraph 9 of the lease agreement—and for not having
complied with Section 2, Rule 45 of the Rules of Court, requiring the filing of twelve (12) copies
of the petitioner’s brief. Both maintain that the complaint filed by petitioner before the Regional
Trial Court of Makati stated no valid cause of action and that petitioner failed to substantiate its
claim that the lower courts decided the same “in a way not in accord with law and applicable
decisions of the Supreme Court”; or that the Court of Appeals has “sanctioned departure by a
trial court from the accepted and usual course of judicial proceedings” so as to merit the exercise
by this Court of the power of review under Rule 45 of the Rules of Court. Furthermore, they
reiterate estoppel and laches as grounds for dismissal, claiming that petitioner’s payment of
rentals of the leased property to respondent Raymundo from June 15, 1989, to June 30, 1990,
was an acknowledgment of the latter’s status as new owner-lessor of said property, by virtue of
which petitioner is deemed to have waived or abandoned its first option to purchase.
Private respondents likewise contend that the deed of assignment of the lease agreement did
not include the assignment of the option to purchase. Respondent Raymundo further avers that
he was not privy to the contract of lease, being neither the lessor nor lessee adverted to therein,
hence he could not be held liable for violation thereof.
The Court’s Ruling
Preliminary Issue: Failure to File
Sufficient Copies of Brief
We first dispose of the procedural issue raised by respondents, particularly petitioner’s failure to
file twelve (12) copies of its brief. We have ruled that when non-compliance with the Rules was
not intended for delay or did not result in prejudice to the adverse party, dismissal of appeal on
mere technicalities—in cases where appeal is a matter of right—may be stayed, in the exercise of
the court’s equity jurisdiction.  It does not appear that respondents were unduly prejudiced by
10

petitioner’s nonfeasance. Neither has it been shown that such failure was intentional.
Main Issue: Validity of Cause of Action
We do not agree with respondents’ contention that the issue involved is purely factual. The
principal legal question, as stated earlier, is whether the complaint filed by herein petitioner in
the lower court states a valid cause of action. Since such question assumes the facts alleged in the
complaint as true, it follows that the determination thereof is one of law, and not of facts. There
is a question of law in a given case when the doubt or difference arises as to what the law is on a
certain state of facts, and there is a question of fact when the doubt or difference arises as to the
truth or the falsehood of alleged facts. 11

At the outset, petitioner concedes that when the ground for a motion to dismiss is lack of
cause of action, such ground must appear on the face of the complaint; that to determine the
sufficiency of a cause of action, only the facts alleged in the complaint and no others should be
considered; and that the test of sufficiency of the facts alleged in a petition or complaint to
constitute a cause of action is whether, admitting the facts alleged, the court could render a valid
judgment upon the same in accordance with the prayer of the petition or complaint.
A cause of action exists if the following elements are present: (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on
the part of the named defendant to respect or not to violate such right; and (3) an act or omission
on the part of such defendant violative of the right of plaintiff or constituting a breach of the
obligation of defendant to the plaintiff for which the latter may maintain an action for recovery
of damages. 12

In determining whether allegations of a complaint are sufficient to support a cause of action,

it must be borne in mind that the complaint does not have to establish or allege facts proving the
existence of a cause of action at the outset; this will have to be done at the trial on the merits of
the case. To sustain a motion to dismiss for lack of cause of action, the complaint must show that
the claim for relief does not exist, rather than that a claim has been defectively stated, or is
ambiguous, indefinite or uncertain. 13

Equally important, a defendant moving to dismiss a complaint on the ground of lack of cause
of action is regarded as having hypothetically admitted all the averments thereof. 14

A careful examination of the complaint reveals that it sufficiently alleges an actionable

contractual breach on the part of private respondents. Under paragraph 9 of the contract of lease
between respondent Santos and petitioner, the latter was granted the “first option or priority” to
purchase the leased properties in case Santos decided to sell. If Santos never decided to sell at
all, there can never be a breach, much less an enforcement of such “right.” But on September 21,
1988, Santos sold said properties to Respondent Raymundo without first offering these to
petitioner. Santos indeed realized her error, since she repurchased the properties after petitioner
complained. Thereafter, she offered to sell the properties to petitioner for P15 million, which
petitioner, however, rejected because of the “ridiculous” price. But Santos again appeared to
have violated the same provision of the lease contract when she finally resold the properties to
respondent Raymundo for only P9 million without first offering them to petitioner at such price.
Whether there was actual breach which entitled petitioner to damages and/or other just or
equitable relief, is a question which can better be resolved after trial on the merits where each
party can present evidence to prove their respective allegations and defenses. 15

The trial and appellate courts based their decision to sustain respondents’ motion to dismiss
on the allegations of Parañaque Kings Enterprises that Santos had actually offered the subject
properties for sale to it prior to the final sale in favor of Raymundo, but that the offer was
rejected. According to said courts, with such offer, Santos had verily complied with her
obligation to grant the right of first refusal to petitioner.
We hold, however, that in order to have full compliance with the contractual right granting
petitioner the first option to purchase, the sale of the properties for the amount of P9 million, the
price for which they were finally sold to respondent Raymundo, should have likewise been first
offered to petitioner.
The Court has made an extensive and lengthy discourse on the concept of, and obligations
under, a right of first refusal in the case of Guzman, Bocaling & Co. vs. Bonnevie.  In that case,
16

under a contract of lease, the lessees (Raul and Christopher Bonnevie) were given a “right of first
priority” to purchase the leased property in case the lessor (Reynoso) decided to sell. The selling
price quoted to the Bonnevies was P600,000.00 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 first
offering said favorable terms and price to the Bonnevies as well. Only if the Bonnevies failed to
exercise their right of first priority could Reynoso thereafter lawfully sell the subject property to
others, and only under the same terms and conditions previously offered to the Bonnevies.
Of course, under their contract, they specifically stipulated that the Bonnevies could exercise
the right of first priority, “all things and conditions being equal.” This Court interpreted this
proviso to mean that there should be identity of terms and conditions to be offered to the
Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the right of first
priority. We hold that the same rule applies even without the same proviso if the right of first
refusal (or the first option to buy) is not to be rendered illusory.
From the foregoing, the basis of the right of first refusal  must be the current offer to sell of
**

the seller or offer to purchase of any prospective buyer. Only after the optionee fails to exercise
its right of first priority under the same terms and within the period contemplated, could the
owner validly offer to sell the property to a third person, again, under the same terms as offered
to the optionee.
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 first refusal of the lessee
17

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” (italics supplied).
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 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 first 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.
No cause of action under P.D. 1517
Petitioner also invokes Presidential Decree No. 1517, or the Urban Land Reform Law, as another
source of its right of first refusal. It claims to be covered under said law, being the “rightful
occupant of the land and its structures” since it is the lawful lessee thereof by reason of contract.
Under the lease contract, petitioner would have occupied the property for fourteen (14) years at
the end of the contractual period.
Without probing into whether petitioner is rightfully a beneficiary under said law, suffice it to
say that this Court has previously ruled that under Section 6  of P.D. 1517, “the terms and
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conditions of the sale in the exercise of the lessee’s right of first refusal to purchase shall be
determined by the Urban Zone Expropriation and Land Management Committee. Hence, x x x
certain prerequisites must be complied with by anyone who wishes to avail himself of the
benefits of the decree.”  There being no allegation in its complaint that the prerequisites were
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complied with, it is clear that the complaint did fail to state a cause of action on this ground.
Deed of Assignment included the option to purchase
Neither do we find merit in the contention of respondent Santos that the assignment of the lease
contract to petitioner did not include the option to purchase. The provisions of the deeds of
assignment with regard to matters assigned were very clear. Under the first assignment between
Frederick Chua as assignor and Lee Ching Bing as assignee, it was expressly stated that:
“x x x the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to herein ASSIGNEE, all his rights,
interest and participation over said premises afore-described, x x x”  (italics supplied)
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And under the subsequent assignment executed between Lee Ching Bing as assignor and the
petitioner, represented by its Vice President Vicenta Lo Chiong, as assignee, it was likewise
expressly stipulated that:
“x x x the ASSIGNOR hereby sells, transfers and assigns all his rights, interest and participation over said
leased premises, x x x”  (italics supplied)
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One of such rights included in the contract of lease and, therefore, in the assignments of rights
was the lessee’s right of first option or priority to buy the properties subject of the lease, as
provided in paragraph 9 of the assigned lease contract. The deed of assignment need not be very
specific as to which rights and obligations were passed on to the assignee. It is understood in the
general provision aforequoted that all specific rights and obligations contained in the contract of
lease are those referred to as being assigned. Needless to state, respondent Santos gave her
unqualified conformity to both assignments of rights.
Respondent Raymundo privy to the Contract of Lease
With respect to the contention of respondent Raymundo that he is not privy to the lease contract,
not being the lessor nor the lessee referred to therein, he could thus not have violated its
provisions, but he is nevertheless a proper party. Clearly, he stepped into the shoes of the owner-
lessor of the land as, by virtue of his purchase, he assumed all the obligations of the lessor under
the lease contract. Moreover, he received benefits in the form of rental payments. Furthermore,
the complaint, as well as the petition, prayed for the annulment of the sale of the properties to
him. Both pleadings also alleged collusion between him and respondent Santos which defeated
the exercise by petitioner of its right of first refusal.
In order then to accord complete relief to petitioner, respondent Raymundo was a necessary,
if not indispensable, party to the case.  A favorable judgment for the petitioner will necessarily
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affect the rights of respondent Raymundo as the buyer of the property over which petitioner
would like to assert its right of first option to buy.
Having come to the conclusion that the complaint states a valid cause of action for breach of
the right of first refusal and that the trial court should thus not have dismissed the complaint, we
find no more need to pass upon the question of whether the complaint states a cause of action for
damages or whether the complaint is barred by estoppel or laches. As these matters require
presentation and/or determination of facts, they can be best resolved after trial on the merits.
While the lower courts erred in dismissing the complaint, private respondents, however,
cannot be denied their day in court. While, in the resolution of a motion to dismiss, the truth of
the facts alleged in the complaint are theoretically admitted, such admission is merely
hypothetical and only for the purpose of resolving the motion. In case of denial, the movant is
not to be deprived of the right to submit its own case and to submit evidence to rebut the
allegations in the complaint. Neither will the grant of the motion by a trial court and the ultimate
reversal thereof by an appellate court have the effect of stifling such right.  So too, the trial court
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should be given the opportunity to evaluate the evidence, apply the law and decree the proper
remedy. Hence, we remand the instant case to the trial court to allow private respondents to have
their day in court.
WHEREFORE, the petition is GRANTED. The assailed decisions of the trial court and Court
of Appeals are hereby REVERSED and SET ASIDE. The case is REMANDED to the Regional
Trial Court of Makati for further proceedings.
SO ORDERED.
     Narvasa (C.J., Chairman), Davide, Jr., Melo and Francisco, JJ., concur.
Petition granted. Judgments reversed and set aside, case remanded to court a quo for further
proceedings.
Note.—A reasonable reading of Section 2(d) of R.A. 7181 is that it merely gives a right of
first refusal by the small investors vis-a-vis the 10% block of shares in a corporation to be
privatized—and the offer may be made before, after or simultaneous with the offer of the shares
to strategic partners or major investors depending on the prevailing conditions of the market.
(Bagatsing vs. Committee on Privatization, 246 SCRA 334 [1995])