HEIRS OF LLENADO v.

LLENADO 580 SCRA 546

FACTS: The subject of this controversy is a parcel of land denominated as Lot 249-D-1 off 1,554 sq.m. located in Barrio Malinta, Valenzuela, Metro Manila and registered in the
names of Eduardo Llenado (Eduardo) and Jorge Llenado (Jorge) under a TCT. The subject lot was once formed part of Lot 249-D owned by and registered in the name of their
father Cornelio Llenado (Cornelio).

On December 2, 1975, Cornelio leased the subject lot to his nephew Romeo Llenado (Romeo), for a period of five years, renewable for another five years at the option of
Cornelio. On March 31, 1978, Cornelio, Romeo and Orlando executed an Agreement whereby Romeo assigned all his rights to Orlando over the unexpired portion of the lease
contract.

They further agreed that Orlando shall have the option to renew the lease contract for another three years commencing from 1980-1983 and renewable for another four years up to
1987 and that during the period, the property cannot be sold, transferred, alienated or conveyed in whatever manner to any third party.

On 1978, Cornelio and Orlando entered into a Supplementary Agreement wherein Orlando was given an additional option to renew the lease contract for an aggregate period of
10 years at five-year intervals, 1987-1992 and 1992-1997. The said provision was inserted in order to comply with the requirements of Mobil Philippines, Inc. for the operation of
a gasoline station which was subsequently build on subject lot.

Upon death of Orlando on November 8, 1982, his wife (Wenifreda) took over the operation of the gasoline station.

In 1987, Cornelio sold Lot 249-D to his children through a deed of sale denominated as Kasulatan sa Ganap na Bilihan for the sum of P160,000. As stated earlier, the subject lot,
which forms part of Lot 249-D, was sold to Eduardo and Jorge and titled on their names.

Several months on thereafter, Cornelio died.

Eduardo’s Action against Wenifreda: In 1993, Eduardo informed Wenifreda of his desire to take over the subject lot, however, Wenifreda refused to vacate the premises
despite repeated demands.

Thus, on September 24, 1993, Eduardo filed a complaint of Unlawful Detainer against Wenifreda. MTC rendered a decision in favor of Eduardo and ordered Wenifreda to (1)
vacate the leased premises, (2) pay Eduardo reasonable compensation and (c) costs. RTC reversed the decision of MTC.

CA reversed RTC and reinstated MTC decisions and it increased the amount of reasonable compensation for the use of leased premises. Wenifreda’s appeal to the SC was
dismissed.

Wenifreda, as Administratrix Complaint against Eduardo: In 1993, she filed for a complaint for annulment of the deed of conveyance, title and damages against Eduardo
and the Register of Deeds. She alleged that the transfer and conveyance of the subject lot by Cornelio in favor of respondents Eduardo and Jorge was fraudulent and in bad faith
considering that the agreement provided that while the sale was in lease, the subject lot cannot be sold, transferred or conveyed to any third party.

That the period of lease was until December 3, 1987 with the option to renew granted to Orlando; that the subject lot was transferred and conveyed to respondent when the lease
was in full force and effect making the sale null and void; and that Cornelio verbally promised Orlando that in case he decides to sell the subject lot, Orland or his heirs shall have
first priority or option to buy the subject lot as not to prejudice business.

Eduardo and Jorge’s Argument: They claimed that they bought the subject lot from their father for value and in good faith; that the lease agreement and its supplement were
not annotated at the back of the mother title of the subject and do not bind them and that the said agreements were only personal to Orlando and Cornelio and that the lease expired
upon the death of Orlando on 1983 and that they were not aware of any verbal promise by Cornelio to Orlando and even if there was, said option to buy must be under the Statute
of Frauds.
RTC rendered decision in favor of Wenifreda which found that upon the death of Orlando, his rights under the lease contract were transmitted to his heirs, that since the lease
was in full force and effect at the time the subject lot was sold by Cornelio to his sons, the sale violated the prohibitory clause in the said contract.

Further, Cornelio’s promise to sell the subject lo was established by parole evidence and that it is not covered by the Statute of Frauds. Hence such is binding to Cornelio and his
heirs.

CA reversed the RTC and dismissed the complaint. It held that the death of Orlando did not extinguish the lease agreement and had the effect of transmitting his lease rights to
his heirs.

However, the breach of the non-alienation clause of the said agreement did not nullify the sale between Cornelio and his sons because the Heirs of Orlando are mere lessees and
can never claim a superior right of ownership over said lot against registered owners thereof.

• It further ruled that petitioner failed to establish by preponderance of evidence that Cornelio made a verbal promise to Orlando granting the latter the right of first
refusal.

ISSUE: WON, the sale of the subject lot by Cornelio to his sons, respondents Eduardo and Jorge, is invalid for:

(1) violating the prohibitory clause in the lease agreement between Cornelio, as lessor-owner, and Orlando, as lessee; and
(2) contravening the right of first refusal of Orlando over the subject lot.

RULING: Petitioner lacks merit.

Estate of Orlando and Wenifreda’s Contentions: They contend that the heirs are entitled to the rights of a tenant under RA1162 as amended by RA 3516. The right of
first refusal or preferential right to buy the leased premises is invoked pursuant to Section 5 of said law.

According to the case of Mataas na Lupa Tenants Association v. Dimayuga the Court explained that the law authorizes that prior to and pending the expropriation, the tenant
shall have a right of first refusal or preferential right to buy the leased premises should the landowner sell the same.

However, compliance with the conditions for the application of the aforesaid law as well as the qualifications of the heirs of
Orlando to be beneficiaries thereunder were never raised before the trial court, or even the Court of Appeals, because petitioner solely anchored its claim of
Application of Article 1311: It is not disputed that the lease agreement contained an option to renew and a prohibition on the sale of the subject lot in favor of
third persons while the lease is in force.

Contention: Petitioner claims that when Cornelio sold the subject lot to respondents Eduardo and Jorge the lease was in full force and effect, thus, the sale violated
the prohibitory clause rendering it invalid.

In resolving this issue, it is necessary to determine whether the lease agreement was in force at the time of the subject sale and, if it was in force, whether the
violation of the prohibitory clause invalidated the sale.

Article 1311 on Principle of Relativity and Lease Contracts:

A contract of lease is, therefore, generally transmissible to the heirs of the lessor or lessee. It involves a property right and, as such, the death of a party does not
excuse non-performance of the contract. The rights and obligations pass to the heirs of the deceased and the heir of the deceased lessor is bound to respect the period
of the lease. The same principle applies to the option to renew the lease.

As a general rule, covenants to renew a lease are not personal but will run with the land. Consequently, the successors-in-interest of the lessee are entitled to the
benefits, while that of the lessor are burdened with the duties and obligations, which said covenants conferred and imposed on the original parties.

Application in this Case: The foregoing principles apply with greater force in this case because the parties expressly stipulated in the March 31, 1978 Agreement
that Romeo, as lessee, shall transfer all his rights and interests under the lease contract with option to renew in favor of the party of the Third Party (Orlando), the
latter’s heirs, successors and assigns indicating the clear intent to allow the transmissibility of all the rights and interests of Orlando under the lease contract unto his
heirs, successors or assigns.

Accordingly, the rights and obligations under the lease contract with option to renew were transmitted from Orlando to his heirs upon his death on November 7,
1983.

It does not follow, however, that the lease subsisted at the time of the sale of the subject lot on January 29, 1987. When Orlando died on November 7, 1983, the lease
contract was set to expire 26 days later or on December 3, 1983, unless renewed by Orlando’s heirs for another four years. While the option to renew is an
enforceable right, it must necessarily be first exercised to be given effect.

There is No Express Renewal of the Contract of Lease: There is no dispute that in the instant case, the lessees (private respondents) were granted the option
to renew the lease for another five (5) years after the termination of the original period of fifteen years. Yet, there was never any positive act on the part of private
respondents before or after the termination of the original period to show their exercise of such option.

The silence of the lessees after the termination of the original period cannot be taken to mean that they opted to renew the contract by virtue of the promise by the
lessor, as stated in the original contract of lease, to allow them to renew. Neither can the exercise of the option to renew be inferred from their persistence to remain in
the premises despite petitioners demand for them to vacate.

Similarly, the election of the option to renew the lease in this case cannot be inferred from petitioner Wenifredas continued possession of the subject lot and operation
of the gasoline station even after the death of Orlando on November 7, 1983 and the expiration of the lease contract on December 3, 1983.

In the unlawful detainer case against petitioner Wenifreda and in the subject complaint for annulment of conveyance, respondents consistently maintained that after
the death of Orlando, the lease was terminated and that they permitted petitioner Wenifreda and her children to remain in possession of the subject property out of
tolerance and respect for the close blood relationship between Cornelio and Orlando.
A Need to Establish by some Positive Act of Exercise of Option: It was incumbent, therefore, upon petitioner as the plaintiff with the burden of proof
during the trial below to establish by some positive act that Orlando or his heirs exercised the option to renew the lease. After going over the records of this case, we
find no evidence, testimonial or documentary, of such nature was presented before the trial court to prove that Orlando or his heirs exercised the option to renew
prior to or at the time of the expiration of the lease on December 3, 1983.

In particular, the testimony of petitioner Wenifreda is wanting in detail as to the events surrounding the implementation of the subject lease agreement after the
death of Orlando and any overt acts to establish the renewal of said lease.

Contract of Lease had long been terminated: Given the foregoing, it becomes unnecessary to resolve the issue on whether the violation of the prohibitory
clause invalidated the sale and conferred ownership over the subject lot to Orlandos heirs, who are mere lessees, considering that at the time of said sale on January
29, 1987 the lease agreement had long been terminated for failure of Orlando or his heirs to validly renew the same. As a result, there was no obstacle to the sale of
the subject lot by Cornelio to respondents Eduardo and Jorge as the prohibitory clause under the lease contract was no longer in force.

On the Issue of Verbal Promise on Right of First Refusal:

Contention: Petitioner also anchors its claim over the subject lot on the alleged verbal promise of Cornelio to Orlando that should he (Cornelio) sell the same,
Orlando would be given the first opportunity to purchase said property. According to petitioner, this amounted to a right of first refusal in favor of Orlando which
may be proved by parole evidence because it is not one of the contracts covered by the statute of frauds.

Considering that Cornelio sold the subject lot to respondents Eduardo and Jorge without first offering the same to Orlandos heirs, petitioner argues that the sale is in
violation of the latters right of first refusal and is, thus, rescissible.

A right of first 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. A right of first 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 first refusal over
the property sought to be sold. It is thus evident that the statute of frauds does not contemplate cases involving a right of first refusal. As such, a right of first refusal
need not be written to be enforceable and may be proven by oral evidence.

In the case: No testimonial evidence was presented to prove the existence of said right. The testimony of petitioner Wenifreda made no mention of the alleged
verbal promise given by Cornelio to Orlando. Neither was it established that respondents Eduardo and Jorge were aware of said promise prior to or at the time of the
sale of the subject lot. On the contrary, in their answer to the Complaint, respondents denied the existence of said promise for lack of knowledge thereof.

Within these parameters, petitioners’ allegations in its Complaint cannot substitute for competent proof on such a crucial factual issue.

Necessarily, petitioners’ claims based on this alleged right of first refusal cannot be sustained for its existence has not been duly established.

ownership over the subject lot on the alleged violation of the prohibitory clause in the lease contract between Cornelio and Orlando, and the alleged non-
performance of the right of first refusal given by Cornelio to Orlando. The rule is settled, impelled by basic requirements of due process, that points of law, theories,
issues and arguments not adequately brought to the attention of the lower court will not be ordinarily considered by a reviewing court as they cannot be raised for
the first time on appeal.

As the issue of the applicability of R.A. No. 1162, as amended, was neither averred in the pleadings nor raised during the trial below, the same cannot be raised for
the first time on appeal.

Non-Applicability of Cited Laws: At any rate, the allegations in the Complaint and the evidence presented during the trial below do not establish that Orlando
or his heirs are covered by R.A. No. 1162, as amended.

It was not alleged nor shown that the subject lot is part of the landed estate or haciendas in the City of Manila which were authorized to be expropriated under said
law; that the Solicitor General has instituted the requisite expropriation proceedings pursuant to Section 2[21] thereof;

That the subject lot has been actually leased for a period of at least ten (10) years; and that the subject lot has at least forty (40) families of tenants thereon.
Instead, what was merely established during the trial is that the subject lot was leased by Cornelio to Orlando for the operation of a gasoline station, thus, negating
petitioners claim that the subject lot is covered by the aforesaid law.