G.R. No.

106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN,
INC., petitioners,
v
MAYFAIR THEATER, INC., respondent.
 
HERMOSISIMA, JR., J.:

FACTS:
Carmelo owned a parcel of land, together with two 2 – storey buildings constructed thereon.
Carmelo then, entered into a contract of lease with Mayfair for the latter's lease of a portion of
Carmelo's property for use by Mayfair as a motion picture theater, for a term of twenty (20) years.
Mayfair thereafter constructed on the leased property a movie house known as "Maxim Theatre." Two
years later, Mayfair entered into a second contract of lease with Carmelo for the lease of another portion
of Carmelo's property for similar use as a movie theater and for a similar term of twenty (20) years.
Mayfair put up another movie house known as "Miramar Theatre" on this leased property. Both contracts
of lease provide identically worded paragraph That if the LESSOR should desire to sell the leased
premises, the LESSEE shall be given 30 – days exclusive option to purchase the same.
In the event, however, that the leased premises are sold to someone other than the LESSEE, the LESSOR
is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that the
purchaser shall recognize this lease and be bound by all the terms and conditions thereof.
After sometime in August 1974, Mr. Pascal of Carmelo informed Mr. Yang, President of Mayfair,
that Carmelo was desirous of selling the entire and told Mr. Yang that a certain Jose Araneta was offering
to buy the whole property and asked Mr. Yang if he was willing to buy the property in a higher value than
that offered. for US Dollars 1,200,000, Six to Seven Million Pesos. Mr. Yang replied that he would let Mr. Pascal
know of his decision and then in a letter, Mayfair replied stating the stipulations in the contracts of lease.
Carmelo did not reply to this letter. Mayfair again, sent another letter to Carmelo purporting to express
interest in acquiring not only the leased premises but "the entire building and other improvements if the
price is reasonable. However, both Carmelo and Equatorial questioned the authenticity of the second
letter.
Four years later, Carmelo sold its entire property including the leased premises housing the
"Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of Absolute Sale, Php 11,300,000.00.
With the foregoing, Mayfair instituted the action a quo for specific performance and annulment of
the sale of the leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a)
that it had informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the same to Mayfair,
but the latter answered that it was interested only in buying the areas under lease, which was impossible since the
property was not a condominium; and (b) that the option to purchase invoked by Mayfair is null and void for lack of

consideration. Equatorial, in its Answer, pleaded as special and affirmative defense that the option is void for lack of
consideration and is unenforceable by reason of its impossibility of performance because the leased premises could not be
sold separately from the other portions of the land and building. It counterclaimed for cancellation of the contracts of
lease, and for increase of rentals in view of alleged supervening extraordinary devaluation of the currency. Equatorial
likewise cross – claimed against co – defendant Carmelo for indemnification in respect of Mayfair's claims.
During the pre – trial conference, the parties stipulated that there was a deed of sale of the contested
premises by the defendant Carmelo in favor of defendant Equatorial, there also a stipulation granting
Mayfair exclusive option to purchase the leased premises should the lessor desire to sell the same
(admitted subject to the contention that the stipulation is null and void)
After assessing the evidence, the court a quo rendered the appealed decision in favor of defendant.
The complaint was dismissed with costs against the plaintiff and dismissing defendant Equatorial's cross – claim against
co – defendant Carmelo & Bauermann.
Aggrieved, Mayfair appealed with the Court of Appeals where judgment of the trial court was
reversed. Mayfair shall pay and return to Equatorial the amount paid for the property and the latter upon payment
shall execute the deeds and documents necessary for the issuance and transfer of ownership to Mayfair however, should
Mayfair be unable to pay the amount as adjudged, declaring the Deed of Absolute Sale between the defendants –
appellants Carmelo & Bauermann, Inc. and Equatorial Realty Development, Inc. as valid and binding upon all the
parties.
Rereading the law on the matter of sales and option contracts, the Court of Appeals differentiated between Article
1324 and Article 1479 of the Civil Code, paragraph 8 of the two lease contracts does not state a fixed price for the
purchase of the leased premises, which is an essential element for a contract of sale to be perfected, what paragraph 8 is,
must be a right of first refusal and not an option contract.
Article 1324 (option contract) speaks of an "offer" made by an offeror which the offeree may or may not accept
within a certain period. Under this article, the offer may be withdrawn by the offeror before the expiration of the period
and while the offeree has not yet accepted the offer. However, the offer cannot be withdrawn by the offeror within the
period if a consideration has been promised or given by the offeree in exchange for the privilege of being given that period
within which to accept the offer. The consideration is distinct from the price which is part of the offer.
Option – A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the
privilege of buying from or selling to B, certain securities or properties within a limited time at a specified price.
Beaumont v Prieto, 41 Phil. 670
Article 1479, 2nd paragraph, contemplates of an accepted unilateral promise to buy or to sell a determinate thing
for a price (offer – a proposal to enter into a contract. Rosenstock v Burke, 46 Phil. 217) within which is binding upon the
promisee if the promise is supported by a consideration distinct from the price. To constitute a legal offer, the proposal
must be certain as to the object, the price and other essential terms of the contract (Art. 1319). Based on the foregoing
discussion, it is evident that the provision granting Mayfair "30 – days exclusive option to purchase" the leased premises
is NOT AN OPTION in the context of Arts. 1324 and 1479, second paragraph, of the Civil Code. Although the provision is
certain as to the object (the sale of the leased premises) the price for which the object is to be sold is not stated in the
provision. Otherwise stated, the questioned stipulation is not by itself, an "option" or the "offer to sell" because the clause
does not specify the price for the subject property. Although the provision giving Mayfair "30-days exclusive option to

purchase" cannot be legally categorized as an option, it is, nevertheless, a valid and binding stipulation. The trial court
failed to appreciate the intention of the parties – the implicit obligation of Carmelo once it had decided to sell the leased
property, was not only to notify Mayfair of such decision to sell the property, but, more importantly, to make an offer to
sell the leased premises to Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the offer, before
offering to sell or selling the leased property to third parties. The right vested in Mayfair is analogous to the right of first
refusal, which means that Carmelo should have offered the sale of the leased premises to Mayfair before offering it to
other parties, or, if Carmelo should receive any offer from third parties to purchase the leased premises, then Carmelo
must first give Mayfair the opportunity to match that offer.
Hence, herein petitioner, comes before this court questioning the correctness and legal basis for the
decision of Court of Appeals.

ISSUE:
WHETHER OR NOT THE CONTRACT OF LEASE IS AN OPTION CONTRACT THUS, THE
COURT OF APPEALS ERRED IN CONCLUDING THE SAME AS A CONTRACT OF A RIGHT
OF FIRST REFUSAL.

RULING:
No. The contract of lease between Carmelo and Mayfair is not an option contract thus, the Court of
Appeals did not err in its ruling that the same contract is a contract of a right of first refusal.
Unequivocal was our characterization of an option contract as one necessarily involving the choice granted to
another for a distinct and separate consideration as to whether or not to purchase a determinate thing at a predetermined

fixed price. Beaumont v Prieto

It is unquestionable that, defendant Valdes granted to the plaintiff Borck the right to purchase the Nagtajan
Hacienda belonging to Benito Legarda, during the period of three months and for its assessed valuation, a grant which
necessarily implied the offer or obligation on the part of the defendant Valdes to sell to Borck the said hacienda during
the period and for the price mentioned. There was, therefore, a meeting of minds on the part of the one and the other,
with regard to the stipulations made in the said document. But it is not shown that there was any cause or consideration
for that agreement, and this omission is a bar which precludes our holding that the stipulations is a contract of option,
for, there can be no contract without the requisite, among others, of the cause for the obligation to be established.
Option as a contract (not a contract of sale itself) – a contract by virtue of which A, in consideration of
the payment of a certain sum to B, acquires the privilege of buying from, or selling to B, certain securities or properties
within a limited time at a specified price. An agreement in writing to give a person the option to purchase lands within a
given time at a named price is neither a sale nor an agreement to sell. It is simply a contract by which the owner of
property agrees with another person that he shall have the right to buy his property  at a fixed price within a certain time.
He does not sell his land; he does not then agree to sell it; but he does sell something; that is, the right or privilege to buy
at the election or option of the other party. The second party gets in praesenti, not lands, nor an agreement that he shall
have lands, but he does get something of value; that is, the right to call for and receive lands if he elects. The owner parts
with his right to sell his lands, except to the second party, for a limited period. The second party receives this right, or,
rather, from his point of view, he receives the right to elect to buy – the two definitions above cited refer to the contract of
option, or, what amounts to the same thing, to the case where there was cause or consideration for the obligation, the
subject of the agreement made by the parties; while in the case at bar there was no such cause or consideration. The
optionee has the right, but not the obligation, to buy. Once the option is exercised timely,  i.e., the offer is accepted before a
breach of the option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply
with their respective undertakings.
The rule is that the deed of option or the option clause in a contract, in order to be valid and
enforceable, must, among other things, indicate the definite price at which the person granting the option,
is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square
meter upon failure to make the purchase within the time specified; in one other case we freed the landowner from her
promise to sell her land if the prospective buyer could raise certain amount in three weeks because such option was not
supported by a distinct consideration; in the same vein in yet one other case, we also invalidated an instrument entitled,
"Option to Purchase" a parcel of land for the sum of money because of lack of consideration; and as an exception to the
doctrine enumerated in the two preceding cases, in another case, we ruled that the option to buy the leased premises as
stipulated in the lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or
promise of each party is the consideration for that of the other. In all these cases, the selling price of the object thereof is
always predetermined and specified in the option clause in the contract or in the separate deed of option.
In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract
is perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to
transfer ownership of a thing or right to another, called the buyer, over which the latter agrees . Ang Yu
Asuncion v Court of Appeals and Art. 1458
By the contract of sale one of the contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent
– A contract of sale may be absolute or conditional. Art. 1458
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the
ownership of the thing sold is retained until the fulfillment of a positive suspensive condition (normally,
the full payment of the purchase price), the breach of the condition will prevent the obligation to convey
title from acquiring an obligatory force. An unconditional mutual promise to buy and sell, as long as the
object is made determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted. An accepted unilateral promise which specifies the thing to be
sold and the price to be paid, when coupled with a valuable consideration distinct and separate from the
price, is what may properly be termed a perfected contract of option. This contract is legally binding, and
in sales, it conforms with the second paragraph of Article 1479 of the Civil Code – An accepted unilateral
promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if the
promise is supported by a consideration distinct from the price.
If the period has a separate consideration, a contract of "option" deemed perfected, and it would be
a breach of that contract to withdraw the offer during the agreed period. The option, however, is an
independent contract by itself; and it is to be distinguished from the projected main agreement (subject
matter of the option) which is obviously yet to be concluded. If, in fact, the optioner – offeror withdraws
the offer before its acceptance (exercise of the option) by the optionee – offeree, the latter may not sue for
specific performance on the proposed contract ("object" of the option) since it has failed to reach its own
stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the
opinion.
In the light of the foregoing disquisition and in view of the wording of the questioned provision in
the two lease contracts involved in the instant case, no option to purchase in contemplation of the second
paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease contracts.
The Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to Mayfair
and is not an option contract. It also correctly reasoned that as such, the requirement of a separate
consideration for the option, has no applicability in the instant case.
An option is a contract granting a privilege to buy or sell within an agreed time and at a determined
price. It is a separate and distinct contract from that which the parties may enter into upon the
consummation of the option. It must be supported by consideration. In the instant case, the right of first
refusal is an integral part of the contracts of lease. The consideration is built into the reciprocal
obligations of the parties.
To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed
by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell would render
ineffectual or "inutile" the provisions on right of first refusal so commonly inserted in leases of real estate
nowadays. The Court of Appeals is correct in stating that Paragraph 8 was incorporated into the contracts
of lease for the benefit of Mayfair which wanted to be assured that it shall be given the first crack or the
first option to buy the property at the price which Carmelo is willing to accept. It is not also correct to say
that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of
the entire contract of lease. The consideration for the lease includes the consideration for the right of first
refusal. Thus, Mayfair is in effect stating that it consents to lease the premises and to pay the price agreed
upon provided the lessor also consents that, should it sell the leased property, then, Mayfair shall be given
the right to match the offered purchase price and to buy the property at that price.
The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited
paragraph 8 to be that of a contractual grant of the right of first refusal to Mayfair.
 The different facts and circumstances in this case call for an amplification of the precedent in  Ang Yu Asuncion
v Court of Appeals, the petitioners acted in bad faith to render Paragraph 8 "inutile". What Carmelo and Mayfair agreed
to, by executing the two lease contracts, was that Mayfair will have the right of first refusal in the event Carmelo sells the
leased premises. It is undisputed that Carmelo did recognize this right of Mayfair. 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 first refusal, Carmelo violated such right when without
affording its negotiations with Mayfair the full process to ripen to at least an interface of a definite offer and a possible
corresponding acceptance within the "30 – day exclusive option" time granted Mayfair, Carmelo abandoned negotiations,
kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible.
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 to be a purchaser in good faith, and, therefore,
rescission lies.
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 for they had substantial interests that were prejudiced by the sale of the subject
property to the petitioner without recognizing their right of first priority under the Contract of Lease.
Rescission – is a remedy granted by law to the contracting parties and even to third persons, to secure reparation
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 preference 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.
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 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.
Petitioners assert the alleged impossibility of performance because the entire property is indivisible property. It
was petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and fairness dictate that
instead of nullifying the agreement on that basis, the stipulation should be given effect by including the indivisible
appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal contract where the
ascendant or the more important of the two parties is the landowner should be given effect, if possible, instead of being
nullified on a selfish pretext posited by the owner. Following the arguments of petitioners and the participation of the
owner in the attempt to strip Mayfair of its rights, the right of first refusal should include not only the property specified
in the contracts of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be
indivisible.
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.
 Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or
rescinded. The facts of 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 by Carmelo to Equatorial should now be rescinded considering that Mayfair, which had substantial
interest over the subject property, was prejudiced by the sale of the subject property to Equatorial without Carmelo
conferring to Mayfair every opportunity to negotiate within the 30 – day stipulated period.

G.R. No. 111538 February 26, 1997

PARAÑAQUE KINGS ENTERPRISES, INCORPORATED, petitioner,
v
COURT OF APPEALS, CATALINA L. SANTOS, represented by her attorney – in – fact, LUZ B.
PROTACIO, and DAVID A. RAYMUNDO, respondents.

PANGANIBAN, J.:
FACTS:
Plaintiff is a private corporation organized and existing under and by virtue of the laws of the
Philippines, with principal place of business in Parañaque, Metro Manila, while defendant Catalina L.
Santos, is of legal age, widow, with residence and postal address at Stockton, California, USA,
represented by her attorney – in – fact, Luz B. Protacio. Defendant David A. Raymundo, is of legal age,
single, with residence and postal address at Makati, Metro Manila. Defendant is the owner of eight (8)
parcels of land located at Parañaque, Metro Manila with transfer certificate of titles.
A certain Frederick Chua leased the above – described property from defendant Santos which was
registered in the Register of Deeds. Chua then, 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. 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. Provided in the
assigned lease contract is in case the properties subject of the lease is sold or encumbered, the lessor shall impose a
condition that the buyer 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.
After sometime, defendant Santos sold the property to defendant David Raymundo for a consideration Php
5,000,000.00. 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. Defendant Santos then, wrote a letter to the plaintiff informing which was
personally handed by the attorney – in – fact of defendant. Upon knowledge, plaintiff's representative wrote a letter to
defendant Santos, requesting her to rectify the error and consequently realizing the error and had it reconveyed for the
same consideration. Subsequently the property was offered for sale to plaintiff by the defendant for the sum of FIFTEEN
MILLION PESOS (Php15,000,000.00). Plaintiff was given ten (10) days to make good of the offer, but the said period
expired thus, another letter came containing the same tenor and before the period given expired, plaintiff's counsel wrote
counsel of defendant Santos offering to buy the properties for FIVE MILLION (Php 5,000,000.00) PESOS. Before
replying, another deed of sale was executed in favor of defendant Raymundo for a consideration of NINE MILLION (Php
9,000,000.00) PESOS. It was another violation of paragraph 9 of the contract of lease between plaintiff and defendant

Santos. It was only that defendant Santos replied to the letter of the plaintiff's offer to buy or two days after
she sold her properties stating that the period has lapsed and the plaintiff is not a privy to the contract.
Counsel for plaintiff informed counsel of Santos of that plaintiff is the assignee of all rights and interest
of the former lessor. In their answer, counsel for Santos informed the plaintiff that the new owner is
defendant Raymundo.
From the preceding facts, plaintiff respectfully prayed, that judgment be rendered in favor of them
and against defendants as it is clear that the sale was simulated and that there was a collusion between the defendants
in the sales of the leased properties – when plaintiff wrote a letter to defendant Santos to rectify the error, she
immediately had the property reconveyed to her in a matter of twelve (12) days. Defendants also 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 between the defendants. In addition, 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. 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 (Php 5,000,000.00) PESOS, so that
plaintiff would purchase the properties at a higher price thus, as a consequence plaintiff will incur total loss of THREE
MILLION (Php 3,000,000.00) PESOS as the actual cost of the building and as such defendants should be charged of the
same amount for actual damages. 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 demands. Despite repeated
demands, defendants failed and refused without justifiable cause to satisfy plaintiff's claim, and was constrained to
engaged the services of undersigned counsel to institute this action.
Instead of filing their respective answers, respondents filed motions to dismiss anchored on the
grounds of lack of cause of action, estoppel and laches which was granted. Defendant Santos had verily
complied with paragraph 9 of the Lease Agreement by twice offering the properties for sale to the plaintiff. 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.
Plaintiff appealed to the Court of Appeals which affirmed in toto the ruling of the trial court thus,
moved for reconsideration but was also denied.
Hence this petition.

ISSUE:
WHETHER OR NOT THE COMPLAINT ALLEGING BREACH OF THE CONTRACTUAL RIGHT
OF FIRST OPTION OR PRIORITY TO BUY STATES A VALID CAUSE OF ACTION.

RULING:
Yes. There was a valid cause of action as there was breach of contractual right of first option or
priority to buy.
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.
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.
In the case at bar, Santos sold said properties to Respondent Raymundo without first offering these
to petitioner and realized her error, since she repurchased the properties after petitioner complained.
Thereafter, she offered to sell the properties to petitioner for Php 15 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 Php 9
million without first offering them to petitioner at such price.
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, complying with her obligation to grant the right of first
refusal to petitioner however, 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 Php 9 million, the price
for which they were finally sold to respondent Raymundo, should have likewise been first offered to
petitioner.
An extensive and lengthy discourse on the concept of, and obligations under, a right of first refusal
is in the case of Guzman, Bocaling & Co. v Bonnevie – 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 Php 600,000.00 to be fully paid in cash, less a mortgage lien of Php
100,000.00. On the other hand, the selling price offered by Reynoso to and accepted by Guzman was only Php 400,000.00
of which Php 137,500.00 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 (Php 600,000.00), 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 (misleading). 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. Equatorial Realty v Mayfair Theater, Inc. – the right of first 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 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 Php 11,300,000.00 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 Php 11,300,000.00.
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: the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to
herein ASSIGNEE, all his rights, interest and participation over said premises afore – described, 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; the ASSIGNOR hereby sells, transfers and
assigns all his rights, interest and participation over said leased premises.
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.
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 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.
G.R. No. 140479 March 8, 2001
ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners,
v
PATERNO INQUING, IRENE GUILLERMO, FEDERICO BANTUGAN, FERNANDO
MAGBANUA and LIZZA TIANGCO, respondents.

GONZAGA – REYES, J.:

FACTS:
Plaintiffs and plaintiffs – intervenors averred that they are the lessees since 1971 of a two – story
residential apartment owned by spouses Faustino and Cresencia Tiangco. The lease was not covered by
any contract. The lessees were renting the premises then for Php 150.00 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 Php 50,000.00 to Php 100,000.00 for its upkeep. These expenses were never deducted from the
rentals which already increased to Php 1,000.00.
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 de Leon offering to sell to them the property they were leasing for Php 2,000,000.00. 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, 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.
Before the demolition can be undertaken, the barangay interceded between the parties 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 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 Php
726,000.00.
The lessees offered to reimburse de Leon the selling price of Php 726,000.00 plus an additional Php
274,000.00 to complete their Php 1,000.000.00 earlier offer. When their offer was refused, they filed 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 reconveyed
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 Php
100,000.00.
After trial on the merits, the Regional Trial Court rendered a Decision in favor of Rosencor. The
right of redemption on which the complaint was based was merely an oral one and as such, is unenforceable under the

law. Not satisfied with the decision of the trial court, respondents herein filed a Notice of Appeal and on
the same date, the trial court issued an Order for the elevation of the records of the case to the Court of
Appeals where respondents filed their appellate brief.
The Court of Appeals rendered its decision reversing the decision of the trial court.
Petitioners herein filed a Motion for Reconsideration of the decision of the Court of Appeals but
the same was denied.
Hence, this petition for review on certiorari.

ISSUE:
WHETHER OR NOT EUFROCINA DE LEON AFFORDED HEREIN RESPONDENTS THE
OPPORTUNITY TO EXERCISE THEIR RIGHT OF FIRST REFUSAL, MAKING THE
ABSOLUTE DEED OF SALE BETWEEN EUFROCINA DE LEON AND PETITIONER
ROSENCOR VALID.

RULING:
Yes. Eufrocina de Leon afforded respondents the opportunity to exercise their right of first refusal
making the absolute deed of sale between her and Rosencor valid.
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
(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 five hundred
pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of
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. Moreover, the statute of frauds refers to specific kinds of
transactions and cannot apply to any other transaction that is not enumerated therein. The application of such statute
presupposes the existence of a perfected contract.
We have previously held that not all agreements "affecting land" must be put into writing to attain enforceability.
Thus, we have held that the setting up of boundaries, the oral partition of real property, and an agreement creating a
right of way 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 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.
The next question to be ascertained is whether or not respondents have satisfactorily proven their
right of first 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 findings of
the Court of Appeals that respondents have adequately proven the existence of their right of first refusal.
Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified that they were promised by
the late spouses Faustino and Crescencia Tiangco and, later on, by their heirs a right of first refusal over
the property they were currently leasing should they decide to sell the same. Moreover, respondents
presented a letter 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 property for Php 2,000,000.00 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 first 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 first 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. They also dispensed with the testimony of Eufrocina de Leon who
could have denied the existence or knowledge of the right of first refusal. As such, there being no evidence to the contrary,
the right of first refusal claimed by respondents was substantially proven by respondents before the lower court.
Having ruled upon the question as to the existence of respondents’ right of first 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 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 first refusal. In other words, may a contract of sale entered into in violation of a third party’s
right of first refusal be rescinded in order that such third party can exercise said right? In Guzman, Bocaling and Co, Inc.
v Bonnevie, the Court upheld the decision of a lower court ordering the rescission of a deed of sale which violated a right
of first refusal granted to one of the parties therein – the 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 first priority under the Contract of Lease. 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. 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 occupying the subject property at the time it was sold to it. Although the Contract of Lease was not
annotated on the transfer certificate 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.
In Equatorial Realty and Development, Inc. v Mayfair Theater, Inc., the Court, En banc, ordered the rescission of
a contract entered into in violation of a right of first refusal. Using the ruling in Guzman Bocaling & Co., Inc. v
Bonnevie as basis, the Court decreed that since respondent therein had a right of first refusal over the said property, it
could only exercise the said right if the fraudulent sale is first set aside or rescinded – What Carmelo and Mayfair agreed
to, by executing the two lease contracts, was that Mayfair will have the right of first 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 first refusal, Carmelo violated such right when without affording its negotiations with Mayfair the full process to
ripen to at least an interface of a definite offer and a possible corresponding acceptance within the "30 – day exclusive
option" time granted Mayfair, Carmelo abandoned negotiations, kept a low profile 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
finding 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. 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 or lease prior to the sale.
Equatorial’s knowledge of the stipulations therein should have cautioned it to look further into the agreement to
determine if it involved stipulations that would prejudice its own interests. Since Mayfair had a right of first refusal, it
can exercise the right only if the fraudulent sale is first 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.
In Paranaque Kings Enterprises, Inc. v Court of Appeals, the Court held that the 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 enforceable by an action for specific performance. Summarizing the rulings in the two previously cited
cases, the Court affirmed the nature of and concomitant rights and obligations of parties under a right of first refusal –
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 Php 9,000,000.00, the price for which they were finally 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 first 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 first
priority" to purchase the leased property in case the lessor (Reynoso) decided to sell. The selling price quoted to the
Bonnevies was Php 600,000.00 to be fully paid in cash, less a mortgage lien of Php 100,000.00. On the other hand, the
selling price offered by Reynoso to and accepted by Guzman was only Php 400,000.00 of which Php 137,500.00 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 (Php 600,000.00), 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.
This principle was reiterated in the very recent case of Equatorial Realty v Mayfair Theater, Inc. which was decided en
banc. This Court upheld the right of first 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 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 Php 11,300,000.00
without priorly informing Mayfair. The Court held that both Carmelo and Equatorial acted in bad faith: Carmelo or
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 Php 11,300,000.00.
In the recent case of Litonjua v L&R Corporation, the Court, also citing the case of Guzman, Bocaling & Co. v
Bonnevie, held that the sale made therein in violation of a right of first refusal embodied in a mortgage contract, was
rescissible – 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 first 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 first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan mortgage
includes the consideration for the right of first 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 first 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 first 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. 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 first 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 notified thereof by registration, which equates to notice
to the whole world. 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 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 first 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 first 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 first 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.” It must be borne in mind that, unlike the cases
cited above, the right of first 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 first refusal either by the respondents or by the heirs of the spouses Tiangco.
It is axiomatic (obvious) that good faith is always presumed unless contrary evidence is adduced. 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. In this regard, the rule on
constructive notice would be inapplicable as it is undisputed that the right of first 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 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 first refusal granted to respondents. The name of petitioner Rosencor or any of it
officers did not appear on the letter and the letter did not state that Atty. Aguila was writing in behalf of
petitioner. In fact, Atty. 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. Neither was there any showing that after receipt of the letter, respondents notified Rosencor or
Atty. Aguila of their right of first 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 of Eufrocina de Leon, where she recognized the right of
first 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 first 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 first 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 first 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.
The acquisition by Rosencor of the property subject of the right of first 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.
This does not mean however that respondents are left without any remedy for the unjustified violation of their
right of first 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 unjustified disregard of their right of first refusal.