EN BANC [G.R. No. 109125. December 2, 1994.] ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners, vs.

THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT CORPORATION, respondents. DECISION VITUG, J p: Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force and effect the orders of execution of the trial court, dated 30 August 1991 and 27 September 1991, in Civil Case No. 87-41058. The antecedents are recited in good detail by the appellate court thusly: "On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ann Yu Asuncion and Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058, alleging, among others, that plaintiffs are tenants or lessees of residential and commercial spaces owned by defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have occupied said spaces since 1935 and have been religiously paying the rental and complying with all the conditions of the lease contract; that on several occasions before October 9, 1986, defendants informed plaintiffs that they are offering to sell the premises and are giving them priority to acquire the same; that during the negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked the defendants to put their offer in writing to which request defendants acceded; that in reply to defendant's letter, plaintiffs wrote them on October 24, 1986 asking that they specify the terms and conditions of the offer to sell; that when plaintiffs did not receive any reply, they sent another letter dated January 28, 1987 with the same request; that since defendants failed to specify the terms and conditions of the offer to sell and because of information received that defendants were about to sell the property, plaintiffs were compelled to file the complaint to compel defendants to sell the property to them. "Defendants filed their answer denying the material allegations of the complaint and interposing a special defense of lack of cause of action. "After the issues were joined, defendants filed a motion for summary judgment which was granted by the lower court. The trial court found that defendants' offer to sell was never accepted by the plaintiffs for the reason that the parties did not agree upon the terms and conditions of the proposed sale, hence, there was no contract of sale at all. Nonetheless, the lower court ruled that should the defendants subsequently offer their property for sale at a price of P11-million or below, plaintiffs will have the right of first refusal. Thus the dispositive portion of the decision states:

"'WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiffs summarily dismissing the complaint subject to the aforementioned condition that if the defendants subsequently decide to offer their property for sale for a purchase price of Eleven Million Pesos or lower, then the plaintiffs has the option to purchase the property or of first refusal, otherwise, defendants need not offer the property to the plaintiffs if the purchase price is higher than Eleven Million Pesos. "'SO ORDERED.' "Aggrieved by the decision, plaintiffs appealed to this Court in CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice Segundino G. Chua and concurred in by Justices Vicente V. Mendoza and Fernando A. Santiago), this Court affirmed with modification the lower court's judgment, holding: "'In resume, there was no meeting of the minds between the parties concerning the sale of the property. Absent such requirement, the claim for specific performance will not lie. Appellants' demand for actual, moral and exemplary damages will likewise fail as there exists no justifiable ground for its award. Summary judgment for defendants was properly granted. Courts may render summary judgment when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law (Garcia vs. Court of Appeals, 176 SCRA 815). All requisites obtaining, the decision of the court a quo is legally justifiable. 'WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is hereby AFFIRMED, but subject to the following modification: The court a quo in the aforestated decision gave the plaintiffsappellants the right of first refusal only if the property is sold for a purchase price of Eleven Million pesos or lower; however, considering the mercurial and uncertain forces in our market economy today. We find no reason not to grant the same right of first refusal to herein appellants in the event that the subject property is sold for a price in excess of Eleven Million pesos. No pronouncement as to costs. 'SO ORDERED.' "The decision of this Court was brought to the Supreme Court by petition for review on certiorari. The Supreme Court denied the appeal on May 6, 1991 'for insufficiency in form and substances' (Annex H, Petition). "On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court, the Cu Unjieng spouses executed a Deed of Sale (Annex D, Petition) transferring the property in question to herein petitioner Buen Realty and Development Corporation, subject to the following terms and conditions: "'1. That for and in consideration of the sum of FIFTEEN MILLION PESOS (P15,000,000.00), receipt of which in full is hereby acknowledged, the VENDORS hereby sells, transfers and conveys for and in favor of the VENDEE, his heirs, executors, administrators or assigns, the above-described property with all the

improvements found therein including all the rights and interest in the said property free from all liens and encumbrances of whatever nature, except the pending ejectment proceeding; '2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for the transfer of title in his favor and other expenses incidental to the sale of above-described property including capital gains tax and accrued real estate taxes.' "As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses was cancelled and, in lieu thereof, TCT No. 195816 was issued in the name of petitioner on December 3, 1990. "On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees demanding that the latter vacate the premises. "On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the property subject to the notice of lis pendens regarding Civil Case No. 87-41058 annotated on TCT No. 105254/T881 in the name of the Cu Unjiengs. "The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case No. 8741058 as modified by the Court of Appeals in CA-G.R. CV No. 21123. "On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows: "'Presented before the Court is a Motion for Execution filed by plaintiff represented by Atty. Antonio Albano. Both defendants Bobby Cu Unjieng and Rose Cu Unjieng represented by Atty. Vicente Sison and Atty. Anacleto Magno respectively were duly notified in today's consideration of the motion as evidenced by the rubber stamp and signatures upon the copy of the Motion for Execution. 'The gist of the motion is that the Decision of the Court dated September 21, 1990 as modified by the Court of Appeals in its decision in CA G.R. CV-21123, and elevated to the Supreme Court upon the petition for review and that the same was denied by the highest tribunal in its resolution dated May 6, 1991 in G.R. No. L-97276, had now become final and executory. As a consequence, there was an Entry of Judgment by the Supreme Court as of June 6, 1991, stating that the aforesaid modified decision had already become final and executory. 'It is the observation of the Court that this property in dispute was the subject of the Notice of Lis Pendens and that the modified decision of this Court promulgated by the Court of Appeals which had become final to the effect that should the defendants decide to offer the property for sale for a price of P11 Million or lower, and considering the mercurial and uncertain forces in our market economy today, the same right of first refusal to herein plaintiffs/appellants in the event that the subject property is sold for a price in excess of Eleven Million pesos or more. 'WHEREFORE, defendants are hereby ordered to execute the necessary Deed of Sale of the property in litigation in favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15

Million pesos in recognition of plaintiffs' right of first refusal and that a new Transfer Certificate of Title be issued in favor of the buyer. 'All previous transactions involving the same property notwithstanding the issuance of another title to Buen Realty Corporation, is hereby set aside as having been executed in bad faith. 'SO ORDERED.' "On September 22, 1991 respondent Judge issue another order, the dispositive portion of which reads: "'WHEREFORE, let there be Writ of Execution issue in the above-entitled case directing the Deputy Sheriff Ramon Enriquez of this Court to implement said Writ of Execution ordering the defendants among others to comply with the aforesaid Order of this Court within a period of one (1) week from receipt of this Order and for defendants to execute the necessary Deed of Sale of the property in litigation in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15,000,000.00 and ordering the Register of Deeds of the City of Manila, to cancel and set aside the title already issued in favor of Buen Realty Corporation which was previously executed between the latter and defendants and to register the new title in favor of the aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go. 'SO ORDERED.' "On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition) was issued". 1 On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared without force and effect the above questioned orders of the court a quo. In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the name of Buen Realty, at the time of the latter's purchase of the property on 15 November 1991 from the Cu Unjiengs. prcd We affirm the decision of the appellate court. A not too recent development in real estate transactions is the adoption of such arrangements as the right of first refusal, a purchase option and a contract to sell. For ready reference, we might point out some fundamental precepts that may find some relevance to this discussion. An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or conduct; required to be observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor) subjects.

Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305, Civil Code). A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge or commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain formalities prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the prescribed form being thereby an essential element thereof. The stage of consummation begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof. cdrep Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation. 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. Article 1458 of the Civil Code provides: "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. 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. 2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the buyer upon actual or constructive delivery (e.g., by the execution of a public document) of the property sold. Where the condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such perfection. 3 If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either waive the condition or refuse to proceed with the sale (Art. 1545, Civil Code). 4 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. 5 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, viz: "ART. 1479. ....

"An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a) 6 Observe, however, that the option is not the contract of sale itself. 7 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. 8 Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules generally govern: (1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdrawal the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Paraaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." LLjur (2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent 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 optioneeofferee, 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 option. In these cases, care should be taken of the real nature of the consideration given, for if, in fact, it has been intended to be part of the consideration for the main contract with a right of withdrawal on the part of the optionee, the main contract could be

deemed perfected; a similar instance would be an "earnest money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code). In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first refusal, understood in its normal concept, per se be brought within the purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of the same Code. An option or an offer would require, among other things, 10 a clear certainty on both the object and the cause or consideration of the envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions of the Civil Code on human conduct. LexLib Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its existence, nor would it sanction an action for specific performance without thereby negating the indispensable element of consensuality in the perfection of contracts. 11 It is not to say, however, that the right of first refusal would be inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the circumstances expressed in Article 19 12 of the Civil Code, can warrant a recovery for damages. The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first refusal" in favor of petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the right of first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an action for damages in a proper forum for the purpose. Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the property, has acted in good faith or bad faith and whether or not it should, in any case, be considered bound to respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be independently addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot be held subject to the writ of execution issued by respondent Judge, let alone ousted from the ownership and possession of the property, without first being duly afforded its day in court. We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of execution varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV21123. The Court of Appeals, in this regard, has observed: Cdpr

"Finally, the questioned writ of execution is in variance with the decision of the trial court as modified by this Court. As already stated, there was nothing in said decision 13 that decreed the execution of a deed of sale between the Cu Unjiengs and respondent lessees, or the fixing of the price of the sale, or the cancellation of title in the name of petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885)." It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the time the execution of any deed of sale between the Cu Unjiengs and petitioners. WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a quo. Costs against petitioners. SO ORDERED. Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and Mendoza, JJ., concur. Kapunan, J., took no part. Feliciano, J., is on leave.

EN BANC [G.R. No. 106063. November 21, 1996.] EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners, vs. MAYFAIR THEATER, INC., respondent. Romulo, Mabanta, Buenaventura Sayoc & De los Angeles for Equatorial Realty Development, Inc. Emiliano S. Samson, E. Balderama for Samson and Mary Anne B. Samson and Carmelo & Bauermann, Inc. De Borja, Medialdea, Ata Bello, Guevarra & Serapio for respondent. SYLLABUS 1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; OPTION CONTRACT; PARAGRAPH 8 OF THE LEASE CONTRACT GRANTS TO MAYFAIR THE RIGHT OF FIRST REFUSAL, NOT AN OPTION. We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a right of first refusal. Respondent 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. There is nothing in the identical paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which would bring them into the ambit of the usual offer or option requiring an independent consideration. 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. As stated in Vda. De Quirino vs. Palarca, in reciprocal contract, the obligation or promise of each party is the consideration for that of the other. cdasia

2. ID.; ID.; SINCE PETITIONER IS A BUYER IN BAD FAITH, THE SALE TO IT OF THE PROPERTY IN QUESTION IS RESCISSIBLE. 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 to be a purchaser in good faith, and, therefore, rescission lies. 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 but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing Mayfair, a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing the offer and counter-offers between the parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiate within the 30day period. 3. ID.; ID.; THE RIGHT OF FIRST REFUSAL SHOULD BE ENFORCED ACCORDING TO THE LAW ON CONTRACTS INSTEAD OF THE CODAL PROVISIONS ON HUMAN RELATIONS. Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on contracts but by the codal provisions on human relations. This may apply here if the contract is limited to the buying and selling of the real property. However, the obligation of Carmelo to first offer the property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite rule on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and that is for Carmelo to comply with its obligation to the property under the right of the first refusal according to the terms at which they should have been offered then to Mayfair, at the price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is it merely preparatory. Paragraph 8 of the two leases can be executed according to their terms. HATEDC PADILLA, J., separate opinion: CIVIL LAW; OBLIGATIONS AND CONTRACTS; DAMAGES; WHILE MAYFAIR'S RIGHT OF FIRST REFUSAL SHOULD BE UPHELD, IT SHOULD NOT BE REQUIRED TO PAY A COMPOUNDED INTEREST OF 12% PER ANNUM UNDER ITS CONTRACT OF LEASE. I am of the considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case should categorically recognize Mayfair's right of first refusal under its contract of lease with Carmelo and Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo's and Equatorial's bad faith in riding "roughshod" over Mayfair's right of first refusal, the Court should order

the rescission of the sale of the Claro M. Recto property by the latter to Equatorial (Arts. 1380-1381[3], Civil Code). I do not agree with the proposition that, in addition to the aforesaid purchase price, Mayfair should be required to pay a compounded interest of 12% per annum of said amount computed from 1 August 1978. Under the Civil Code, a party to a contract may recover interest as indemnity for damages in the following instances: "Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. Art. 2210. Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract." There appears to be no basis in law for adding 12% per annum compounded interest to the purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there was no such stipulation in writing between the parties (Mayfair and Carmelo) but, more importantly, because Mayfair neither incurred in delay in the performance of its obligation nor committed any breach of contract. Indeed, why should Mayfair be penalized by way of making it pay 12% per annum compounded interest when it was Carmelo which violated Mayfair's right of first refusal under the contract? HCEcAa PANGANIBAN, J., separate concurring opinion: 1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION OF CONTRACT; SALE OF AN IMMOVABLE IN BREACH OF A RIGHT OF FIRST REFUSAL; MAYFAIR, NOT BEING A PARTY TO THE SALE OF THE PROPERTY, HAD NO PERSONALITY TO SUE FOR ITS ANNULMENT; BUT THE FACTS IN THIS CASE MAKE OUT A CASE FOR RESCISSION UNDER ART. 1177, IN RELATION TO ART. 1381(3), OF THE CIVIL CODE. With respect to the sale of the property, Mayfair was not a party. It therefore had no personality to sue for its annulment, since Art. 1397 of the Civil Code provides, inter alia, that "(t)he action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily." But the facts as alleged and proved clearly in the case at bar make out a case for rescission under Art. 1177, in relation to Art 1381(3), of the Civil Code, which pertinently reads as follows: "Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them." "Art. 1381. The following contracts are rescissible: . . . (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; . . . " The term "creditors" as used in these provisions of the Civil Code is broad enough to include the obligee under an option contract as well as under a right of first refusal, sometimes known as a right of first priority. Thus, in Nietes, the Supreme Court, speaking through then Mr. Chief Justice Roberto Concepcion, repeatedly referred to the grantee or optionee as "the creditor" and to the grantor or optioner as "the debtor." In any case, the personal elements of an obligation are the active and passive subjects thereof, the former being known as creditors or obligees and the latter as debtors or obligors. Insofar as the right of first refusal is concerned, Mayfair is the obligee or creditor. 2. ID.; SPECIFIC PERFORMANCE; A PROPER REMEDY TO ENFORCE A RIGHT OF FIRST REFUSAL; THE PRINCIPLE OF CONSENSUALITY OF A CONTRACT OF SALE SHOULD BE DEEMED SATISFIED IN THE CASE AT BAR; REASON. The inescapable conclusion from all of the foregoing is not only that rescission is the

proper remedy but also and more importantly that specific performance was actually used and given free rein as an effective remedy to enforce a right of first refusal in the wake of its violation, in the cited case of Guzman. The consensuality required for a contract of sale is distinct from, and should not be confused with, the consensuality attendant to the right of first refusal itself. While indeed, prior to the actual sale of the property to Equatorial and the filing of Mayfair's complaint for specific performance, no perfected contract of sale involving the property ever existed between Carmelo as seller and Mayfair as buyer, there already was, in law and in fact, a perfected contract between them which established a right of first refusal, or of first priority. Worth stressing at this juncture is the fact that Mayfair had the right to require that the offer to sell the property be sent to it by Carmelo, and not to anybody else. This was violated when the offer was made to Equatorial. Under its covenant with Carmelo, Mayfair had the right, at that point, to sue for either specific performance or rescission, with damages in either case, pursuant to Arts. 1165 and 1191, Civil Code. An action for specific performance and damages seasonably filed, fortified by a writ of preliminary injunction, would have enabled Mayfair to prevent the sale to Equatorial from taking place and to compel Carmelo to sell the property to Mayfair for the same terms and price, for the reason that the filing of the action for specific performance may juridically be considered as a solemn, formal, and unqualified acceptance by Mayfair of the specific terms of the offer of sale. Note that by that time, the price and other terms of the proposed sale by Carmelo had already been determined, being set forth in the offer of sale that had wrongfully been directed to Equatorial. The act of promptly filing this suit, coupled with the fact that it is one for specific performance, indicates beyond cavil or doubt Mayfair's unqualified acceptance of the misdirected offer of sale, giving rise, thereby, to a demandable obligation on the part of Carmelo to execute the corresponding document of sale upon the payment of the price of P11,300,000.00. In other words, the principle of consensuality of a contract of sale should be deemed satisfied. The aggrieved party's consent to, or acceptance of, the misdirected offer of sale should be legally presumed in the context of the proven facts. To say, therefore, that the wrongful breach of a right of first refusal does not sanction an action for specific performance simply because, factually, there was no meeting of the minds as to the particulars of the sale since ostensibly no offer was ever made to, let alone accepted by, Mayfair, is to ignore the proven fact of presumed consent. To repeat, that consent was deemed given by Mayfair when it sued for invalidation of the sale and for specific performance of Carmelo's obligation to Mayfair. Nothing in the law as it now stands will be violated, or even simply emasculated, by this holding. AEITDH ROMERO, J., concurring and dissenting opinion: 1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LEASE; RIGHT OF FIRST REFUSAL; OPTION; THE RIGHT OF FIRST REFUSAL IS UNLIKE AN OPTION WHICH REQUIRES A CERTAINTY AS TO THE OBJECT AND CONSIDERATION OF THE ANTICIPATED CONTRACT. An option is a privilege granted to buy a determinate thing at a price certain within a specified time and is usually supported by a consideration which is why, it may be regarded as a contract in itself. The option results in a perfected contract of sale once the person to whom it is granted decides to exercise it. The right of first refusal is unlike an option which requires a certainty as to the object and consideration of the anticipated contract. When the right of the first refusal is exercised, there is no perfected contract of sale because the other terms of the sale

have yet to be determined. Hence, in case the offeror reneges on his promise to negotiate with offeree, the latter may only recover damages in the belief that a contract could have been perfected under Article 19 of the New Civil Code. CTDHSE 2. ID.; RESCISSION OF CONTRACT; THE CONTRACT OF SALE ENTERED INTO BY CARMELO AND BAUERMANN, INC. AND EQUATORIAL REALTY, INC. SHOULD NOT BE RESCINDED; REASON. I beg to disagree, however, with the majority opinion that the contract of sale entered into by Carmelo and Bauermann, Inc. and Equatorial Realty, Inc., should be rescinded. Justice Hermosisima, in citing Art. 1381 (3) as ground for rescission apparently relied on the case of Guzman, Bocaling and Co. v. Bonnevie (206 SCRA 668 [1992]) where the offeree was likened to the status of a creditor. The case, in citing Tolentino, stated that rescission is a remedy granted by law to 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 restoration of things to their condition prior to celebration of the contract. It is my opinion that "third persons" should be construed to refer to the wards, creditors, absentees, heirs and others enumerated under the law who are prejudiced by the contract sought to be rescinded. It should be borne in mind that rescission is an extreme remedy which may be exercised only in the specific instances provided by law. Article 1381 (3) specifically refers to contracts undertaken in fraud of creditors when the latter cannot in any manner collect the claims due them. If rescission were allowed for analogous cases, the law would have so stated. While Article 1381 (5) itself says that rescission may be granted to all other contracts specially declared by law to be subject to rescission, there is nothing in the law that states that an offeree who failed to exercise his right of refusal because of bad faith on the part of the offeror may rescind the subsequent contract entered into by the offeror and a third person. Hence, there is no legal justification to rescind the contract between Carmelo and Bauermann, Inc. and Equatorial Realty. DHITcS VITUG, J., dissenting opinion: 1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION OF CONTRACT; RIGHT OF FIRST REFUSAL; A "BREACH" OF THE RIGHT OF FIRST REFUSAL CAN ONLY GIVE RISE TO AN ACTION FOR DAMAGES BUT NOT TO AN ACTION FOR SPECIFIC PERFORMANCE. The concept of a right of first refusal as a simple juridical relation, and so governed (basically) by the Civil Code's title on "Human Relations," is not altered by the fact alone that it might be among the stipulated items in a separate document or even in another contract. A "breach" of the right of first refusal can only give rise to an action for damages primarily under Article 19 of the Civil Code, as well as its related provisions, but not to an action for specific performance set out under Book IV of the Code on "Obligations and Contracts." That right, standing by itself, is far distant from being the obligation referred to in Article 1159 of the Code which would have the force of law sufficient to compel compliance per se or to establish a creditor-debtor or obligee-obligor relation between the parties. If, as it is rightly so, a right of first refusal cannot even be properly classed as an offer or as an option, certainly, and with much greater reason, it cannot be the equivalent of, nor be given the same legal effect as, a duly perfected contract. It is not possible to cross out, such as we have said in Ang Yu Asuncion vs. Court of Appeals (238 SCRA 602), the indispensable element of consensuality in the perfection of contracts. It is basic that without mutual consent on the object and on the cause, a contract cannot exist (Art. 1305, Civil Code); corollary

to it, no one can be forced, least of all perhaps by a court, into a contract against his will or compelled to perform thereunder. 2. ID.; A RIGHT OF FIRST REFUSAL CANNOT BE DEEMED A PERFECTED CONTRACT OF SALE UNDER ART. 1458 OF THE CIVIL CODE; REASON. It would be perilous a journey, first of all, to try to seek out a common path for such juridical relations as contracts, options, and rights of first refusal since they differ, substantially enough, in their concepts, consequences and legal implications. Very briefly, in the area on sales particularly, I borrow from Ang Yu, a unanimous decision of the Supreme Court En Banc, which held: "In the law on sales, the so-called 'right of first refusal' is an innovative juridical relation. Needless to point out, it cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first refusal, understood in its normal concept, per se be brought within the purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 of the same Code. An option or an offer would require, among other things, a clear certainty on both the object and the cause or consideration of the envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws of general application, the pertinent scattered provisions of the Civil Code on human conduct." An obligation, and so a conditional obligation as well (albeit subject to the occurrence of the condition), in its context under Book IV of the Civil Code, can only be "a juridical necessity to give, to do or not to do" (Art. 1156, Civil Code), and one that is constituted by law, contracts, quasi-contracts, delicts and quasi-delicts (Art. 1157, Civil Code) which all have their respective legal significance rather well settled in law. The law certainly must have meant to provide congruous, albeit contextual, consequences to its provisions. Interpretare et concordore legibus est optimus interpretendi. As a valid source of an obligation, a contract must have the concurrence of (a) consent of the contracting parties, (b) object certain (subject matter of the contract) and (c) cause (Art. 1318, Civil Code). These requirements, clearly defined, are essential. The consent contemplated by the law is that which is manifested by the meeting of the offer and of the acceptance upon the object and the cause of the obligation. The offer must be certain and the acceptance absolute (Article 1319 of the Civil Code). Thus, a right of first refusal cannot have the effect of a contract because, by its very essence, certain basic terms would have yet to be determined and fixed. How its "breach" be also its perfection escapes me. It is only when the elements concur that the juridical act would have the force of law between the contracting parties that must be complied with in good faith (Article 1159 of the Civil Code; see also Article 1308, of the Civil Code), and, in case of its breach, would allow the creditor or obligee (the passive subject) to invoke the remedy that specifically appertains to it. AaDSEC DECISION HERMOSISIMA, JR., J p:

Before us is a petition for review of the decision 1 of the Court of Appeals 2 involving questions in the resolution of which the respondent appellate court analyzed and interpreted particular provisions of our laws on contracts and sales. In its assailed decision, the respondent court reversed the trial court 3 which, in dismissing the complaint for specific performance with damages and annulment of contract, 4 found the option clause in the lease contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and unsupported by a consideration and the subsequent sale of the subject property to petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made without any breach of or prejudice to, the said lease contracts. 5 We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost verbatim the basis of the statement of facts as rendered by the petitioners in their pleadings: "Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro M Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila. On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a portion of Carmelo's property particularly described, to wit: 'A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with a floor area of 1,610 square meters. THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto Avenue, Manila, with a floor area of 150 square meters, for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair hereafter constructed on the leased property a movie house known as Maxim Theatre. Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the lease of another portion of Carmelo's property, to wit: 'A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with a floor area of 1,064 square meters. THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey building situated at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and bearing street numbers 1871 and 1875,' 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 provides (sic) identically worded paragraph 8, which reads: '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 is 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 thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions thereof. Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair, through a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars 1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million Pesos. Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied through a letter stating as follows: 'It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang through the telephone that your company desires to sell your above-mentioned C.M Recto Avenue property. Under your company's two lease contracts with our client, it is uniformly provided: '8. 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 is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it is (sic) herebinds (sic) and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by and the terms and conditions hereof (sic).' Carmelo did no reply to this letter. On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not only the leased premises but the entire building and other improvements if the price is reasonable. However, both Carmelo and Equatorial questioned the authenticity of the second letter. Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which included the leased premises housing the 'Maxim' and 'Miramar' theatres, to Equatorial by virtue of a Deed of Absolute Sale, for the total sum of P11,300,000.00. In September 1978, 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 considertion (sic) 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 held on January 23, 1979, the parties stipulated on the following: '1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in favor of defendant Carmelo . . . in favor of defendant Equatorial . . .; 2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff 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); 3. That the two buildings erected on this land are not of the condominium plan;

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of lease constitute the consideration for the plaintiff's occupancy of the leased premises, subject of the same contracts of lease, Exhibits A and B; xxx 6. 7. 8. xxx xxx

That there was no consideration specified in the option to buy embodied in the contract; That Carmelo & Bauermann owned the land and the two buildings erected thereon; That the leased premises constitute only the portions actually occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and the two buildings erected thereon.' xxx xxx xxx

After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which reads as follows: WHEREFORE, judgment is hereby rendered: (1) Dismissing the complaint with costs against the plaintiff;

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of attorneyss fees on its counterclaim; (3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as reasonable compensation for the use of areas not covered by the contract (sic) of lease from July 31, 1979 until plaintiff vacates said area (sic) plus legal interest from July 31, 1978; P70,000.00 per month as reasonable compensation for the use of the premises covered by the contracts (sic) of lease dated (June 1, 1967 from June 1, 1987 until plaintiff vacates the premises plus legal interest from .June 1, 1987; P55,000.00 per month as reasonable compensation for the use of the premises covered by the contract

of lease dated March 31, 1969 from March 30, 1989 until plaintiff vacates the premises plus legal interest from March 30, 1989; and P40,000.00 as attorneys fees; (4) Dismissing defendant Equatorials crossclaim against defendant Carmelo & Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all persons claiming rights under these contracts are directed to vacate the premises'." 6 The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be an option clause which however cannot be deemed to be binding on Carmelo because of lack of distinct consideration therefor. The court a quo ratiocinated. "Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of lease is not supported by a separate consideration. Without a consideration, the option is therefore not binding on defendant Carmelo & Bauermann to sell the C.M. Recto property to the former. The option invoked by the plaintiff appears in the contracts of lease . . . in effect there is no option, on the ground that there is no consideration. Article 1352 of the Civil Code, provides: 'Contracts without cause or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good custom, public order or public policy.' Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides: 'When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon consideration, as something paid or promised.' in relation with Article 1479 of the same Code: 'A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. 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.' The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes the existence of a distinct consideration. In other words, the promisee has the burden of proving the consideration. The consideration cannot be presumed as in Article 1354: 'Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless the debtor proves the contrary.' where consideration is legally presumed to exist. Article 1354 applies to contracts in general, whereas when it comes to an option it is governed particularly and more specifically by Article 1479 whereby the promisee has the burden of proving the existence of consideration distinct from the price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368, 372-373, the Court said:

'(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to sales in particular, and, more specifically, to an accepted unilateral promise to buy or to sell. In other words, Article 1479 is controlling in the case at bar. (2) In order that said unilateral promise may be binding upon the promisor, Article 1479 requires the concurrence of a condition, namely, that the promise be supported by a consideration distinct from the price. Accordingly, the promisee cannot compel the promisor to comply with the promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee has the burden of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.' 7 It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto property to the former. Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent Court of Appeals. Respondent appellate court reversed the court a quo and rendered judgment: "1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the amount of P11,300,000.00 within fifteen (15) days from notice of this Decision, and ordering Equatorial Realty Development, Inc. to accept such payment; 3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to execute the deeds and documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered under TCT Nos. 17350, 118612, 60936, and 52571; and 4. Should plaintiff-appellant Mayfair Theater, Inc. 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. 8 Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this case, and concluded that since paragraph 8 of the two lease contracts does not state a fixed price for 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. It explicated: "Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of the Civil Code. Article 1324 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. The contract that arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the Supreme Court, citing Bouvier, defined an option as follows: '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.' (pp. 686-7). Article 1479, second paragraph, on the other hand, contemplates of an 'accepted unilateral promise to buy or to sell a determinate thing for a price within (which) is binding upon the promisee if the promise is supported by a consideration distinct from the price.' That 'unilateral promise to buy or to sell a determinate thing for a price certain' is called an offer. An 'offer', in law, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil. 217). 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, Civil Code). 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. What the trial court failed to appreciate was the intention of the parties behind the questioned proviso. xxx xxx xxx

The provision in question is not of the pro-forma type customarily found in a contract of lease. Even appellees have recognized that the stipulation was incorporated in the two Contracts of Lease at the initiative and behest of Mayfair. Evidently, the stipulation was intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should decide, during the term of the lease, to sell the leased property. This intention of the parties is achieved in two ways in accordance with the stipulation. The first is by giving Mayfair '30-days exclusive option to purchase' the leased property. The second is, in case Mayfair would opt not to purchase the leased property, 'that the purchaser (the new owner of the leased property) shall recognize the lease and be bound by all the terms and conditions thereof. In other words, paragraph 8 of the two Contracts of Lease, particularly the stipulation giving Mayfair '30 days exclusive option to purchase the (leased premises),' was meant to provide Mayfair the opportunity to purchase and acquire the leased property in the event that Carmelo should decide to dispose of the property. In order to realize this intention, 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. In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified: 'Q: Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?

A: I have an offer from another party to buy the property and having the offer we decided to make an offer to Henry Yang on a first-refusal basis.' (TSN November 8, 1983, p. 12.). and on cross-examination: 'Q. When you called Mr. Yang on August 1974 can you remember exactly what you have told him in connection with that matter, Mr. Pascal? A. More or less, I told him that I received an offer from another party to buy the property and I was offering him first choice of the entire property.' (TSN, November 29, 1983, p. 18). We rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties. "9 Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of distinct consideration indispensable in an option contract, has no application, respondent appellate court also addressed the claim of Carmelo and Equatorial that assuming arguendo that the option is valid and effective, it is impossible of performance because it covered only the leased premises and not the entire Claro M. Recto property, while Carmelo's offer to sell pertained to the entire property in question. The Court of Appeals ruled as to this issue in this wise: "We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the Deed of Absolute Sale between Carmelo and Equatorial covering the whole Claro M. Recto property, made reference to four titles: TCT Nos. 17350, 118612, 60936 and 52571. Based on the information submitted by Mayfair in its appellants Brief (pp. 5 and 46) which has not been controverted by the appellees, and which We, therefore, take judicial notice of the two theaters stand on the parcels of land covered by TCT No. 17350 with an area of 622.10 sq. m. and TCT No. 118612 with an area of 2,100.10 sq. m. The existence of four separate parcels of land covering the whole Recto property demonstrates the legal and physical possibility that each parcel of land, together with the buildings and improvements thereon, could have been sold independently of the other parcels. At the time both parties executed the contracts, they were aware of the physical and structural conditions of the buildings on which the theaters were to be constructed in relation to the remainder of the whole Recto property. The peculiar language of the stipulation would tend to limit Mayfairs right under paragraph 8 of the Contract of Lease to the acquisition of the leased areas only. Indeed, what is

being contemplated by the questioned stipulation is a departure from the customary situation wherein the buildings and improvements are included in and form part of the sale of the subjacent land. Although this situation is not common, especially considering the non-condominium nature of the buildings, the sale would be valid and capable of being performed. A sale limited to the leased premises only, if hypothetically assumed, would have brought into operation the provisions of co-ownership under which Mayfair would have become the exclusive owner of the leased premises and at the same time a co-owner with Carmelo of the subjacent land in proportion to Mayfairs interest over the premises sold to it." 10 Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision of respondent Court of Appeals on the basis of the following assigned errors: "I THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN THE CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE COURT OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY AND UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR STIPULATION OF FACTS. II WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED TO EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE. III THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF ITS DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS NOT EVEN PRAYED FOR IN THE COMPLAINT. IV THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA, TO RESOLVE ALL THE MOTIONS IN THE 'COMPLETION PROCESS' AND TO STILL RESOLVE THE MERITS OF THE CASE IN THE 'DECISION STAGE.' " 11 We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in the Court of Appeals. Suffice it to say that in our Resolution, 12 dated December 9, 1992, we already took note of this matter and set out the proper applicable procedure to be the following: "On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a lettercomplaint to this Court alleging certain irregularities and infractions committed by certain lawyers, and

Justices of the Court of Appeals and of this Court in connection with case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes of the nature of an administrative complaint for misconduct, against members of the judiciary. While the letter-complaint arose as an incident in case CA-G.R. CV No. 32918 (now G.R. No. 106063), the disposition thereof should be separate and independent from Case G.R No. 106063. However, for purposes of receiving the requisite pleadings necessary in disposing of the administrative complaint, this Division shall continue to have control of the case. Upon completion thereof, the same shall be referred to the Court En Banc for proper disposition." 13 This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and Equatorial, to be an independent and separate subject for an administrative complaint based on misconduct by the lawyers and justices implicated therein, it is the correct, prudent and consistent course of action not to pre-empt the administrative proceedings to be undertaken respecting the said irregularities. Certainly, a discussion thereupon by us in this case would entail a finding on the merits as to the real nature of the questioned procedures and the true intentions and motives of the players therein. In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated in the two contracts of lease between Carmelo and Mayfair in the face of connecting findings by the trial court and the Court of Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as well as Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto property to Equatorial. Both contracts of lease in question provide the identically worded paragraph 8, which reads: "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 is sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it is hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions thereof." 14 We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option contact. It is a contract of a right of first refusal. As early as 1916, in the case of Beaumont vs. Prieto, 15 unequivocal was our characterization of an option contract as one necessarily invoking 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. "It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911, quoted at the beginning of this decision, the 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 contained in Exhibit E 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. In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language: '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. (Story vs Salamon, 71 N.Y. 420.)'

From vol 6, page 5001, of the work 'Words and Phrases, ' citing the case of Ide vs. Leiser (24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken: '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.' But 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." 16 (Italics ours.) The rule so early established in this jurisdiction is that the deed of option or 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; 17 in one other case we freed the landowner from her promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks because such option was not supported by a distinct consideration; 18 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 P1,510.00 because of lack of consideration; 19 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 for P12,000.00 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. 20 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. We elucidated, thus, in the very recent case of Ang Yu Asuncion vs. Court of Appeals 21 that: ". . . 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. Article 1458 of the Civil Code provides: '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.' 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, viz: ART. 1479. . . . 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 (1451a).' Observe, however, that the option is not the contract of sale itself. 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. Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere institutions to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Paraaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that 'every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.' (2) If the period has a separate consideration; a contract of 'option' is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be distinguished from the projected main agreement (subject matter of the option) which it obviously yet to be concluded. If, in fact, the optionerofferor 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 option. . . ." 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, we so hold that 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. Respondent 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. There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which would bring them into the ambit of the usual offer or option requiring an independent consideration. 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. 22 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 on 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. As stated in Vda. De Quirino vs. Palarca, 23 in reciprocal contract, the obligation or promise of each party is the consideration for that of the other. 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. We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and Equatorial. The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu Asuncion vs. Court of Appeals. 24 First and foremost is that 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, 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 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 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. According to Tolentino, 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 preferential 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 it was aware of the lease in favor of the Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although the Contract of Lease was not annotated on the transfer 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 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. 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. The petitioner insists that it was not aware of the right of first priority, granted by the Contract of Lease. Assuming this to be true, we nevertheless agree with the observation of the respondent court that: If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20 on priority right given to the Bonnevies, it had only itself to blame. Having known that the property it was buying was under lease, it behooved it as a prudent person to have required Reynoso or the broker to show to it the Contract of Lease in which Par. 20 is contained." 25 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 but also the appurtenant portions sold to Equatorial which are claimed by

petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing Mayfair, a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing the offer and counter-offers between the parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiate within the 30-day period. Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be authorized to exercise its right of first refusal under the contract to include the entirety of the indivisible property. The boundaries of the property sold should be the boundaries of the offer under the right of first refusal. As to the remedy to enforce Mayfair's right, the Court disagrees to a certain extent with the concluding part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not amplified under the peculiar facts of this case. 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. 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. 26 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. 27 This Court has always been against multiplicity of suits where all remedies according to the facts and the law can be included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which Mayfair could have purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over it. The damages which Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution would be to allow Mayfair to exercise its right of first refusal at the price which it was entitled to accept or reject which is P11,300,000.00. This is clear from the records. To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter of the disputed property would be unjust and unkind to Mayfair because it is once more compelled to litigate to enforce its right. It is not proper to give it an empty or vacuous victory in this case. From the viewpoint of Carmelo, it is like asking a fish if it would accept the choice of being thrown back into the river. Why should Carmelo be rewarded for and allowed to profit from, its wrongdoing?

Prices of real estate have skyrocketed. After having sold the property for P11,300,000.00, why should it be given another chance to sell it at an increased price? Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on contracts but by the codal provisions on human relations. This may apply here if the contract is limited to the buying and selling of the real property. However, the obligation of Carmelo to first offer the property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite rule on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and that is for Carmelo to comply with its obligation to the property under the right of the first refusal according to the terms at which they should have been offered then to Mayfair, at the price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be executed according to their terms. On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that both Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into with Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice or knowledge of the sale coming to the attention of Mayfair. All the circumstances point to a calculated and contrived plan of non-compliance with the agreement of first refusal. On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took unconscientious advantage of Mayfair. Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other hand, has received rents and otherwise profited from the use of the property turned over to it by Carmelo. In fact, during all the years that this controversy was being litigated, Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or Equatorial. WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CAG.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo & Bauermann is ordered to return to petitioner Equatorial Realty Development the purchase price. The latter is directed to execute the deeds and documents necessary to return ownership to Carmelo & Bauermann of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for P11,300,000.00. SO ORDERED.

Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza, and Francisco, JJ ., concur. Padilla and Panganiban, JJ ., concur in separate opinion. Romero, J ., concurs and dissents in a separate opinion. Vitug and Torres, Jr., JJ ., dissent in separate opinion. Narvasa, C .J ., took no part.

THIRD DIVISION [G.R. No. 111538. February 26, 1997.] PARAAQUE 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. Gancayco Law Offices for petitioner. Delfin R Sumapo, Jr. for private respondent David Raymundo. M.B. Tomacruz Law Office for private respondent Catalina L. Santos SYLLABUS 1. REMEDIAL LAW; CIVIL ACTIONS; ESSENTIAL REQUISITES FOR A CAUSE OF ACTION TO EXIST. A cause of action exist 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. 2. ID.; ID.; ID.; THE COMPLAINT IN CASE AT BAR SUFFICIENTLY ALLEGES AN ACTIONABLE CONTRACTUAL BREACH. 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. 3. CIVIL LAW; CONTRACTS; LEASE; RIGHT OF FIRST REFUSAL;. BASIS THEREOF MUST BE THE CURRENT OFFER TO SELL OF THE SELLER OR OFFER TO PURCHASE OF ANY PROSPECTIVE BUYER. 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 grantee 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 grantee.

4. ID.; ID.; ID.; ID.; NO CAUSE OF ACTION UNDER P.D. 1517; CASE AT BAR. 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, "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, . . . 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. 5. ID.; ID.; ID.; ID.; THE ASSIGNMENT OF THE LEASE CONTRACT INCLUDED THE OPTION TO PURCHASE; CASE AT BAR. 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 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. 6. ID.; ID.; ID.; SUBSEQUENT BUYER BECOMES PRIVY TO THE CONTRACT AFTER HAVING 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; CASE AT BAR. 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. DECISION PANGANIBAN, J p: 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 1 of the Court of Appeals 2 promulgated on March 29, 1993, in CA-G.R. CV No. 34987 entitled "Paraaque Kings Enterprises, Inc. vs. Catalina L. Santos, et al.," which affirmed the order 3 of September 2, 1991, of the Regional Trial Court of Makati, Branch 57, 4 dismissing Civil Case No. 91-786 for lack of a valid cause of action. Facts of the Case On March 19, 1991, herein petitioner filed before the Regional Trial Court of Makati a complaint, 5 which is reproduced in full below: "Plaintiff, by counsel, respectfully states that: 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, Paraaque, 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, Dasmarias 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. Defendant Catalina L. Santos is the owner of eight (8) parcels of land located at (sic) Paraaque, Metro Manila with transfer certificate 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. 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'.

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'. 5. On August 6, 1979, Lee Ching Bing also assigned all his rights and interest in the leased property to Paraaque 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'. 6. Paragraph 9 of the assigned leased (sic) contract provides among others that:

'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;' 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'. 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-infact of defendant Santos, Xerox copy of the letter is hereto attached as Annex 'N'. 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'. 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'. 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'. 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'.

13. Defendant Santos violated again paragraph 9 of the contract of lease by executing a second deed of sale to defendant Raymundo. 14. It was only on May 17, 1989, that defendant Santos replied to the letter of the plaintiffs 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' 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'. 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'. 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. 18. Defendants have the same counsel who represented both of them in their exchange of communication with plaintiffs counsel, a fact that led to the conclusion that a collusion exist (sic) between the defendants. 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. 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. 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. 22. As a consequence of this unlawful act of the defendants, plaintiff will incur (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. 23. As a consequence of the collusion, evil design and illegal acts of the defendants, plaintiff in the process suffered mental anguish, sleepless nights, besmirched (sic) reputation which entitles plaintiff to moral damages in the amount of FIVE MILLION (P5,000,000.00) PESOS.

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. 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. Xerox copies of the demand letters are hereto attached as Annexes 'KK' to 'LL', respectively. 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: 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; b. c. d. e. Dependants (sic) pay plaintiff the sum of P3,000,000.00 as actual damages; Defendants pay the sum of P5,000,000.00 as moral damages; Defendants pay exemplary damages left to the discretion of the Court; 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. . . . xxx xxx xxx

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. . . 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: . . . 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, . . ." 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." 9 The motion sought to enjoin respondent Raymundo and his counsel from pursuing the ejectment complaint filed before the barangay captain of San Isidro, Paraaque, 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 forumshopping. 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. aisadc 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. 10 It does not appear that respondents were unduly prejudiced by 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 averment's 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 Paraaque 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. 16 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 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 grantee** 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 grantee.*** This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair Theater, Inc. 17 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" (emphasis 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 refusal* 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 18 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, . . . certain prerequisites must be complied with by anyone who wishes to avail himself of the benefits of the decree." 19 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. 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: ". . . the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to herein ASSIGNEE, all his rights, interest and participation over said premises afore-described, . . . " 20 (emphasis supplied) 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, . . ." 21 (emphasis supplied) 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. 22 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. 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. 23 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. cdt 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 ., Davide, Jr., Melo and Francisco, JJ., concur.

SECOND DIVISION [G.R. No. 123581. August 29, 1997.] RODRIGO B. BANGAYAN, BENJAMIN B. BANGAYAN, ET AL., petitioners, vs. THE HONORABLE COURT OF APPEALS and ANGELITA OCAMPO LIM, respondents. Nelson A. Loyola for petitioners. Zshornack & Zshornack for private respondent. SYNOPSIS Petronilla Lingat entered into a Contract of Lease of a piece of land with a two-story building with Teopista Ocampo. Atty. Amado, counsel for Lingat, notified Ocampo that she could exercise her right of first option within 30 days from receipt of his letter. However, Ocampo failed to exercise her first option within the given period. Lingat sold the property to the Bangayans. Atty. Amador advised Ocampo of the sale of the property and the cancellation of the leased contract, hence, was asked to vacate the premises. Because Ocampo ignored the demand, the Bangayans filed an ejectment case against her. Lingat executed a Deed of Absolute Sale to the Bangayans. Ocampo, then, sued Lingat and the Bangayans for annulment of the Deed of Sale and for the cancellation of the title issued to the Bangayans. While the annulment of sale was pending, the ejectment case was decided in favor of the Bangayans. The decision was affirmed by the RTC, the Court of Appeals and by the Supreme Court. In October 1991, Ocampo died and was substituted by her daughter, Angelita Lim in the annulment case. The RTC ruled that Lim could not substitute Ocampo because the death of Ocampo terminated her lease contract and thereby extinguished her right of first option. Lim appealed to the Court of Appeals, which ruled in her favor. In this petition for review, the Bangayans pose the issue of whether Ocampo has the right to assign her right of first option under the lease contract to her daughter. DSEaHT The Supreme Court reversed the decision of the Court of Appeals and reinstated the decision of the RTC. A reasonable perusal of the stipulations in the lease contract revealed the intent of the parties to limit their lease relationship to themselves alone. It cannot be denied that Ocampo's right of first option to buy the leased property in case of its sale is but part of the bigger right to lease said property from Lingat. The option was an independent right, which can be exercised by Ocampo. It ought to follow that if Ocampo is barred by the contract from assigning her right to lease the subject property to any other party, she is similarly barred from assigning her first option to buy the leased property to her daughter. SYLLABUS CIVIL LAW; LEASE; RIGHT OF FIRST OPTION TO BUY; IF THE LESSEE IS BARRED BY THE LEASE CONTRACT FROM ASSIGNING HER RIGHT TO LEASE THE SUBJECT PROPERTY TO ANY OTHER PARTY, SHE IS SIMILARLY BARRED FROM ASSIGNING HER FIRST OPTION TO BUY THE LEASED PROPERTY TO OTHER PERSONS; CASE AT BAR. The respondent Court of Appeals harbored the wrong notion that Angelita Ocampo Lim inherited from Teofista Ocampo her right of first option upon the latter's death. The evidence, however, shows that Ocampo assigned her right of first option to Angelita even during her

lifetime. The assignment was made on August 23, 1990. This assignment has no legal warrant. We have held that the consent of the lessor is necessary because the assignment of the lease would involve the transfer, not only of rights but also of obligations. It constitutes novation by a substitution of the person of one of the parties. A reasonable perusal of paragraphs 4 and 5 of the lease contract reveals the intent of the parties to limit their lease relationship to themselves alone. Paragraph 4 provides that "leased premises shall be used exclusively by her," referring to the late Teofista Ocampo. Paragraph 5 prohibits Ocampo from directly or indirectly) assigning, transferring or conveying her right of lease over the leased premises or any portion thereof under any circumstances whatsoever. It cannot be denied that Ocampo's right of first option to buy the leased property in case of its sale is but part of the bigger right to lease said property from Lingat. The option was given to Ocampo because she was the lessee of the subject property. It was a component of the consideration of the lease. The option was by no means an independent right which can be exercised by Ocampo. It ought to follow that if Ocampo is barred by the contract from assigning her right to lease the subject property to any other party, she is similarly barred from assigning her first option to buy the leased property to her daughter. Angelita Ocampo Lim. Needless to state, Angelita Ocampo Lim had no right to substitute her mother, Teofista Ocampo, in Civil Case No. 90-54459. aSTAHD DECISION PUNO, J p: In this petition for review, petitioners assail the decision of the Court of Appeals dated February 21, 1995, in CA-G.R. SP No. 136101 reversing and setting aside the decision of the Regional Trial Court of Manila, Branch 10, dated February 9, 1994, in Civil Case No. 90-54459. cdasia The facts show that on July 6, 1988, Teofista Ocampo and Petronilla Lingat entered into a Contract of Lease involving a piece of land with a two storey building of mixed materials located at 2309 Severino Street, Sta. Cruz, Manila, at a monthly rental of P7,000.00. The lease contract contains the following provisions: "xxx xxx xxx

"4. The lessee hereby expressly warrants that the leased premises shall be used exclusively by her for an automobile supply and parts company and partly as a dwelling place for her employees only and the lessee is strictly prohibited from using the said premises for any other purpose without the written consent of the lessor. "5. The lessee shall not directly or indirectly sublease, assign, transfer, convey, mortgage or in any manner encumber its (sic) right of lease over the leased premises or any portion thereof under any circumstances whatsoever. "8. The lessee hereby expressly acknowledges the right of the lessor to sell the leased premises, but in the event of the sale, the lessee shall be given by the lessor the FIRST OPTION to purchase the property. And in the event that it is sold to a third person, the lessor is duty bound to place a condition

on the deed of sale to the effect that this Lease Contract shall be binding and shall be honored by the vendee. "xxx xxx xxx"

On January 2, 1990, Atty. Almario Amador, counsel of Petronilla Lingat, notified Teofista Ocampo by mail that she could exercise her right of first option within 30 days from receipt of his letter. In response, Ocampo asked Atty. Amador for the selling price of the property. In a letter dated February 3, 1990, Atty. Amador informed Ocampo that she should make a written offer to buy and indicate the price she was willing to pay for the property. The parties' negotiation appears to have bogged down on who should first make the offer with a price. In a letter dated February 9, 1990, Ocampo reiterated to Atty. Amador her desire to buy the property and again inquired about its price. On February 22, 1990, Atty. Amador terminated the negotiation by sending the following letter to Ocampo's counsel, viz: "Since she failed and refused and still failing and refusing to exercise her FIRST OPTION within the period stated in our letter, our client is now free to offer the subject property to other interested buyers and to entertain and receive offers for her consideration. Meanwhile, your client is not precluded to make the offer. Moreover, it shall now be on a 'FIRST COME, FIRST SERVE' basis as your client has waived her above mentioned privilege." 1 In March 1990, Petronilla Lingat agreed to sell the above property to Rodrigo, Roberto, and Benjamin, Jr., all surnamed Bangayan, at P1,000,000.00. The Bangayans partially paid the consideration. 2 On April 5, 1990, Atty. Amador advised Ocampo of the sale of the property to the Bangayans. He also cancelled the Contract of Lease for breach of its terms and conditions. Ocampo was asked to vacate the premises and to pay the rentals in arrears. Ocampo did not heed the demand and an ejectment case against her was filed by the Bangayans before the Metropolitan Trial Court. On May 7, 1990, Petronilla Lingat executed a Deed of Absolute Sale involving the said property to the Bangayans. A new Transfer Certificate of Title No. 193035 was issued by the Register of Deeds of Manila in favor of the Bangayans with the adverse claim of Teofista Ocampo annotated therein. On September 18, 1990, Ocampo filed a complaint against Petronilla Lingat and the Bangayans for the annulment of their deed of sale, cancellation of title issued to the Bangayans, reconveyance of title and damages before the Regional Trial Court of Manila Branch 10. The case was docketed as Civil Case No. 90-54459. While Civil Case No. 90-54459 was pending in the Regional Trial Court, the ejectment case was decided against Ocampo by the Metropolitan Trial Court on February 21, 1991. The assailed decision was affirmed by the Regional Trial Court, the Court of Appeals and by this Court on October 2, 1991. It appears that Teofista Ocampo died in October 1991. She was substituted in Civil Case No. 90-54459 by her daughter, Angelita Ocampo Lim. Allegedly, Teofista Ocampo assigned her right of first option to buy the leased property to Angelita Ocampo Lim before she died. On February 9, 1994, the Regional Trial

Court of Manila 3 dismissed the case of Ocampo. It found that Teofista Ocampo cannot be substituted by her daughter. It held that the death of Ocampo terminated her lease contract with Lingat and extinguished all her rights therein, including her right of first option. Angelita Ocampo Lim appealed to the Court of Appeals. In a Decision dated February 21, 1995, the appellate court reversed the trial court. The dispositive portion of the Decision states: "xxx xxx xxx

"WHEREFORE, this petition is GRANTED. The challenged decision of the Regional Trial Court of Manila, Branch 10, is hereby REVERSED and SET ASIDE. A new judgment is entered (1) declaring the deed of absolute sale between Petronilla Lingat and the Bangayans to be null and void; (2) directing the Register of Deeds of Manila to cancel Transfer Certificate of Title No. 193035; and (3) ordering Petronilla Lingat to offer to sell the property to the petitioner in accordance with the above discussion." In this petition for review, the Bangayans pose the following issues for resolution: (1) whether or not the termination of the Contract of Lease pursuant to the decision in the ejectment case extinguished Teofista Ocampo's right of first option; (2) whether or not Teofista Ocampo's right of first option provided for under the Contract of Lease was violated by Petronilla Lingat and the Bangayans; and (3) whether or not the Court of Appeals decided the case in a way not in accord with the applicable decision of the Supreme Court. We find merit in the petition. The threshold issue is whether the late Teofista Ocampo has the right to assign her right of first option under the lease contract to her daughter, Angelita Ocampo Lim. If Ocampo's right is assignable, then her daughter, Angelita Ocampo Lim, can continue Civil Case No. 90-54459. The respondent Court of Appeals held that the said right of Ocampo is transmissible, viz: "xxx xxx xxx

"We found no legal or factual basis for concluding that the lease contract between Teofista Ocampo and Lingat was automatically extinguished upon the death of the former. There is no provision in the law which so provides. It also appears from the pleadings and the decision of the trial court that the lease contract in question does not provide for such an eventuality. "Indeed, the right to continue a lease contract either as lessor or lessee is not automatically extinguished by death of either of the contracting parties without any express provision either by will or agreement in this regard. It becomes part of the inheritance so that the heirs of the decedent succeed to the rights and obligations of the latter arising from the lease contract (III Tolentino: Civil Code of the Philippines 14-15, 1979 ed.; III Paras: Civil Code of the Philippines Annotated 7, 12th ed.)." We find this ruling erroneous. Firstly, the respondent Court of Appeals harbored the wrong notion that Angelita Ocampo Lim inherited from Teofista Ocampo her right of first option upon the latter's death.

The evidence, however, shows that Ocampo assigned her right of first option to Angelita even during her lifetime. The assignment was made on August 23, 1990. This assignment has no legal warrant. Article 1311 of the Civil Code is too clear to be misinterpreted. It provides that "contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. . . ." In the case at bar, paragraphs 4 and 5 of the lease contract specifically provide: "4. The lessee hereby expressly warrants that the leased premises shall be used exclusively by her for an automobile supply and parts company and partly as a dwelling place for her employees only and the latter is strictly prohibited from using the said premises for any other purpose without the written consent of the lessor. cdta "5. The lessee shall not directly or indirectly sublease, assign, transfer, convey, mortgage or in any manner encumber its (sic) right of lease over the leased premises or any portion thereof under any circumstances whatsoever." These stipulations are consistent with Article 1649 of the Civil Code which provides that "the lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary." We have held that the consent of the lessor is necessary because the assignment of the lease would involve the transfer, not only of rights but also of obligations. It constitutes novation by a substitution of the person of one of the parties. 4 A reasonable perusal of paragraphs 4 and 5 of the lease contract reveals the intent of the parties to limit their lease relationship to themselves alone. Paragraph 4 provides that "the leased premises shall be used exclusively by her," referring to the late Teofista Ocampo. Paragraph 5 prohibits Ocampo from directly or indirectly assigning, transferring or conveying her right of lease over the leased premises or any portion thereof under any circumstances whatsoever. It cannot be denied that Ocampo's right of first option to buy the leased property in case of its sale is but part of the bigger right to lease said property from Lingat. The option was given to Ocampo because she was the lessee of the subject property. It was a component of the consideration of the lease. The option was by no means an independent right which can be exercised by Ocampo. It ought to follow that if Ocampo is barred by the contract from assigning her right to lease the subject property to any other party, she is similarly barred from assigning her first option to buy the leased property to her daughter, Angelita Ocampo Lim. Needless to state, Angelita Ocampo Lim had no right to substitute her mother, Teofista Ocampo, in Civil Case No. 90-54459. IN VIEW WHEREOF, the decision of the respondent Court of Appeals dated February 21, 1995 is reversed and the decision of the RTC of Manila, Branch 10, dated February 9, 1994 in Civil Case No. 90-54459 is reinstated. No costs. cdti SO ORDERED. Romero, Mendoza and Torres, Jr., JJ ., concur. Regalado, J ., is on official leave.

SECOND DIVISION [G.R. No. 117355. April 5, 2002.] RIVIERA FILIPINA, INC., petitioner, vs. COURT OF APPEALS, JUAN L. REYES, (now deceased), substituted by his heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes, PHILIPPINE CYPRESS CONSTRUCTION & DEVELOPMENT CORPORATION, CORNHILL TRADING CORPORATION and URBAN DEVELOPMENT BANK, respondents. Fortunato Gupit, Jr. for petitioner. Ireneo Santos Juan and Mendoza Lacson Mison & Garcia for private respondents. Guerrero Ortega Aquino and Roque Law Offices for respondent Urban Bank. SYNOPSIS On November 23, 1982, respondent Juan L. Reyes executed a Contract of Lease with Right of First Refusal with Riviera Filipina, Inc. involving a parcel of land located along EDSA, Quezon City. Subsequently, the said land was extrajudicially foreclosed by Prudential Bank. To redeem the subject property, Reyes offered to sell the subject property to Riviera, through its President Vicente C. Angeles, but there was a disagreement as to the price. On December 4, 1988, Reyes offered the subject property to Rolando P. Traballo, President of Cypress Construction & Development Corporation. The following day, Traballo bargained for P5,300.00 per square meter. Reyes accepted the same. However, since Traballo did not have the amount at that moment, Reyes told him to look for a partner for that purpose. In January 1989, Reyes decided to approach anew Riviera but the latter insisted on his offer of P5,000 only. In February 1989, Cypress and its partner, Cornhill Trading Corporation, were able to come up with the amount sufficient to cover the redemption money, with which Reyes paid to the Prudential Bank. Thereafter, Riviera claimed that its right of first refusal under the lease contract was violated, thus, it filed a suit to compel Reyes, Cypress, Cornhill and Urban Development Bank to transfer the disputed title of the land in its favor upon payment of the price paid by Cypress and Cornhill. After trial, the court a quo dismissed the complaint as well as the counterclaims and cross-claims. On appeal, the appellate court affirmed the decision of the trial court in its entirety. Hence, this petition. aECTcA The Court ruled that nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it was, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three Hundred Pesos (P5,300) of Cypress and Cornhill it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to Article 1339 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made.

SYLLABUS 1. REMEDIAL LAW; CIVIL PROCEDURE; DISTINCTIONS BETWEEN RULE 45 AND RULE 65. The distinctions between Rule 45 and 65 are far and wide, the most notable of which is that errors of jurisdiction are best reviewed in a special civil action for certiorari under Rule 65, while errors of judgment are correctible only by appeal in a petition for review under Rule 45. The rationale for the distinction is simple. When a court exercises its jurisdiction an error committed while so engaged does not deprive it of the jurisdiction being exercised when the error is committed. If it did, every error committed by a court would deprive it of its jurisdiction and every erroneous judgment would be a void judgment. This cannot be allowed. The administration of justice would not countenance such a rule. Thus, an error of judgment that the court may commit in the exercise of its jurisdiction is not correctible through the original special civil action of certiorari. Appeal from a final disposition of the Court of Appeals, as in the case at bar, is by way of a petition for review under Rule 45. DTESIA 2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; LEASE; RIGHT OF FIRST REFUSAL; THERE MUST BE IDENTITY OF TERMS AND CONDITIONS TO BE OFFERED TO THE LESSEE AND ALL OTHER PROSPECTIVE BUYERS. [I]n 1997, in Paraaque Kings Enterprises, Inc. v. Court of Appeals, the Court affirmed the nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., held 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 price for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to be rendered illusory. Lastly, 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. Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible. DCcHAa 3. STATUTORY CONSTRUCTION; LAWS ARE INTERPRETED IN THE CONTEXT OF THE PECULIAR FACTUAL SITUATION OF EACH PROCEEDING. [W]e must remember that general propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom principles. Analysis and construction should not be limited to the words used in the contract, as they may not accurately reflect the parties' true intent. The court must read a contract as the average person would read it and should not give it a strained or forced construction. 4. ID.; OBLIGATIONS AND CONTRACTS; INTERPRETATION OF CONTRACTS; INTENTION OF THE PARTIES SHALL BE ACCORDED PRIMORDIAL CONSIDERATION. [T]he cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration and in case of doubt, their contemporaneous and subsequent acts shall be principally considered. Where the parties to a contract have given it a practical construction by their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract, determining its meaning and

ascertaining the mutual intention of the parties at the time for contracting. The parties' practical construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the contract. cHSIAC 5. ID.; ID.; LEASE; RIGHT OF FIRST REFUSAL; PROPERLY COMPLIED WITH BY LESSOR IN CASE AT BAR. As clearly shown by the records and transcripts of the case, the actions of the parties to the contract of lease, Reyes and Riviera, shaped their understanding and interpretation of the lease provision "right of first refusal" to mean simply that should the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per square meter of the subject property with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by the exchange of letters between the two contenders. It can clearly be discerned from Riviera's letters dated December 2, 1988 and February 4, 1989 that Riviera was so intractable in its position and took obvious advantage of the knowledge of the time element in its negotiations with Reyes as the redemption period of the subject foreclosed property drew near. Riviera strongly exhibited a "take-it or leave-it" attitude in its negotiations with Reyes. It quoted its "fixed and final" price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced out that it had other properties to consider so Reyes should decide and make known its decision "within fifteen days." Riviera, in its letter dated February 4, 1989, admittedly, even downgraded its offer when Reyes offered anew the property to it, such that whatever amount Reyes initially receives from Riviera would absolutely be insufficient to pay off the redemption price of the subject property. Naturally, Reyes had to disagree with Riviera's highly disadvantageous offer. DASCIc 6. ID.; ID.; FRAUD; NOT CONSTITUTED BY SILENCE OR CONCEALMENT UNLESS THERE IS A SPECIAL DUTY TO DISCLOSE CERTAIN FACTS. Nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it was, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to Article 1339 of the New Civil Code, silence or concealment, by itself, does not constitute fraud unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made. We apply the general rule in the case at bar since Riviera failed to convincingly show that either of the exceptions are relevant to the case at bar. 7. ID.; ID.; COURT HAS NO RIGHT TO MAKE NEW CONTRACTS FOR THE PARTIES OR IGNORE, THOSE ALREADY MADE BY THEM. In sum, the Court finds that in the interpretation of the right of first refusal as understood by the parties herein, the question as to what is to be included therein or what is meant by the same, as in all other provisions of the contract, is for the parties and not for the court to determine, and this question may not be resolved by what the parties might have provided had they thought about it, which is evident from Riviera claims, or by what the court might conclude regarding

abstract fairness. The Court would be rewriting the contract of Reyes and Riviera under the guise of construction were we to interpret the right of first refusal as Riviera propounds it, despite a contrary construction as exhibited by its actions. A court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed. cTECHI 8. REMEDIAL LAW; CIVIL PROCEDURE; PARTIES TO CIVIL ACTIONS; FAILURE OF COUNSEL TO COMPLY WITH HIS DUTY TO INFORM THE COURT OF THE DEATH OF HIS CLIENT WILL NOT INVALIDATE THE PROCEEDINGS; CASE AT BAR. Section 16 and 17 of Rule 3 of the Revised Rules of Court, upon which Riviera anchors its argument, has already been amended by the 1997 Rules of Civil Procedure. Even applying the old Rules, the failure of a counsel to comply with his duty under Section 16 of Rule 3 of the Revised Rules of Court, to inform the court of the death of his client and no substitution of such is effected, will not invalidate the proceedings and the judgment thereon if the action survives the death of such party, as this case does, since the death of Reyes did not extinguish his civil personality. The appellate court was well within its jurisdiction to proceed as it did with the case since the death of a party is not subject to its judicial notice. Needless to stress, the purpose behind the rule on substitution of parties is the protection of the right of every party to due process. This purpose has been adequately met in this case since both parties argued their respective positions through their pleadings in the trial court and the appellate court. Besides, the Court has already acquired jurisdiction over the heirs of Reyes by voluntarily submitting themselves to our jurisdiction. ISCaTE DECISION DE LEON, JR., J p: Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals 2 dated June 6, 1994 in CA-G.R. CV No. 26513 affirming the Decision 3 dated March 20, 1990 of the Regional Trial Court of Quezon City, Branch 89 dismissing Civil Case No. Q-89-3371. Civil Case No. Q-89-3371 is a suit instituted by Riviera Filipina, Inc. (Riviera) on August 31, 1989 4 to compel the defendants therein Juan L. Reyes, now deceased, Philippine Cypress Construction & Development Corporation (Cypress), Cornhill Trading Corporation (Cornhill) and Urban Development Bank to transfer the title covering a 1,018 square meter parcel of land located along EDSA, Quezon City for alleged violation of Riviera's right of first refusal. It appears that on November 23, 1982, respondent Juan L. Reyes (Reyes, for brevity) executed a Contract of Lease with Riviera. The ten-year (10) renewable lease of Riviera, which started on August 1, 1982, involved a 1,018 square meter parcel of land located along Edsa, Quezon City, covered and described in Transfer Certificate of Title No. 186326 of the Registry of Deeds of Quezon City in the name of Juan L. Reyes. 5

The said parcel of land was subject of a Real Estate Mortgage executed by Reyes in favor of Prudential Bank. Since the loan with Prudential Bank remained unpaid upon maturity, the mortgagee bank extrajudicially foreclosed the mortgage thereon. At the public auction sale, the mortgagee bank emerged as the highest bidder. The redemption period was set to expire on March 7, 1989. Realizing that he could not possibly raise in time the money needed to redeem the subject property, Reyes decided to sell the same. 6 Since paragraph 11 of the lease contract expressly provided that the "LESSEE shall have the right of first refusal should the LESSOR decide to sell the property during the term of the lease," 7 Reyes offered to sell the subject property to Riviera, through its President Vicente C. Angeles, for Five Thousand Pesos (P5,000.00) per square meter. However, Angeles bargained for Three Thousand Five Hundred Pesos (P3,500.00) per square meter. Since Reyes was not amenable to the said price and insisted on Five Thousand Pesos (P5,000.00) per square meter, Angeles requested Reyes to allow him to consult the other members of the Board of Directors of Riviera. 8 Seven (7) months later, or sometime in October 1988, Angeles communicated with Reyes Riviera's offer to purchase the subject property for Four Thousand Pesos (P4,000.00) per square meter. However, Reyes did not accept the offer. This time he asked for Six Thousand Pesos (P6,000.00) per square meter since the value of the property in the area had appreciated in view of the plans of Araneta to develop the vicinity. 9 In a letter dated November 2, 1988, Atty. Irineo S. Juan, acting as counsel for Reyes, informed Riviera that Reyes was selling the subject property for Six Thousand Pesos (P6,000.00) per square meter, net of capital gains and transfer taxes, registration fees, notarial fees and all other attendant charges. He further stated therein that: In this connection, conformably to the provisions stipulated in Paragraph/Item No. 11 of your CONTRACT OF LEASE (Doc. No. 365, Page No. 63, Book No. X, Series of 1982, of the Notarial Registry of Notary Public Leovillo S. Agustin), notice is served upon your goodselves for you to exercise "the right of first refusal" in the sale of said property, for which purpose you are hereby given a period of ten (10) days from your receipt hereof within which to thus purchase the same under the terms and conditions aforestated, and failing which you shall be deemed to have thereby waived such pre-emptive right and my client shall thereafter be absolutely free to sell the subject property to interested buyers. 10 To answer the foregoing letter and confirm their telephone conversation on the matter, Riviera sent a letter dated November 22, 1988 to Atty. Juan, counsel for Reyes, expressing Riviera's interest to purchase the subject property and that Riviera is already negotiating with Reyes which will take a couple of days to formalize. 11 Riviera increased its offer to Five Thousand Pesos (P5,000.00) per square meter but Reyes did not accede to said price as it was still lower than his quoted price of Six Thousand Pesos (P6,000.00) per square meter. 12 Angeles asked Reyes to give him until the end of November 1988 for Riviera's final decision. In a letter dated December 2, 1988, Angeles wrote Reyes confirming Riviera's intent to purchase the subject property for the fixed and final 13 price of Five Thousand Pesos (P5,000.00) per square meter,

complete payment within sixty (60) to ninety (90) days which "offer is what we feel should be the market price of your property." Angeles asked that the decision of Reyes and his written reply to the offer be given within fifteen (15) days since there are also other properties being offered to them at the moment. 14 In response to the foregoing letter, Atty. Juan sent a letter to Riviera dated December 5, 1988 informing Riviera that Riviera's offer is not acceptable to his client. He further expressed, "let it be made clear that, much as it is the earnest desire of my client to really give you the preference to purchase the subject property, you have unfortunately failed to take advantage of such opportunity and thus lost your right of first refusal in sale of said property." 15 Meanwhile, on December 4, 1988, Reyes confided to Rolando P. Traballo, a close family friend and President of Cypress, his predicament about the nearing expiry date of the redemption period of the foreclosed mortgaged property with Prudential Bank, the money for which he could not raise on time thereby offering the subject property to him for Six Thousand Pesos (P6,000.00) per square meter. Traballo expressed interest in buying the said property, told Reyes that he will study the matter and suggested for them to meet the next day. 16 They met the next day, December 5, 1988, at which time Traballo bargained for Five Thousand Three Hundred Pesos (P5,300.00) per square meter. After considering the reasons cited by Traballo for his quoted price, Reyes accepted the same. However, since Traballo did not have the amount with which to pay Reyes, he told the latter that he will look for a partner for that purpose. 17 Reyes told Traballo that he had already afforded Riviera its right of first refusal but they cannot agree because Riviera's final offer was for Five Thousand Pesos (P5,000.00) per square meter. 18 Sometime in January 1989, apprehensive of the impending expiration in March 1989 of the redemption period of the foreclosed mortgaged property with Prudential Bank and the deal between Reyes and Traballo was not yet formally concluded, Reyes decided to approach anew Riviera. For this purpose, he requested his nephew, Atty. Estanislao Alinea, to approach Angeles and find out if the latter was still interested in buying the subject property and ask him to raise his offer for the purchase of the said property a little higher. As instructed, Atty. Alinea met with Angeles and asked the latter to increase his offer of Five Thousand Pesos. (P5,000.00) per square meter but Angeles said that his offer is Five Thousand Pesos (P5,000.00) per square meter. 19 Following the meeting, Angeles sent a letter dated February 4, 1989 to Reyes, through Atty. Alinea, that his offer is Five Thousand Pesos (P5,000.00) per square meter payment of which would be fifty percent (50%) down within thirty (30) days upon submission of certain documents in three (3) days, the balance payable in five (5) years in equal monthly installments at twelve percent (12%) interest in diminishing balance. 20 With the terms of this second offer, Angeles admittedly downgraded the previous offer of Riviera on December 2, 1988. 21 Atty. Alinea conveyed to Reyes Riviera's offer of Five Thousand Pesos (P5,000.00) per square meter but Reyes did not agree. Consequently, Atty. Alinea contacted again Angeles and asked him if he can increase his price. Angeles, however, said he cannot add anymore. 22 Reyes did not expressly offer his

subject property to Riviera at the price of Five Thousand Three Hundred Pesos (P5,300.00) per square meter. 23 Sometime in February 1989, Cypress and its partner in the venture, Cornhill Trading Corporation, were able to come up with the amount sufficient to cover the redemption money, with which Reyes paid to the Prudential Bank to redeem the subject property. 24 On May 1, 1989, a Deed of Absolute Sale covering the subject property was executed by Reyes in favor of Cypress and Cornhill for the consideration of Five Million Three Hundred Ninety-Five Thousand Four Hundred Pesos (P5,395,400.00). 25 On the same date, Cypress and Cornhill mortgaged the subject property to Urban Development Bank for Three Million Pesos (P3,000,000.00). 26 Thereafter, Riviera sought from Reyes, Cypress and Cornhill a resale of the subject property to it claiming that its right of first refusal under the lease contract was violated. After several unsuccessful attempts, 27 Riviera filed the suit to compel Reyes, Cypress, Cornhill and Urban Development Bank to transfer the disputed title to the land in favor of Riviera upon its payment of the price paid by Cypress and Cornhill. Following trial on the merits, the trial court dismissed the complaint of Riviera as well as the counterclaims and cross-claims of the other parties. 28 It ruled that the defendants therein did not violate Riviera's right of first refusal, ratiocinating in this wise: Resolving the first issue, this Court takes note that since the beginning of the negotiation between the plaintiff and defendant Reyes for the purchase of the property, in question, the plaintiff was firm and steadfast in its position, expressed in writing by its President Vicente Angeles, that it was not willing to buy the said property higher than P5,000.00, per square meter, which was far lower than the asking price of defendant Reyes for P6,000.00, per square meter, undoubtedly, because, in its perception, it would be difficult for other parties to buy the property, at a higher price than what it was offering, since it is in occupation of the property, as lessee, the term of which was to expire after about four (4) years more. On the other hand, it was obvious, upon the basis of the last ditch effort of defendant Reyes, thru his nephew, Atty. Alinea, to have the plaintiff buy the property, in question, that he was willing to sell the said property at a price less than P6,000.00 and a little higher than P5,000.00, per square meter, precisely, because Atty. Alinea, in behalf of his uncle, defendant Reyes, sought plaintiff's Angeles and asked him to raise his price a little higher, indicating thereby the willingness of defendant Reyes to sell said property at less than his offer of P6,000.00, per square meter. This being the case, it can hardly be validly said by the plaintiff that he was deprived of his right of first refusal to buy the subject property at a price of P5,300.00, per square meter which is the amount defendants Cypress/Cornhill bought the said property from defendant Reyes. For, it was again given such an opportunity to exercise its right of first refusal by defendant Reyes had it only signified its willingness to increase a little higher its purchase price above P5,000.00, per square meter, when its President, Angeles, was asked by Atty. Alinea to do so, instead of adamantly sticking to its offer of only P5,000.00 per square meter, by reason of which, therefore, the plaintiff had lost, for the second time, its

right of first refusal, even if defendant Reyes did not expressly offer to sell to it the subject land at P5,300.00, per square meter, considering that by the plea of Atty. Alinea, in behalf of defendant Reyes, for it to increase its price a little, the plaintiff is to be considered as having forfeited again its right of first refusal, it having refused to budged from its regid (sic) offer to buy the subject property at no more than P5,000.00, per square meter. As such, this Court holds that it was no longer necessary for the defendant Reyes to expressly and categorically offer to the plaintiff the subject property at P5,300.00, per square meter, in order that he can comply with his obligation to give first refusal to the plaintiff as stipulated in the Contract of Lease, the plaintiff having had already lost its right of first refusal, at the first instance, by refusing to buy the said property at P6,000.00, per square meter, which was the asking price of defendant Reyes, since to do so would be a useless ceremony and would only be an exercise in futility, considering the firm and unbending position of the plaintiff, which defendant Reyes already knew, that the plaintiff, at any event, was not amenable to increasing its price at over P5,000.00, per square meter. Dissatisfied with the decision of the trial court, both parties appealed to the Court of Appeals. 29 However, the appellate court, through its Special Seventh Division, rendered a Decision dated June 6, 1994 which affirmed the decision of the trial court in its entirety. 30 In sustaining the decision of the trial court, the Court of Appeals adopted the above-quoted ratiocination of the trial court and further added: To put things in its proper perspective in accordance with the peculiar attendant circumstances herein, particular stress should be given to RIVIERA's uncompromising counter offer of only P5,000.00 per square meter on all the occasions when REYES offered the subject property to it. RIVIERA, in its letter to REYES dated December 2, 1988 (Exhibit "D", p. 68, Rollo) justified its rigid offer by saying that "the above offer is what we feel should be the market price of your property." If that be the case, We are convinced, the same manner that REYES was, that RIVIERA was unwilling to increase its counter offer at any present or future time. RIVIERA's unilateral valuation of the subject property thus binds him, it cannot now be heard to claim that it could have upped its offer had it been informed of CYPRESS' and CORNHILL'S offer of P5,000.00 (sic) per square meter. Defendants CYPRESS and CORNHILL were therefore right in saying that: On the basic assumption that RIVIERA really meant what it said in its letter, DR. REYES could not be faulted for believing that RIVIERA was definitely NOT WILLING TO PAY MORE THAN P5,000.00 PER SQUARE METER ON HIS PROPERTY. The fault lies with the deceptive and insincere words of RIVIERA. Injustice (sic) and equity, RIVIERA must be deemed in estoppel in now belatedly asserting that it would have been willing to pay a price higher than P5,000.00 . . . ." (Defendants-Appellees Cypress' and Cornhill's Brief, p. 8) For this reason, no adverse inference can be drawn from REYES' failure to disclose to RIVIERA the intervening counter-offer of CYPRESS and CORNHILL. It would have been far different had REYES' non-disclosure of CYPRESS' and CORNHILL's counter-offer to RIVIERA resulted in the sale of the subject property at equal or less than RIVIERA's offer; in which case, REYES would have been rightly accused of cunningly circumventing RIVIERA's right of first refusal. But

the incontrovertible antecedents obtaining here clearly reveal REYES' earnest efforts in respecting RIVIERA's contractual right to initially purchase the subject property. Not only once but twice did REYES approach RIVIERA, the last one being the most telling indication of REYES' sincerest intention in RIVIERA eventually purchasing the subject property if only the latter would increase a little its offer of P5,000.00 per square meter. And to this REYES was desperately willing to accede to despite the financial quandary he was then in as the expiration of the redemption period drew closer and closer, and despite the better offer of CYPRESS and CORNHILL. REYES unquestionably had displayed good faith. Can the same be said of RIVIERA? We do not think so. It appears that RIVIERA all along was trying to push REYES' back against the wall, for RIVIERA was well-aware of REYES' precarious financial needs at that time, and by clinging to its offer, REYES might eventually succumb to its offer out of sheer desperation. RIVIERA was, to be frank, whimsically exercising its contractual right to the prejudice of REYES who had commendably given RIVIERA extra leeway in exercising it. And to this We say that no amount of jurisprudence RIVIERA might avail of for the purpose of construing the right of first refusal, however enlightening and persuasive they may be, will cover-up for its arrogant exercise of its right as can be gleaned from the factual premises. Equity in this case tilts in favor of defendants REYES, CYPRESS and CORNHILL that the consummated sale between them concerning the subject property be given this Court's imprimatur, for if RIVIERA lost its opportunity to acquire it, it has only itself to blame. For after all, REYES' fundamental and intrinsic right of ownership which necessarily carries with it the exclusive right to dispose of it to whoever he pleases, must ultimately prevail over RIVIERA's right of first refusal which it unscrupulously tried to exercise. From this decision, Riviera filed a motion for reconsideration, 31 but the appellate court denied the same in a Resolution dated September 22, 1994. 32 Hence, Riviera interposed the instant petition anchored on the following errors: 33 I THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN RULING THAT PETITIONER RIVIERA FILIPINA, INC. ALREADY LOST ITS RIGHT OF FIRST REFUSAL. II THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN NOT FINDING THAT IT WAS THE PETITIONER, NOT RESPONDENT JUAN L. REYES, WHICH HAD BEEN THOROUGHLY DECEIVED BY THE LATTER OUT OF ITS RIGHTS TO ITS CONTINUING PREJUDICE. III THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN DENYING RECONSIDERATION. IV

THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF ITS JURISDICTION IN DECIDING PETITIONER'S APPEAL AT A TIME WHEN THE PRINCIPAL APPELLEE IS ALLEGEDLY DEAD AND NO PROPER SUBSTITUTION OF THE ALLEGED DECEASED PARTY HAS BEEN MADE; HENCE, THE DECISION OF THE COURT OF APPEALS AND ITS RESOLUTION DENYING RECONSIDERATION, IS NULL AND VOID. At the outset, we note that, while Riviera alleges that the Court of Appeals committed grave abuse of discretion amounting to lack or excess of jurisdiction, the instant petition is, as it should be, treated as a petition for review under Rule 45 and not as a special civil action for certiorari under Rule 65 of the Revised Rules of Court, now the 1997 Rules of Civil Procedure. The distinctions between Rule 45 and 65 are far and wide, the most notable of which is that errors of jurisdiction are best reviewed in a special civil action for certiorari under Rule 65, while errors of judgment are correctable only by appeal in a petition for review under Rule 45. 34 The rationale for the distinction is simple. When a court exercises its jurisdiction an error committed while so engaged does not deprive it of the jurisdiction being exercised when the error is committed. If it did, every error committed by a court would deprive it of its jurisdiction and every erroneous judgment would be a void judgment. This cannot be allowed. The administration of justice would not countenance such a rule. Thus, an error of judgment that the court may commit in the exercise of its jurisdiction is not correctable through the original special civil action of certiorari. 35 Appeal from a final disposition of the Court of Appeals, as in the case at bar, is by way of a petition for review under Rule 45. 36 In the petition at bar, Riviera posits the view that its right of first refusal was totally disregarded or violated by Reyes by the latter's sale of the subject property to Cypress and Cornhill. It contends that the right of first refusal principally amounts to a right to match in the sense that it needs another offer for the right to be exercised. The concept and interpretation of the right of first refusal and the consequences of a breach thereof evolved in Philippine juristic sphere only within the last decade. It all started in 1992 with Guzman, Bocaling & Co. v. Bonnevie 37 where the Court held that a lease with a proviso granting the lessee the right of first priority "all things and conditions being equal" meant that there should be identity of the terms and conditions to be offered to the lessee and all other prospective buyers, with the lessee to enjoy the right of first priority. A deed of sale executed in favor of a third party who cannot be deemed a purchaser in good faith, and which is in violation of a right of first refusal granted to the lessee is not voidable under the Statute of Frauds but rescissible under Articles 1380 to 1381 (3) of the New Civil Code. Subsequently in 1994, in the case of Ang Yu Asuncion v. Court of Appeals, 38 the Court en banc departed from the doctrine laid down in Guzman, Bocaling & Co. v. Bonnevie and refused to rescind a contract of sale which violated the right of first refusal. The Court held that the so-called "right of first refusal" cannot be deemed a perfected contract of sale under Article 1458 of the New Civil Code and, as such, a breach thereof decreed under a final judgment does not entitle the aggrieved party to a writ of execution of the judgment but to an action for damages in a proper forum for the purpose.

In the 1996 case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 39 the Court en banc reverted back to the doctrine in Guzman Bocaling & Co. v. Bonnevie stating that 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. Thereafter in 1997, in Paraaque Kings Enterprises, Inc. v. Court of Appeals, 40 the Court affirmed the nature of and the concomitant rights and obligations of parties under a right of first refusal. The Court, summarizing the rulings in Guzman, Bocaling & Co. v. Bonnevie and Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., held 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 price for which they were finally sold to a third person should have likewise been first offered to the former. Further, there should be identity of terms and conditions to be offered to the buyer holding a right of first refusal if such right is not to be rendered illusory. Lastly, 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. Thus, the prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible. However, we must remember that general propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom principles. 41 Analysis and construction should not be limited to the words used in the contract, as they may not accurately reflect the parties' true intent. 42 The court must read a contract as the average person would read it and should not give it a strained or forced construction. 43 In the case at bar, the Court finds relevant and significant the cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial consideration and in case of doubt, their contemporaneous and subsequent acts shall be principally considered. 44 Where the parties to a contract have given it a practical construction by their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the time for contracting. The parties' practical construction of their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the proper construction of the contract. 45 An examination of the attendant particulars of the case do not persuade us to uphold Riviera's view. As clearly shown by the records and transcripts of the case, the actions of the parties to the contract of lease, Reyes and Riviera, shaped their understanding and interpretation of the lease provision "right of first refusal" to mean simply that should the lessor Reyes decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee Riviera. And that is what exactly ensued between Reyes and Riviera, a series of negotiations on the price per square meter of the subject

property with neither party, especially Riviera, unwilling to budge from his offer, as evidenced by the exchange of letters between the two contenders. It can clearly be discerned from Riviera's letters dated December 2, 1988 and February 4, 1989 that Riviera was so intractable in its position and took obvious advantage of the knowledge of the time element in its negotiations with Reyes as the redemption period of the subject foreclosed property drew near. Riviera strongly exhibited a "take-it or leave-it" attitude in its negotiations with Reyes. It quoted its "fixed and final" price as Five Thousand Pesos (P5,000.00) and not any peso more. It voiced out that it had other properties to consider so Reyes should decide and make known its decision "within fifteen days." Riviera, in its letter dated February 4, 1989, admittedly, even downgraded its offer when Reyes offered anew the property to it, such that whatever amount Reyes initially receives from Riviera would absolutely be insufficient to pay off the redemption price of the subject property. Naturally, Reyes had to disagree with Riviera's highly disadvantageous offer. Nary a howl of protest or shout of defiance spewed forth from Riviera's lips, as it were, but a seemingly whimper of acceptance when the counsel of Reyes strongly expressed in a letter dated December 5, 1989 that Riviera had lost its right of first refusal. Riviera cannot now be heard that had it been informed of the offer of Five Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Pursuant to Article 1339 46 of the New Civil Code, silence or concealment, by itself, does not constitute fraud, unless there is a special duty to disclose certain facts, or unless according to good faith and the usages of commerce the communication should be made. 47 We apply the general rule in the case at bar since Riviera failed to convincingly show that either of the exceptions are relevant to the case at bar. In sum, the Court finds that in the interpretation of the right of first refusal as understood by the parties herein, the question as to what is to be included therein or what is meant by the same, as in all other provisions of the contract, is for the parties and not for the court to determine, and this question may not be resolved by what the parties might have provided had they thought about it, which is evident from Riviera claims, or by what the court might conclude regarding abstract fairness. 48 The Court would be rewriting the contract of Reyes and Riviera under the guise of construction were we to interpret the right of first refusal as Riviera propounds it, despite a contrary construction as exhibited by its actions. A court, even the Supreme Court, has no right to make new contracts for the parties or ignore those already made by them, simply to avoid seeming hardships. Neither abstract justice nor the rule of liberal construction justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract of an obligation not assumed. 49 On the last error attributed to the Court of Appeals which is the effect on the jurisdiction of the appellate court of the non-substitution of Reyes, who died during the pendency of the appeal, the Court notes that when Riviera filed its petition with this Court and assigned this error, it later filed on October 27, 1994 a Manifestation 50 with the Court of Appeals stating that it has discovered that Reyes is

already dead, in view of which the appellate court issued a Resolution dated December 16, 1994 which noted the manifestation of Riviera and directed the counsel of Reyes to submit a copy of the latter's death certificate and to file the proper motion for substitution of party. 51 Complying therewith, the necessary motion for substitution of deceased Reyes, who died on January 7, 1994, was filed by the heirs, namely, Estefania B. Reyes, Juanita R. de la Rosa, Juan B. Reyes, Jr. and Fidel B. Reyes. 52 Acting on the motion for substitution, the Court of Appeals granted the same. 53 Notwithstanding the foregoing, Section 16 54 and 17 55 of Rule 3 of the Revised Rules of Court, upon which Riviera anchors its argument, has already been amended by the 1997 Rules of Civil Procedure. 56 Even applying the old Rules, the failure of a counsel to comply with his duty under Section 16 of Rule 3 of the Revised Rules of Court, to inform the court of the death of his client and no substitution of such is effected, will not invalidate the proceedings and the judgment thereon if the action survives the death of such party, 57 as this case does, since the death of Reyes did not extinguish his civil personality. The appellate court was well within its jurisdiction to proceed as it did with the case since the death of a party is not subject to its judicial notice. Needless to stress, the purpose behind the rule on substitution of parties is the protection of the right of every party to due process. This purpose has been adequately met in this case since both parties argued their respective positions through their pleadings in the trial court and the appellate court. Besides, the Court has already acquired jurisdiction over the heirs of Reyes by voluntarily submitting themselves to our jurisdiction. 58 In view of all the foregoing, the Court is convinced that the appellate court committed no reversible error in its challenged Decision. WHEREFORE, the instant petition is hereby DENIED, and the Decision of the Court of Appeals dated June 6, 1994 in CA-G.R. CV No. 26513 is AFFIRMED. No pronouncement as to costs. SO ORDERED. Bellosillo, Mendoza and Quisumbing, JJ., concur.

SECOND DIVISION [G.R. No. 103338. January 4, 1994.] FEDERICO SERRA, petitioner, vs. THE HON. COURT OF APPEALS AND RIZAL COMMERCIAL BANKING CORPORATION, respondents. SYLLABUS 1. CIVIL LAW; CONTRACTS; CONTRACT OF ADHESION; CONSTRUED; CASE AT BAR NOT A CASE OF. A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his "adhesion" thereto. These types of contracts are as binding as ordinary contracts. Because in reality, the party who adheres to the contract is free to reject it entirely. Although, this Court will not hesitate to rule out blind adherence to terms where facts and circumstances will show that it is basically one-sided. We do not find the situation in the present case to be inequitable. Petitioner is a highly educated man, who, at the time of the trial was already a CPA-Lawyer, and when he entered into the contract, was already a CPA, holding a respectable position with the Metropolitan Manila Commission. It is evident that a man of his stature should have been more cautious in transactions he enters into, particularly where it concerns valuable properties. He is amply equipped to drive a hard bargain if he would be so minded to. 2. ID.; ID.; PROMISE TO BUY AND SELL A DETERMINATE THING FOR A PRICE; DISTINGUISHED FROM ACCEPTED UNILATERAL PROMISE TO BUY OR SELL A DETERMINATE THING FOR A PRICE. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. 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. (Article 1479, New Civil Code) The first is a mutual promise and each has the right to demand from the other the fulfillment of the obligation. While the second is merely an offer of one to another, which if accepted, would create an obligation to the offeror to make good his promise, provided the acceptance is supported by a consideration distinct from the price. Article 1324 of the Civil Code provides that when an offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at anytime before acceptance by communicating such withdrawal, except when the option is founded upon consideration, as something paid or promised. On the other hand, Article 1479 of the Code provides that an accepted unilateral promise to buy and 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. In a unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance by the creditor, the transaction becomes a bilateral contract to sell and to buy, because upon acceptance by the creditor of the offer to sell by the debtor, there is already a meeting of the minds of the parties as to the thing which is determinate and the price which is certain. In which case, the parties may then reciprocally demand performance. Jurisprudence has taught us that an optional contract is a privilege existing only in one party the buyer. For a separate consideration paid, he is given the right to decide to purchase or not, a certain merchandise or property, at any time within the agreed period, at a fixed price. This being his prerogative, he may not be compelled to exercise the option to buy before the time expires.

3. ID.; ID.; ID.; ID.; APPLICATION IN CASE AT BAR; VDA. DE QUIRINO v. PALARCA (29 SCRA 1), CITED. What may be regarded as a consideration separate from the price is discussed in the case of Vda. de Quirino v. Palarca (29 SCRA 1) wherein the facts are almost on all fours with the case at bar. The said case also involved a lease contract with option to buy where we had occasion to say that "the consideration for the lessor's obligation to sell the leased premises to the lessee, should he choose to exercise his option to purchase the same, is the obligation of the lessee to sell to the lessor the building and/or improvements constructed and/or made by the former, if he fails to exercise his option to buy said premises." In the present case, the consideration is even more onerous on the part of the lessee since it entails transferring of the building and/or improvements on the property to petitioner, should respondent bank fail to exercise its option within the period stipulated. The bugging question then is whether the price "not greater than TWO HUNDRED PESOS" is certain or definite. A price is considered certain if it is so with reference to another thing certain or when the determination thereof is left to the judgment of a specified person or persons. And generally, gross inadequacy of price does not affect a contract of sale. Contracts are to be construed according to the sense and meaning of the terms which the parties themselves have used. In the present dispute, there is evidence to show that the intention of the parties is to peg the price at P210 per square meter. Moreover, by his subsequent acts of having the land titled under the Torrens System, and in pursuing the bank manager to effect the sale immediately, means that he understood perfectly well the terms of the contract. He even had the same property mortgaged to the respondent bank sometime in 1979, without the slightest hint of wanting to abandon his offer to sell the property at the agreed price P210 per square meter. 4. ID.; ID.; EXTRAORDINARY INFLATION; WHEN CONSIDERED. We agree with the courts a quo that there is no basis, legal or factual, in adjusting the amount of the rent. The contract is the law between the parties and if there is indeed reason to adjust the rent, the parties could by themselves negotiate for the amendment of the contract. Neither could we consider the decline of the purchasing power of the Philippine peso from 1983 to the time of the commencement of the present case in 1985, to be so great as to result in an extraordinary inflation. Extraordinary inflation exists when there is an unimaginable increase or decrease of the purchasing power of the Philippine currency, or fluctuation in the value of pesos manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. DECISION NOCON, J p: A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. 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. (Article 1479, New Civil Code) The first is a mutual promise and each has the right to demand from the other the fulfillment of the obligation. While the second is merely an offer of one to another, which if accepted, would create an obligation to the offeror to make good his promise, provided the acceptance is supported by a consideration distinct from the price. LibLex

Disputed in the present case is the efficacy of a "Contract of Lease with Option to Buy," entered into between petitioner Federico Serra and private respondent Rizal Commercial Banking Corporation. (RCBC). Petitioner is the owner of a 374 square meter parcel of land located at Quezon St., Masbate, Masbate. Sometime in 1975, respondent bank, in its desire to put up a branch in Masbate, Masbate, negotiated with petitioner for the purchase of the then unregistered property. On May 20, 1975, a contract of LEASE WITH OPTION TO BUY was instead forged by the parties, the pertinent portion of which reads: "1. The LESSOR leases unto the LESSEE, and the LESSEE hereby accepts in lease, the parcel of land described in the first WHEREAS clause, to have and to hold the same for a period of twenty-five (25) years commencing from June 1, 1975 to June 1, 2000. The LESSEE, however, shall have the option to purchase said parcel of land within a period of ten (10) years from the date of the signing of this Contract at a price not greater than TWO HUNDRED TEN PESOS (P210.00) per square meter. For this purpose, the LESSOR undertakes, within such ten-year period, to register said parcel of land under the TORRENS SYSTEM and all expenses appurtenant thereto shall be for his sole account. "If, for any reason, said parcel of land is not registered under the TORRENS SYSTEM within the aforementioned ten-year period, the LESSEE shall have the right, upon termination of the lease to be paid by the LESSOR the market value of the building and improvements constructed on said parcel of land. cdll "The LESSEE is hereby appointed attorney-in-fact for the LESSOR to register said parcel of land under the TORRENS SYSTEM in case the LESSOR, for any reason, fails to comply with his obligation to effect said registration within a reasonable time after the signing of this Agreement, and all expenses appurtenant to such registration shall be charged by the LESSEE against the rentals due to the LESSOR. "2. During the period of the lease, the LESSEE covenants to pay the LESSOR, at the latter's residence, a monthly rental of SEVEN HUNDRED PESOS (P700.00), Philippine Currency, payable in advance on or before the fifth (5th) day of every calendar month, provided that the rentals for the first four (4) months shall be paid by the LESSEE in advance upon the signing of this Contract. "3. The LESSEE is hereby authorized to construct at its sole expense a building and such other improvements on said parcel of land, which it may need in the pursuance of its business and/or operations; provided, that if for any reason the LESSEE shall fail to exercise its option mentioned in paragraph (1) above in case the parcel of land is registered under the TORRENS SYSTEM within the tenyear period mentioned therein, said building and/or improvements, shall become the property of the LESSOR after the expiration of the 25-year lease period without right of reimbursement on the part of the LESSEE. The authority herein granted does not, however, extend to the making or allowing any unlawful, improper or offensive use of the leased premises, or any use thereof, other than banking and office purposes. The maintenance and upkeep of such building, structure and improvements shall likewise be for the sole account of the LESSEE. 1 The foregoing agreement was subscribed before Notary Public Romeo F. Natividad. prcd

Pursuant to said contract, a building and other improvements were constructed on the land which housed the branch office of RCBC in Masbate, Masbate. Within three years from the signing of the contract, petitioner complied with his part of the agreement by having the property registered and placed under the TORRENS SYSTEM, for which Original Certificate of Title No. 0-232 was issued by the Register of Deeds of the Province of Masbate. Petitioner alleges that as soon as he had the property registered, he kept on pursuing the manager of the branch to effect the sale of the lot as per their agreement. It was not until September 4, 1984, however, when the respondent bank decided to exercise its option and informed petitioner, through a letter, 2 of its intention to buy the property at the agreed price of not greater than P210.00 per square meter or a total of P78,430.00. But much to the surprise of the respondent, petitioner replied that he is no longer selling the property. 3 Hence, on March 14, 1985, a complaint for specific performance and damages was filed by respondent against petitioner. In the complaint, respondent alleged that during the negotiations it made clear to petitioner that it intends to stay permanently on the property once its branch office is opened unless the exigencies of the business requires otherwise. Aside from its prayer for specific performance, it likewise asked for an award of P50,000.00 for attorney's fees P100,000.00 as exemplary damages and the cost of the suit. 4 A special and affirmative defenses, petitioner contended: 1. That the contract having been prepared and drawn by RCBC, it took undue advantage on him when it set in lopsided terms. 2. That the option was not supported by any consideration distinct from the price and hence not binding upon him. cdphil 3. That as a condition for the validity and/or efficacy of the option, it should have been exercised within the reasonable time after the registration of the land under the Torrens System; that its delayed action on the option has forfeited whatever its claim to the same. 4. That extraordinary inflation supervened resulting in the unusual decrease in the purchasing power of the currency that could not reasonably be foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation, thus, rendering the terms of the contract unenforceable, inequitable and to the undue enrichment of RCBC. 5 and as counterclaim petitioner alleged that: 1. The rental of P700.00 has become unrealistic and unreasonable, that justice and equity will require its adjustment. 2. By the institution of the complaint he suffered moral damages which may be assessed at P100,000.00; and award of attorney's fee of P25,000.00 and exemplary damages at P100,000.00. 6

Initially, after trial on the merits, the court dismissed the complaint. Although it found the contract to be valid, the court nonetheless ruled that the option to buy is unenforceable because it lacked a consideration distinct from the price and that RCBC did not exercise its option within reasonable time. The prayer for readjustment of rental was denied, as well as that for moral and exemplary damages. 7 Nevertheless, upon motion for reconsideration of respondent, the court in the order of January 9, 1989, reversed itself, the dispositive portion reads: "WHEREFORE, the Court reconsiders its decision dated June 6, 1988, and hereby renders judgment as follows: "1. The defendant is hereby ordered to execute and deliver the proper deed of sale in favor of plaintiff selling, transferring and conveying the property covered and described in the Original Certificate of Title 0-232 of the Registry of Deeds of Masbate for the sum of Seventy Eight Thousand Five Hundred Forty Pesos (P78,540,00), Philippine Currency; LLpr "2. fees; "3. "4. Defendant is ordered to pay plaintiff the sum of Five Thousand (P5,000.00) Pesos as attorney's

The counter claim of defendant is hereby dismissed; and Defendant shall pay the costs of suit." 8

In a decision promulgated on September 19, 1991, 9 the Court of Appeals affirmed the findings of the trial court that: 1. 2. 3. The contract is valid and that the parties perfectly understood the contents thereof; The option is supported by a distinct and separate consideration as embodied in the agreement; There is no basis in granting an adjustment in rental.

Assailing the judgment of the appellate court, petitioner would like us to consider mainly the following: 1. The disputed contract is a contract of adhesion.

2. There was no consideration to support the option, distinct from the price, hence the option cannot be exercised. 3. Respondent court gravely abused its discretion in not granting currency adjustment on the already eroded value of the stipulated rentals for twenty-five years. The petition is devoid of merit. There is no dispute that the contract is valid and existing between the parties, as found by both the trial court and the appellate court. Neither do we find the terms of the contract unfairly lopsided to have it ignored.

A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his "adhesion" thereto. These types of contracts are as binding as ordinary contracts. Because in reality, the party who adheres to the contract is free to reject it entirely. Although, this Court will not hesitate to rule out blind adherence to terms where facts and circumstances will show that it is basically one-sided. 10 We do not find the situation in the present case to be inequitable. Petitioner is a highly educated man, who, at the time of the trial was already a CPA-Lawyer, and when he entered into the contract, was already a CPA, holding a respectable position with the Metropolitan Manila Commission. It is evident that a man of his stature should have been more cautious in transactions he enters into, particularly where it concerns valuable properties. He is amply equipped to drive a hard bargain if he would be so minded to. Petitioner contends that the doctrines laid down in the cases of Atkins Kroll v. Cua Hian Tek, 11 Sanchez v. Rigos, 12 and Vda. de Quirino v. Palarca 13 were misapplied in the present case, because 1) the option given to the respondent bank was not supported by a consideration distinct from the price; and 2) that the stipulated price of "not greater than P210.00 per square meter" is not certain or definite. cdrep Article 1324 of the Civil Code provides that when an offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at anytime before acceptance by communicating such withdrawal, except when the option is founded upon consideration, as something paid or promised. On the other hand, Article 1479 of the Code provides that an accepted unilateral promise to buy and 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. In a unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance by the creditor, the transaction becomes a bilateral contract to sell and to buy, because upon acceptance by the creditor of the offer to sell by the debtor, there is already a meeting of the minds of the parties as to the thing which is determinate and the price which is certain. 14 In which case, the parties may then reciprocally demand performance. llcd Jurisprudence has taught us that an optional contract is a privilege existing only in one party the buyer. For a separate consideration paid, he is given the right to decide to purchase or not, a certain merchandise or property, at any time within the agreed period, at a fixed price. This being his prerogative, he may not be compelled to exercise the option to buy before the time expires. 15 On the other hand, what may be regarded as a consideration separate from the price is discussed in the case of Vda. de Quirino v. Palarca 16 wherein the facts are almost on all fours with the case at bar. The said case also involved a lease contract with option to buy where we had occasion to say that "the consideration for the lessor's obligation to sell the leased premises to the lessee, should he choose to exercise his option to purchase the same, is the obligation of the lessee to sell to the lessor the building and/or improvements constructed and/or made by the former, if he fails to exercise his option to buy said premises." 17

In the present case, the consideration is even more onerous on the part of the lessee since it entails transferring of the building and/or improvements on the property to petitioner, should respondent bank fail to exercise its option within the period stipulated. 18 The bugging question then is whether the price "not greater than TWO HUNDRED PESOS" is certain or definite. A price is considered certain if it is so with reference to another thing certain or when the determination thereof is left to the judgment of a specified person or persons. 19 And generally, gross inadequacy of price does not affect a contract of sale. 20 Contracts are to be construed according to the sense and meaning of the terms which the parties themselves have used. In the present dispute, there is evidence to show that the intention of the parties is to peg the price at P210 per square meter. This was confirmed by petitioner himself in his testimony, as follows: Q. A. Q. xxx A. Q. A. Q. A. Will you please tell this Court what was the offer? It was an offer to buy the property that I have in Quezon City (sic). And did they give you a specific amount? xxx xxx

Well, there was an offer to buy the property at P210 per square meters (sic). And that was in what year? 1975, sir. And did you accept the offer? Yes, sir. 21

Moreover, by his subsequent acts of having the land titled under the Torrens System, and in pursuing the bank manager to effect the sale immediately, means that he understood perfectly well the terms of the contract. He even had the same property mortgaged to the respondent bank sometime in 1979, without the slightest hint of wanting to abandon his offer to sell the property at the agreed price of P210 per square meter. 22 Finally, we agree with the courts a quo that there is no basis, legal or factual, in adjusting the amount of the rent. The contract is the law between the parties and if there is indeed reason to adjust the rent, the parties could by themselves negotiate for the amendment of the contract. Neither could we consider the decline of the purchasing power of the Philippine peso from 1983 to the time of the commencement of the present case in 1985, to be so great as to result in an extraordinary inflation. Extraordinary inflation exists when there in an unimaginable increase or decrease of the purchasing power of the Philippine currency, or fluctuation in the value of pesos manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. 23

Premises considered, we find that the contract of "LEASE WITH OPTION TO BUY" between petitioner and respondent bank is valid, effective and enforceable, the price being certain and that there was consideration distinct from the price to support the option given to the lessee. WHEREFORE, this petition is hereby DISMISSED, and the decision of the appellate court is hereby AFFIRMED. SO ORDERED. Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

FIRST DIVISION [G.R. No. 147575. October 22, 2004.] TERESITA B. MENDOZA, petitioner, vs. BETH DAVID, respondent. The Law Firm of Habitan Carbonell Ferrer Chan & Associates for petitioner. Rodolfo Reynoso for respondent. SYNOPSIS Petitioner ordered three sets of furniture from the respondent and made an initial deposit. Both parties agreed on the specifications, including the material and quality of the furniture. Petitioner, however, rejected the sets of furniture when delivered allegedly because of inferior material and poor quality. When the respondent refused to return the deposit, the petitioner filed a complaint for collection of money with damages before the Metropolitan Trial Court of Quezon City. The respondent denied petitioner's allegations in the complaint. The MTC dismissed the complaint finding no proof of breach of contract on the respondent's part. It held that there was a consummated "made to order" agreement between the parties. The Regional Trial Court of Quezon City affirmed with modification the decision of the MTC. On appeal, the Court of Appeals dismissed the petition for being insufficient in form and substance. TAEcCS Hence, the instant petition. Petitioner insisted that the transaction was a sale by sample or description, which can be rescinded as provided under Article 1481 of the Civil Code. On the other hand, the respondent alleged that the three sets of furniture were "made to order" in accordance with the usual practice of furniture stores. The Supreme Court agreed with the MTC that the transaction in this case was a "made to order" agreement. It found nothing in the records which would show that the intent of the parties was for a sale by sample or description. According to the Court, whether a sale is by sample or description depends upon the facts disclosing the intention of the parties. Here, other than the bare allegation that the transaction was a sale by sample or description, petitioner failed to produce evidence to substantiate her claim. The Court further held that the sale of furniture in this case was not a sale by sample. The term "sale by sample" does not include an agreement to manufacture goods to correspond with the pattern. Here, the three sets of furniture were manufactured according to the specifications provided by the buyer. Petitioner did not order the exact replica of the furniture displayed in the respondent's shop, but made her own specifications on the measurement, material and quality of the sets of furniture she ordered. Neither was the transaction a sale by description. Petitioner did not rely on any description made by the respondent when she ordered the furniture. Rather, the petitioner inspected the furniture displayed in respondent's furniture shop and made her own specifications on the three sets of furniture she ordered. Anent petitioner's claim that the respondent committed a breach of contract, the Court found that the petitioner failed to substantiate her claim. She failed to present any

evidence to overcome the presumption that the transaction was fair and regular. In view of the foregoing, the Court modified the decision of the Court of Appeals. ECISAD SYLLABUS 1. REMEDIAL LAW; RULES OF PROCEDURE; SHOULD BE USED TO PROMOTE, NOT FRUSTRATE JUSTICE. The Court of Appeals dismissed the case based on Sections 2 and 3, Rule 42 of the 1997 Rules of Civil Procedure which read: . . . . However, Section 6, Rule I of the 1997 Rules of Civil Procedure also provides that rules shall be liberally construed in order to promote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding. Indeed, rules of procedure should be used to promote, not frustrate justice. This Court has ruled against the dismissal of appeals based solely on technicalities in several cases, especially when the appellant had substantially complied with the formal requirements. 2. ID.; ID.; ID.; APPEALS SHOULD NOT BE DISMISSED ON A MERE TECHNICALITY TO AFFORD THE LITIGANTS THE MAXIMUM OPPORTUNITY FOR THE ADJUDICATION OF THEIR CASES ON THE MERITS. Instead of denying the Motion for Reconsideration, the Court of Appeals should have ruled on the merits of the case considering that Mendoza already submitted the pleadings and documents required by the Court of Appeals. The rules of procedure are designed to ensure a fair, orderly and expeditious disposition of cases. As much possible, appeals should not be dismissed on a mere technicality in order to afford the litigants the maximum opportunity for the adjudication of their cases on the merits. ICAcTa 3. ID.; EVIDENCE; FACTUAL FINDINGS OF THE LOWER COURTS ENTITLED TO GREAT WEIGHT IF SUPPORTED BY SUBSTANTIAL EVIDENCE ON RECORD; CASE AT BAR. Likewise, the Court of Appeals should have refrained from hastily dismissing the petition through the expediency of applying the doctrine that factual findings of the lower courts are entitled to great weight. The doctrine is applicable where there is substantial evidence to support the findings of fact by the lower court as borne by the records of the case. In this case, the Court of Appeals admitted that without the pertinent documents and pleadings, it is deprived of a full opportunity to know all the facts and issues involved in the case. The doctrine therefore is not applicable considering the absence of the records of the case to determine whether substantial evidence supports the factual findings of the lower court. Instead of relying on the doctrine, the Court of Appeals could have required Mendoza to submit additional documents in accordance with Section 3 (d), Rule 3 of the Revised Internal Rules of the Court of Appeals so that it would have a basis for its ruling. Furthermore, the Court of Appeals could order the Clerk of the RTC to elevate the original records of the case for a complete adjudication of the case. 4. ID.; ID.; BURDEN OF PROOF AND PRESUMPTIONS; DISPUTABLE PRESUMPTIONS; PRIVATE TRANSACTIONS ARE FAIR AND REGULAR; CASE AT BAR. It is undisputed that there was a perfected contract of sale of furniture between Mendoza and David. The three sets of furniture were delivered or ready for delivery within the agreed period. The issue for resolution is whether there was breach of contract on David's part. The Court finds none. Part of the exhibits David submitted to the MTC were pictures of the sets of furniture Mendoza ordered. The MTC found the furniture to be strictly in

accordance with the tenor of the contract between Mendoza and David. The MTC and the RTC, noting the lack of written specifications on the material and quality of the furniture ordered, held that Mendoza failed to present any proof to show that the furniture was not in accordance with the agreed specifications. The records show that the parties agreed that the furniture should be made of narra. Mendoza admitted that the furniture delivered was made of narra but was of inferior quality. She also complained of deep nail marks and rough surface at the back of the table and chairs. However, Mendoza failed to prove these allegations. In civil cases, the burden of proof rests on the party who asserts the affirmative of an issue based on the pleadings or the nature of the case. In this case, the burden lies on Mendoza who must prove her allegation that there was breach of contract. After reviewing the records of the case, the Court finds that Mendoza failed to substantiate her claim of breach of contract. Mendoza failed to present any evidence to overcome the presumption that the transaction was fair and regular. aSEDHC 5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; SALES; SALE BY SAMPLE DISTINGUISHED FROM SALE OF GOODS BY DESCRIPTION. There is a sale by sample when a small quantity is exhibited by the seller as a fair specimen of the bulk, which is not present and there is no opportunity to inspect or examine the same. To constitute a sale by sample, it must appear that the parties treated the sample as the standard of quality and that they contracted with reference to the sample with the understanding that the product to be delivered would correspond with the sample. In a contract of sale by sample, there is an implied warranty that the goods shall be free from any defect which is not apparent on reasonable examination of the sample and which would render the goods unmerchantable. There is a sale of goods by description where "a seller sells things as being of a particular kind, the buyer not knowing whether the seller's representations are true or false, but relying on them as true; or as otherwise stated, where the buyer has not seen the article sold and relies on the description given to him by the seller, or has seen the goods, but the want of identity is not apparent on inspection." A seller's description of the goods which is made part of the basis of the transaction creates a warranty that the goods will conform to that description. Where the goods are bought by description from a seller who deals in the goods of that description, there is an implied warranty that the goods are of merchantable quality. aTcIAS 6. ID.; ID.; ID.; WHETHER A SALE IS BY SAMPLE OR A SALE BY DESCRIPTION DEPENDS UPON THE FACTS DISCLOSING THE INTENTION OF THE PARTIES. Whether a transaction is a sale by sample, a sale by description or "made to order" is a question of fact for the trial court to decide from the evidence presented. In this case, the MTC found that there was a consummated "made to order" agreement between Mendoza and David. The Court agrees with the MTC that the transaction in this case was a "made to order" agreement. There is nothing in the records which would show that the intent of the parties was for a sale by sample or description. Whether a sale is by sample or description depends upon the facts disclosing the intention of the parties. Other than Mendoza's bare allegations that the transaction was a sale by sample or description, Mendoza failed to produce evidence to substantiate her claim. 7. ID.; ID.; ID.; TERM "SALE BY SAMPLE" DOES NOT INCLUDE AN AGREEMENT TO MANUFACTURE GOODS TO CORRESPOND WITH THE PATTERN. The sale of furniture in this case is not a sale by sample. The term sale by sample does not include an agreement to manufacture goods to correspond

with the pattern. In this case, the three sets of furniture were manufactured according to the specifications provided by the buyer. Mendoza did not order the exact replica of the furniture displayed in David's shop but made her own specifications on the measurement, material and quality of the furniture she ordered. Neither is the transaction a sale by description. Mendoza did not rely on any description made by David when she ordered the furniture. Mendoza inspected the furniture displayed in David's furniture shop and made her own specifications on the three sets of furniture she ordered. aHIEcS DECISION CARPIO, J p: The Case This is a petition for review 1 of the Decision 2 dated 10 October 2000 and the Resolution dated 20 March 2001 of the Court of Appeals in CA-G.R. SP No. 58087. The Court of Appeals dismissed Teresita B. Mendoza's ("Mendoza") petition for review for being insufficient in form and substance and denied her motion to reconsider the Decision. cDHAES The Facts This case 3 arose from an action for collection of money with damages that Mendoza filed against Beth David ("David") before the Metropolitan Trial Court of Quezon City ("MTC"), Branch 35. In her complaint, Mendoza alleged that on 17 February 1997, she ordered three sets of furniture from David worth P185,650 and paid an initial deposit of P40,650. Mendoza and David agreed on the specifications of the dining set, sofa set and tea set including the material and quality. On 18 February 1997, Mendoza cancelled some of the furniture she ordered and David agreed to the cancellation. On 12 April 1997, Mendoza paid an additional deposit of P40,000. When David delivered the dining set to Mendoza on 17 April 1997, Mendoza rejected the set because of inferior material and poor quality. Mendoza likewise rejected the sala set and the tea set for the same reason. When Mendoza requested a refund of her total deposit of P80,650, David refused. Mendoza then sent David a letter dated 27 May 1997 demanding the refund of her deposit but David ignored the demand letter. 4 The parties failed to arrive at an amicable settlement. Thus, Mendoza filed a complaint for collection of money with damages. 5 In her Answer, David admitted that she and Mendoza agreed on the material and quality of the furniture Mendoza ordered since that was the normal practice for "made to order" furniture. David stated that on 17 April 1997, she delivered some of the furniture which was received by Mendoza's father. However, Mendoza could not pay the balance of the price and requested payment on installment which David rejected. As a result of Mendoza's non-payment, David reclaimed the furniture already delivered and informed Mendoza she could get the furniture upon payment of the balance of P105,000. In the meantime, David stored the furniture in her warehouse. When David received Mendoza's demand letter, she refused to comply with Mendoza's request for a refund of the deposit since all the three sets

of furniture Mendoza ordered were already finished and delivered on the agreed date. David only retrieved the furniture due to non-payment of the balance. 6 On 2 August 1999, the MTC dismissed Mendoza's complaint for lack of merit. The MTC held that David is not liable to return the deposit Mendoza paid. The MTC found there was already a perfected contract of sale which imposes reciprocal obligations on the parties. Mendoza is obligated to pay the balance of the purchase price while David is obligated to deliver the three sets of furniture to Mendoza upon payment of the purchase price. cSTDIC The MTC found no proof of breach of contract on David's part. Mendoza failed to present any evidence that the furniture David delivered to her on 17 April 1997 was not in accordance with the agreed specifications. Besides, the order receipt for the sofa set, tea set and dining set contained no specifications on the required material or the quality of workmanship. Mendoza appealed to the Regional Trial Court of Quezon City ("RTC"), Branch 105, which modified the decision of the MTC. The dispositive portion of the RTC's decision reads: WHEREFORE, in the light of the foregoing, the decision appealed from is affirmed with MODIFICATION in that the plaintiff-appellant is ordered to pay to the defendant within sixty (60) days from receipt of this decision the amount of P55,850.00, with legal interest from 17 April 1997 until fully paid; otherwise, the deposit of P80,650.00 will be deemed forfeited and the defendant-appellee shall, thereafter, be authorized to dispose of the subject furniture. Upon timely payment of said obligation by the plaintiffappellant to the defendant-appellee, the latter is ordered to deliver the subject furniture to the former. 7 The RTC agreed with the MTC that there was a perfected contract of sale. The RTC found that Mendoza failed to present any proof to show that the furniture delivered was not in accordance with the agreed specifications. Applying the doctrine of caveat emptor, the RTC held that Mendoza should have specified in writing the details of her order. However, the RTC held that the remaining balance for the furniture ordered was only P55,850 since the total purchase price was reduced to P136,500 8 because of the cancelled orders. Mendoza filed a petition for review with the Court of Appeals. On 10 October 2000, the Court of Appeals dismissed the petition for being insufficient in form and substance. The Court of Appeals held that failure to append the complaint, answer, position papers, memoranda and other evidence is sufficient ground to dismiss the petition, citing Sections 2 and 3, Rule 42 of the 1997 Rules of Civil Procedure. Nevertheless, despite the absence of pleadings and other pertinent documents, the Court of Appeals ruled that there is no basis for Mendoza's claim that the furniture sets did not meet the agreed specifications. Relying merely on the decisions of the MTC and the RTC, the Court of Appeals held that factual findings of the lower courts are entitled to great weight and should not be disturbed except for cogent reasons. 9 On 6 November 2000, Mendoza filed a motion for reconsideration which the Court of Appeals denied. Hence, the instant petition. ESCTaA

The Issues Mendoza raises the following issues: 1. Whether the Court of Appeals erred in dismissing the petition for review on the ground that Mendoza failed to attach the required documents to the petition despite subsequent compliance by Mendoza in her motion for reconsideration. 2. Whether the Court of Appeals erred in dismissing the petition despite the fact that the transaction between the parties was one of sale by description or sample. The Ruling of the Court We find the petition partly meritorious. Mendoza substantially complied with the formal requirements when she filed her motion for reconsideration with the Court of Appeals. However, to avoid further delay, the Court will resolve the petition on the merits instead of remanding the case to the Court of Appeals. Compliance with the Formal Requirements The Court of Appeals dismissed the case based on Sections 2 and 3, Rule 42 of the 1997 Rules of Civil Procedure which read: SEC. 2. Form and contents. The petition shall be filed in seven (7) legible copies, with the original copy intended for the court being indicated as such by the petitioner, and shall (a) state the full names of the parties to the case, without impleading the lower courts or judges thereof either as petitioners or respondents; (b) indicate the specific material dates showing that it was filed on time; (c) set forth concisely a statement of the matters involved, the issues raised, the specification of errors of fact or law, or both, allegedly committed by the Regional Trial Court, and the reasons or arguments relied upon for the allowance of the appeal; (d) be accompanied by clearly legible duplicate originals or true copies of the judgments or final orders of both lower courts, certified correct by the clerk of court of the Regional Trial Court, the requisite number of plain copies thereof and of the pleadings and other material portions of the record as would support the allegations of the petition. CDHcaS xxx xxx xxx

SEC. 3. Effect of failure to comply with requirements. The failure of the petitioner to comply with any of the foregoing requirements regarding the payment of the docket and other lawful fees, the deposit for costs, proof of service of the petition, and the contents of and the documents which should accompany the petition shall be sufficient ground for the dismissal thereof . (Emphasis supplied) However, Section 6, Rule 1 of the 1997 Rules of Civil Procedure also provides that rules shall be liberally construed in order to promote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding. Indeed, rules of procedure should be used to promote, not frustrate

justice. 10 This Court has ruled against the dismissal of appeals based solely on technicalities in several cases, especially when the appellant had substantially complied with the formal requirements. 11 In Donato v. Court of Appeals, 12 the Court of Appeals dismissed the petition on two grounds: (a) the certificate of non-forum shopping was signed by petitioner's counsel and not by petitioner himself; 13 and (b) only a certified copy of the questioned decision was annexed to the petition leaving out copies of the pleadings and other material portions of the record to support the allegations of the petition. This Court reversed the Court of Appeals' dismissal of the case since in petitioner's motion for reconsideration, he submitted a certificate of non-forum shopping signed by him and attached copies of the pleadings and material portions of the records. This Court considered the subsequent filing of the certification of non-forum shopping duly signed by petitioner himself as substantial compliance which justifies relaxation of the rule. As regards the failure to attach the necessary pleadings and material portions of the records, this Court held: In like manner, the failure of the petitioner to comply with Section 3, paragraph b, Rule 6 of the RIRCA, that is, to append to his petition copies of the pleadings and other material portions of the records as would support the petition, does not justify the outright dismissal of the petition. It must be emphasized that the RIRCA gives the appellate court a certain leeway to require parties to submit additional documents as may be necessary in the interest of substantial justice. Under Section 3, paragraph d of Rule 3 of the RIRCA, the CA may require the parties to complete the annexes as the court deems necessary, and if the petition is given due course, the CA may require the elevation of a complete record of the case as provided for under Section 3(d)(5) of Rule 6 of the RIRCA. At any rate, petitioner attached copies of the pleadings and other material portions of the records below with his motion for reconsideration. In Jaro vs. Court of Appeals, the Court reiterated the doctrine laid down in CusiHernandez vs. Diaz and Piglas-Kamao vs. National Labor Relations Commission that subsequent submission of the missing documents with the motion for reconsideration amounts to substantial compliance which calls for the relaxation of the rules of procedure . . . (Emphasis supplied) aCcSDT Similarly, in this case, although Mendoza failed to append the pleadings and pertinent documents in her petition to the Court of Appeals, Mendoza rectified her error by filing a motion for reconsideration and appending the pleadings and documents required by the Court of Appeals. Mendoza appended copies of the following pleadings and documents in her motion for reconsideration: 1. 2. 3. 4. 5. 6. Complaint filed in the MTC (Annex A) David's Answer (Annex B) Pre-Trial Order of the MTC (Annex C) Mendoza's Memorandum filed in the MTC (Annex D) David's Memorandum filed in the MTC (Annex E) Mendoza's Memorandum filed in the RTC (Annex F)

7.

David's Comment to the Motion for Reconsideration of Mendoza (Annex G)

The Complaint that Mendoza appended also contained the following annexes: (a) the sales invoice dated 17 February 1997 which indicated the total deposit for the furniture ordered; (b) the letter of Mendoza to David dated 27 May 1997 demanding the return of the P80,650 deposit; and (c) the certification to file action from the Office of the Barangay Captain of Barangay Pasong Tamo, Quezon City. Instead of denying the Motion for Reconsideration, the Court of Appeals should have ruled on the merits of the case considering that Mendoza already submitted the pleadings and documents required by the Court of Appeals. The rules of procedure are designed to ensure a fair, orderly and expeditious disposition of cases. 14 As much as possible, appeals should not be dismissed on a mere technicality in order to afford the litigants the maximum opportunity for the adjudication of their cases on the merits. 15

Reliance on the Factual Findings of the Lower Courts Likewise, the Court of Appeals should have refrained from hastily dismissing the petition through the expediency of applying the doctrine that factual findings of the lower courts are entitled to great weight. The doctrine is applicable where there is substantial evidence to support the findings of fact by the lower court as borne by the records of the case. 16 In this case, the Court of Appeals admitted that without the pertinent documents and pleadings, it is deprived of a full opportunity to know all the facts and issues involved in the case. 17 The doctrine therefore is not applicable considering the absence of the records of the case to determine whether substantial evidence supports the factual findings of the lower court. Instead of relying on the doctrine, the Court of Appeals could have required Mendoza to submit additional documents in accordance with Section 3 (d), Rule 3 of the Revised Internal Rules of the Court of Appeals 18 so that it would have a basis for its ruling. Furthermore, the Court of Appeals could order the Clerk of the RTC to elevate the original records of the case for a complete adjudication of the case. 19 Made to Order or Sale by Description or Sample? David alleges that the three sets of furniture were "made to order" in accordance with the usual practice of furniture stores. On the other hand, Mendoza insists that the transaction was a sale by sample or description which can be rescinded as provided under Article 1481 20 of the Civil Code. AaHcIT There is a sale by sample when a small quantity is exhibited by the seller as a fair specimen of the bulk, which is not present and there is no opportunity to inspect or examine the same. 21 To constitute a sale by sample, it must appear that the parties treated the sample as the standard of quality and that they contracted with reference to the sample with the understanding that the product to be delivered would correspond with the sample. 22 In a contract of sale by sample, there is an implied warranty that the goods shall be free from any defect which is not apparent on reasonable examination of the sample and which would render the goods unmerchantable. 23

There is a sale of goods by description where "a seller sells things as being of a particular kind, the buyer not knowing whether the seller's representations are true or false, but relying on them as true; or as otherwise stated, where the buyer has not seen the article sold and relies on the description given to him by the seller, or has seen the goods, but the want of identity is not apparent on inspection." 24 A seller's description of the goods which is made part of the basis of the transaction creates a warranty that the goods will conform to that description. 25 Where the goods are bought by description from a seller who deals in the goods of that description, there is an implied warranty that the goods are of merchantable quality. 26 Whether a transaction is a sale by sample, a sale by description or "made to order" is a question of fact for the trial court to decide from the evidence presented. In this case, the MTC found that there was a consummated "made to order" agreement between Mendoza and David. The Court agrees with the MTC that the transaction in this case was a "made to order" agreement. There is nothing in the records which would show that the intent of the parties was for a sale by sample or description. Whether a sale is by sample or description depends upon the facts disclosing the intention of the parties. Other than Mendoza's bare allegations that the transaction was a sale by sample or description, Mendoza failed to produce evidence to substantiate her claim. The sale of furniture in this case is not a sale by sample. The term sale by sample does not include an agreement to manufacture goods to correspond with the pattern. 27 In this case, the three sets of furniture were manufactured according to the specifications provided by the buyer. Mendoza did not order the exact replica of the furniture displayed in David's shop but made her own specifications on the measurement, material and quality of the furniture she ordered. HDICSa Neither is the transaction a sale by description. Mendoza did not rely on any description made by David when she ordered the furniture. Mendoza inspected the furniture displayed in David's furniture shop and made her own specifications on the three sets of furniture she ordered. Breach of Contract Not Proven It is undisputed that there was a perfected contract of sale of furniture between Mendoza and David. The three sets of furniture were delivered or ready for delivery within the agreed period. The issue for resolution is whether there was breach of contract on David's part. The Court finds none. Part of the exhibits David submitted to the MTC were pictures of the sets of furniture Mendoza ordered. The MTC found the furniture to be strictly in accordance with the tenor of the contract between Mendoza and David. The MTC and the RTC, noting the lack of written specifications on the material and quality of the furniture ordered, held that Mendoza failed to present any proof to show that the furniture was not in accordance with the agreed specifications. The records show that the parties agreed that the furniture should be made of narra. Mendoza admitted that the furniture delivered was made of narra but was of inferior quality. She also complained of deep nail marks and rough surface at the back of the table and chairs. However, Mendoza failed to prove these allegations.

In civil cases, the burden of proof 28 rests on the party who asserts the affirmative of an issue based on the pleadings or the nature of the case. 29 In this case, the burden lies on Mendoza who must prove her allegation that there was breach of contract. After reviewing the records of the case, the Court finds that Mendoza failed to substantiate her claim of breach of contract. Mendoza failed to present any evidence to overcome the presumption that the transaction was fair and regular. 30 WHEREFORE, the Decision of the Court of Appeals dated 10 October 2000 and the Resolution dated 20 March 2001 are MODIFIED. Petitioner Teresita B. Mendoza is ordered to pay respondent Beth David the amount of P55,850 with interest at 6% per annum from 17 April 1997 until finality of this Decision and 12% per annum thereafter until full payment. Beth David is ordered to deliver to Teresita B. Mendoza the three sets of furniture Mendoza ordered upon her payment of the balance of the purchase price with interest. TESDcA SO ORDERED. Davide, Jr., C .J ., Quisumbing and Ynares-Santiago, JJ ., concur. Azcuna, J ., is on leave.

THIRD DIVISION [G.R. No. 128573. January 13, 2003.] NAAWAN COMMUNITY RURAL BANK, INC., petitioner, vs. THE COURT OF APPEALS and SPOUSES ALFREDO AND ANNABELLE LUMO, respondents. Ike L. Roa for petitioner. Teogenes X. Velez for private respondents. SYNOPSIS In 1988, after inquiries from the Office of the Register of Deeds of Cagayan de Oro City and the Bureau of Lands on the legal status of the vendor's title, spouses Alfredo and Annabelle Lumo purchased a house and lot covered by TCT No. 41499 from Guillermo Comayas. The deed of absolute sale was registered and TCT No. T-50134 was issued in their names. However, when they requested for the issuance of new tax declaration in their names, they learned from the City Assessor's Office that the said property was also declared for tax purposes in the name of Naawan Community Rural Bank, Inc. It appeared then that in 1983 Comayas mortgaged the said property to the Naawan Community Rural Bank and for failure to pay the said loan, it was foreclosed and sold at a public auction to the latter as a highest bidder. And in 1986, after the redemption period had lapsed, the deed of final conveyance was registered under Act 3344 and recorded in the registration book of the Register of Deeds of Cagayan de Oro City. By reason thereof, spouses Lumo filed an action for quieting of title. After trial, the Regional Trial Court rendered a decision declaring spouses Lumo to be a purchaser for value and in good faith. On appeal, the Court of Appeals affirmed the trial court's decision. Hence, Naawan Community Rural Bank Inc. filed this petition. CTaIHE The Court ruled that the "priority in time" principle being invoked by petitioner bank is misplaced because its registration referred to land not within the Torrens System but under Act 3344. On the other hand, when private respondents bought the subject property, the same was already registered under the Torrens System. It is a well-known rule in this jurisdiction that persons dealing with registered land have the legal right to rely on the face of the Torrens Certificate of Title and to dispense with the need to inquire further, except when the party concerned has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry. Considering, therefore, that private respondents exercised the diligence required by law in ascertaining the legal status of the Torrens title of Guillermo Comayas over the subject property and found no flaws therein, they should be considered as innocent purchasers for value and in good faith. SYLLABUS 1. CIVIL LAW; SALES; DOUBLE SALE OF IMMOVABLE PROPERTY; APPLICABLE ONLY IF EXECUTION SALE OF REAL ESTATE IS REGISTERED UNDER ACT 496; NOT PRESENT IN CASE AT BAR. It has been held that, where a person claims to have superior proprietary rights over another on the ground that he

derived his title from a sheriff's sale registered in the Registry of Property, Article 1473 (now Article 1544) of the Civil Code will apply only if said execution sale of real estate is registered under Act 496. Unfortunately, the subject property was still untitled when it was acquired by petitioner bank by virtue of a final deed of conveyance. On the other hand, when private respondents purchased the same property, it was already covered by the Torrens System. 2. ID.; LAND TITLES AND DEEDS; TORRENS SYSTEM; REGISTRATION IS THE OPERATIVE ACT THAT GIVES VALIDITY TO THE TRANSFER OR CREATES A LIEN UPON THE LAND; NOT COMPLIED WITH IN CASE AT BAR. [A] close scrutiny of the records reveals that, at the time of the execution and delivery of the sheriff's deed of final conveyance on September 5, 1986, the disputed property was already covered by the Land Registration Act and Original Certificate of Title No. 0-820 pursuant to Decree No. N189413 was likewise already entered in the registration book of the Register of Deeds of Cagayan de Oro City as of April 17, 1984. Thus, from April 17, 1984, the subject property was already under the operation of the Torrens System. Under the said system, registration is the operative act that gives validity to the transfer or creates a lien upon the land. acIHDA 3. ID.; ID.; ID.; ISSUANCE OF CERTIFICATE OF TITLE HAD THE EFFECT OF RELIEVING THE LAND OF ALL CLAIMS EXCEPT THOSE NOTED THEREON. [T]he issuance of a certificate of title had the effect of relieving the land of all claims except those noted thereon. Accordingly, private respondents, in dealing with the subject registered land, were not required by law to go beyond the register to determine the legal condition of the property. They were only charged with notice of such burdens on the property as were noted on the register or the certificate of title. To have required them to do more would have been to defeat the primary object of the Torrens System which is to make the Torrens Title indefeasible and valid against the whole world. 4. CIVIL LAW; SALES; DOUBLE SALE; MERE REGISTRATION IS NOT ENOUGH, GOOD FAITH MUST CONCUR. The rights created by the [Property Registration Decree] of course do not and cannot accrue under an inscription in bad faith. Mere registration of title in case of double sale is not enough; good faith must concur with the registration. 5. ID.; ID.; ID.; ID.; ESTABLISHED IN CASE AT BAR. Before private respondents bought the subject property from Guillermo Comayas, inquiries were made with the Registry of Deeds and the Bureau of Lands regarding the status of the vendor's title. No liens or encumbrances were found to have been annotated on the certificate of title. Neither were private respondents aware of any adverse claim or lien on the property other than the adverse claim of a certain Geneva Galupo to whom Guillermo Comayas had mortgaged the subject property. But, as already mentioned, the claim of Galupo was eventually settled and the adverse claim previously annotated on the title cancelled. Thus, having made the necessary inquiries, private respondents did not have to go beyond the certificate of title. Otherwise, the efficacy and conclusiveness of the Torrens Certificate of Title would be rendered futile and nugatory. Considering therefore that private respondents exercised the diligence required by law in ascertaining the legal status of the Torrens title of Guillermo Comayas over the subject property and found no flaws therein, they should be considered as innocent purchasers for value and in good faith.

6. CIVIL LAW; LAND TITLES AND DEEDS; PERSONS DEALING WITH REGISTERED LAND HAVE THE LEGAL RIGHT TO RELY ON THE FACE OF THE TORRENS CERTIFICATE OF TITLE. The "priority in time" principle being invoked by petitioner bank is misplaced because its registration referred to land not within the Torrens System but under Act 3344. On the other hand, when private respondents bought the subject property, the same was already registered under the Torrens System. It is a well-known rule in this jurisdiction that persons dealing with registered land have the legal right to rely on the face of the Torrens Certificate of Title and to dispense with the need to inquire further, except when the party concerned has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry. DHIaTS DECISION CORONA, J p: Under the established principles of land registration, a person dealing with registered land may generally rely on the correctness of a certificate of title and the law will in no way oblige him to go beyond it to determine the legal status of the property. STADIH Before us is a Petition for Review on Certiorari challenging the February 7, 1997 Decision 1 of the Court of Appeals in CA-G.R. CV No. 55149, which in turn affirmed the decision 2 of the Regional Trial Court of Misamis Oriental, Branch 18 as follows: "WHEREFORE, the plaintiffs-spouses are adjudged the absolute owners and possessors of the properties in question (Lot 18583, under TCT No. T-50134, and all improvements thereon) and quieting title thereto as against any and all adverse claims of the defendant. Further, the sheriff's certificate of sale, Exhibit 4; 4-A; Sheriff's deed of final conveyance, Exhibit 5, 5-A; Tax Declarations No. 71211, Exhibit 7, and any and all instrument, record, claim, encumbrance or proceeding in favor of the defendant, as against the plaintiffs, and their predecessor-in-interest, which may be extant in the office of the Register of Deeds of Province of Misamis Oriental, and of Cagayan de Oro City, and in the City Assessor's Office of Cagayan de Oro City, are declared as invalid and ineffective as against the plaintiffs' title. "The counterclaim is dismissed for lack of merit. "SO ORDERED." 3 The facts of the case, as culled from the records, are as follows: On April 30, 1988, a certain Guillermo Comayas offered to sell to private respondent-spouses Alfredo and Annabelle Lumo, a house and lot measuring 340 square meters located at Pinikitan, Camaman-an, Cagayan de Oro City. Wanting to buy said house and lot, private respondents made inquiries at the Office of the Register of Deeds of Cagayan de Oro City where the property is located and the Bureau of Lands on the legal status of the vendor's title. They found out that the property was mortgaged for P8,000 to a certain Mrs. Galupo and that the owner's copy of the Certificate of Title to said property was in her possession.

Private respondents directed Guillermo Comayas to redeem the property from Galupo at their expense, giving the amount of P10,000 to Comayas for that purpose. On May 30, 1988, a release of the adverse claim of Galupo was annotated on TCT No. T-41499 which covered the subject property. In the meantime, on May 17, 1988, even before the release of Galupo's adverse claim, private respondents and Guillermo Comayas, executed a deed of absolute sale. The subject property was allegedly sold for P125,000 but the deed of sale reflected the amount of only P30,000 which was the amount private respondents were ready to pay at the time of the execution of said deed, the balance payable by installment. On June 9, 1988, the deed of absolute sale was registered and inscribed on TCT No. T-41499 and, on even date, TCT No. T-50134 was issued in favor of private respondents. After obtaining their TCT, private respondents requested the issuance of a new tax declaration certificate in their names. However, they were surprised to learn from the City Assessor's Office that the property was also declared for tax purposes in the name of petitioner Naawan Community Rural Bank Inc. Records in the City Assessor's Office revealed that, for the lot covered by TCT No. T-50134, Alfredo Lumo's T/D # 83324 bore the note: "This lot is also declared in the name of Naawan Community Rural Bank Inc. under T/D # 71210". Apparently, on February 7, 1983, Guillermo Comayas obtained a P15,000 loan from petitioner Bank using the subject property as security. At the time said contract of mortgage was entered into, the subject property was then an unregistered parcel of residential land, tax-declared in the name of a certain Sergio A. Balibay while the residential one-storey house was tax-declared in the name of Comayas. CSTDEH Balibay executed a special power of attorney authorizing Comayas to borrow money and use the subject lot as security. But the Deed of Real Estate Mortgage and the Special Power of Attorney were recorded in the registration book of the Province of Misamis Oriental, not in the registration book of Cagayan de Oro City. It appears that, when the registration was made, there was only one Register of Deeds for the entire province of Misamis Oriental, including Cagayan de Oro City. It was only in 1985 when the Office of the Register of Deeds for Cagayan de Oro City was established separately from the Office of the Register of Deeds for the Province of Misamis Oriental. For failure of Comayas to pay, the real estate mortgage was foreclosed and the subject property sold at a public auction to the mortgagee Naawan Community Rural Bank as the highest bidder in the amount of P16,031.35. Thereafter, the sheriff's certificate of sale was issued and registered under Act 3344 in the Register of Deeds of the Province of Misamis Oriental. On April 17, 1984, the subject property was registered in original proceedings under the Land Registration Act. Title was entered in the registration book of the Register of Deeds of Cagayan de Oro City as Original Certificate of Title No. 0-820, pursuant to Decree No. N-189413.

On July 23, 1984, Transfer Certificate of Title No. T-41499 in the name of Guillermo P. Comayas was entered in the Register of Deeds of Cagayan de Oro City. Meanwhile, on September 5, 1986, the period for redemption of the foreclosed subject property lapsed and the MTCC Deputy Sheriff of Cagayan de Oro City issued and delivered to petitioner bank the sheriff's deed of final conveyance. This time, the deed was registered under Act 3344 and recorded in the registration book of the Register of Deeds of Cagayan de Oro City. By virtue of said deed, petitioner Bank obtained a tax declaration for the subject house and lot. Thereafter, petitioner Bank instituted an action for ejectment against Comayas before the MTCC which decided in its favor. On appeal, the Regional Trial Court affirmed the decision of the MTCC in a decision dated April 13, 1988. DHSCEc On January 27, 1989, the Regional Trial Court issued an order for the issuance of a writ of execution of its judgment. The MTCC, being the court of origin, promptly issued said writ. However, when the writ was served, the property was no longer occupied by Comayas but herein private respondents, the spouses Lumo who had, as earlier mentioned, bought it from Comayas on May 17, 1988. Alarmed by the prospect of being ejected from their home, private respondents filed an action for quieting of title which was docketed as Civil Case No. 89-138. After trial, the Regional Trial Court rendered a decision declaring private respondents as purchasers for value and in good faith, and consequently declaring them as the absolute owners and possessors of the subject house and lot. Petitioner appealed to the Court of Appeals which in turn affirmed the trial court's decision. Hence, this petition. Petitioner raises the following issues: I. WHETHER OR NOT THE SHERIFF'S DEED OF FINAL CONVEYANCE WAS DULY EXECUTED AND REGISTERED IN THE REGISTER OF DEEDS OF CAGAYAN DE ORO CITY ON DECEMBER 2, 1986; II. WHETHER OR NOT REGISTRATION OF SHERIFF'S DEED OF FINAL CONVEYANCE IN THE PROPER REGISTRY OF DEEDS COULD BE EFFECTIVE AS AGAINST SPOUSES LUMO. Both parties cite Article 1544 of the Civil Code which governs the double sale of immovable property. Article 1544 provides: ". . . . Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property." Petitioner bank contends that the earlier registration of the sheriff's deed of final conveyance in the day book under Act 3344 should prevail over the later registration of private respondents' deed of absolute sale under Act 496, 4 as amended by the Property Registration Decree, PD 1529. aAcDSC

This contention has no leg to stand on. It has been held that, where a person claims to have superior proprietary rights over another on the ground that he derived his title from a sheriff's sale registered in the Registry of Property, Article 1473 (now Article 1544) of the Civil Code will apply only if said execution sale of real estate is registered under Act 496. 5 Unfortunately, the subject property was still untitled when it was already acquired by petitioner bank by virtue of a final deed of conveyance. On the other hand, when private respondents purchased the same property, it was covered by the Torrens System. Petitioner also relies on the case of Bautista vs. Fule 6 where the Court ruled that the registration of an instrument involving unregistered land in the Registry of Deeds creates constructive notice and binds third person who may subsequently deal with the same property. However, a close scrutiny of the records reveals that, at the time of the execution and delivery of the sheriff's deed of final conveyance on September 5, 1986, the disputed property was already covered by the Land Registration Act and Original Certificate of Title No. 0-820 pursuant to Decree No. N189413 was likewise already entered in the registration book of the Register of Deeds of Cagayan De Oro City as of April 17, 1984. Thus, from April 17, 1984, the subject property was already under the operation of the Torrens System. Under the said system, registration is the operative act that gives validity to the transfer or creates a lien upon the land. Moreover, the issuance of a certificate of title had the effect of relieving the land of all claims except those noted thereon. Accordingly, private respondents, in dealing with the subject registered land, were not required by law to go beyond the register to determine the legal condition of the property. They were only charged with notice of such burdens on the property as were noted on the register or the certificate of title. To have required them to do more would have been to defeat the primary object of the Torrens System which is to make the Torrens Title indefeasible and valid against the whole world. Private respondents posit that, even assuming that the sheriff's deed of final conveyance in favor of petitioner bank was duly recorded in the day book of the Register of Deeds under Act 3344, ownership of the subject real property would still be theirs as purchasers in good faith because they registered the sale first under the Property Registration Decree. aDIHCT The rights created by the above-stated statute of course do not and cannot accrue under an inscription in bad faith. Mere registration of title in case of double sale is not enough; good faith must concur with the registration. 7 Petitioner contends that the due and proper registration of the sheriff's deed of final conveyance on December 2, 1986 amounted to constructive notice to private respondents. Thus, when private respondents bought the subject property on May 17, 1988, they were deemed to have purchased the said property with the knowledge that it was already registered in the name of petitioner bank.

Thus, the only issue left to be resolved is whether or not private respondents could be considered as buyers in good faith. The "priority in time" principle being invoked by petitioner bank is misplaced because its registration referred to land not within the Torrens System but under Act 3344. On the other hand, when private respondents bought the subject property, the same was already registered under the Torrens System. It is a well-known rule in this jurisdiction that persons dealing with registered land have the legal right to rely on the face of the Torrens Certificate of Title and to dispense with the need to inquire further, except when the party concerned has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry. 8 Did private respondents exercise the required diligence in ascertaining the legal condition of the title to the subject property so as to be considered as innocent purchasers for value and in good faith? We answer in the affirmative. Before private respondents bought the subject property from Guillermo Comayas, inquiries were made with the Registry of Deeds and the Bureau of Lands regarding the status of the vendor's title. No liens or encumbrances were found to have been annotated on the certificate of title. Neither were private respondents aware of any adverse claim or lien on the property other than the adverse claim of a certain Geneva Galupo to whom Guillermo Comayas had mortgaged the subject property. But, as already mentioned, the claim of Galupo was eventually settled and the adverse claim previously annotated on the title cancelled. Thus, having made the necessary inquiries, private respondents did not have to go beyond the certificate of title. Otherwise, the efficacy and conclusiveness of the Torrens Certificate of Title would be rendered futile and nugatory. Considering therefore that private respondents exercised the diligence required by law in ascertaining the legal status of the Torrens title of Guillermo Comayas over the subject property and found no flaws therein, they should be considered as innocent purchasers for value and in good faith. Accordingly, the appealed judgment of the appellate court upholding private respondents Alfredo and Annabelle Lumo as the true and rightful owners of the disputed property is affirmed. CAHaST WHEREFORE, petition is hereby DENIED. SO ORDERED. Puno, Panganiban, Sandoval-Gutierrez and Carpio-Morales, JJ., concur.

SECOND DIVISION [G.R. No. 145878. April 25, 2006.] MARCIANO BLANCO, petitioner, vs. FELIMON RIVERA, respondent. RESOLUTION CORONA, J p: Assailed in this petition for review 1 are the decision 2 and resolution 3 of the Court of Appeals which affirmed the decision 4 of Branch 70, Regional Trial Court (RTC) of Binangonan, Rizal in a civil case 5 for quieting of title filed by respondent Felimon Rivera against his half-brother, petitioner Marciano Blanco. CSIcHA The subject matter of the controversy is a parcel of residential land consisting of 217 square meters. It was formerly co-owned in equal undivided shares by respondent and Eugenia Reyes vda. de Rivera, the mother of both petitioner and respondent. On February 21, 1977, Eugenia sold her undivided share to petitioner. The sale could not be registered because the original owner's copy of the title was allegedly in the custody of respondent who refused to surrender the same. The deed of sale 6 did not have the consent of respondent. Eugenia, however, executed an affidavit 7 alleging that she had already notified her co-owner Felimon and other possible redemptioners of the sale of the property. Three years later, on April 19, 1980, Eugenia again sold her undivided share, this time to her co-owner, respondent Felimon, through a quitclaim deed 8 and for a consideration of P9,785. Respondent registered the sale with the register of deeds of Rizal. He was issued TCT No. 501585 9 on May 21, 1980. He thereafter took actual and physical possession of the property and had since then paid the real property tax thereon. 10 Sometime in 1982, petitioner, who was residing on one-fourth (1/4) of the property, heard about the sale of the property to respondent. He confronted their mother Eugenia who sought the assistance of barangay authorities in San Pedro, Angono, Rizal. In the barangay proceedings, 11 petitioner exhibited the deed of sale and the affidavit executed by Eugenia attesting to the sale of the property and the prior notice to her co-owner Felimon Rivera. Petitioner maintained that he tried unsuccessfully to register his deed of sale but, when asked by the registrar of deeds to produce the original TCT as a requirement for registration, all he could show was a photocopy inasmuch as the original was in respondent's possession. He claimed that he requested the original TCT from his mother and respondent but they refused. After several days, petitioner reiterated his request to respondent but the latter ignored him.

For his part, 12 respondent denied that he knew of the alleged prior sale of the property to petitioner. When he learned about petitioner's claim, he filed an ejectment case to oust him from the property. 13 Unfortunately, the ejectment suit was decided in favor of petitioner. On March 3, 1991, respondent filed the present civil case for quieting of title. Eugenia failed to testify because of her untimely demise. The court a quo gave no weight to the tape-recorded barangay proceedings for being hearsay. Likewise, the court did not consider the dismissal of the ejectment case because the sole issue in that proceeding was possession, not ownership. It decided the case mostly on documentary evidence. It ruled: WHEREFORE, in view of all the foregoing, Judgment is rendered[:] 1. Declaring the plaintiff Felimon Rivera, married to Gliceria Diaz as the true and lawful owner of the property covered by Transfer Certificate of Title No. 501585 of the Registry of Deeds of Rizal. ASDCaI 2. Ordering the defendant to pay the costs.

SO ORDERED. 14 On appeal, the Court of Appeals affirmed the RTC decision. It also denied petitioner's motion for reconsideration. Hence, this petition. Essentially, the issue before us is who, between petitioner and respondent, has the better right over Eugenia's portion of the property. Petitioner contends that respondent did not act in good faith when he purchased it from their mother and had the sale registered in his name. Being the first buyer, petitioner claimed to have a better right to own the property. When immovable property is sold to two different buyers at different times, ownership is determined in accordance with Article 1544 of the Civil Code 15 which provides: ART. 1544. ...

Should it be immovable property, the ownership shall pertain to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person, who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. HCaIDS The requirement of the law is two-fold: acquisition in good faith and registration in good faith. 16 The rationale behind this was laid out in Uraca v. Court of Appeals: 17

The prior registration of the disputed property by the second buyer does not by itself confer ownership or a better right over the property. Article 1544 requires that such registration must be coupled with good faith. Jurisprudence teaches us that "the governing principle is primus in tempore, potior jure (first in time, stronger in right). Knowledge gained by the first buyer of the second sale cannot defeat the first buyer's rights except where the second buyer registers in good faith the second sale ahead of the first, as provided by the Civil Code. Such knowledge of the first buyer does not bar her from availing of her rights under the law, among them, to register first her purchase as against the second buyer. But in converso, knowledge gained by the second buyer of the first sale defeats his right even if he is first to register the second sale, since such knowledge taints his prior registration with bad faith. This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to displace the first buyer; that before the second buyer can obtain priority over the first, he must show that he acted in good faith throughout (i.e. in ignorance of the first sale and of the first buyer's right) from the time of acquisition until the title is transferred to him by registration or failing registration, by delivery of possession.) The vendee who first registers the sale in good faith in the registry of property has a preferred right over another vendee who has not registered his title. This is true even if the latter is in actual possession of the immovable property. More credit is given to registration than to actual possession. 18 But the law is clear mere registration of title is not enough. Good faith must concur with registration. 19 To be in a priority status, the second purchaser must be in good faith, that is, without knowledge of the previous alienation by the vendor to another. 20 What holds relevance and materiality is not whether the second buyer is a buyer in good faith but whether he registers such second sale in good faith, meaning, without knowledge of any defect in the title of the property sold. 21 Here, both the trial and appellate courts declared respondent to be the true owner of the property. He was uncontestedly the first to register his ownership over the property, untainted by proof of any knowledge of the prior sale. Respondent's acquisition and registration of the property were therefore in good faith. HIaTCc The appellate court elucidated: . . . . Although defendant-appellant (petitioner) claims that he asked the owner's copy of the title from the plaintiff-appellant (respondent), the same was vehemently denied by the latter. Defendantappellant presented the affidavit of their mother attesting that the subject lot was sold to him and that notice was given to the co-owner, however, proof of the said notice was never presented nor attached to the said affidavit. Defendant-appellant failed to prove that there was any notice, aside from the statement in the said affidavit. . . . We agree with the ruling of the lower court in not giving much weight to the affidavit of Eugenia Reyes Vda. de Rivera for the reason that plaintiff-appellee denied having been told of the sale in his testimony in open court. The infirmity of affidavits as a specie of evidence is a matter of judicial experience. As such, an affidavit taken ex-parte is generally considered to be inferior to testimonies in open court. 22

Besides, even if petitioner's claim were true, he would nonetheless still be guilty of laches. 23 He failed to utilize, for an unreasonable and unexplained length of time, the available legal remedies 24 for his claim over the property to be recognized not only by respondent but all other persons. Beginning from his alleged acquisition of the land in 1977, to his discovery of respondent's registration in 1982, up to the filing of this case in 1991, more than 14 years had lapsed without any legal action on his part to secure his ownership over the property. His failure to display zealousness about his alleged ownership is fatal to his claim. cCDAHE WHEREFORE, the petition is hereby DENIED and the assailed decision and resolution of the Court of Appeals AFFIRMED. Costs against petitioner. SO ORDERED. Sandoval-Gutierrez, Azcuna and Garcia, JJ., concur. Puno, J., is on leave.

FIRST DIVISION [G.R. No. L-27674. May 12, 1975.] SOLEDAD T. CONSING assisted by her husband, ANTONIO M. CONSING, plaintiffs-petitioner, vs. JOSE T. JAMANDRE, personally, and as Judicial Administrator of the Estate of Cirilo Jamandre, defendantrespondent. Agustin T. Locsin for plaintiffs-petitioners. Januario L. Sison, Sr. for defendant-respondent. SYNOPSIS Plaintiffs-petitioners filed a complaint for forcible entry and detainer against a defendant for taking the possession of Haciendas Aida and Fe despite a contract for sub-lease executed between the former as sub-lessee and the latter's father as sub-lessor. Defendant-respondent averred that he took possession of the haciendas in question after his father's death because of the failure of plaintiff-petitioner with the terms and conditions of the contract, which failure, according to express stipulation, gave him the authority to take possession of the leased premises without need for judicial action. The Court of Appeals dismissed the complaint, reversing a decision rendered by the Court of First Instance. Thereafter, plaintiffs-petitioners filed this petition arguing that the contractual stipulation relied upon by the defendant-respondent was violative of due process; that the court a quo should have limited the reception of evidence to possession de facto only; and that summary judgment should have been rendered by the court a quo. Overruling these contentions, the Supreme Court held that the questioned contractual stipulation was a valid resolutory condition the fulfillment of which terminated the contract. There was, therefore, no necessity for judicial permission to cancel the agreement. The Court further held that the court a quo may interpret the contract of sublease for the purpose of determining the character and extent of possession for the detention and that summary judgment cannot be granted as the material allegations of the plaintiff's pleadings are disputed. Decision appealed from affirmed. SYLLABUS 1. CONTRACTS; TERMINATION; FULFILLMENT OF RESOLUTORY CONDITION TERMINATES CONTRACT. A stipulation in a contract of sub-lease authorizing the sub-lessor or his authorized representative to take possession of the leased premises without necessity of resorting to any court action in case of the failure on the part of the sub-lessee to comply with any of the terms and condition of the sub-lease is in the nature of a resolutory condition, for upon the exercise by the sub-lessor of his right to take possession of the leased property the contract is deemed terminated.

2. ID.; RESCISSION; JUDICIAL ACTION NOT NECESSARY IF MODE OF CANCELLATION IS EXPRESSLY STIPULATED. Judicial permission to cancel contract of sublease is not necessary if it is expressly stipulated that the sub-lessor, in case of failure of the sub-lessee to comply with the terms and conditions thereof, can take over the possession of the leased premises, thereby canceling the contract. Resort to judicial action is necessary only in the absence of a special provision granting the power of cancellation. 3. FORCIBLE ENTRY AND DETAINER; ISSUE OF PHYSICAL POSSESSION; COURT MAY GO BEYOND ISSUE TO PROVE NATURE OF POSSESSION. While it is true that the only issue in forcible entry or unlawful detainer action is the physical possession of the leased property, that is possession de facto not possession de jure, yet the court may go beyond that if only to prove the nature of the possession. The court may receive evidence upon the question of title, or for that matter possession de jure, solely for the purpose of determining the character and extent of possession and damages for detention. 4. SUMMARY JUDGMENT; NO SUMMARY JUDGMENT MAY BE GRANTED IF MATERIAL ALLEGATIONS IN THE PLEADINGS ARE DISPUTED. Summary judgment can only be granted where there are no questions of the fact in issue or where the material allegations of the pleadings are not disputed. Thus summary judgment cannot be granted in a forcible entry case where defendant maintains that plaintiffs failed to comply with the terms of their agreement and that in view of such failure, he is authorized to take over the possession of the leased premises. D E C I S I ON ESGUERRA, J p: Petition for review on certiorari of the decision of the Court of Appeals in its CA-G.R. No. 36711-R reversing that of the Court of First Instance of Negros Occidental and dismissing the complaint of the plaintiffs-petitioners, besides ordering them to pay the defendant-respondent the amount of P19,000.00. The factual background of the case is as follows: Plaintiffs (now petitioners) filed in the Municipal Court of Sagay, Negros Occidental, a Complaint for Forcible Entry and Detainer against defendant (now respondent) for taking possession of Haciendas "Aida" and "Fe" through force, intimidation, stealth and strategy despite the contract of sub-lease (Annex "A" of the Complaint) executed on October 19, 1962, (the date plaintiffs-petitioners took possession and management of the leased premises) by and between the former, as sub-lessee, and the father of the latter, Cirilo Jamandre, as sub-lessor. Defendant-respondent filed his answer and averred that he took-over the haciendas in question on September 11, 1963, seven (7) months after the death of his father, Cirilo Jamandre, on February 11, 1963, because of the failure of plaintiffs-petitioners to comply with the terms and conditions of paragraphs 3 and 4 of the contract of sub-lease which read as follows:

"3. That the SUB-LESSEE Soledad T. Consing shall pay the SUB-LESSOR Cirilo Jamandre 1,000 piculs of "C" sugar every crop year and to effectuate said payment the Lopez Sugar Central is hereby authorized to register in the name of the SUB-LESSOR Cirilo Jamandre a proportion of 10% of the weekly sugar milled by the SUB-LESSEE properly quedaned until the full amount of 1,000 piculs of "C" sugar shall have been fully paid and satisfied not later than the month of February of every year." "4. That the SUB-LESSEE Soledad T. Consing shall pay the SUB-LESSOR the amount of TWENTY THOUSAND PESOS (P20,000.00) by way of advance payment every crop year until the duration of the lease. For the payment thereof, the amount of 1,000 piculs of "C" sugar referred in par. No. 3 shall be assigned and/or endorsed to the SUB-LESSEE Soledad T. Consing and after proper liquidation of the same the surplus from the proceeds of 1,000 piculs of C sugar shall be paid to the SUB-LESSOR Cirilo Jamandre not later than the month of February of each crop year." As justification for the take-over of the leased premises, defendant-respondent cited paragraph 9 of said contract of sub-lease as his authority, the text of which will be quoted hereafter. After the issues had been joined, the Municipal Court of Sagay, Negros Occidental, rendered judgment on June 5, 1964, in favor of plaintiffs-petitioners, the dispositive portion of which is as follows: "WHEREFORE, in view of all the foregoing, the Court renders judgment for the plaintiff and against the defendant Jose T. Jamandre, personally and in his capacity as Judicial Administrator of the estate of the late Cirilo Jamandre, to vacate from and restore to plaintiff, Soledad Tumbokon Consing, the possession of Hdas. "Aida" and "Fe" covered by Lots Nos. 1257, 1258, 806 and 694 all of Sagay Cadastre, and with costs against the defendant." Defendant-respondent appealed to the Court of First Instance of Negros Occidental where the appeal was docketed as Civil Case No. 246 on July 25, 1964. On August 5, 1964, defendant-respondent filed his amended answer with the Court of First Instance of Negros Occidental. On August 18, 1964, plaintiffs-petitioners filed their Motion To Strike And For Summary Judgment, attaching thereto as Annex "A" the affidavit of Soledad Tumbokon Consing in support of the motion for summary judgment. Defendant-respondent objected to the motion to strike out the amended answer and for summary judgment. On August 29, 1964, the Court of First Instance of Negros Occidental admitted the amended answer of defendant-respondent and denied the motion to strike out and for judgment on the pleadings. The plaintiffs-petitioners moved for the reconsideration of the Order of August 29, 1964, and on September 15, 1964, they filed their Supplement To Motion For Reconsideration to which the defendant-respondent objected.

On October 9, 1964, the Court of First Instance denied the motion for reconsideration, as follows: "After considering the pleadings in the present case and the provisions of Rule 19 in connection with Rule 34 of the Rules of Court, the Court is of the opinion and so holds that the plaintiff is not entitled to summary judgment. "IN VIEW OF THE FOREGOING, the Court denies the motion for reconsideration dated September 11, 1964. The Clerk of Court is directed to set the trial of this case on the merits in the November calendar at San Carlos City." After the plaintiffs-petitioners had filed their Reply With Answer To Counterclaims, the case was set for pre-trial. On March 31, 1965, the Court of First Instance issued its Pre-Trial Order, to wit: "After hearing the manifestations of both counsel, the Court finds that there is no possibility of an amicable settlement. According to the theory of the plaintiffs, considering that the prior possession of the plaintiff's is admitted by the defendant, the acts of the defendant in taking the possession of the property are illegal, and that the only question to be resolved in this case insofar as the plaintiffs are concerned is the determination of damages. The defendant, however, contends that according to the stipulations of the contract which is attached to the complaint and admitted by the defendant, the plaintiffs have violated the terms of the stipulations and conditions therein, and by virtue of the stipulations of that contract the defendant is authorized to take possession of the property. The issue, therefore, to be resolved by this Court are: "First: Whether the stipulations in the contract authorize the defendant in the taking of the possession of the property subject of the litigation; and "Second: The damages that may be adjudicated to either of the parties in the event that a judgment is rendered. "Therefore, the trial now will be confined to the interpretation of the contract and the determination of damages. There is no need of evidence with reference to the fact of prior possession because that is admitted in the pleadings and in the open manifestation of the parties." On August 4, 1965, the Court of First Instance of Negros Occidental, in the exercise of its appellate jurisdiction over Forcible Entry and Detainer cases, rendered judgment, the dispositive portion of which reads as follows: "IN VIEW OF the foregoing, judgment is hereby rendered as follows: "1. The defendant is ordered to vacate the premises of Lots Nos. 1257, 1258, 806 and 694 of the cadastral survey of Sagay, known as Hdas. "Aida" and "Fe" and to deliver the possession thereof to the plaintiffs;

"2. The defendant is ordered to make an accounting of his expenses and income from the leased property from September 11, 1963 up to the date when the plaintiffs shall have been restored to the possession thereof and the profit or net income shall be paid the plaintiffs; "3. The defendant shall pay the costs; and

"4. No award for attorney's fees as there is no evidence that the acts of the defendant were inspired by fraud, malice or evident bad faith." The defendant-respondent appealed to the Court of Appeals which rendered judgment reversing that of the Court a quo, the dispositive portion of which reads as follows: "WHEREFORE, the judgment appealed from is reversed and another one entered dismissing the complaint of the plaintiffs, and ordering said plaintiffs to pay the defendant, on the counter-claim, the amount of P19,000.00, which however, should be deducted from the proceeds of the sugarcane harvested by the appellant, who is ordered to render an accounting of the sugar cane he harvested for the crop year 1962-63, the excess thereof, if any, after such accounting is made, is ordered to be delivered to the appellees. "On equitable considerations, without special pronouncement as to costs." The plaintiffs-petitioners' motion for reconsideration and Addendum to Motion For Reconsideration having been denied, the herein petition for review on certiorari was filed. Plaintiffs-petitioners maintain that summary judgment should have been rendered by the court a quo in view of the failure of the defendant-respondent to file a counter affidavit or verified opposition. Besides, defendant-respondent admits having taken possession of the leased premises. Plaintiffs-petitioners likewise maintain that the original case being one of forcible entry, reception of evidence should have been limited only to that of possession de facto, and that the contractual stipulation no. 9 of the Contract of Sublease (Annex "A" of the Complaint and submitted as Exhibit "A") authorizing defendantrespondent to take possession of the leased premises without need of a court action is illegal. Petitioners further contend that the only issue in forcible entry case is the physical possession of the property involved which is only possession de facto and not possession de jure; that what is needed to be proved only in forcible entry case is prior possession, and that if one could prove prior possession of the property under litigation, he is entitled to stay thereon until he is lawfully ejected by a person having a better right either by accion publiciana or accion reivindicatoria. Petitioners argue that the contractual stipulation in the contract of sub-lease with the herein respondent, authorizing the latter to take possession of the leased premises even without resorting to court action is illegal and violative of due process. They maintain that this is tantamount to a renunciation of one's day in Court and, therefore, null and void. Besides, this might open the floodgates to violence which our laws seek to suppress.

Respondent on the other hand maintains that he took possession of the leased property because he is authorized to do so under the contract (Annex "A" of the Complaint; Exh. "A"). Respondent further maintains that the appellate court did not err in proceeding with its interpretation of the contract of sub-lease of the parties and in determining the amount of damages because the parties so agreed during the pre-trial of the case. Respondent also claims that the stipulation "without necessity of resorting to any court action", in the contract of sub-lease (stipulation no. 9, Annex "A" of the Complaint; Exh. "A") is not tainted with illegality because it does not provide for the use of force in the taking of possession by the sub-lessor (respondent in the present case) and, therefore, the same is not offensive to the law against forcible entry or to public policy which, for the preservation of the public peace, does not allow taking the law into one's own hands. I The principal issue, therefore, to be resolved is whether or not the stipulation in the contract of sublease between the parties authorizing the herein respondent, as sub-lessor, to take possession of the leased premises including all its improvements thereon without compensation to the sub-lessee (herein petitioners) and without the need of judicial action is valid and binding. For a better understanding of the controversy, the contractual stipulation is hereunder quoted: "9. That in case of the failure on the part of the SUB-LESSEE to comply with any of the terms and conditions thereof, the SUB-LESSEE hereby gives an authority to the SUB-LESSOR or to any of his authorized representative to take possession of the leased premises including all its improvements thereon without compensation to the SUB-LESSEE and without necessity of resorting to any court action but in which case the SUB-LESSEE shall be duly advised in writing of her failure to comply with the terms and conditions of the contract by way of reminder before the take-over." This stipulation is in the nature of a resolutory condition, for upon the exercise by the Sub-lessor of his right to take possession of the leased property, the contract is deemed terminated. This kind of contractual stipulation is not illegal, there being nothing in the law proscribing such kind of agreement. As held by this Court in Froilan vs. Pan Oriental Shipping Co., G.R. No. L-11897, October 31, 1964; 12 SCRA 276, 286: "Under Article 1191 of the Civil Code, in case of reciprocal obligations, the power to rescind the contract where a party incurs in default, is impliedly given to the injured party. Appellee maintains, however, that the law contemplates of rescission of contract by judicial action and not a unilateral act by the injured party; consequently, the action of the Shipping Administration contravenes said provision of the law. This is not entirely correct, because there is also nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract. As already held, judicial action is needed where there is absence of special provision in the contract granting to a party the right of rescission."

Judicial permission to cancel the agreement was not, therefore, necessary because of the express stipulation in the contract of sub-lease that the sub-lessor, in case of failure of the sub-lessee to comply with the terms and conditions thereof, can take-over the possession of the leased premises, thereby cancelling the contract of sub-lease. Resort to judicial action is necessary only in the absence of a special provision granting the power of cancellation. (De la Rama Steamship Co., vs. Tan, G.R. No. L-8784, May 21, 1956; 99 Phil. 1034). II On the question that the reception of evidence should have been limited to possession de facto only, We rule that the court a quo did not err in going further by interpreting the contract of sub-lease. While it is true that the only issue in forcible entry or unlawful detainer action is the physical possession of the leased property, that is possession de facto not possession de jure, yet the court may go beyond that if only to prove the nature of the possession. (Pitargue vs. Sorilla, L-4302, September 17, 1952; 48 O.G. 3849). The court may receive evidence upon the question of title, or for that matter possession de jure, solely for the purpose of determining the character and extent of possession and damages for the detention. (Sec. 88, Judiciary Act of 1948, as amended by R.A. Nos. 2613 and 3828, approved June 22, 1963). III As to the legal question that summary judgment should have been rendered by the court a quo, We rule that plaintiffs-petitioners are not entitled, as a matter of right, thereto. Summary judgment can only be granted where there are no questions of fact in issue or where the material allegations of the pleadings are not disputed. Such is not true in the case at bar. Firstly, defendant-respondent maintains that plaintiffs-petitioners failed to comply with the terms and conditions of their agreement. Secondly, in view of such failure on the part of plaintiffs-petitioners, the defendant-respondent maintains that under their contract of sub-lease he is authorized to take-over the possession of the leased premises. WHEREFORE, finding no error in the decision appealed from, the same is hereby affirmed. Costs against petitioners. SO ORDERED. Castro (Chairman), Makasiar, Muoz Palma and Martin, JJ., concur. Teehankee, J., took no part.

SECOND DIVISION [G.R. No. 177120. July 14, 2008.] PAUL T. IRAO, petitioner, vs. BY THE BAY, INC., respondent. DECISION CARPIO-MORALES, J p: By Resolution of February 20, 2008, this Court denied the Petition for Review on Certiorari filed by Paul T. Irao (petitioner) due to non-compliance with the September 17, 2007 Resolution directing him to file a reply to the comment of By the Bay, Inc. (respondent) on the petition. Petitioner, through counsel, promptly filed an Urgent Omnibus Motion 1 praying for the reconsideration of the above-said February 20, 2008 Resolution, the reinstatement of his petition, and the admission of his belated reply attached to the motion. Explaining the non-compliance, petitioner's counsel Atty. Tristram B. Zoleta of A. Tan, Zoleta and Associates alleges that "the previous lawyer (Atty. Wilfred F. Neis) assigned to this case inadvertently and unintentionally failed to file the required reply due to his resignation from the law firm, without properly turning over all the cases assigned to him;" that "the law firm and its associates had no slightest intention" to disobey the September 17, 2007 Resolution; and that they have "committed themselves under their oath as lawyers that they will be more circumspect in the supervision and handling of petitioner's case." 2 Atty. Zoleta further averred that "petitioner has a valid and meritorious case", warranting the grant of the petition. 3 The Court finds counsel's excuse to be flimsy and hackneyed. It is preposterous for his law firm to allow the handling lawyer to resign without requiring him to turn over all the cases assigned to him. Given that the findings on the case by the Metropolitan Trial Court and the Regional Trial Court on one hand, and the Court of Appeals on the other, are conflicting, however, and the prima facie merit of the petition, the Court heeds petitioner's entreaty and thus reconsiders the February 20, 2008 Resolution, reinstates the petition, and admits petitioner's belated reply to respondent's comment on the petition. In June of 2002, the Estate of Doa Trinidad de Leon Roxas represented by Ruby Roxas as lessor, and herein respondent represented by Ronald M. Magbitang as lessee, forged a contract of lease 4 over a three-storey building with an area of 662 square meters, located at Roxas Boulevard corner Salud Street, Pasay City, for a term of five (5) years commencing on July 1, 2002 until June 30, 2007, for a monthly rental of P200,000.00, to be increased annually by P50,000.00. 5 It appears that in November 2003, respondent's restaurant business at the leased premises was "closed down by the City Government".

Respondent defaulted in the payment of rentals which, as of January 2004, totaled P2,517,333.36 6 inclusive of interest and penalty charges. Despite demands to pay the amount and comply with the terms and conditions of the contract, respondent failed and refused to do so. 7 The lessor's counsel thereupon demanded, by letter 8 of January 16, 2004, the payment by respondent of P2,517,333.36 within five (5) days from notice "otherwise the Contract of Lease would be terminated without notice." It appears that the letter to respondent was received on January 23, 2004. 9 Respondent failed to heed the demand, however, drawing the lessor to terminate the contract without notice, in accordance with Section 31 of the contract which provides: 31. DEFAULT The LESSEE agrees that all the covenants and agreements herein contained shall be deemed conditions as well as covenants and that if default or breach be made of any of such covenants and conditions then this lease, at the discretion of the LESSOR, may be terminated and cancelled forthwith, and the LESSEE shall be liable for any and all damages, actual and consequential, resulting from such default and termination. If after due notice has been given to the LESSEE of the cancellation of the lease, the latter fails to comply with the LESSOR's demand for the return to it of the possession of the premises and the payment of the LESSEE's accrued obligations pursuant to the provisions of this Contract or in the event the LESSOR should exercise its Contract or in the event the LESSOR should exercise its right to enforce its preferred lien on the personal properties of the LESSEE existing on the Leased Premises, or in the event of default or breach by the LESSEE of any of the provisions herein contained, the LESSEE hereby empowers the LESSOR and/or her authorized representatives to open, enter, occupy, padlock, secure, enclose, fence and/or discontinue public utilities and otherwise take full and complete physical possession and control of the Leased Premises without resorting to court action; . . . . For purposes of this provision and other pertinent provisions of this Contract, the LESSEE hereby constitutes the LESSOR and her authorized representatives as the LESSEE's attorney-in-fact, and all acts performed by them in the exercise of their authority are hereby confirmed. The LESSEE hereby expressly agrees that only or all acts performed by the LESSOR, her authorized agents, employees and/or representatives under the provisions of this Section may not be the subject of any Petition for a Writ of Preliminary Injunction or Mandatory Injunction in court. 10 (Emphasis and underscoring supplied) Subsequently or on February 4, 2004, the lessor executed a lease contract 11 over the same property with herein petitioner, Paul T. Irao, effective February 1, 2004 until January 30, 2009. Paragraph 6 of this contract empowers petitioner to enter and take over the possession of the leased premises, thus: 6. TURNOVER OF POSSESSION The Leased Premises is presently being unlawfully detained by the previous lessee and the LESSEE acknowledges and recognizes such fact. The LESSEE undertakes that it shall take the necessary legal measures to eject or evict the previous lessee and its employees and assigns and take over possession of the Leased Premises. 12

Consequently, on or about February 6, 2004, petitioner, accompanied by a Barangay Kagawad and some security guards from the Spy Master Security Agency, entered and took possession of the leased premises. Respondent thereupon filed with the Metropolitan Trial Court (MeTC) of Pasay City a complaint 13 for forcible entry with prayer for preliminary mandatory injunction and damages against petitioner and all persons claiming rights under him, docketed as Civil Case No. 89-04 CFM. In its complaint, respondent alleged that its lease contract had not been terminated 14 because the lessor's demand letter was merely a demand to pay the rental arrears, without a notice to terminate the contract, hence, it "has the right to occupy the leased premises until June 30, 2007", 15 the expiry date of the lease; and that, therefore, petitioner's taking over the possession of the leased premises on February 6, 2004 was illegal. By Decision 16 of May 21, 2004, Branch 44 of the MeTC dismissed respondent's complaint, it holding that by respondent's failure to pay monthly rentals, it "violated its contractual obligations and therefore come to Court with unclean hands." 17 On appeal, the Regional Trial Court (RTC) of Pasay City, Branch 108, by Decision 18 dated August 16, 2004, dismissed respondent's appeal and affirmed the MeTC Decision. Respondent elevated the case via petition for review to the Court of Appeals which, by Decision 19 of February 22, 2006, granted the petition, disposing as follows: WHEREFORE, the petition is GRANTED. Accordingly, the August 16, 2004 Decision of the Regional Trial Court of Pasay City, Branch 108, and May 21, 2004 Decision of the Metropolitan Trial Court of Pasay City, Branch 44, are REVERSED and SET ASIDE. A NEW JUDGMENT is rendered ordering respondent [herein petitioner] Paul Irao to turn over the possession of the subject premises to petitioner. SO ORDERED. (Emphasis in the original; underscoring supplied) In reversing the RTC decision, the appellate court held that "while the contract with respondent provided that [i]n case of default, the parties stipulated that the lessor (or its authorized representative) could take over the physical possession of the leased premises 'without resorting to court action', [t]his empowerment, however, comes into play only 'after due notice has been given to the LESSEE of the cancellation of the lease'", 20 citing the second paragraph of Section 31 of respondent's lease contract, quoted earlier. Finding that a termination notice and a demand to vacate the leased premises were not incorporated in the lessor's demand letter, the appellate court ruled that respondent's eviction was improper. Petitioner's motion for reconsideration was denied by Resolution 21 of March 26, 2007. Hence, the present petition for review on certiorari filed on May 15, 2007 hinged on the issue of whether the lessor's demand letter to respondent contains a notice of termination of the lease contract

and a demand to vacate the leased premises to justify the taking over of possession thereof by the lessor and/or its representative-herein petitioner. The Court finds in the affirmative. The pertinent portions of the demand letter read: xxx xxx xxx

Our client [the lessor] has informed us that since June 2003, you failed to pay and refused to pay your monthly rentals including the interest due thereon, which to date amounts to Php1,450,000. In addition, you also owe our client the amount of Php567,333.36 by way of penalty and interest for late payment of your rentals from January 2003 to January 2004. A statement of account is attached herewith for your guidance and information. xxx xxx xxx

In view of the foregoing, formal demand is hereby made on you to pay our client the full amount of Php2,517,333.36 within five (5) days from receipt hereof, otherwise we shall be constrained, much to our regret, to terminate your Contract of Lease and take the necessary legal measures against you to protect our client's interest, without further notice. (Emphasis and underscoring supplied) The language and intent of the abovequoted portions of the demand letter are unambiguous. The lessor demanded from respondent the full payment of its unpaid rentals of P2,517,333.36 within five days from notice. The phrase "otherwise we shall be constrained, much to our regret" in the letter sends a clear warning that failure to settle the amount within the stated period would constrain the lessor to "terminate [the] Contract of Lease" and "take the necessary legal measures against [respondent] to protect [its] interest without further notice". The letter made it clear to respondent that the therein stated adverse consequences would ensue "without further notice", an unmistakable warning to respondent that upon its default, the lease contract would be deemed terminated and that its continued possession of the leased premises would no longer be permitted. The notice of impending termination was not something strange to respondent since it merely implemented the stipulation in Section 31 of their contract that "if default or breach be made of any of such covenants and conditions, then this lease, at the discretion of the LESSOR, may be terminated and cancelled forthwith". To "warn" means "to give notice to somebody beforehand, especially of danger;" and a "warning" may be "a notice of termination of an agreement, employment, etc." 22 Its purpose is "to apprise a party of the existence of danger of which he is not aware to enable him to protect himself against it". 23 "[W]here", as here, "the party is aware of the danger, the warning will serve no useful purpose and is unnecessary, and there is no duty to warn against risks which are open and obvious". 24

The appellate court's ruling that the lessor's letter did not demand respondent to vacate is flawed. A notice or demand to vacate does not have to expressly use the word "vacate", as it suffices that the demand letter puts the lessee or occupant on notice that if he does not pay the rentals demanded or comply with the terms of the lease contract, it should move out of the leased premises. 25 It bears reiteration that the demand letter priorly warned respondent that upon its default the lease contract would not only be terminated, but the lessor would "take the necessary legal measures against [respondent] to protect [its] interest, without further notice" and "without resorting to court action" as stipulated in their lease contract. The "necessary legal measures" are those expressly stipulated in Section 31 of the lease contract among which are, for expediency, requoted below: ". . . in the event of default or breach by the LESSEE of any of the provisions herein contained, the LESSEE hereby empowers the LESSOR and/or her authorized representatives to open, enter, occupy, . . . and otherwise take full and complete physical possession and control of the Leased Premises without resorting to court action; . . . . For purposes of this provision and other pertinent provisions of this Contract, the LESSEE hereby constitutes the LESSOR and her authorized representatives as the LESSEE's attorney-in-fact, and all acts performed by them in the exercise of their authority are hereby confirmed. . . . ." (Emphasis and underscoring supplied) Contractual stipulations empowering the lessor and/or his representative to repossess the leased property extrajudicially from a deforciant lessee, as in the present case, have been held to be valid. 26 Being the law between the parties, they must be respected. Respondent cannot thus feign ignorance that the repossession of the leased property by the lessor and/or its representative-herein petitioner was the appropriate legal measure it (respondent) itself authorized under their contract. In Viray v. Intermediate Appellate Court 27 where the lessor and the lessee stipulated as follows: 7. Upon failure of the Lessee to comply with any of the terms and conditions of this lease, as well as such other terms and conditions which may be imposed by the Lessor prior to and/or upon renewal of this lease agreement as provided in par. 2 above, then the Lessor shall have the right, upon five (5) days written notice to the Lessee or in his absence, upon written notice posted at the entrance of the premises leased, to enter and take possession of the said premises holding in his trust and custody and such possessions and belongings of the Lessee found therein after an inventory of the same in the presence of a witness, all these acts being hereby agreed to by the Lessee as tantamount to his voluntary vacation of the leased premises without the necessity of suit in court." (Underscoring supplied; italics in the original), this Court, finding that the stipulation empowered the lessor to reposses the leased premises extrajudicially, and citing, inter alia, Consing v. Jamandre 28 wherein this Court sustained the validity of a lease agreement empowering the sub-lessor to take possession of the leased premises, in case the sub-lessee fails "to comply with any of the terms and conditions" of the contract "without necessity of resorting to court action", held that the stipulation was valid.

In Subic Bay Metropolitan Authority v. Universal International Group of Taiwan, 29 this Court, in resolving in the affirmative the issue of whether a "stipulation authorizing [the therein petitioner-lessor] to extrajudicially rescind its contract [with the therein respondent-lessee] and to recover possession of the property in case of contractual breach is lawful", considered, among other things, the therein lessee's several violations of the Lease and Development Agreement including its failure to complete the "rehabilitation of the Golf Course in time for the APEC Leaders' Summit, and to pay accumulated lease rentals, and to post the required performance bond", which violations the lessee did not deny or controvert. The Court therein concluded that the lessee "effectively . . . offered no valid or sufficient objection to the lessor's exercise of its stipulated right to extrajudicially rescind the [agreement] and take over the property in case of material breach." As in Subic Bay, 30 herein respondent-lessee violated its agreement with the lessor and offered no valid or sufficient objection to the exercise by the lessor through petitioner of its stipulated right to extrajudicially take possession of the leased premises. Apropos with respect to herein respondent's having already been ousted of the leased premises is this Court's explanation in Viray that "the existence of . . . an affirmative right of action [of the lessor] constitutes a valid defense against, and is fatal to any action by the tenant who has been ousted otherwise than judicially to recover possession", citing Apundar v. Andrin 31 which held: . . . The existence of an affirmative right of action on the part of the landlord to oust the tenant is fatal to the maintenance of any action by the tenant. Otherwise, the absurd result would follow that a tenant ousted under the circumstances here revealed would be restored to possession only himself to be immediately put out in a possessory action instituted by the landlord. To prevent circuity of action, therefore, we must recognize the affirmative right of action on the part of the landlord as a complete and efficacious defense to the maintenance of an action by the tenant. Circuitus est evitandus; et boni judices est lites dirimere, ne lis ex lite oriatur. Another consideration based upon an idea familiar to jurisprudence is equally decisive. This is found in one of the implications of the familiar maxim, Ubi jus ibi remedium, the converse of which is of course equally true, namely: Nullum jus nullum remedium. Applying this idea to the case before us, it is manifest that inasmuch as the plaintiffs right of possession has been destroyed, the remedy is also necessarily taken away. 32 (Underscoring supplied) To restore possession of the premises to herein respondent, who was ousted under the circumstances reflected above, would undoubtedly, certainly result to absurdity. WHEREFORE, the petition is GRANTED. The challenged Court of Appeals Decision dated February 22, 2006 and its Resolution dated March 26, 2007 are REVERSED and SET ASIDE. The August 16, 2004 Decision of the Regional Trial Court of Pasay City, Branch 108 affirming that of the Metropolitan Trial Court of Pasay City, Branch 44 is REINSTATED. Costs against respondent.

SO ORDERED. Quisumbing, Tinga, Velasco, Jr. and Brion, JJ., concur.

SECOND DIVISION [G.R. No. 164110. February 12, 2008.] LEONOR B. CRUZ, petitioner, vs. TEOFILA M. CATAPANG, respondent. DECISION QUISUMBING, J p: This petition for review seeks the reversal of the Decision 1 dated September 16, 2003 and the Resolution 2 dated June 11, 2004 of the Court of Appeals in CA-G.R. SP No. 69250. The Court of Appeals reversed the Decision 3 dated October 22, 2001 of the Regional Trial Court (RTC), Branch 86, Taal, Batangas, which had earlier affirmed the Decision 4 dated September 20, 1999 of the 7th Municipal Circuit Trial Court (MCTC) of Taal, Batangas ordering respondent to vacate and deliver possession of a portion of the lot co-owned by petitioner, Luz Cruz and Norma Maligaya. DTIcSH The antecedent facts of the case are as follows. Petitioner Leonor B. Cruz, Luz Cruz and Norma Maligaya are the co-owners of a parcel of land covering an area of 1,435 square meters located at Barangay Mahabang Ludlod, Taal, Batangas. 5 With the consent of Norma Maligaya, one of the aforementioned co-owners, respondent Teofila M. Catapang built a house on a lot adjacent to the abovementioned parcel of land sometime in 1992. The house intruded, however, on a portion of the co-owned property. 6 In the first week of September 1995, petitioner Leonor B. Cruz visited the property and was surprised to see a part of respondent's house intruding unto a portion of the co-owned property. She then made several demands upon respondent to demolish the intruding structure and to vacate the portion encroaching on their property. The respondent, however, refused and disregarded her demands. 7 On January 25, 1996, the petitioner filed a complaint 8 for forcible entry against respondent before the 7th MCTC of Taal, Batangas. The MCTC decided in favor of petitioner, ruling that consent of only one of the co-owners is not sufficient to justify defendant's construction of the house and possession of the portion of the lot in question. 9 The dispositive portion of the MCTC decision reads: DaScAI WHEREFORE, judgment is hereby rendered ordering the defendant or any person acting in her behalf to vacate and deliver the possession of the area illegally occupied to the plaintiff; ordering the defendant to pay plaintiff reasonable attorney's fees of P10,000.00, plus costs of suit. SO ORDERED. 10 On appeal, the RTC, Branch 86, Taal, Batangas, affirmed the MCTC's ruling in a Decision dated October 22, 2001, the dispositive portion of which states: Wherefore, premises considered, the decision [appealed] from is hereby affirmed in toto. SO ORDERED. 11

After her motion for reconsideration was denied by the RTC, respondent filed a petition for review with the Court of Appeals, which reversed the RTC's decision. The Court of Appeals held that there is no cause of action for forcible entry in this case because respondent's entry into the property, considering the consent given by co-owner Norma Maligaya, cannot be characterized as one made through strategy or stealth which gives rise to a cause of action for forcible entry. 12 The Court of Appeals' decision further held that petitioner's remedy is not an action for ejectment but an entirely different recourse with the appropriate forum. The Court of Appeals disposed, thus: STHAaD WHEREFORE, premises considered, the instant Petition is hereby GRANTED. The challenged Decision dated 22 October 2001 as well as the Order dated 07 January 2002 of the Regional Trial Court of Taal, Batangas, Branch 86, are hereby REVERSED and SET ASIDE and, in lieu thereof, another is entered DISMISSING the complaint for forcible entry docketed as Civil Case No. 71-T. SO ORDERED. 13 After petitioner's motion for reconsideration was denied by the Court of Appeals in a Resolution dated June 11, 2004, she filed the instant petition. Raised before us for consideration are the following issues: I. WHETHER OR NOT THE KNOWLEDGE AND CONSENT OF CO-OWNER NORMA MALIGAYA IS A VALID LICENSE FOR THE RESPONDENT TO ERECT THE BUNGALOW HOUSE ON THE PREMISES OWNED PROINDIVISO SANS CONSENT FROM THE PETITIONER AND OTHE[R] CO-OWNER[.] II. WHETHER OR NOT RESPONDENT, BY HER ACTS, HAS ACQUIRED EXCLUSIVE OWNERSHIP OVER THE PORTION OF THE LOT SUBJECT OF THE PREMISES PURSUANT TO THE CONSENT GRANTED UNTO HER BY CO-OWNER NORMA MALIGAYA TO THE EXCLUSION OF THE PETITIONER AND THE OTHER CO-OWNER. 14 HIAEaC III. . . . WHETHER OR NOT RESPONDENT IN FACT OBTAINED POSSESSION OF THE PROPERTY IN QUESTION BY MEANS OF SIMPLE STRATEGY. 15 Petitioner prays in her petition that we effectively reverse the Court of Appeals' decision. Simply put, the main issue before us is whether consent given by a co-owner of a parcel of land to a person to construct a house on the co-owned property warrants the dismissal of a forcible entry case filed by another co-owner against that person. In her memorandum, 16 petitioner contends that the consent and knowledge of co-owner Norma Maligaya cannot defeat the action for forcible entry since it is a basic principle in the law of co-

ownership that no individual co-owner can claim title to any definite portion of the land or thing owned in common until partition. On the other hand, respondent in her memorandum 17 counters that the complaint for forcible entry cannot prosper because her entry into the property was not through strategy or stealth due to the consent of one of the co-owners. She further argues that since Norma Maligaya is residing in the house she built, the issue is not just possession de facto but also one of possession de jure since it involves rights of co-owners to enjoy the property. HSDCTA As to the issue of whether or not the consent of one co-owner will warrant the dismissal of a forcible entry case filed by another co-owner against the person who was given the consent to construct a house on the co-owned property, we have held that a co-owner cannot devote common property to his or her exclusive use to the prejudice of the co-ownership. 18 In our view, a co-owner cannot give valid consent to another to build a house on the co-owned property, which is an act tantamount to devoting the property to his or her exclusive use. Furthermore, Articles 486 and 491 of the Civil Code provide: Art. 486. Each co-owner may use the thing owned in common, provided he does so in accordance with the purpose for which it is intended and in such a way as not to injure the interest of the coownership or prevent the other co-owners from using it according to their rights. The purpose of the coownership may be changed by agreement, express or implied. Art. 491. None of the co-owners shall, without the consent of the others, make alterations in the thing owned in common, even though benefits for all would result therefrom. However, if the withholding of the consent by one or more of the co-owners is clearly prejudicial to the common interest, the courts may afford adequate relief. aEIcHA Article 486 states each co-owner may use the thing owned in common provided he does so in accordance with the purpose for which it is intended and in such a way as not to injure the interest of the co-ownership or prevent the other co-owners from using it according to their rights. Giving consent to a third person to construct a house on the co-owned property will injure the interest of the coownership and prevent other co-owners from using the property in accordance with their rights. Under Article 491, none of the co-owners shall, without the consent of the others, make alterations in the thing owned in common. It necessarily follows that none of the co-owners can, without the consent of the other co-owners, validly consent to the making of an alteration by another person, such as respondent, in the thing owned in common. Alterations include any act of strict dominion or ownership and any encumbrance or disposition has been held implicitly to be an act of alteration. 19 The construction of a house on the co-owned property is an act of dominion. Therefore, it is an alteration falling under Article 491 of the Civil Code. There being no consent from all co-owners, respondent had no right to construct her house on the co-owned property.

Consent of only one co-owner will not warrant the dismissal of the complaint for forcible entry filed against the builder. The consent given by Norma Maligaya in the absence of the consent of petitioner and Luz Cruz did not vest upon respondent any right to enter into the co-owned property. Her entry into the property still falls under the classification "through strategy or stealth". cCaEDA The Court of Appeals held that there is no forcible entry because respondent's entry into the property was not through strategy or stealth due to the consent given to her by one of the co-owners. We cannot give our imprimatur to this sweeping conclusion. Respondent's entry into the property without the permission of petitioner could appear to be a secret and clandestine act done in connivance with coowner Norma Maligaya whom respondent allowed to stay in her house. Entry into the land effected clandestinely without the knowledge of the other co-owners could be categorized as possession by stealth. 20 Moreover, respondent's act of getting only the consent of one co-owner, her sister Norma Maligaya, and allowing the latter to stay in the constructed house, can in fact be considered as a strategy which she utilized in order to enter into the co-owned property. As such, respondent's acts constitute forcible entry. Petitioner's filing of a complaint for forcible entry, in our view, was within the one-year period for filing the complaint. The one-year period within which to bring an action for forcible entry is generally counted from the date of actual entry to the land. However, when entry is made through stealth, then the one-year period is counted from the time the petitioner learned about it. 21 Although respondent constructed her house in 1992, it was only in September 1995 that petitioner learned of it when she visited the property. Accordingly, she then made demands on respondent to vacate the premises. Failing to get a favorable response, petitioner filed the complaint on January 25, 1996, which is within the oneyear period from the time petitioner learned of the construction. TaCDAH WHEREFORE, the petition is GRANTED. The Decision dated September 16, 2003 and the Resolution dated June 11, 2004 of the Court of Appeals in CA-G.R. SP No. 69250 are REVERSED and SET ASIDE. The Decision dated October 22, 2001 of the Regional Trial Court, Branch 86, Taal, Batangas is REINSTATED. Costs against respondent. SO ORDERED. Carpio, Carpio-Morales, Tinga and Velasco, Jr., JJ., concur.