Republic of the Philippines On July 19, 1955, the Philippine Resources Development Corporation
SUPREME COURT moved to intervene, appending to its motion, the complaint in the
Manila
EN BANC
G.R. No. L-10141 January 31, 1958
REPUBLIC OF THE PHILIPPINES, petitioner,
vs.
PHILIPPINE RESOURCES DEVELOPMENT CORPORATION and the COURT OF
APPEALS, respondents.
Office of the Solicitor General Ambrosio Padilla, and Solicitor Frine C. Zaballero for
petitioner.
Vicente L. Santiago for respondent Corporation.
PADILLA, J.:
This is a petition under Rule 46 to review a judgment rendered by the Court of
Appeals,in CA-GR No. 15767-R, Philippine Resources Development Corporation vs.
The Hon. Judge Magno Gatmaitan et al.
The findings of the Court of Appeals are, as follows.
It appears that on May 6, 1955, the Republic of the Philippines in
representation of the Bureau of Prisons instituted against Macario Apostol
and the Empire Insurance Co. a complaint docketed as Civil Case No. 26166
of the Court of First instance of Manila. The complaint alleges as the first
cause of action, that defendant Apostol submitted the highest bid the amount
P450.00 per ton for the purchase of 100 tons of Palawan Almaciga from the
Bureau of Prisons; that a contract therefor was drawn and by virtue of which,
Apostol obtained goods from the Bureau of Prisons valued P15,878.59; that
of said account, Apostol paid only P691.10 leaving a balane obligation of
P15,187.49. The complaint further averes, as second cause of action, that
Apostol submitted the best bid with the Bureau of Prisons for the purchase of
three million board feet of logs at P88.00 per 1,000 board feet; that a
contract was executed between the Director of Prisons and Apostol pursuant
to which contract Apostol obtained deliveries of logs valued at P65.830.00,
and that Apostol failed to pay a balance account Of P18,827.57. All told, for
the total demand set forth in complaint against Apostol is for P34,015.06 with
legal interests thereon from January 8, 1952. The Empire lnsurance
Company was included in the complaint having executed a performance
bond of P10,000.00 in favor of Apostol.
In his answer, Apostol interposed payment as a defense and sought the
dismissal of the complaint.
intervention of even date. The complaint recites that for sometime prior to
Apostol's transactions the corporate had some goods deposited in a
warehouse at 1201 Herran, Manila; that Apostol, then the president of the
corporation but without the knowledge or consent of the stockholders
thereof, disposed of said goods by delivering the same to the Bureau of
Prisons of in an attempt to settle his personal debts with the latter entity; that
upon discovery of Apodol's act, the corporation took steps to recover said
goods by demanding from the Bureau of Prisons the return thereof; and that
upon the refusal of the Bureau to return said goods, the corporation sought
leave to intervene in Civil Case No. 26166.
As aforestated, His Honor denied the motion for intervention and thereby
issued an order to this effect on July 23, 1955. A motion for the
reconsideration of said order was filed by the movant corporation and the
same was likewise denied by His Honor on August 18, 1955 . . . (Annex L.).
On 3 September 1955, in a petition for a writ of certiorari filed in the Court of Appeals,
the herein respondent corporation prayed for the setting aside of the order of the
Court of First Instance that had denied the admission of its complaint-in-intervention
and for an order directing the latter Court to allow the herein respondent corporation
to intervene in the action (Annex G). On 12 December 1955 the Court of Appeals set
aside the order denying the motion to intervene and ordered the respondent court to
admit the herein respondent corporation's complaint-in-intervention with costs against
Macario Apostol.
On 9 January 1956 the Republic of the Philippines filed this petition in this Court for
the purpose stated at the beginning of this opinion.
The Goverment contends that the intervenor has no legal interest in the matter in
litigation, because the action brought in the Court of First Instance of Manila against
Macario Apostol and the Empire Insurance Company (Civil Case No. 26166, Annex
A) is just for the collection from the defendant Apostol of a sum of money, the unpaid
balance of the purchase price of logs and almaciga bought by him from the Bureau of
Prisons, whereas the intervenor seeks to recover ownership and possession of G. I.
sheets, black sheets, M. S. plates, round bars and G. I. pipes that it claims its owns-
an intervention which would change a personal action into one ad rem and would
unduly delay the disposition of the case.
The Court of Appeals held that:
Petitioner ardently claims that the reason behind its motion to intervene is
the desire to protect its rights and interests over some materials purportedly
belonging to it; that said material were unauthorizedly and illegally assigned
and delivered to the Bureau of Prisons by petitioning corporation's president
Macario Apostol in payment of the latter's personal accounts with the said
entity; and that the Bureau of Prisons refused to return said materials despite
petitioner's demands to do so.
Petitioner refers to the particulars recited in Apostol's answer dated July 12,
1955 to the effect that Apostol had paid unto the Bureau of Prisons his
accounts covered, among others, by BPPO 1077 for the sum of P4,638.40
and BPPO 1549 for the amount of P4,398.54. Petitioner moreover, points to
the State of Paid and Unpaid accounts of Apostol dated January 16, 1954
prepared by the accounting of officer of the Bureau of Prisons (Annex B.
Complaint in Intervention), wherein it appears that the aforementioned
accounts covered respectively by BPPO Nos. 1077 for 892 pieces of GI
sheets and 1549 for 399 pieces of GI pipes in the total sum of P9,036.94
have not been credited to Apostol's account in view of lack of supporting
papers; and that according to the reply letter of the Undersecretary of
Justice, said GI sheets and pipes were delivered by Macario Apostol to the
Bureau of Prisons allegedly in Apostol's capacity as owner and that the black
iron sheets were delivered by Apostol as President of the petitioner
corporation.
Respondents, on the other hand, assert that the subject matter of the original
litigation is a sum of money allegedly due to the Bureau of Prisons from
Macario Apostol and not the goods or the materials reportedly turned over by
Apostol as payment of his private debts to the Bureau of Prisons and the
recovery of which is sought by the petitioner; and that for this reason,
petitioner has no legal interest in the very subject matter in litigation as to
entitle it to intervene.
We find no merit in respondents' contention. It is true that the very subject
matter of the original case is a sum of money. But it is likewise true as borne
out by the records, that the materials purportedly belonging to the petitioner
corporation have been assessed and evaluated and their price equivalent in
terms of money have been determined; and that said materials for whatever
price they have been assigned by defendant now respondent Apostol as
tokens of payment of his private debts with the Bureau of Prisons. In view of
these considerations, it becomes enormously plain in the event the
respondent judge decides to credit Macario Apostol with the value of the
goods delivered by the latter to the Bureau of Prisons, the petitioner
corporation stands to be adversely affected by such judgment. The
conclusion, therefore, is inescapable that the petitioner possesses a legal
interest in the matter in litigation and that such interest is of an actual,
material, direct and immediate nature as to entitle petitioner to intervene.
xxx xxx xxx
Section 3 of Rule 13 of the Rules of Court endows the lower Court with
discretion to allow or disapprove the motion for intrvention (Santarromana et
al. vs. Barrios, 63 Phil. 456); and that in the exercise of such discretion, the
court shall consider whether or not the intervention will unduly delay or
prejudice the adjudicatio of the rights of the original parties and whether or
not the intervenors the rights may be fully protected in a separate
proceeding. The petitioner in the instant case positively authorized to a
separate action against any of all the respondents. But considering that the
resolution of the issues raised in and enjoined by the pleadings in the main
case, would virtally affect the rights not only the original parties but also of
the berein petitioner: that far from unduly delaying or prejudicing the
adjudication of the rights of the original parties or bringing about confusion in
the original case, the adnission of the complaint in intervention would help
clarify the vital issue of the true and real ownership of the materials involved,
besides preventing an abhorrent munltiplicity of suit, we believe that the
motion to intervene should be given due to cause.
We find no reason for disturbing the foregoing pronouncements. The Government
argues that "Price . . . is always paid in terms of money and the supposed payment
beeing in kind, it is no payment at all, "citing Article 1458 of the new Civil Code.
However, the same Article provides that the purschaser may pay "a price certain in
money or its equivalent," which means that they meant of the price need not be in
money. Whether the G.I. sheets, black sheets, M. S. Plates, round bars and G. I.
pipes claimed by the respondent corporation to belong to it and delivered to the
Bureau of Prison by Macario Apostol in payment of his account is sufficient payment
therefore, is for the court to pass upon and decide after hearing all the parties in the
case. Should the trial court hold that it is as to credit Apostol with the value or price of
the materials delivered by him, certainly the herein respondent corporation would be
affected adversely if its claim of ownership of such sheets, plates, bars and pipes is
true.
The Government reiterates in its original stand that counsel appearing for the
respondent corporation has no authority to represent it or/and sue in its behalf, the
Court of Appeals held that:
Respondents aver also that petitioner lacks legal capacity to sue and that its
counsel is acting merely in an individual capacity without the benefit of the
corporate act authorizing him to bring sue. In this connection, respondents
invoked among others section 20 of Rule 127 which provision, in our opinion,
squarely disproves their claim as by virtue thereof, the authority of
petitioner's counsel is pressumed. Withal, the claim of the counsel for the
petitioner that a resolution to proceed against Apostol, had been
unanonimously adopted by the stockholders of the corporation, has not been
refuted.
Evidently, petitioner is a duly organized corporation with offices at the
Samanillo Building and that as such, it is endowed with a personality distinct
and separate from that of its president or stockholders. It has the right to
bring suit to safeguard its interests and ordinarily, such right is exercised at
the instance of the president. However, under the circumstance now
obtaining, such right properly devolves upon the other officers of the
corporations as said right is sought to be exercised against the president
himself who is the very object of the intended suit.
The power of a corporation to sue and be sued in any court 1 is lodged in the board of
directors which exercises it corporater powers,2 and not in the president, as
contended by the Government. The "motion for admission of complaint in
intervention" (Annex C) and the "complaint in intervention" attached thereto, signed by
counsel and filed in the Court of First Instance begin with the following statement:
"COMES NOW the above-name Intervenor, by its undersigned counsel, . . . , "and
underneath his typewritten name is affixed the description" Counsel for the
Intervenor." As counsels authority to appeal for the respondent corporation was
newer questioned in the Court of First Instance, it is to be pressumed that he was
properly authorized to file the complaint in intervention and appeal for his client. 1 It
was only in the Court of Appeals where his authority to appear was questioned. As
the Court of Appeals was satisfied that counsel was duly authorized by his client to
file the complaint does in intervention and to appear in its behalf, hte resolution of the
Court of Appeals on this point should not be disturbed.

Granting that counsel has not been actually authorized by the board of directors to
appear for and in behalf of the respondent corporation, the fact that counsel is the
secretary treasurer of the respondent corporation and member of the board of
directors; and that the other members of the board, namely, Macario Apostol, the
president, and his wife Pacita R. Apostol, who shuold normally initiate the action to
protect the corporate properties and in interest are the ones to be adversely affected
thereby, a single stockholder under such circumstances may sue in behalf of the
corporation.2 Counsel as a stockholder and director of the respondent corporation
may sue in its behalf and file the complaint in intervention in the proper court.

The judgment under review is affirmed, without pronouncements as to costs.


Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 83759 July 12, 1991
SPOUSES CIPRIANO VASQUEZ and VALERIANA GAYANELO, petitioners,
vs.
HONORABLE COURT OF APPEALS and SPOUSES MARTIN VALLEJERA and
APOLONIA OLEA,respondents.
Dionisio C. Isidto for petitioners.
Raymundo Lozada, Jr. for private respondents.
GUTIERREZ, JR., J.:
This petition seeks to reverse the decision of the Court of Appeals which affirmed the
earlier decision of the Regional Trial Court, 6th Judicial Region, Branch 56,
Himamaylan, Negros Occidental in Civil Case No. 839 (for specific performance and
damages) ordering the petitioners (defendants in the civil case) to resell Lot No. 1860
of the Cadastral Survey of Himamaylan, Negros Occidental to the respondents
(plaintiffs in the civil case) upon payment by the latter of the amount of P24,000.00 as
well as the appellate court's resolution denying a motion for reconsideration. In
addition, the appellate court ordered the petitioners to pay the amount of P5,000.00
as necessary and useful expenses in accordance with Article 1616 of the Civil Code.
The facts of the case are not in dispute. They are summarized by the appellate court
as follows:
On January 15, 1975, the plaintiffs-spouses (respondents herein) filed this
action against the defendants-spouses (petitioners herein) seeking to
redeem Lot No. 1860 of the Himamaylan Cadastre which was previously
sold by plaintiffs to defendants on September 21, 1964.
The said lot was registered in the name of plaintiffs. On October 1959, the
same was leased by plaintiffs to the defendants up to crop year 1966-67,
which was extended to crop year 1968-69. After the execution of the lease,
defendants took possession of the lot, up to now and devoted the same to
the cultivation of sugar.
On September 21, 1964, the plaintiffs sold the lot to the defendants under a
Deed of Sale for the amount of P9,000.00. The Deed of Sale was duly
ratified and notarized. On the same day and along with the execution of the
Deed of Sale, a separate instrument, denominated as Right to Repurchase
(Exh. E), was executed by the parties granting plaintiffs the right to
repurchase the lot for P12,000.00, said Exh. E likewise duly ratified and
notarized. By virtue of the sale, defendants secured TCT No. T-58898 in
their name. On January 2, 1969, plaintiffs sold the same lot to Benito
Derrama, Jr., after securing the defendants' title, for the sum of P12,000.00.
Upon the protestations of defendant, assisted by counsel, the said second
sale was cancelled after the payment of P12,000.00 by the defendants to
Derrama.
Defendants resisted this action for redemption on the premise that Exh. E is
just an option to buy since it is not embodied in the same document of sale
but in a separate document, and since such option is not supported by a
consideration distinct from the price, said deed for right to repurchase is not
binding upon them.
After trial, the court below rendered judgment against the defendants,
ordering them to resell lot No. 1860 of the Himamaylan Cadastre to the
plaintiffs for the repurchase price of P24,000.00, which amount combines the
price paid for the first sale and the price paid by defendants to Benito
Derrama, Jr.
Defendants moved for, but were denied reconsideration. Excepting thereto,
defendants-appealed, . . . (Rollo, pp. 44-45)
The petition was given due course in a resolution dated February 12, 1990.
The petitioners insist that they can not be compelled to resell Lot No. 1860 of the
Himamaylan Cadastre. They contend that the nature of the sale over the said lot
between them and the private respondents was that of an absolute deed of sale and
that the right thereafter granted by them to the private respondents (Right to
Repurchase, Exhibit "E") can only be either an option to buy or a mere promise on
their part to resell the property. They opine that since the "RIGHT TO
REPURCHASE" was not supported by any consideration distinct from the purchase
price it is not valid and binding on the petitioners pursuant to Article 1479 of the Civil
Code.
The document denominated as "RIGHT TO REPURCHASE" (Exhibit E) provides:
RIGHT TO REPURCHASE
KNOW ALL MEN BY THESE PRESENTS:
 I, CIPRIANO VASQUEZ, . . ., do hereby grant the spouses Martin Vallejera
and Apolonia Olea, their heirs and assigns, the right to repurchase said Lot
No. 1860 for the sum of TWELVE THOUSAND PESOS (P12,000.00),
Philippine Currency, within the period TEN (10) YEARS from the agricultural
year 1969-1970 when my contract of lease over the property shall expire and
until the agricultural year 1979-1980.
IN WITNESS WHEREOF, I have hereunto signed my name at Binalbagan,
Negros Occidental, this 21st day of September, 1964.
SGD. CIPRIANO VASQUEZ
SGD. VALERIANA G. VASQUEZ SGD. FRANCISCO SANICAS
(Rollo, p. 47)
The Court of Appeals, applying the principles laid down in the case of Sanchez v.
Rigos, 45 SCRA 368 [1972] decided in favor of the private respondents.
In the Sanchez case, plaintiff-appellee Nicolas Sanchez and defendant-appellant
Severino Rigos executed a document entitled "Option to Purchase," whereby Mrs.
Rigos "agreed, promised and committed . . . to sell" to Sanchez for the sum of
P1,510.00, a registered parcel of land within 2 years from execution of the document
with the condition that said option shall be deemed "terminated and lapsed," if
"Sanchez shall fail to exercise his right to buy the property" within the stipulated
period. In the same document, Sanchez" . . . hereby agree and conform with all the
conditions set forth in the option to purchase executed in my favor, that I bind myself
with all the terms and conditions." (Emphasis supplied) The notarized document was
signed both by Sanchez and Rigos.
After several tenders of payment of the agreed sum of P1,510.00 made by Sanchez
within the stipulated period were rejected by Rigos, the former deposited said amount
with the Court of First Instance of Nueva Ecija and filed an action for specific
performance and damages against Rigos.
The lower court rendered judgment in favor of Sanchez and ordered Rigos to accept
the sum judicially consigned and to execute in Sanchez' favor the requisite deed of
conveyance. Rigos appealed the case to the Court of Appeals which certified to this
Court on the ground that it involves a pure question of law.
This Court after deliberating on two conflicting principles laid down in the cases of
Southwestern Sugar and Molasses Co. v. Atlantic Gulf and Pacific Co., (97 Phil. 249
[1955]) and Atkins, Kroll & Co., Inc. v. Cua Hian Tek, 102 Phil. 948 [1958]) arrived at
the conclusion that Article 1479 of the Civil Code which provides: ––
Art. 1479. 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 promissory if the promise is supported by a
consideration distinct from the price.
and Article 1324 thereof which provides:
Art. 1324. When the offerer has allowed the offerer 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 a
consideration, as something paid or promised.
should be reconciled and harmonized to avoid a conflict between the two provisions.
In effect, the Court abandoned the ruling in the Southwestern Sugar and Molasses
Co. case and reiterated the ruling in the Atkins, Kroll and Co. case, to wit:
However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua
Hian Tek, (102 Phil. 948, 951-952) decided later than Southwestern Sugar &
Molasses Co. v. Atlantic Gulf & Pacific Co., (supra) saw no distinction
between Articles 1324 and 1479 of the Civil Code and applied the former
where a unilateral promise to sell similar to the one sued upon here was
involved, treating such promise as an option which, although not binding as
a contract in itself for lack of separate consideration, nevertheless generated
a bilateral contract of purchase and sale upon acceptance. Speaking through
Associate Justice, later Chief Justice, Cesar Bengzon, this Court said:
Furthermore, an option is unilateral: a promise to sell at the price
fixed whenever the offeree should decide to exercise his option
within the specified time. After accepting the promise and before he
exercises his option, the holder of the option is not bound to buy.
He is free either to buy or not to buy later. In this case however,
upon accepting herein petitioner's offer a bilateral promise to sell
and to buy ensued, and the respondent ipso facto assumed the
obligation of a purchaser. He did not just get the right subsequently
to buy or not to buy. It was not a mere option then; it was bilateral
contract of sale.
Lastly, even supposing that Exh. A granted an option which is not
binding for lack of consideration, the authorities hold that
If the option is given without a consideration, it is a mere offer of a
contract of sale, which is not binding until accepted. If, however,
acceptance is made before a withdrawal, it constitutes a binding
contract of sale, even though the option was not supported by a
sufficient consideration . . . (77 Corpus Juris Secundum p.
652. See also 27 Ruling Case Law 339 and cases cited.)
This Court affirmed the lower court's decision although the promise to sell was not
supported by a consideration distinct from the price. It was obvious that Sanchez, the
promisee, accepted the option to buy before Rigos, the promisor, withdrew the same.
Under such circumstances, the option to purchase was converted into a bilateral
contract of sale which bound both parties.
In the instant case and contrary to the appellate court's finding, it is clear that the right
to repurchase was not supported by a consideration distinct from the price. The rule is
that the promisee has the burden of proving such consideration. Unfortunately, the
private respondents, promisees in the right to repurchase failed to prove such
consideration. They did not even allege the existence thereof in their complaint.
(See Sanchez v. Rigos supra)
Therefore, in order that the Sanchez case can be applied, the evidence must show
that the private respondents accepted the right to repurchase.
The record, however, does not show that the private respondents accepted the "Right
to Repurchase" the land in question. We disagree with the appellate court's finding
that the private respondents accepted the "right to repurchase" under the following
circumstances: . . as evidenced by the annotation and registration of the same on the
back of the transfer of certificate of title in the name of appellants. As vividly
appearing therein, it was signed by appellant himself and witnessed by his wife so
that for all intents and purposes the Vasquez spouses are estopped from disregarding
its obvious purpose and intention."
The annotation and registration of the right to repurchase at the back of the certificate
of title of the petitioners can not be considered as acceptance of the right to
repurchase. Annotation at the back of the certificate of title of registered land is for the
purpose of binding purchasers of such registered land. Thus, we ruled in the case
of Bel Air Village Association, Inc. v. Dionisio (174 SCRA 589 [1989]), citing Tanchoco
v. Aquino (154 SCRA 1 [1987]), and Constantino v. Espiritu (45 SCRA 557 [1972])
that purchasers of a registered land are bound by the annotations found at the back of
the certificate of title covering the subject parcel of land. In effect, the annotation of
the right to repurchase found at the back of the certificate of title over the subject
parcel of land of the private respondents only served as notice of the existence of
such unilateral promise of the petitioners to resell the same to the private
respondents. This, however, can not be equated with acceptance of such right to
repurchase by the private respondent.
Neither can the signature of the petitioners in the document called "right to
repurchase" signify acceptance of the right to repurchase. The respondents did not
sign the offer. Acceptance should be made by the promisee, in this case, the private
respondents and not the promisors, the petitioners herein. It would be absurd to
require the promisor of an option to buy to accept his own offer instead of the
promisee to whom the option to buy is given.
Furthermore, the actions of the private respondents –– (a) filing a complaint to compel
re-sale and their demands for resale prior to filing of the complaint cannot be
considered acceptance. As stated in Vda. de Zulueta v. Octaviano (121 SCRA 314
[1983]):
And even granting, arguendo that the sale was a pacto de retro sale, the
evidence shows that Olimpia, through her lawyer, opted to repurchase the
land only on 16 February 1962, approximately two years beyond the
stipulated period, that is not later than May, 1960.
If Olimpia could not locate Aurelio, as she contends, and based on her
allegation that the contract between her was one of sale with right to
repurchase, neither, however, did she tender the redemption price to private
respondent Isauro, but merely wrote him letters expressing her readiness to
repurchase the property.
It is clear that the mere sending of letters by the vendor expressing his
desire to repurchase the property without accompanying tender of the
redemption price fell short of the requirements of law. (Lee v. Court of
Appeals, 68 SCRA 197 [1972])
Neither did petitioner make a judicial consignation of the repurchase price
within the agreed period.
In a contract of sale with a right of repurchase, the redemptioner who may
offer to make the repurchase on the option date of redemption should
deposit the full amount in court . . . (Rumbaoa v. Arzaga, 84 Phil. 812 [1949])
To effectively exercise the right to repurchase the vendor a retro must make
an actual and simultaneous tender of payment or consignation.
(Catangcatang v. Legayada, 84 SCRA 51 [1978])
The private respondents' ineffectual acceptance of the option to buy validated the
petitioner's refusal to sell the parcel which can be considered as a withdrawal of the
option to buy.
We agree with the petitioners that the case of Vda. de Zulueta v. Octaviano, (supra) is
in point.
Stripped of non-essentials the facts of the Zulueta case are as follows: On November
25, 1952 (Emphasis supplied) Olimpia Fernandez Vda. de Zulueta, the registered
owner of a 5.5 hectare riceland sold the lot to private respondent Aurelio B. Octaviano
for P8,600.00 subject to certain terms and conditions. The contract was an absolute
and definite sale. On the same day, November 25, 1952, (Emphasis supplied) the
vendee, Aurelio signed another document giving the vendor Zulueta the "option to
repurchase" the property at anytime after May 1958 but not later than May 1960.
When however, Zulueta tried to exercise her "option to buy" the property, Aurelio
resisted the same prompting Zulueta to commence suit for recovery of ownership and
possession of the property with the then Court of First Instance of Iloilo.
The trial court ruled in favor of Zulueta. Upon appeal, however, the Court of Appeals
reversed the trial court's decision.
We affirmed the appellate court's decision and ruled:
The nature of the transaction between Olimpia and Aurelio, from the context
of Exhibit "E" is not a sale with right to repurchase. Conventional redemption
takes place "when the vendor reserves the right to repurchase the thing sold,
with the obligation to comply with the provisions of Article 1616 and other
stipulations which may have been agreed upon. (Article 1601, Civil Code).
In this case, there was no reservation made by the vendor, Olimpia, in the
document Exhibit "E" the "option to repurchase" was contained in a
subsequent document and was made by the vendee, Aurelio. Thus, it was
more of an option to buy or a mere promise on the part of the vendee,
Aurelio, to resell the property to the vendor, Olimpia. (10 Manresa, p. 311
cited in Padilla's Civil Code Annotated, Vol. V, 1974 ed., p. 467) As held in
Villarica v. Court of Appeals (26 SCRA 189 [1968]):
The right of repurchase is not a right granted the vendor by the
vendee in a subsequent instrument, but is a right reserved by the
vendor in the same instrument of sale as one of the stipulations of
the contract. Once the instrument of absolute sale is executed, the
vendor can no longer reserve the right to repurchase, and any right
thereafter granted the vendor by the vendee in a separate
instrument cannot be a right of repurchase but some other right like
the option to buy in the instant case. . . (Emphasis supplied)
The appellate court rejected the application of the Zulueta case by stating:
Conventional redemption shall take place when the vendor reserves the right
to repurchase the thing sold, with the obligation to comply with the provision
of Article 1616 and other stipulations which may have been agreed upon.
(Rollo, pp. 46-47)
Obviously, the appellate court's findings are not reflected in the cited
decision.1âwphi1 As in the instant case, the option to repurchase involved in the
Zulueta case was executed in a separate document but on the same date that the
deed of definite sale was executed.
While it is true that this Court in the Zulueta case found Zulueta guilty of laches, this,
however, was not the primary reason why this Court disallowed the redemption of the
property by Zulueta. It is clear from the decision that the ruling in the Zulueta case
was based mainly on the finding that the transaction between Zulueta and Octaviano
was not a sale with right to repurchase and that the "option to repurchase was but an
option to buy or a mere promise on the part of Octaviano to resell the property to
Zulueta.
In the instant case, since the transaction between the petitioners and private
respondents was not a sale with right to repurchase, the private respondents cannot
avail of Article 1601 of the Civil Code which provides for conventional redemption.
WHEREFORE, the petition is GRANTED. The questioned decision and resolution of
the Court of Appeals are hereby REVERSED and SET ASIDE. The complaint in Civil
Case No. 839 of the then Court of First Instance of Negros Occidental 12th Judicial
District Branch 6 is DISMISSED. No costs.

. . . [A]s found by the trial court from which we quote with approval below, the SO ORDERED.
said cases involve the lapse of several days for the execution of separate
instruments after the execution of the deed of sale, while the instant case
involves the execution of an instrument, separate as it is, but executed on
the same day, and notarized by the same notary public, to wit:

A close examination of Exh. "E" reveals that although it is a separate

document in itself, it is far different from the document which was
pronounced as an option by the Supreme Court in the Villarica case. The
option in the Villarica case was executed several days after the execution of
the deed of sale. In the present case, Exh. "E" was executed and ratified by
the same notary public and the Deed of Sale of Lot No. 1860 by the plaintiffs
to the defendants were notarized by the same notary public and entered in
the same page of the same notarial register . . .

The latter case (Vda. de Zulueta v. Octaviano, supra), likewise involved the
execution of the separate document after an intervention of several days and
the question of laches was decided therein, which is not present in the
instant case. That distinction is therefore crucial and We are of the opinion
that the appellee's right to repurchase has been adequately provided for and
reserved in conformity with Article 1601 of the Civil Code, which states:

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-32873 August 18, 1972
AQUILINO NIETES, petitioner,
vs.
HON. COURT OF APPEALS & DR. PABLO C. GARCIA, respondents.
Conrado V. del Rosario for petitioner.
Romeo D. Magat for private respondent.
CONCEPCION, C.J.:p
Petitioner Aquilino Nietes seeks a review on certiorari of a decision of the Court of
Appeals.
It appears that, on October 19, 1959, said petitioner and respondent Dr. Pablo C.
Garcia entered into a "Contract of Lease with Option to Buy," pursuant to the terms
and conditions set forth in the deed Exhibits A and A-1, (also, marked as Exhibit 2)
namely:
That the LESSOR is an owner of the ANGELES EDUCATIONAL
INSTITUTE situated at Angeles, Pampanga, a school which is duly
recognized by the Government;
That the lessor agrees to lease the above stated school to the
LESSEE under the following terms and conditions:
1. That the term will be for a period of five (5) years;
2. That the price of the rent is FIVE THOUSAND PESOS (P5,000)
per year payable in the following manners:
a. That the amount of FIVE THOUSAND FIVE
HUNDRED PESOS (P5,500) will be paid upon
the execution of this Contract of Lease;
b. That the amount of FOUR THOUSAND FIVE
HUNDRED PESOS (P4,500) is payable on or
before the 30th day of October, 1959;
c. That the remaining balance of FIFTEEN
THOUSAND PESOS (P15,000) will be paid on or
before March 30, 1960;
3. That all improvements made during the lease by the LESSEE will
be owned by the LESSOR after the expiration of the term of this
Contract of Lease;
4. That the LESSOR agrees to give the LESSEE an option to buy
the land and the school building, for a price of ONE HUNDRED
THOUSAND PESOS (P100,000) within the period of the Contract
of Lease;
5. That should the LESSEE buy the lot, land and the school building
within the stipulated period, the unused payment for the Contract of
Lease will be considered as part payment for the sale of the land
and school;
6. That an inventory of all properties in the school will be made on
March 31, 1960;
6A. That the term of this Contract will commence in June 1960 and
will terminate in June 1965;
7. That the LESSEE will be given full control and responsibilities
over all the properties of the school and over all the supervisions
and administrations of the school;
8. That the LESSEE agrees to help the LESSOR to collect the back
accounts of students incurred before the execution of this contract.
Instead of paying the lessor in the manner set forth in paragraph 2 of said contract,
Nietes had, as of August 4, 1961, made payments as follows:
October 6,1960 ....................................... P18,957.00 (Exh. D)
November 23, 1960 ................................. 300.00 (Exh. E)
December 21, 1960 ................................. 200.00 (Exh. F)
January 14, 1961 ..................................... 500.00 (Exh. G)
February 16, 1961 ................................... 3,000.00 (Exh. H)
 March 12, 1961 ....................................... 1,000.00 (Exh. I)
March 13, 1961 ....................................... 700.00 (Exh. J)
August 4, 1961 ........................................ 100.00 (Exh. K)
_________
TOTAL ..................................... P24,757.00
Moreover, Nietes maintains that, on September 4, 1961, and December 13, 1962, he
paid Garcia the additional sums of P3,000 and P2,200, respectively, for which Garcia
issued receipts Exhibit B and C, reading:
Received the amount of (P3,000.00) Three Thousand Pesos from
Mrs. Nietes as per advance pay for the school, the contract of lease
being paid.
(Sgd.) PABLO GARCIA (Exh. B)
To Whom it May Concern:
This is to certify that I received the sum of Two Thousand Two
Hundred Pesos, Philippine Currency, from Mrs. Catherine R. Nietes
as the partial payment on the purchase of the property as specified
on the original contract of "Contract of Lease with the First Option
to Buy" originally contracted and duly signed.
(Sgd.) DR. PABLO GARCIA (Exh. C)
On or about July 31, 1964, Dr. Garcia's counsel wrote to Nietes the letter Exhibit 1
(also Exhibit V) stating:
The Director
Philippine Institute of Electronics
Angeles, Pampanga
Sir:
I regret to inform you that our client, Dr. Pablo Garcia, desires to
rescind your contract, dated 19 October 1959 because of the
following:
1. That you had not maintained the building, subject of the lease
contract in good condition.
2. That you had not been using the original name of the school —
Angeles Institute, thereby extinguishing its existence in the eyes of
the public and injuring its prestige.
3. That through your fault, no inventory has been made of all
properties of the school.
4. That up to this time, you had not collected or much less helped in
the collection of back accounts of former students.
This is to remind you that the foregoing obligations had been one, if
not, the principal moving factors which had induced the lessor in
agreeing with the terms embodied in your contract of lease, without
which fulfillment, said contract could not have come into existence.
It is not simply one of those reminders that we make mention, that
our client under the circumstances, is not only entitled to a
rescission of the contract. He is likewise entitled to damages —
actual, compensatory and exemplary.
In view of the serious nature of the breach which warrant and
sanction drastic legal remedies against you, we earnestly request
you to please see the undersigned at the above-named address
two days from receipt hereof. Otherwise, if we shall not hear from
you, the foregoing will serve notice on your part to vacate the
premises within five (5) days to be counted from date of notice.
Very truly yours,
(Sgd.) VICTOR T. LLAMAS, JR.
to which counsel for Nietes replied in the following language:
Atty. Victor T. Llamas, Jr.
Victor Llamas Law Office
Corner Rivera-Zamora Streets
Dagupan City
Dear Sir:
Your letter dated July 31, 1964 addressed to my client, the Director
of the Philippine Institute of Electronics, Angeles City, has been
referred to me and in reply, please, be informed that my client has
not violated any provision of the CONTRACT OF LEASE WITH
OPTION TO BUY, executed by him as LESSEE and Dr. Pablo
Garcia as LESSOR. For this reason, there is no basis for rescission
of the contract nor of the demands contained in your letter.
In this connection, I am also serving this formal notice upon your
client Dr. Pablo Garcia, thru you, that my client Mr. AQUILINO T.
 NIETES will exercise his OPTION to buy the land and building
subject matter of the lease and that my said client is ready to pay
the balance of the purchase price in accordance with the contract.
Please, inform Dr. Pablo Garcia to make available the land title and
execute the corresponding Deed of Sale pursuant to this notice,
and that if he fails to do so within fifteen (15) days from the receipt
of this letter, we shall take the corresponding action to enforce the
agreement.
Truly yours,
(Sgd.) CONRADO V. DEL ROSARIO
Counsel for Mr. Aquilino T. Nietes
Angeles City
On July 26, 1965, Nietes deposited with the branch office of the Agro-Industrial Bank
in Angeles City checks amounting to P84,860.50, as balance of the purchase price of
the property, but he withdrew said sum of P84,860.50 on August 12, 1965, after the
checks had been cleared. On August 2, 1965, he commenced the present action, in
the Court of First Instance of Pampanga, for specific performance of Dr. Garcia's
alleged obligation to execute in his (Nietes') favor a deed of absolute sale of the
leased property, free from any lien or encumbrance whatsoever, he having meanwhile
mortgaged it to the People's Bank and Trust Company, and to compel him (Garcia) to
accept whatever balance of the purchase price is due him, as well as to recover from
him the aggregate sum of P90,000 by way of damages, apart from attorney's fees
and the costs.
Dr. Garcia filed an answer admitting some allegations of the complaint and denying
other allegations thereof, as well as setting up a counterclaim for damages in the sum
of P150,000.
After due trial, said court rendered its decision, the dispositive part of which reads:
WHEREFORE, in view of the preponderance of evidence in favor of
the plaintiff and against the defendant, judgment is hereby rendered
ordering the latter to execute the Deed of Absolute Sale of property
originally leased together with the school building and other
improvements thereon which are covered by the contract, Annex
"A", upon payment of the former of the balance (whatever be the
amount) of the stipulated purchase price; to free the said property
from any mortgage or encumbrance and deliver the title thereto to
the plaintiff free from any lien or encumbrance, and should said
defendant fail to do so, the proceeds from the purchase price be
applied to the payment of the encumbrance so that the title may be
conveyed to the plaintiff; to pay the plaintiff the sum of P1,000.00 as
attorney's fees, and the cost of this suit.
Both parties appealed to the Court of Appeals, Dr. Garcia insofar as the trial court had
neither dismissed the complaint nor upheld his counterclaim and failed to order Nietes
to vacate the property in question, and Nietes insofar as the trial court had granted
him no more than nominal damages in the sum of P1,000, as attorney's fees.
After appropriate proceedings, a special division of Court of Appeals rendered its
decision, on October 18, 1969, affirming, in effect, that of the trial court, except as
regards said attorney's fees, which were eliminated. The dispositive part of said
decision of the Court of Appeals reads:
WHEREFORE, with the modification that the attorney's fees awarded by the trial court
in favor of the plaintiff is eliminated, the appealed judgment is hereby affirmed in all
other respects, and the defendant is ordered to execute the corresponding deed of
sale for the school building and lot in question in favor of the plaintiff upon the latter's
full payment of the balance of the purchase price. The costs of this proceedings shall
be taxed against the defendant-appellant.
On motion for reconsideration of defendant Garcia, said special division set aside its
aforementioned decision and rendered another one, promulgated on March 10, 1970
reversing the appealed decision of the court of first instance, and dismissing the
complaint of Nietes, with costs again him. Hence, the present petition of Nietes for
review certiorari of the second decision of the Court of Appeals, dated March 10,
1970, to which petition We gave due course.
Said decision of the Court of Appeals, reversing that of the Court of First Instance, is
mainly predicated upon the theory that, under the contract between the parties, "the
full purchase price must be paid before the option counsel be exercised," because
"there was no need nor sense providing that "the unused payment for the Contract
Lease will be considered as part payment for the sale the land and school'" inasmuch
as "otherwise there is substantial amount from which such unused rental could be
deducted"; that the statement in the letter, Exhibit L, of Nietes, dated August 7, 1964,
to the effect that he "will exercise his OPTION to buy the land and building," indication
that he did not consider the receipts, Exhibits B and for P3,000 and P2,200,
respectively, "as an effective exercise of his option to buy"; that the checks for
P84,860.50 deposited by Nietes with the Agro-Industrial Development Bank, did not
constitute a proper tender of payment, which, at any rate, was "made beyond the
stipulated 5-year period"; that such deposit "was not seriously made, because on
August 12, 1965, the same was withdrawn from the Bank and ostensibly remains in
the lessee's hand"; and that "the fact that such deposit was made by the lessee
shows that he himself believed that he should have paid the entire amount of the
purchase price before he could avail of the option to buy, otherwise, the deposit was a
senseless gesture ... ."
Dr. Garcia, in turn, maintained in his answer "that the sums paid" to him "were part of
the price of the contract of lease between the parties which were paid late and not
within the periods and/or schedules fixed by the contract (Annex A.)." What is more,
on the witness stand, Garcia claimed that he did "not know" whether the signatures
on Exhibits B and C — the receipt for P3,000 and P2,200, respectively — were his,
and even said that he was "doubtful" about it.
This testimony is manifestly incredible, for a man of his intelligence — a Doctor of
Medicine and the owner of an educational institution — could not possibly "not know"
or entertain doubts as to whether or not the aforementioned signatures are his and
the payments therein acknowledged had been received by him. His dubious veracity
becomes even more apparent when we consider the allegations in paragraph (4) of
his answer — referring to paragraphs 5 and 6 of the complaint alleging, inter alia, the
aforementioned partial payments of P3,000 and P2,200, on account of the stipulated
sale price — to the effect that said sums " paid to the herein defendant were part of
the price of the contract of lease." In other words, payment of said sums of P3,000
and P2,200 is admitted in said answer. Besides, the rentals for the whole period of
the lease aggregated P25,000 only, whereas said sums of P3,000 and P2,200, when
added to the payments previously made by Nietes, give a grand total of P29,957.00,
or P4,957 in excess of the agreed rentals for the entire period of five years. Thus, Dr.
Garcia was less than truthful when he tried to cast doubt upon the fact of payment of
said sums of P3,000 and P2,200, as well as when he claimed that the same were part
of the rentals collectible by him.
We, likewise, find ourselves unable to share the view taken by the Court of Appeals.
Neither the tenor of the contract Exhibits A and A-1 (also Exhibit 2) nor the behaviour
of Dr. Garcia — as reflected in the receipts Exhibits B and C — justifies such view.
The contract does not say that Nietes had to pay the stipulated price of
P100,000 before exercising his option to buy the property in question. Accordingly,
said option is governed by the general principles on obligations, pursuants to which:
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.1
In the case of an option to buy, the creditor may validly and effectively exercise his
right by merely advising the debtor of the former's decision to buy and expressing his
readiness to pay the stipulated price, provided that the same is available and actually
delivered to the debtor upon execution and delivery by him of the corresponding deed
of sale. Unless and until the debtor shall have done this the creditor is not and cannot
be in default in the discharge of his obligation to pay.2 In other words, notice of the
creditor's decision to exercise his option to buy need not be coupled with actual
payment of the price, so long as this is delivered to the owner of the property upon
performance of his part of the agreement. Nietes need not have deposited, therefore,
with the Agro-Industrial Bank checks amounting altogether to P84,860.50 on July 26,
1965, and the withdrawal thereof soon after does not and cannot affect his cause of
action in the present case. In making such deposit, he may have had the intent to
show his ability to pay the balance of the sum due to Dr. Garcia as the sale price of
his property. In short, said deposit and its subsequent withdrawal cannot affect the
result of the present case.
Nietes was entitled to exercise his option to buy "within the period of the Contract of
Lease," which — pursuant to paragraph 6-A of said contract — commenced "in June
1960" and was to "terminate in June 1965." As early as September 4, 1961, or well
"within the period of the Contract of Lease," Nietes had paid Dr. Garcia the following
sums:
October 6, 1960 ............................ P18,957.00 (Exh. D)
November 23, 1960 ....................... 300.00 (Exh E)
December 21, 1960 ....................... 200.00 (Exh. F)
January 14, 1961 ........................... 500.00 (Exh. G)
February 16, 1961 ......................... 3,000.00 (Exh. H)
March 12, 1961 ............................. 1,000.00 (Exh. I)
March 13, 1961 ............................. 700.00 (Exh. J)
August 4, 1961 ............................... 100.00 (Exh. K)
September 4, 1961 ......................... 3,000.00 (Exh. B)
________
TOTAL ............................... P27,757.00
It is true that Nietes was bound, under the contract, to pay P5,500 on October 19,
1959, P4,500 on or before October 30, 1959, and P15,000 on or before March 30,
1960, or the total sum of P25,000, from October 19, 1959 to March 30, 1960, whereas
his first payment was not made until October 10, 1960, when he delivered the sum of
P18,957 to Dr. Garcia, and the latter had by August 4, 1961, received from the former
the aggregate sum of P24,757. This is, however, P243.00 only less than the P25,000
due as of March 30, 1960, so that Nietes may be considered as having complied
substantially with the terms agreed upon. Indeed, Dr. Garcia seems to have either
agreed thereto or not considered that Nietes had thereby violated the contract,
because the letter of the former, dated July 31, 1964, demanding rescission of the
contract, did not mention said acts or omissions of Nietes among his alleged
violations thereof enumerated in said communication. In fact, when, on September 4,
1961, Mrs. Nietes turned over the sum of P3,000 to Dr. Garcia, he issued the receipt
Exhibit B, stating that said payment had been made "as per advance pay for the
school, the Contract of Lease being paid" — in other words, in accordance or
conformity with said contract. Besides, when, on December 13, 1962, Mrs. Nietes
delivered the additional sum of P2,200, Dr. Garcia issued a receipt accepting said
amount "as the partial payment on the purchase price of the property as specified on
the original contract," thus further indicating that the payment, in his
opinion, conformed with said contract, and that, accordingly, the same was in full
force and effect.
In any event, it is undisputed that, as of September 4, 1961, Dr. Garcia had received
the total sum of P27,757, or P2,757 in excess of the P25,000 representing the rentals
for the entire period of the lease, and over P21,200 in excess of the rentals for the
unexpired portion of the lease, from September 4, 1961 to June 1965. This
circumstance indicates clearly that Nietes had, on September 4, 1961, chosen to
exercise and did exercise then his option to buy. What is more, this is borne out by
the receipt issued by Dr. Garcia for the payment of P2,200, on December 13, 1962, to
which he referred therein as a "partial payment on the purchase of the property as
specified on the original contract of 'Contract of Lease with the First Option to Buy' ...
."

Further confirmation is furnished by the letter of Nietes, Exhibit L, of August 1964 —

also, within the period of the lease — stating that he "will exercise his OPTION to buy
the land and building subject matter of the lease." It is not correct to construe this
expression — as did the appealed decision — as implying that the option had not
been or was not yet being exercised, or as a mere announcement of the intent to avail
of it at some future time. This interpretation takes said expression out of the context of
Exhibit L, which positively states, also, that Nietes "is ready to pay the balance of the
purchase price in accordance with the contract," and requests counsel for Dr. Garcia
to inform or advise him "to make available the land title and execute the
corresponding Deed of Sale pursuant to this notice, and that if he fails to do so within
fifteen (15) days ... we shall take the corresponding action to enforce the agreement."
Such demand and said readiness to pay the balance of the purchase price leave no
room for doubt that, as stated in Exhibit L, the same is "a formal notice" that Nietes
had exercised his option, and expected Dr. Garcia to comply, within fifteen (15) days,
with his part of the bargain. Surely, there would have been no point for said demand
and readiness to pay, if Nietes had not yet exercised his option to buy.

The provision in paragraph 5 of the Contract, to the effect that "should the LESSEE"
choose to make use of his option to buy "the unused payment for the Contract of
Lease will be considered as payment for the sale of the land and school, "simply
means that the rental paid for the unused portion of the lease shall be applied to and
deducted from the sale price of P100,000 to be paid by Nietes at the proper time — in
other words, simultaneously with the delivery to him of the corresponding deed of
sale, duly executed by Dr. Garcia.

It is, consequently, Our considered opinion that Nietes had validly and effectively
exercised his option to buy the property of Dr. Garcia, at least, on December 13,
1962, when he acknowledged receipt from Mrs. Nietes of the sum of P2,200 then
delivered by her "in partial payment on the purchase of the property" described in the
"Contract of Lease with Option to Buy"; that from the aggregate sum of P29,957.00
paid to him up to that time, the sum of P12,708.33 should be deducted as rental for
the period from June 1960 to December 13, 1962, or roughly thirty (30) months and a
half, thereby leaving a balance of P17,248.67, consisting of P12,291.67, representing
the rentals for the unused period of the lease, plus P4,957.00 paid in excess of said
rental and advanced solely on account of the purchase price; that deducting said sum
of P17,248.67 from the agreed price of P100,000.00, there results a balance of
P82,751.33 which should be paid by Nietes to Dr. Garcia, upon execution by the latter
of the corresponding deed of absolute sale of the property in question, free from any
lien or encumbrance whatsoever, in favor of Nietes, and the delivery to him of said
deed of sale, as well as of the owner's duplicate of the certificate of title to said
property; and that Dr. Garcia should indemnify Nietes in the sum of P2,500 as and for
attorney's fees.

Thus modified, the decision of the Court of First Instance of Pampanga is hereby
affirmed in all other respects, and that of the Court of Appeals reversed, with costs
against respondent herein, Dr. Pablo C. Garcia. It is so ordered.

SECOND DIVISION
[G.R. No. 124791. February 10, 1999]
JOSE RAMON CARCELLER, petitioner, vs. COURT OF APPEALS and STATE
INVESTMENT HOUSES, INC., respondents.
DECISION
QUISUMBING, J.:
Before us is a petition for review of the Decision [1] dated September 21, 1995 of
the Court of Appeals[2]in CA - G. R. CV No. 37520, as well as its Resolution [3] dated
April 25, 1996, denying both parties motion for partial reconsideration or
clarification. The assailed decision affirmed with modification the judgment [4] of the
Regional Trial Court of Cebu City, Branch 5, in Civil Case No. CEB 4700, and disposed
of the controversy as follows:
However, We do not find it just that the appellee, in exercising his option to buy,
should pay appellant SIHI only P1,800,000.00. In fairness to appellant SIHI, the
purchase price must be based on the prevailing market price of real property in
Bulacao, Cebu City. (Emphasis supplied)
The factual background of this case is quite simple.
Private respondent State Investment Houses, Inc. (SIHI) is the registered owner
of two (2) parcels of land with a total area of 9,774 square meters, including all the
improvements thereon, located at Bulacao, Cebu City, covered by Transfer Certificate
of Titles Nos. T-89152 and T-89153 of the Registry of Deeds of Cebu City.
On January 10, 1985, petitioner and SIHI entered into a lease contract with option
to purchase[5] over said two parcels of land, at a monthly rental of Ten Thousand
(P10,000.00) pesos for a period of eighteen (18) months, beginning on August 1, 1984
until January 30, 1986. The pertinent portion of the lease contract subject of the dispute
reads in part:
4. As part of the consideration of this agreement, the LESSOR hereby grants unto the
LESSEE the exclusive right, option and privilege to purchase, within the lease period,
the leased premises thereon for the aggregate amount of P1,800,000.00 payable as
follows:
a. Upon the signing of the Deed of Sale, the LESSEE shall immediately
pay P360,000.00.
b. The balance of P1,440,000.00 shall be paid in equal installments of P41,425.87
over sixty (60) consecutive months computed with interest at 24% per annum on the
diminishing balance; Provided, that the LESSEE shall have the right to accelerate
payments at anytime in which event the stipulated interest for the remaining
installments shall no longer be imposed.
x . . The option shall be exercised by a written notice to the LESSOR at anytime
within the option period and the document of sale over the afore-described properties
has to be consummated within the month immediately following the month when the
LESSEE exercised his option under this contract.[6]
On January 7, 1986, or approximately three (3) weeks before the expiration of the
lease contract, SIHI notified petitioner of the impending termination of the lease
agreement, and of the short period of time left within which he could still validly exercise
the option. It likewise requested petitioner to advise them of his decision on the option,
on or before January 20, 1986.[7]
In a letter dated January 15, 1986, which was received by SIHI on January 29,
1986, petitioner requested for a six-month extension of the lease contract, alleging that
he needs ample time to raise sufficient funds in order to exercise the option. To support
his request, petitioner averred that he had already made a substantial investment on
the property, and had been punctual in paying his monthly rentals. [8]
On February 14, 1986, SIHI notified petitioner that his request was disapproved.
Nevertheless, it offered to lease the same property to petitioner at the rate of Thirty
Thousand (P30,000.00) pesos a month, for a period of one (1) year. It further informed
the petitioner of its decision to offer for sale said leased property to the general public. [9]
On February 18, 1986, petitioner notified SIHI of his decision to exercise the
option to purchase the property and at the same time he made arrangements for the
payment of the downpayment thereon in the amount of Three Hundred Sixty Thousand
(P360,000.00) pesos.[10]
On February 20, 1986, SIHI sent another letter to petitioner, reiterating its previous
stand on the latters offer, stressing that the period within which the option should have
been exercised had already lapsed. SIHI asked petitioner to vacate the property within
ten (10) days from notice, and to pay rental and penalty due. [11]
Hence, on February 28, 1986, a complaint for specific performance and
damages[12] was filed by petitioner against SIHI before the Regional Trial Court of Cebu
City, to compel the latter to honor its commitment and execute the corresponding deed
of sale.
After trial, the court a quo promulgated its decision dated April 1, 1991, the
dispositive portion of which reads:
In the light of the foregoing considerations, the Court hereby renders judgment in Civil
Case No. CEB 4700, ordering the defendant to execute a deed of sale in favor of the
plaintiff, covering the parcels of land together with all the improvements thereon,
covered by Transfer Certificates of Title Nos. 89152 and 89153 of the Registry of
Deeds of Cebu City, in accordance with the lease contract executed on January 10,
1984 between the plaintiff and the defendant, but the purchase price may be by one
shot payment of P1,800,000.00; and the defendant to pay attorneys fee
of P20,000.00.
No damages awarded.[13]
Not satisfied with the judgment, SIHI elevated the case to the Court of Appeals by
way of a petition for review.
On September 21, 1995, respondent court rendered its decision, affirming the trial
courts judgment, but modified the basis for assessing the purchase price. While
respondent court affirmed appellees option to buy the property, it added that, the
purchase price must be based on the prevailing market price of real property in
Bulacao, Cebu City.[14]
Baffled by the modification made by respondent court, both parties filed a motion
for reconsideration and/or clarification, with petitioner, on one hand, praying that the
prevailing market price be the value of the property in February 1986, the time when
the sale would have been consummated. SIHI, on the other hand, prayed that the
market price of the property be based on the prevailing price index at least 10 years
later, that is, 1996.
Respondent court conducted further hearings to clarify the matter, but no
agreement was reached by the parties. Thus, on April 25, 1996, respondent court
promulgated the assailed resolution, which denied both parties motions, and directed
the trial court to conduct further hearings to ascertain the prevailing market value of real
properties in Bulacao, Cebu City and fix the value of the property subject of the
controversy.14a
Hence, the instant petition for review.
The fundamental issue to be resolved is, should petitioner be allowed to exercise
the option to purchase the leased property, despite the alleged delay in giving the
required notice to private respondent?
An option is a preparatory contract in which one party grants to the other, for a
fixed period and under specified conditions, the power to decide, whether or not to enter
into a principal contract. It binds the party who has given the option, not to enter into
the principal contract with any other person during the period designated, and, within
that period, to enter into such contract with the one to whom the option was granted, if
the latter should decide to use the option. [15] It is a separate agreement distinct from
the contract which the parties may enter into upon the consummation of the option. [16]
Considering the circumstances in this case, we find no reason to disturb the
findings of respondent court, that petitioners letter to SIHI, dated January 15, 1986, was
fair notice to the latter of the formers intent to exercise the option, despite the request
for the extension of the lease contract. As stated in said letter to SIHI, petitioner was
requesting for an extension (of the contract) for six months to allow us to generate
sufficient funds in order to exercise our option to buy the subject property. [17] The
analysis by the Court of Appeals of the evidence on record and the process by which it
arrived at its findings on the basis thereof, impel this Courts assent to said
findings. They are consistent with the parties primary intent, as hereafter discussed,
when they executed the lease contract. As respondent court ruled:
We hold that the appellee [herein petitioner] acted with honesty and good faith. Verily,
We are in accord with the trial court that he should be allowed to exercise his option
to purchase the lease property. In fact, SIHI will not be prejudiced. A contrary ruling,
however, will definitely cause damage to the appellee, it appearing that he has
introduced considerable improvements on the property and has borrowed huge loan
from the Technology Resources Center.17a
The contracting parties primary intent in entering into said lease contract with
option to purchase confirms, in our view, the correctness of respondent courts
ruling. Analysis and construction, however, should not be limited to the words used in
the contract, as they may not accurately reflect the parties true intent. The
reasonableness of the result obtained, after said analysis, ought likewise to be carefully
considered.
It is well-settled in both law and jurisprudence, that contracts are the law between
the contracting parties and should be fulfilled, if their terms are clear and leave no room
for doubt as to the intention of the contracting parties.[18] Further, it is well-settled that
in construing a written agreement, the reason behind and the circumstances
surrounding its execution are of paramount importance. Sound construction requires
one to be placed mentally in the situation occupied by the parties concerned at the time
the writing was executed. Thereby, the intention of the contracting parties could be
made to prevail, because their agreement has the force of law between them. [19]
Moreover, to ascertain the intent of the parties in a contractual relationship, it is
imperative that the various stipulations provided for in the contract be construed
together, consistent with the parties contemporaneous and subsequent acts as regards
the execution of the contract.[20] And once the intention of the parties has been
ascertained, that element is deemed as an integral part of the contract as though it has
been originally expressed in unequivocal terms.
As sufficiently established during the trial, SIHI, prior to its negotiation with
petitioner, was already beset with financial problems. SIHI was experiencing difficulty
in meeting the claims of its creditors. Thus, in order to reprogram the companys
financial investment plan and facilitate its rehabilitation and viability, SIHI, being a
quasi-banking financial institution, had been placed under the supervision and control
of the Central Bank (CB). It was in dire need of liquidating its assets, so to speak, in
order to stay afloat financially.
Thus, SIHI was compelled to dispose some of its assets, among which is the
subject leased property, to generate sufficient funds to augment its badly-depleted
financial resources. This then brought about the execution of the lease contract with
option to purchase between SIHI and the petitioner.
The lease contract provided that to exercise the option, petitioner had to send a
letter to SIHI, manifesting his intent to exercise said option within the lease period
ending January 30, 1986. However, what petitioner did was to request on January 15,
1986, for a six-month extension of the lease contract, for the alleged purpose of raising
funds intended to purchase the property subject of the option. It was only after the
request was denied on February 14, 1986, that petitioner notified SIHI of his desire to
exercise the option formally. This was by letter dated February 18, 1986. In private
respondents view, there was already a delay of 18 days, fatal to petitioners cause. But
respondent court found the delay neither substantial nor fundamental and did not
amount to a breach that would defeat the intention of the parties when they executed from the TRC. If the courts were to allow SIHI to take advantage of the situation, the
the lease contract with option to purchase.20a result would have been an injustice to petitioner, because SIHI would be unjustly
enriched at his expense.Courts of law, being also courts of equity, may not
In allowing petitioner to exercise the option, however, both lower courts are in countenance such grossly unfair results without doing violence to its solemn obligation
accord in their decision, rationalizing that a contrary ruling would definitely cause to administer fair and equal justice for all.
damage to the petitioner, as he had the whole place renovated to make the same
suitable and conducive for the business he established there. Moreover, judging from WHEREFORE, the appealed decision of respondent court, insofar as it affirms
the subsequent acts of the parties, it is undeniable that SIHI really intended to dispose the judgment of the trial court in granting petitioner the opportunity to exercise the option
of said leased property, which petitioner indubitably intended to buy. to purchase the subject property, is hereby AFFIRMED. However the purchase price
should be based on the fair market value of real property in Bulacao, Cebu City, as of
SIHIs agreement to enter first into a lease contract with option to purchase with February 1986, when the contract would have been consummated. Further, petitioner
herein petitioner, is a clear proof of its intent to promptly dispose said property although is hereby ordered to pay private respondent SIHI legal interest on the said purchase
the full financial returns may materialize only in a years time. Furthermore, its letter price beginning February 1986 up to the time it is actually paid, as well as the taxes
dated January 7, 1986, reminding the petitioner of the short period of time left within due on said property, considering that petitioner have enjoyed the beneficial use of said
which to consummate their agreement, clearly showed its desire to sell that property. The case is hereby remanded to Regional Trial Court of Cebu, Branch 5, for
property. Also, SIHIs letter dated February 14, 1986 supported the conclusion that it further proceedings to determine promptly the fair market value of said real property as
was bent on disposing said property. For this letter made mention of the fact that, said of February 1986, in Bulacao, Cebu City.
property is now for sale to the general public.
Costs against private respondent.
Petitioners determination to purchase said property is equally indubitable. He
introduced permanent improvements on the leased property, demonstrating his intent SO ORDERED.
to acquire dominion in a years time. To increase his chances of acquiring the property,
he secured an P8 Million loan from the Technology Resources Center (TRC), thereby
augmenting his capital. He averred that he applied for a loan since he planned to pay
the purchase price in one single payment, instead of paying in installment, which would
entail the payment of additional interest at the rate of 24% per annum, compared to 7%
per annum interest for the TRC loan. His letter earlier requesting extension was
premised, in fact, on his need for time to secure the needed financing through a TRC
loan.
In contractual relations, the law allows the parties reasonable leeway on the terms
of their agreement, which is the law between them.[21]Note that by contract SIHI had
given petitioner 4 periods: (a) the option to purchase the property for P1,800,000.00
within the lease period, that is, until January 30, 1986; (b) the option to be exercised
within the option period by written notice at anytime; (c) the document of sale...to be
consummated within the month immediately following the month when petitioner
exercises the option; and (d) the payment in equal installments of the purchase price
over a period of 60 months. In our view, petitioners letter of January 15, 1986 and his
formal exercise of the option on February 18, 1986 were within a reasonable time-frame
consistent with periods given and the known intent of the parties to the agreement dated
January 10, 1985. A contrary view would be harsh and inequituous indeed.
In Tuason, Jr., etc. vs. De Asis,[22] this Court opined that in a contract of lease, if
the lessor makes an offer to the lessee to purchase the property on or before the
termination of the lease, and the lessee fails to accept or make the purchase on time,
the lessee losses the right to buy the property later on the terms and conditions set in
the offer. Thus, on one hand, petitioner herein could not insist on buying the said
property based on the price agreed upon in the lease agreement, even if his option to
purchase it is recognized. On the other hand, SIHI could not take advantage of the
situation to increase the selling price of said property by nearly 90% of the original price.
Such leap in the price quoted would show an opportunistic intent to exploit the situation
as SIHI knew for a fact that petitioner badly needed the property for his business and
that he could afford to pay such higher amount after having secured an P8 Million loan
 letter, plaintiffs wrote them on October 24, 1986 asking that they
Republic of the Philippines specify the terms and conditions of the offer to sell; that when
SUPREME COURT plaintiffs did not receive any reply, they sent another letter dated
Manila 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
EN BANC 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

G.R. No. 109125 December 2, 1994 the complaint and interposing a special defense of lack of cause of
action.
ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs. After the issues were joined, defendants filed a motion for summary
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT judgment which was granted by the lower court. The trial court
CORPORATION, respondents. found that defendants' offer to sell was never accepted by the
plaintiffs for the reason that the parties did not agree upon the
Antonio M. Albano for petitioners. 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
Umali, Soriano & Associates for private respondent. 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

VITUG, J.: favor of the defendants and against the plaintiffs
summarily dismissing the complaint subject to the
aforementioned condition that if the defendants
Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04
subsequently decide to offer their property for
December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without force
sale for a purchase price of Eleven Million Pesos
and effect the orders of execution of the trial court, dated 30 August 1991 and 27
or lower, then the plaintiffs has the option to
September 1991, in Civil Case No. 87-41058.
purchase the property or of first refusal,
otherwise, defendants need not offer the property
The antecedents are recited in good detail by the appellate court thusly: to the plaintiffs if the purchase price is higher than
Eleven Million Pesos.
On July 29, 1987 a Second Amended Complaint for Specific
Performance was filed by Ang Yu Asuncion and Keh Tiong, et al., SO ORDERED.
against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before
the Regional Trial Court, Branch 31, Manila in Civil Case No. 87-
Aggrieved by the decision, plaintiffs appealed to this Court in
41058, alleging, among others, that plaintiffs are tenants or lessees
CA-G.R. CV No. 21123. In a decision promulgated on September
of residential and commercial spaces owned by defendants
21, 1990 (penned by Justice Segundino G. Chua and concurred in
described as Nos. 630-638 Ongpin Street, Binondo, Manila; that
by Justices Vicente V. Mendoza and Fernando A. Santiago), this
they have occupied said spaces since 1935 and have been
Court affirmed with modification the lower court's judgment, holding:
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 In resume, there was no meeting of the minds
premises and are giving them priority to acquire the same; that between the parties concerning the sale of the
during the negotiations, Bobby Cu Unjieng offered a price of P6- property. Absent such requirement, the claim for
million while plaintiffs made a counter offer of P5-million; that specific performance will not lie. Appellants'
plaintiffs thereafter asked the defendants to put their offer in writing demand for actual, moral and exemplary
to which request defendants acceded; that in reply to defendant's 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 plaintiffs-appellants 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/T-881 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. 87-41058 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 issued 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.
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.
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 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 Parañaque, 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 is obviously yet to be concluded. If, in fact, the optioner-
offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed
contract ("object" of the option) since it has failed to reach its own stage of perfection.
The optioner-offeror, however, renders himself liable for damages for breach of the
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 It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not
described as merely belonging to a class of preparatory juridical relations governed have decreed at the time the execution of any deed of sale between the Cu Unjiengs
not by contracts (since the essential elements to establish the vinculum juris would and petitioners.
still be indefinite and inconclusive) but by, among other laws of general application,
the pertinent scattered provisions of the Civil Code on human conduct. 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
Even on the premise that such right of first refusal has been decreed under a final quo. Costs against petitioners.
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 SO ORDERED.
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 1912 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. CV-21123. The Court of Appeals, in this regard,
has observed:

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).

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 106063 November 21, 1996
EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN,
INC., petitioners,
vs.
MAYFAIR THEATER, INC., respondent.
HERMOSISIMA, JR., J.:
Before us is a petition for review of the decision1 of the Court of
Appeals2 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 court3 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 thereafter 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 hereof 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 all the
terms and conditions hereof (sic).
Carmelo did not 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 consideration (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 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 xxx xxx
6. That there was no consideration specified in
the option to buy embodied in the contract;
7. That Carmelo & Bauermann owned the land
and the two buildings erected thereon;
8. 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 attorney's 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 attorney's
fees;
(4) Dismissing defendant Equatorial's 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 determine thing for a
price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determine thing for a price certain is binding upon
the promissor 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 exists. 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 promissor, 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
promissor 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 laws, 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 enter 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 appellant's 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 thereof, 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 Mayfair's 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 Mayfair's 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 and Justices of the Court of Appeals and of this Court in connection
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 letter-complaint to this Court alleging
certain irregularities and infractions committed by certain lawyers,
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 conflicting 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
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 contract. 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 involving the choice
granted to another for a distinct and separate consideration as to whether or
not to purchase a determinate thing at a predetermined fixed price.
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 (Emphasis ours.)
The rule so early established in this jurisdiction is that the deed of option or
the option clause in a contract, in order to be valid and enforceable, must,
among other things, indicate the definite price at which the person granting
the option, is willing to sell.
Notably, in one case we held that the lessee loses his right to buy the leased property
for a named price per square meter upon failure to make the purchase within the time
specified;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
Appeals21 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 in
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 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 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 Parañaque,
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"
deemed perfected, and it would be a breach of that contract to
withdraw the offer during the agreed period. The option, however, is
an independent contract by itself; and it is to be distinguished from
the projected main agreement (subject matter of the option) which
is obviously yet to be concluded. If, in fact, the optioner-offeror
withdraws the offer before its acceptance (exercise of the option) by
the optionee-offeree, the latter may not sue for specific
performance on the proposed contract ("object" of the option) since
it has failed to reach its own stage of perfection. The optioner-
offeror, however, renders himself liable for damages for breach of
the opinion. . .
In the light of the foregoing disquisition and in view of the wording of the
questioned provision in the two lease contracts involved in the instant case,
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 or Article
1479 on promise to buy and sell would render in effectual 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 valid may
nonetheless be subsequently rescinded by reason of injury to third
persons, like creditors. The status of creditors could be validly
accorded the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner
without recognizing their right of first priority under the Contract of
Lease.
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 preferent right created by the
contract. Rescission implies a contract which, even if initially valid,
produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.
It is true that the acquisition by a third person of the property
subject of the contract is an obstacle to the action for its rescission
where it is shown that such third person is in lawful possession of
the subject of the contract and that he did not act in bad faith.
However, this rule is not applicable in the case before us because
the petitioner is not considered a third party in relation to the
Contract of Sale nor may its possession of the subject property be
regarded as acquired lawfully and in good faith.
 Indeed, Guzman, Bocaling and Co. was the vendee in the Contract
of Sale. Moreover, the petitioner cannot be deemed a purchaser in
good faith for the record shows that it categorically admitted 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 is one who buys the
property of another without notice that some other person has a
right to or interest in such property and pays a full and fair price for
the same at the time of such purchase or before he has notice of
the claim or interest of some other person in the property. Good
faith connotes an honest intention to abstain from taking
unconscientious advantage of another. 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 of lease 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 WHEREFORE, the petition for review of the decision of the Court of
negotiations for the sale to the latter of the disputed property would be unjust Appeals, dated June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY
and unkind to Mayfair because it is once more compelled to litigate to DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty
enforce its right. It is not proper to give it an empty or vacuous victory in this Development, Inc. and Carmelo & Bauermann, Inc. is hereby deemed
case. From the viewpoint of Carmelo, it is like asking a fish if it would accept rescinded; petitioner Carmelo & Bauermann is ordered to return to petitioner
the choice of being thrown back into the river. Why should Carmelo be Equatorial Realty Development the purchase price. The latter is directed to
rewarded for and allowed to profit from, its wrongdoing? Prices of real estate execute the deeds and documents necessary to return ownership to
have skyrocketed. After having sold the property for P11,300,000.00, why Carmelo and Bauermann of the disputed lots. Carmelo & Bauermann is
should it be given another chance to sell it at an increased price? ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for
P11,300,000.00.
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 SO ORDERED.
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 Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco, JJ.,
may apply here if the contract is limited to the buying and selling of the real concur.
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 Narvasa, C.J., took no part.
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.
Separate Opinions
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
PADILLA, J., concurring:
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. 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
On the part of Equatorial, it cannot be a buyer in good faith because it
Carmelo's and Equatorial's bad faith in riding "roughshod" over Mayfair's right of first
bought the property with notice and full knowledge that Mayfair had a right to
refusal, the Court should order the rescission of the sale of the Claro M. Recto
or interest in the property superior to its own. Carmelo and Equatorial took
property by the latter to Equatorial (Art. 1380-1381[3], Civil Code). The Court should,
unconscientious advantage of Mayfair.
in this same case, to avoid multiplicity of suits, likewise allow Mayfair to effectively
exercise said right of first refusal, by paying Carmelo the sum of P11,300,000.00 for
Neither may Carmelo and Equatorial avail of considerations based on equity the entire subject property, without any need of instituting a separate action for
which might warrant the grant of interests. The vendor received as payment damages against Carmelo and/or Equatorial.
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
I do not agree with the proposition that, in addition to the aforesaid purchase price,
the amount. Equatorial, on the other hand, has received rents and otherwise
Mayfair should be required to pay a compounded interest of 12% per annum of said
profited from the use of the property turned over to it by Carmelo. In fact,
amount computed from 1 August 1978. Under the Civil Code, a party to a contract
during all the years that this controversy was being litigated, Mayfair paid
may recover interest as indemnity for damages in the following instances:
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.
 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?
The equities of the case support the foregoing legal disposition. During the
intervening years between 1 August 1978 and this date, Equatorial (after acquiring
the C.M. Recto property for the price of P11,300,000.00) had been leasing the
property and deriving rental income therefrom. In fact, one of the lessees in the
property was Mayfair. Carmelo had, in turn, been using the proceeds of the sale,
investment-wise and/or operation-wise in its own business.
It may appear, at first blush, that Mayfair is unduly favored by the solution submitted
by this opinion, because the price of P11,300,000.00 which it has to pay Carmelo in
the exercise of its right of first refusal, has been subjected to the inroads of inflation so
that its purchasing power today is less than when the same amount was paid by
Equatorial to Carmelo. But then it cannot be overlooked that it was Carmelo's breach
of Mayfair's right of first refusal that prevented Mayfair from paying the price of
P11,300,000.00 to Carmelo at about the same time the amount was paid by
Equatorial to Carmelo. Moreover, it cannot be ignored that Mayfair had also incurred
consequential or "opportunity" losses by reason of its failure to acquire and use the
property under its right of first refusal. In fine, any loss in purchasing power of the
price of P11,300,000.00 is for Carmelo to incur or absorb on account of its bad faith in
breaching Mayfair's contractual right of first refusal to the subject property.
ACCORDINGLY, I vote to order the rescission of the contract of sale between
Carmelo and Equatorial of the Claro M. Recto property in question, so that within
thirty (30) days from the finality of the Court's decision, the property should be
retransferred and delivered by Equatorial to Carmelo with the latter simultaneously
returning to Equatorial the sum of P11,300, 000.00.
I also vote to allow Mayfair to exercise its right of first refusal, by paying to Carmelo
the sum of P11,300,000.00 without interest for the entire subject property, within thirty
(30) days from re-acquisition by Carmelo of the titles to the property, with the
corresponding obligation of Carmelo to sell and transfer the property to Mayfair within
the same period of thirty (30) days.
PANGANIBAN, J., concurring:
In the main, I concur with the ponencia of my esteemed colleague, Mr. Justice Regino
C. Hermosisima, Jr., especially with the following doctrinal pronouncements:
1. That while no option to purchase within the meaning of the
second paragraph of Article 1479 of the Civil Code was given to
Mayfair Theater, Inc. ("Mayfair"), under the two lease contracts a
right of first refusal was in fact granted, for which no separate
consideration is required by law to be paid or given so as to make it
binding upon Carmelo & Bauermann, Inc. ("Carmelo");
2. That such right was violated by the latter when it sold the entire
property to Equatorial Realty Development, Inc. ("Equatorial") on
July 30, 1978, for the sum of P11,300,000.00;
3. That Equatorial is a buyer in bad faith as it was aware of the
lease contracts, its own lawyers having studied said contracts prior
to the sale; and
4. That, consequently, the contract of sale is rescissible.
5. That, finally, under the proven facts, the right of first refusal may
be enforced by an action for specific performance.
There appears to be unanimity in the Court insofar as items 1, 2 and 3 above are
concerned. It is in items 4 and 5 that there is a marked divergence of opinion. Hence,
I shall limit the discussion in this Separate Concurring Opinion to such issues,
namely: Is the contract of sale between Carmelo and Equatorial rescissible, and
corollarily, may the right of first refusal granted to Mayfair be enforced by an action for
specific performance?
It is with a great amount of trepidation that I respectfully disagree with the legal
proposition espoused by two equally well-respected colleagues, Mme. Justice Flerida
Ruth P. Romero and Mr. Justice Jose C. Vitug — who are both acknowledged
authorities on Civil Law — that a breach of the covenanted right of first refusal, while
warranting a suit for damages under Article 19 of the Civil Code, cannot sanction an
action for specific performance without thereby negating the indispensable element of
con-sensuality in the perfection of contracts.
Ang Yu Asuncion Not In Point
Such statement is anchored upon a pronouncement in Ang Yu Asuncion vs.
CA, 1 which was penned by Mr. Justice Vitug himself. I respectfully submit, however,
that that case turned largely on the issue of whether or not the sale of an immovable
in breach of a right of first refusal that had been decreed in a final judgment would
justify the issuance of certain orders of execution in the same case. The validity of
said orders was the subject of the attack before this Court. These orders had not only
directed the defendants to execute a deed of sale in favor of the plaintiffs, when there
was nothing in the judgment itself decreeing it, but had also set aside the sale made
in breach of said right of first refusal and even canceled the title that had been issued
to the buyer, who was not a party to the suit and had obviously not been given its day
in court. It was thus aptly held:
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.2
In other words, the question of whether specific performance of one's right of first
refusal is available as a remedy in case of breach thereof was not before the
Supreme Court at all in Ang Yu Asuncion. Consequently, the pronouncements there
made bearing on such unlitigated question were mere obiter. Moreover, as will be
shown later, the pronouncement that a breach of the right of first refusal would not
sanction an action for specific performance but only an action for damages (at p. 615)
is at best debatable (and in my humble view, imprecise or incorrect), on top of its
being contradicted by extant jurisprudence.
Worth bearing in mind is the fact that two juridical relations, both contractual, are
involved in the instant case: (1) the deed of sale between the petitioners dated July
30, 1978, and (2) the contract clause establishing Mayfair's right of first refusal which
was violated by said sale.
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 read 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:
xxx xxx xxx
(3) Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them;
xxx xxx xxx
(emphasis supplied)
The term "creditors" as used in these provisions of the Civil Code is broad enough to
include the obligee under an option contract3 as well as under a right of first refusal,
sometimes known as a right of first priority.4 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".5 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.6 Insofar as the right of first refusal is concerned, Mayfair
is the obligee or creditor.
As such creditor, Mayfair had, therefore, the right to impugn the sale in question by
way of accion pauliana under the last clause of Art. 1177, aforequoted, because the
sale was an act done by the debtor to defraud him of his right to acquire the
property.7 Rescission was also available under par. 3, Art. 1381, abovequoted, as
was expressly held in Guzman, Bocaling & Co., a case closely analogous to this one
as it was also an action brought by the lessee to enforce his "right of first priority" —
which is just another name for the right of first refusal — and to annul a sale made by
the lessor in violation of such right. In said case, this Court, speaking through Mr.
Justice Isagani A. Cruz, affirmed the invalidation of the sale and the enforcement of
the lessee's right of first priority this wise:8
The petitioner argues that assuming the Contract of Sale to be
voidable, only the parties thereto could bring an action to annul it
pursuant to Article 1397 of the Civil Code. It is stressed that private
respondents are strangers to that agreement and therefore have no
personality to seek its annulment.
The respondent court correctly held that the Contract of Sale was
not voidable but rescissible. Under Article(s) 1380 to 1381 (3) of the
Civil Code, a contract otherwise valid may nonetheless be
subsequently rescinded by reason of injury to third persons, like
creditors. The status of creditors could be validly accorded the
 Bonnevies for they had substantial interests that were prejudiced by
the sale of the subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease. (emphasis
supplied)
By the same token, the status of a defrauded creditor can, and should, be granted to
Mayfair, for it certainly had substantial interests that were prejudiced by the sale of the
subject property to petitioner Equatorial in open violation of Mayfair's right of first
refusal under its existing contracts with Carmelo.
In fact, the parity between that case and the present one does not stop there but
extends to the crucial and critical fact that there was manifest bad faith on the part of
the buyer. Thus, in Guzman, this Court affirmed in toto the appealed judgment of the
Court of Appeals which, in turn, had affirmed the trial court's decision insofar as it
invalidated the deed of sale in favor of the petitioner-buyer, cancelled its TCT, and
ordered the lessor to execute a deed of sale over the leased property in favor of the
lessee for the same price and "under the same terms and conditions", aside from
affirming as well the damages awarded, but at a reduced amount. 9 In other words, the
aggrieved party was allowed to acquire the property itself.
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.
On the other hand, and as already commented on above, the pronouncement in Ang
Yu Asuncion to the effect that specific performance is unavailable to enforce a
violated right of first refusal is at best a debatable legal proposition, aside from being
contradicted by extant jurisprudence. Let me explain why.
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.
Specific Performance Is
Viable Remedy
The question is: Can this right (of first refusal) be enforced by an action for specific
performance upon a showing of its breach by an actual sale of the property under
circumstances showing palpable bad faith on the part of both seller and buyer?
The answer, I respectfully submit, should be 'yes'.
As already noted, Mayfair's right of first refusal in the case before us is embodied in
an express covenant in the lease contracts between it as lessee and Carmelo as
lessor, hence the right created is one springing from contract. 10 Indubitably, this had
the force of law between the parties, who should thus comply with it in good
faith. 11 Such right also established a correlative obligation on the part of Carmelo to
give or deliver to Mayfair a formal offer of sale of the property in the event Carmelo
decides to sell it. The decision to sell was eventually made. But instead of giving or
tendering to Mayfair the proper offer to sell, Carmelo gave it to its now co-petitioner,
Equatorial, with whom it eventually perfected and consummated, on July 30, 1978, an
absolute sale of the property, doing so within the period of effectivity of Mayfair's right
of first refusal. Less than two months later, or in September 1978, with the lease still
in full force, Mayfair filed the present suit.
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. 12 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.
As it turned out, however, Mayfair did not have a chance to file such suit, for it learned
of the sale to Equatorial only after it had taken place. But it did file the present action
for specific performance and for invalidation of the wrongful sale immediately after
learning about the latter act. 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. On
the contrary, the decision in Guzman supports it.
Moreover, under the Civil Code provisions on the nature, effect and kinds of
obligations,13 Mayfair's right of first refusal may be classified as one subject to a
suspensive condition — namely, if Carmelo should decide to sell the leased premises
during the life of the lease contracts, then it should make an offer of sale to Mayfair.
Futurity and uncertainty, which are the essential characteristics of a condition, 14 were
distinctly present. Before the decision to sell was made, Carmelo had absolutely no
obligation to sell the property to Mayfair, nor even to make an offer to sell, because in
conditional obligations, where the condition is suspensive, the acquisition of rights
depends upon the happening of the event which constitutes the condition. 15 Had the
decision to sell not been made at all, or had it been made after the expiry of the lease,
the parties would have stood as if the conditional obligation had never existed. 16 But
the decision to sell was in fact made. And it was made during the life and efficacy of
the lease. Undoubtedly, the condition was duly fulfilled; the right of first refusal
effectively accrued and became enforceable; and correlatively, Carmelo's obligation
to make and send the offer to Mayfair became immediately due and
demandable. 17 That obligation was to deliver to Mayfair an offer to sell a determinate
thing for a determinate price. As things turned out, a definite and specific offer to sell
the entire property for the price of P11,300,000.00 was actually made by Carmelo —
but to the wrong party. It was that particular offer, and no other, which Carmelo should
have delivered to Mayfair, but failed to deliver. Hence, by the time the obligation of
Carmelo accrued through the fulfillment of the suspensive condition, the offer to sell
had become a determinate thing.
Art. 1165 of the Civil Code, earlier quoted in footnote 12, indicates the remedies
available to the creditor against the debtor, when it provides that "(w)hen what is to be
delivered is a determinate thing, the creditor, in addition to the right granted him by
article 1170, may compel the debtor to make the delivery," clearly authorizing not only
the recovery of damages under Art. 1170 but also an action for specific performance.
But even assuming that Carmelo's prestation did not involve the delivery of a
determinate offer but only a generic one, the second paragraph of Art. 1165 explicitly
gives to the creditor the right "to ask that the obligation be complied with at the
expense of the debtor." The availability of an action for specific performance is thus
clear and beyond doubt. And the correctness of Guzman becomes all the more
manifest.
Upon the other hand, the obiter in Ang Yu Asuncion is further weakened by the fact
that the jurisprudence upon which it supposedly rests — namely, the cases
of Madrigal & CO. vs. Stevenson & Co. 18 and Salonga vs. Farrales19 — did NOT
involve a right of first refusal or of first priority. Nor did those two cases involve an
option to buy. In Madrigal, plaintiff sued defendant for damages claiming wrongful
breach of an alleged contract of sale of 2,000 tons of coal. The case was dismissed
because "the minds of the parties never met upon a contract of sale by defendant to
plaintiff", 20 each party having signed the broker's memorandum as buyer, erroneously
thinking that the other party was the seller! In Salonga, a lessee, who was one of
several lessees ordered by final judgment to vacate the leased premises, sued the
lessor to compel the latter to sell the leased premises to him, but his suit was not
founded upon any right of first refusal and was therefore dismissed on the ground that
there was no perfected sale in his favor. He just thought that because the lessor had
decided to sell and in fact sold portions of the property to her other lessees, she was
likewise obligated to sell to him even in the absence of a perfected contract of sale. In
fine, neither of the two cases cited in support of the legal proposition that a breach of
the right of first refusal does not sanction an action for specific performance but, at
best, only one for damages, provides such support.
Finally, the fact that what was eventually sold to Equatorial was the entire property,
not just the portions leased to Mayfair, is no reason to deprive the latter of its right to
receive a formal and specific offer. The offer of a larger property might have led
Mayfair to reject the offer, but until and unless such rejection was actually made, its
right of first refusal still stood. Upon the other hand, an acceptance by Mayfair would
have saved all concerned the time, trouble, and expense of this protracted litigation.
In any case, the disquisition by the Court of Appeals on this point can hardly be
faulted; in fact, it amply justifies the conclusions reached in its decision, as well as the
dispositions made therein.
IN VIEW OF THE FOREGOING, I vote to DENY the petition and to AFFIRM the
assailed Decision.
ROMERO, J., concurring and dissenting:
I share the opinion that the right granted to Mayfair Theater under the identical par 8
of the June 1, 1967 and March 31, 1969 contracts constitute a right of first refusal.
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 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.
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 recission
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.
Neither do I agree with Justice Melo that Mayfair Theater should pay Carmelo and
Bauermann, Inc. the amount of P11,300,000.00 plus compounded interest of 12%
p.a. Justice Melo rationalized that had Carmelo and Bauermann sold the property to
Mayfair, the latter would have paid the property for the same price that Equatorial
bought it. It bears emphasis that Carmelo and Bauermann, Inc. and Mayfair never
reached an agreement as to the price of the property in dispute because the
negotiations between the two parties were not pursued to its very end. We cannot,
even for reasons of equity, compel Carmelo to sell the entire property to Mayfair at
P11,300,000.00 without violating the consensual nature of contracts.
I vote, therefore, not to rescind the contract of sale entered into by Carmelo and
Bauermann, Inc. and Equatorial Realty Development Corp.
VITUG, J., dissenting:
I share the opinion that the right granted to Mayfair Theater, Inc., is neither an offer
nor an option but merely a right of first refusal as has been so well and amply
essayed in the ponencia of our distinguished colleague Mr. Justice Regino C.
Hermosisima, Jr.
Unfortunately, it would seem that Article 1381 (paragraph 3) of the Civil Code invoked
to be the statutory authority for the rescission of the contract of sale between Carmelo
& Bauermann, Inc., and Equatorial Realty Development, Inc., has been misapplied.
The action for rescission under that provision of the law, unlike in the resolution of
reciprocal obligations under Article 1191 of the Code, is merely subsidiary and relates
to the specific instance when a debtor, in an attempt to defraud his creditor, enters
into a contract with another that deprives the creditor to recover his just claim and
leaves him with no other legal means, than by rescission, to obtain reparation. Thus,
the rescission is only to the extent necessary to cover the damages caused (Article
1384, Civil Code) and, consistent with its subsidiary nature, would require the debtor
to be an indispensable party in the action (see Gigante vs. Republic Savings Bank,
135 Phil. 359).
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.
It is sufficiently clear, I submit, that, there being no binding contract between Carmelo
and Mayfair, neither the rescission of the contract between Carmelo and Equatorial
nor the directive to Carmelo to sell the property to Mayfair would be legally
appropriate.
My brief disquisition should have ended here except for some personal impressions
expressed by my esteemed colleague, Mr. Justice Artemio V. Panganiban, on
the Ang Yu decision which perhaps need to be addressed.
The discussion by the Court in Ang Yu on the right of first refusal is branded as a
mere obiter dictum. Justice Panganiban states: The case "turned largely on the issue
of whether or not the sale of an immovable in breach of a right of first refusal that had
been decreed in a final judgment would justify the issuance of certain orders of
execution in the same case. . . . . In other words, the question of whether specific
performance of one's right of first refusal is available as a remedy in case of breach
thereof was not before the Supreme Court at all in Ang Yu Asuncion."
Black defines an obiter dictum as "an opinion entirely unnecessary for the decision of
the case" and thus "are not binding as precedent." (Black's Law Dictionary, 6th
edition, 1990). A close look at the antecedents of Ang Yu as found by the Court of
Appeals and as later quoted by this Court would readily disclose that the "right of first
refusal" was a major point in the controversy. Indeed, the trial and the appellate
courts had rule on it. With due respect, I would not deem it "entirely unnecessary" for
this Court to itself discuss the legal connotation and significance of the decreed
(confirmatory) right of first refusal. I should add that when the ponencia recognized
that, in the case of Buen Realty Development Corporation (the alleged purchaser of
the property), the latter could not be held subject of the writ of execution and be
ousted from the ownership and possession of the disputed property without first
affording it due process, the Court decided to simply put a cap in the final disposition
of the case but it could not have intended to thereby mitigate the import of its
basic ratio decidendi.
Justice Panganiban opines that the pronouncement in Ang Yu, i.e., that a breach of
the right of first refusal does not sanction an action for specific performance but only
an action for damages, "is at best debatable (. . . imprecise or incorrect), on to top of
its being contradicted by extant jurisprudence." He then comes up with the novel
proposition that "Mayfair's right of first refusal may be classified as one subject to a
suspensive condition — namely, if Carmelo should decide to sell the leased premises
during the life of the lease contracts, then it should make an offer of sale to Mayfair,"
presumably enforceable by action for specific performance.
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.
The judicial remedies, in general, would, of course, include: (a) The principal
remedies (i) of specific performance in obligations to give specific things (Articles
1165 and 1167 of the Civil Code), substitute performance in an obligation to do or to
deliver generic things (Article 1165 of the Civil Code) and equivalent performance for
damages (Articles 1168 and 1170 of the Civil Code); and (ii) of rescission or
resolution of reciprocal obligations; and (b) the subsidiary remedies that may be
availed of when the principal remedies are unavailable or ineffective such as
(i) accion subrogatoria or subrogatory action (Article 1177 of the Civil Code; see also
Articles 1729 and 1893 of the Civil Code); and (ii) accion pauliana or rescissory action
(Articles 1177 and 1381 of the Civil Code). And, in order to secure the integrity of final
judgments, such ancillary remedies as attachments, replevin, garnishments,
receivership, examination of the debtor, and similar remedies, are additionally
provided for in procedural law.
Might it be possible, however, that Justice Panganiban was referring to how Ang
Yu could relate to the instant case for, verily, his remark, earlier quoted, was followed
by an extensive discussion on the factual and case milieu of the present petition? If it
were, then I guess it was the applicability of the Ang Yu decision to the instant case
that he questioned, but that would not make Ang Yu "imprecise" or "incorrect."
Justice Panganiban would hold the Ang Yu ruling to be inconsistent with Guzman,
Bocaling & Co. vs. Bonnevie (206 SCRA 668). I would not be too hasty in concluding
similarly. In Guzman, the stipulation involved, although loosely termed a "right of first
priority," was, in fact, a contract of option. The provision in the agreement there
stated:
20. — In case the LESSOR desires or decides to sell the leased
property, the LESSEES shall be given a first priority to purchase the
same, all things and considerations being equal.(At page 670;
emphasis supplied.)
In the above stipulation, the Court ruled, in effect, that the basic terms had
been adequately, albeit briefly, spelled out with the lease consideration being
deemed likewise to be the essential cause for the option. The situation
undoubtedly was not the same that prevailed in Ang Yu or, for that matter, in
the case at bar. The stipulation between Mayfair Theater, Inc., and Carmelo
& Bauermann, Inc., merely read:
That if the LESSOR should desire to sell the leased premises, the
LESSEE shall be given 30-days exclusive option to purchase the
same.
The provision was too indefinite to allow it to even come close to within the
area of the Guzman ruling.
Justice Panganiban was correct in saying that the "cases of Madrigal & Co. vs.
Stevenson & Co. and Salonga vs. Farrales (cited in Ang Yu) did NOT involve a right
of first refusal or of first priority. Nor did those two cases involve an option to buy."
The two cases, to set the record straight, were cited, not because they were thought
to involve a right of first refusal or an option to buy but to emphasize the
indispensability of consensuality over the object and cause of contracts in their
perfection which would explain why, parallel therewith, Articles 1315 and 1318 of the
Civil Code were also mentioned.

One final note: A right of first refusal, in its proper usage, is not a contract; when
parties instead make certain the object and the cause thereof and support their
understanding with an adequate consideration, that juridical relation is not to be taken
as just a right of first refusal but as a contract in itself (termed an "option"). There is,
unfortunately, in law a limit to an unabated use of common parlance.

With all due respect, I hold that the judgment of the trial court, although not for all the
reasons it has advanced, should be REINSTATED.

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.
DECISION
PANGANIBAN, J.:
Do allegations in a complaint showing violation of a contractual right of first option
or priority to buy the properties subject of the lease constitute a valid cause of action? Is
the grantee of such right entitled to be offered the same terms and conditions as those
given to a third party who eventually bought such properties? In short, is such right of
first refusal enforceable by an action for specific performance?
These questions are answered in the affirmative by this Court in resolving this
petition for review under Rule 45 of the Rules of Court challenging the Decision [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, Damarias 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-in-fact of defendant
Santos, Xerox copy of the letter is hereto attached as Annex N.
9. Upon learning of this fact plaintiffs 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, plaintiffs 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.
PRAYER
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
incurr (sic) total loss of THREE MILLION (P3,000,000.00) PESOS as the
actual cost of the building and as such defendants should be charged of
the same amount for actual damages.
23. As a consequence of the collusion, evil design and illegal acts of the
defendants, plaintiff in the process suffered mental anguish, sleepless
nights, bismirched (sic) reputation which entitles plaintiff to moral damages
in the amount of FIVE MILLION (P5,000,000.00) PESOS.
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 plaintiffs 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 attorneys fees, exclusive of cost
and expenses of litigation.
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. Dependants (sic) pay plaintiff the sum of P3,000,000.00 as actual
damages;
c. Defendants pay the sum of P5,000,000.00 as moral damages;
d. Defendants pay exemplary damages left to the discretion of the Court;
e. Defendants pay the sum of not less than P200,000.00 as attorneys 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 plaintiffs Complaint itself, it therefore indubitably appears
that the defendant Santos had verily complied with paragraph 9 of the Lease
Agreement by twice offering the properties for sale to the plaintiff for P15 M. The said
offers, however, were plainly rejected by the plaintiff which scorned the said offer as
RIDICULOUS. There was therefore a definite refusal on the part of the plaintiff to
accept the offer of defendant Santos. For in acquiring the said properties back to her
name, and in so making the offers to sell both by herself (attorney-in-fact) and through
her counsel, defendant Santos was indeed conscientiously complying with her
obligation under paragraph 9 of the Lease Agreement. x x x
xxxxxxxxx
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 plaintiffs subsequent
protestations of collusion is bereft or devoid of any meaning or purpose. x x x
The inescapable result of the foregoing considerations point to no other conclusion
than that the Complaint actually does not contain any valid cause of action and should
therefore be as it is hereby ordered DISMISSED. The Court finds no further need to
consider the other grounds of estoppel and laches inasmuch as this resolution is
sufficient to dispose the matter.[6]
Petitioners appealed to the Court of Appeals which affirmed in toto the ruling of
the trial court, and further reasoned that:
x x x Appellants protestations that the P15 million price quoted by appellee Santos
was reduced to P9 million when she later resold the leased properties to Raymundo
has no valid legal moorings because appellant, as a prospective buyer, cannot dictate
its own price and forcibly ram it against appellee Santos, as owner, to buy off her
leased properties considering the total absence of any stipulation or agreement as to
the price or as to how the price should be computed under paragraph 9 of the lease
contract, x x x[7]
Petitioner moved for reconsideration but was denied in an order dated August 20,
1993.[8]
Hence this petition. Subsequently, petitioner filed an Urgent Motion for the
Issuance of Restraining Order and/or Writ of Preliminary Injunction and to Hold
Respondent David A. Raymundo in Contempt of Court.[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 forum-shopping. The ejectment suit initiated by respondent Raymundo
against petitioner arose from the expiration of the lease contract covering the property
subject of this case. The ejectment suit was decided in favor of Raymundo, and the
entry of final judgment in respect thereof renders the said motion moot and academic.
Issue
The principal legal issue presented before us for resolution is whether the
aforequoted complaint alleging breach of the contractual right of first option or priority
to buy states a valid cause of action.
Petitioner contends that the trial court as well as the appellate tribunal erred in
dismissing the complaint because it in fact had not just one but at least three (3) valid
causes of action, to wit: (1) breach of contract, (2) its right of first refusal founded in law,
and (3) damages.
Respondents Santos and Raymundo, in their separate comments, aver that the
petition should be denied for not raising a question of law as the issue involved is purely
factual -- whether respondent Santos complied with paragraph 9 of the lease
agreement -- and for not having complied with Section 2, Rule 45 of the Rules of Court,
requiring the filing of twelve (12) copies of the petitioners 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 petitioners
payment of rentals of the leased property to respondent Raymundo from June 15, 1989,
to June 30, 1990, was an acknowledgment of the latters 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 Courts Ruling
Preliminary Issue: Failure to File Sufficient Copies of Brief
We first dispose of the procedural issue raised by respondents, particularly
petitioners 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 courts equity jurisdiction. [10] It
does not appear that respondents were unduly prejudiced by petitioners
nonfeasance. Neither has it been shown that such failure was intentional.
Main Issue: Validity of Cause of Action
We do not agree with respondents contention that the issue involved
is purely factual. The principal legal question, as stated earlier, is whether the complaint
filed by herein petitioner in the lower court states a valid cause of action. Since such
question assumes the facts alleged in the complaint as true, it follows that the
determination thereof is one of law, and not of facts. There is a question of law in a
given case when the doubt or difference arises as to what the law is on a certain state
of facts, and there is a question of fact when the doubt or difference arises as to the
truth or the falsehood of alleged facts.[11]
At the outset, petitioner concedes that when the ground for a motion to dismiss is
lack of cause of action, such ground must appear on the face of the complaint; that to
determine the sufficiency of a cause of action, only the facts alleged in the complaint
and no others should be considered; and that the test of sufficiency of the facts alleged
in a petition or complaint to constitute a cause of action is whether, admitting the facts
alleged, the court could render a valid judgment upon the same in accordance with the
prayer of the petition or complaint.
A cause of action exists if the following elements are present: (1) a right in favor
of the plaintiff by whatever means and under whatever law it arises or is created; (2) an
obligation on the part of the named defendant to respect or not to violate such right,
and (3) an act or omission on the part of such defendant violative of the right of plaintiff
or constituting a breach of the obligation of defendant to the plaintiff for which the latter
may maintain an action for recovery of damages.[12]
In determining whether allegations of a complaint are sufficient to support a cause
of action, it must be borne in mind that the complaint does not have to establish or
allege facts proving the existence of a cause of action at the outset; this will have to be
done at the trial on the merits of the case. To sustain a motion to dismiss for lack of
cause of action, the complaint must show that the claim for relief does not exist, rather
than that a claim has been defectively stated, or is ambiguous, indefinite or uncertain. [13]
Equally important, a defendant moving to dismiss a complaint on the ground of
lack of cause of action is regarded as having hypothetically admitted all the averments
thereof.[14]
A careful examination of the complaint reveals that it sufficiently alleges an
actionable contractual breach on the part of private respondents. Under paragraph 9 of
the contract of lease between respondent Santos and petitioner, the latter was granted
the first option or priority to purchase the leased properties in case Santos decided to
sell. If Santos never decided to sell at all, there can never be a breach, much less an
enforcement of such right. But on September 21, 1988, Santos sold said properties to
Respondent Raymundo without first offering these to petitioner. Santos indeed realized
her error, since she repurchased the properties after petitioner complained. Thereafter,
she offered to sell the properties to petitioner for P15 million, which petitioner, however,
rejected because of the ridiculous price. But Santos again appeared to have violated
the same provision of the lease contract when she finally resold the properties to
respondent Raymundo for only P9 million without first offering them to petitioner at such
price. Whether there was actual breach which entitled petitioner to damages and/or
other just or equitable relief, is a question which can better be resolved after trial on the
merits where each party can present evidence to prove their respective allegations and
defenses.[15]
The trial and appellate courts based their decision to sustain respondents motion
to dismiss on the allegations of 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 Management Committee. Hence, x x x certain prerequisites must be complied with by
thereafter lawfully sell the subject property to others, and only under the same terms anyone who wishes to avail himself of the benefits of the decree.[19] There being no
and conditions previously offered to the Bonnevies. 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.
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 Deed of Assignment included the option to purchase
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.
Neither do we find merit in the contention of respondent Santos that the
From the foregoing, the basis of the right of the first refusal * must be the current
assignment of the lease contract to petitioner did not include the option to
offer to sell of the seller or offer to purchase of any prospective buyer. Only after the
purchase. The provisions of the deeds of assignment with regard to matters assigned
grantee** fails to exercise its right of first priority under the same terms and within the
were very clear.Under the first assignment between Frederick Chua as assignor and
period contemplated, could the owner validly offer to sell the property to a third person,
Lee Ching Bing as assignee, it was expressly stated that:
again, under the same terms as offered to the grantee ***.
This principle was reiterated in the very recent case of Equatorial Realty vs. x x x the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to herein
Mayfair Theater, Inc.[17] which was decided en banc. This Court upheld the right of first ASSIGNEE, all his rights, interest and participation over said premises afore-
refusal of the lessee Mayfair, and rescinded the sale of the property by the lessor described, x x x[20] (underscoring supplied)
Carmelo to Equatorial Realty considering that Mayfair, which had substantial interest
over the subject property, was prejudiced by its sale to Equatorial without Carmelo
And under the subsequent assignment executed between Lee Ching Bing as
conferring to Mayfair every opportunity to negotiate within the 30-day stipulated period
assignor and the petitioner, represented by its Vice President Vicenta Lo Chiong, as
(underscoring supplied).
assignee, it was likewise expressly stipulated that:
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 x x x the ASSIGNOR hereby sells, transfers and assigns all his rights, interest and
days exclusive option to purchase the same. Carmelo initially offered to sell the leased participation over said leased premises, x x x[21](underscoring supplied)
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
One of such rights included in the contract of lease and, therefore, in the
thereafter from Carmelo. Four years later, the latter sold its entire Recto Avenue
assignments of rights was the lessees right of first option or priority to buy the properties
property, including the leased premises, to Equatorial for P11,300,000.00 without
subject of the lease, as provided in paragraph 9 of the assigned lease contract. The
priorly informing Mayfair. The Court held that both Carmelo and Equatorial acted in bad
deed of assignment need not be very specific as to which rights and obligations were
faith: Carmelo for knowingly violating the right of first refusal * of Mayfair, and Equatorial
passed on to the assignee. It is understood in the general provision aforequoted that
for purchasing the property despite being aware of the contract stipulation. In addition
all specific rights and obligations contained in the contract of lease are those referred
to rescission of the contract of sale, the Court ordered Carmelo to allow Mayfair to buy
to as being assigned. Needless to state, respondent Santos gave her unqualified
the subject property at the same price of P11,300,000.00.
conformity to both assignments of rights.

No cause of action under P.D. 1517

Respondent Raymundo privy to the Contract of Lease

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 lessees right of first refusal
to purchase shall be determined by the Urban Zone Expropriation and Land
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.
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.

THIRD DIVISION
[G.R. No. 140479. March 8, 2001]
ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners,
vs. PATERNO INQUING, IRENE GUILLERMO, FEDERICO BANTUGAN,
FERNANDO MAGBANUA and LIZZA TIANGCO, respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
seeking reversal of the Decision[1] of the Court of Appeals dated June 25, 1999 in CA-
G.R. CV No. 53963. The Court of Appeals decision reversed and set aside the
Decision[2]dated May 13, 1996 of Branch 217 of the Regional Trial Court of Quezon
City in Civil Case No. Q-93-18582.
The case was originally filed on December 10, 1993 by Paterno Inquing, Irene
Guillermo and Federico Bantugan, herein respondents, against Rosencor Development
Corporation (hereinafter Rosencor), Rene Joaquin, and Eufrocina de Leon. Originally,
the complaint was one for annulment of absolute deed of sale but was later amended
to one for rescission of absolute deed of sale. A complaint-for intervention was
thereafter filed by respondents Fernando Magbanua and Danna Lizza Tiangco. The
complaint-in-intervention was admitted by the trial court in an Order dated May 4,
1994.[3]
The facts of the case, as stated by the trial court and adopted by the appellate
court, are as follows:
This action was originally for the annulment of the Deed of Absolute Sale dated
September 4, 1990 between defendants Rosencor and Eufrocina de Leon but later
amended (sic) praying for the rescission of the deed of sale.
Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of a
two-story residential apartment located at No. 150 Tomas Morato Ave., Quezon City
covered by TCT No. 96161 and owned by spouses Faustino and Cresencia
Tiangco. The lease was not covered by any contract. The lessees were renting the
premises then for P150.00 a month and were allegedly verbally granted by the
lessors the pre-emptive right to purchase the property if ever they decide to sell the
same.
Upon the death of the spouses Tiangcos in 1975, the management of the property
was adjudicated to their heirs who were represented by Eufrocina de Leon. The
lessees were allegedly promised the same pre-emptive right by the heirs of Tiangcos
since the latter had knowledge that this right was extended to the former by the late
spouses Tiangcos. The lessees continued to stay in the premises and allegedly spent
their own money amounting from P50,000.00 to P100,000.00 for its upkeep. These
expenses were never deducted from the rentals which already increased to
P1,000.00.
In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding that
they vacate the premises so that the demolition of the building be undertaken. They
refused to leave the premises. In that same month, de Leon refused to accept the
lessees rental payment claiming that they have run out of receipts and that a new
collector has been assigned to receive the payments. Thereafter, they received a
letter from Eufrocina de Leon offering to sell to them the property they were leasing
for P2,000,000.00. xxx.
The lessees offered to buy the property from de Leon for the amount of
P1,000,000.00. De Leon told them that she will be submitting the offer to the other
heirs. Since then, no answer was given by de Leon as to their offer to buy the
property. However, in November 1990, Rene Joaquin came to the leased premises
introducing himself as its new owner.
In January 1991, the lessees again received another letter from Atty. Aguila
demanding that they vacate the premises. A month thereafter, the lessees received a
letter from de Leon advising them that the heirs of the late spouses Tiangcos have
already sold the property to Rosencor.The following month Atty. Aguila wrote them
another letter demanding the rental payment and introducing herself as counsel for
Rosencor/Rene Joaquin, the new owners of the premises.
The lessees requested from de Leon why she had disregarded the pre-emptive right
she and the late Tiangcos have promised them. They also asked for a copy of the
deed of sale between her and the new owners thereof but she refused to heed their
request. In the same manner, when they asked Rene Joaquin a copy of the deed of
sale, the latter turned down their request and instead Atty. Aguila wrote them several
letters demanding that they vacate the premises. The lessees offered to tender their
rental payment to de Leon but she refused to accept the same.
In April 1992 before the demolition can be undertaken by the Buiding Official, the
barangay interceded between the parties herein after which Rosencor raised the
issue as to the rental payment of the premises. It was also at this instance that the
lessees were furnished with a copy of the Deed of Sale and discovered that they were
deceived by de Leon since the sale between her and Rene Joaquin/Rosencor took
place in September 4, 1990 while de Leon made the offer to them only in October
1990 or after the sale with Rosencor had been consummated. The lessees also noted
that the property was sold only for P726,000.00.
The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an
additional P274,000.00 to complete their P1,000.000.00 earlier offer. When their offer
was refused, they filed the present action praying for the following: a) rescission of the
Deed of Absolute Sale between de Leon and Rosencor dated September 4, 1990; b)
the defendants Rosencor/Rene Joaquin be ordered to reconvey the property to de
Leon; and c) de Leon be ordered to reimburse the plaintiffs for the repairs of the
property, or apply the said amount as part of the price for the purchase of the property
in the sum of P100,000.00.[4]
After trial on the merits, the Regional Trial Court rendered a Decision [5] dated May
13, 1996 dismissing the complaint. The trial court held that the right of redemption on
which the complaint was based was merely an oral one and as such, is unenforceable
under the law. The dispositive portion of the May 13, 1996 Decision is as follows:
WHEREFORE, in view of the foregoing, the Court DISMISSES the instant
action. Plaintiffs and plaintiffs-intervenors are hereby ordered to pay their respective
monthly rental of P1,000.00 per month reckoned from May 1990 up to the time they
leave the premises. No costs.
SO ORDERED.[6]
Not satisfied with the decision of the trial court, respondents herein filed a Notice
of Appeal dated June 3, 1996. On the same date, the trial court issued an Order for the
elevation of the records of the case to the Court of Appeals. On August 8, 1997,
respondents filed their appellate brief before the Court of Appeals.
On June 25, 1999, the Court of Appeals rendered its decision[7]
reversing the
decision of the trial court. The dispositive portion of the June 25, 1999 decision is as
follows:
WHEREFORE, premises considered, the appealed decision (dated May 13, 1996) of
the Regional Trial Court (Branch 217) in Quezon City in Case No. Q-93-18582 is
hereby REVERSED and SET ASIDE. In its stead, a new one is rendered ordering:
(1) The rescission of the Deed of Absolute Sale executed between the
appellees on September 4, 1990;
(2) The reconveyance of the subject premises to appellee Eufrocina de
Leon;
(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina
de Leon, to afford the appellants thirty days within which to exercise their
right of first refusal by paying the amount of ONE MILLION PESOS
(P1,000,000.00) for the subject property; and
(4) The appellants to, in turn, pay the appellees back rentals from May 1990
up to the time this decision is promulgated.
No pronouncement as to costs.
SO ORDERED.[8]
Petitioners herein filed a Motion for Reconsideration of the decision of the Court
of Appeals but the same was denied in a Resolution dated October 15, 1999. [9]
Hence, this petition for review on certiorari where petitioners Rosencor
Development Corporation and Rene Joaquin raise the following assignment of
errors[10]:
I.
THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE
RESCISSION OF THE ABSOLUTE DEED OF SALE BETWEEN EUFROCINA
DE LEON AND PETITIONER ROSENCOR.
II.
THE COURT OF APPEALS COMMITTED MANIFEST ERROR IN MANDATING
THAT EUFROCINA DE LEON AFFORD RESPONDENTS THE OPPORTUNITY
TO EXERCISE THEIR RIGHT OF FIRST REFUSAL.
III.
THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT
RESPONDENTS HAVE ESTABLISHED THEIR RIGHT OF FIRST REFUSAL
DESPITE PETITIONERS RELIANCE ON THEIR DEFENSE BASED ON THE
STATUTE OF FRAUDS.
Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and
Crescencia Tiangco, did not appeal the decision of the Court of Appeals.
At the onset, we note that both the Court of Appeals and the Regional Trial Court
relied on Article 1403 of the New Civil Code, more specifically the provisions on the
statute of frauds, in coming out with their respective decisions. The trial court, in
denying the petition for reconveyance, held that right of first refusal relied upon by
petitioners was not reduced to writing and as such, is unenforceable by virtue of the
said article. The Court of Appeals, on the other hand, also held that the statute of frauds
governs the right of first refusal claimed by respondents. However, the appellate court
ruled that respondents had duly proven the same by reason of petitioners waiver of the
protection of the statute by reason of their failure to object to the presentation of oral
evidence of the said right.
Both the appellate court and the trial court failed to discuss, however, the
threshold issue of whether or not a right of first refusal is indeed covered by the
provisions of the New Civil Code on the statute of frauds. The resolution of the issue
on the applicability of the statute of frauds is important as it will determine the type of
evidence which may be considered by the trial court as proof of the alleged right of first
refusal.
The term statute of frauds is descriptive of statutes which require certain classes
of contracts to be in writing. This statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the
formalities of the contract necessary to render it enforceable. Thus, they are included
in the provisions of the New Civil Code regarding unenforceable contracts, more
particularly Art. 1403, paragraph 2. Said article provides, as follows:
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(2) Those that do not comply with the Statute of Frauds as set forth in this number. In
the following cases an agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum thereof, be in writing, and subscribed
by the party charged, or by his agent; evidence, therefore, of the agreement cannot
be received without the writing, or a secondary evidence of its contents:
a) An agreement that by its terms is not to be performed within a year from the
making thereof;
b) A special promise to answer for the debt, default, or miscarriage of another;
c) An agreement made in consideration of marriage, other than a mutual promise to
marry;
d) An agreement for the sale of goods, chattels or things in action, at a price not less
than five hundred pesos, unless the buyer accept and receive part of such goods and
chattels, or the evidences, or some of them, of such things in action, or pay at the
time some part of the purchase money; but when a sale is made by auction and entry
is made by the auctioneer in his sales book, at the time of the sale, of the amount and
kind of property sold, terms of sale, price, names of purchasers and person on whose
account the sale is made, it is a sufficient memorandum;
e) An agreement for the leasing of a longer period than one year, or for the sale of
real property or of an interest therein;
f) A representation to the credit of a third person.
The purpose of the statute is to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witnesses by
requiring certain enumerated contracts and transactions to be evidenced by a writing
signed by the party to be charged.[11] Moreover, the statute of frauds refers to specific
kinds of transactions and cannot apply to any other transaction that is not enumerated
therein.[12] The application of such statute presupposes the existence of a perfected
contract.[13]
The question now is whether a right of first refusal is among those enumerated in
the list of contracts covered by the Statute of Frauds. More specifically, is a right of first
refusal akin to an agreement for the leasing of a longer period than one year, or for the
sale of real property or of an interest therein as contemplated by Article 1403, par. 2(e)
of the New Civil Code.
We have previously held that not all agreements affecting land must be put into
writing to attain enforceability[14]. Thus, we have held that the setting up of
boundaries,[15] the oral partition of real property[16], and an agreement creating a right
of way[17] are not covered by the provisions of the statute of frauds. The reason simply
is that these agreements are not among those enumerated in Article 1403 of the New
Civil Code.
A right of first refusal is not among those listed as unenforceable under the statute
of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code
presupposes the existence of a perfected, albeit unwritten, contract of sale.[18] A right
of first refusal, such as the one involved in the instant case, is not by any means a
perfected contract of sale of real property. At best, it is a contractual grant, not of the
sale of the real property involved, but of the right of first refusal over the property sought
to be sold[19]
It is thus evident that the statute of frauds does not contemplate cases involving
a right of first refusal. As such, a right of first refusal need not be written to be
enforceable and may be proven by oral evidence.
The next question to be ascertained is whether or not respondents have
satisfactorily proven their right of first refusal over the property subject of the Deed of
Absolute Sale dated September 4, 1990 between petitioner Rosencor and Eufrocina
de Leon.
On this point, we agree with the factual findings of the Court of Appeals that
respondents have adequately proven the existence of their right of first
refusal. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified
that they were promised by the late spouses Faustino and Crescencia Tiangco and,
later on, by their heirs a right of first refusal over the property they were currently leasing
should they decide to sell the same. Moreover, respondents presented a letter[20] dated
October 9, 1990 where Eufrocina de Leon, the representative of the heirs of the
spouses Tiangco, informed them that they had received an offer to buy the disputed
property for P2,000,000.00 and offered to sell the same to the respondents at the same
price if they were interested. Verily, if Eufrocina de Leon did not recognize respondents
right of first refusal over the property they were leasing, then she would not have
bothered to offer the property for sale to the respondents.
It must be noted that petitioners did not present evidence before the trial court
contradicting the existence of the right of first refusal of respondents over the disputed
property. They only presented petitioner Rene Joaquin, the vice-president of petitioner
Rosencor, who admitted having no personal knowledge of the details of the sales
transaction between Rosencor and the heirs of the spouses Tiangco [21] They also
dispensed with the testimony of Eufrocina de Leon [22] who could have denied the
existence or knowledge of the right of first refusal. As such, there being no evidence to
the contrary, the right of first refusal claimed by respondents was substantially proven
by respondents before the lower court.
Having ruled upon the question as to the existence of respondents right of first
refusal, the next issue to be answered is whether or not the Court of Appeals erred in
ordering the rescission of the Deed of Absolute Sale dated September 4, 1990 between
Rosencor and Eufrocina de Leon and in decreeing that the heirs of the spouses Tiangco
should afford respondents the exercise of their right of first refusal. In other words, may
a contract of sale entered into in violation of a third partys right of first refusal be
rescinded in order that such third party can exercise said right?
The issue is not one of first impression.
 In Guzman, Bocaling and Co, Inc. vs. Bonnevie [23], the Court upheld the decision
of a lower court ordering the rescission of a deed of sale which violated a right of first
refusal granted to one of the parties therein. The Court held:
xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381 (3)
of the Civil Code, a contract otherwise valid may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. The status of creditors
could be validly accorded the Bonnevies for they had substantial interests that were
prejudiced by the sale of the subject property to the petitioner without recognizing
their right of first priority under the Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting
parties and even to third persons, to secure reparations for damages caused to them
by a contract, even if this should be valid, by means of the restoration of things to
their condition at the moment prior to the celebration of said contract. It is a relief
allowed for the protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause, or to protect some incompatible
and preferent right created by the contract. Rescission implies a contract which, even
if initially valid, produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.
It is true that the acquisition by a third person of the property subject of the contract is
an obstacle to the action for its rescission where it is shown that such third person is
in lawful possession of the subject of the contract and that he did not act in bad
faith. However, this rule is not applicable in the case before us because the petitioner
is not considered a third party in relation to the Contract of Sale nor may its
possession of the subject property be regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of
Sale. Moreover, the petitioner cannot be deemed a purchaser in good faith for the
record shows that it categorically admitted that it was aware of the lease in favor of
the Bonnevies, who were actually occupying the subject property at the time it was
sold to it. Although the Contract of Lease was not annotated on the transfer certificate
of title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner
cannot deny actual knowledge of such lease which was equivalent to and indeed
more binding than presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another
without notice that some other person has a right to or interest in such property
without and pays a full and fair price for the same at the time of such purchase or
before he has notice of the claim or interest of some other person in the
property. Good faith connotes an honest intention to abstain from taking
unconscientious advantage of another.Tested by these principles, the petitioner
cannot tenably claim to be a buyer in good faith as it had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look
deeper into the agreement to determine if it involved stipulations that would prejudice
its own interests.
Subsequently[24] in Equatorial Realty and Development, Inc. vs. Mayfair Theater,
Inc.[25], the Court, en banc, with three justices dissenting,[26] ordered the rescission of a
contract entered into in violation of a right of first refusal. Using the ruling in Guzman
Bocaling & Co., Inc. vs. Bonnevie as basis, the Court decreed that since respondent
therein had a right of first refusal over the said property, it could only exercise the said
right if the fraudulent sale is first set aside or rescinded. Thus:
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 Mayfairs right of first refusal, Carmelo violated such right when
without affording its negotiations with Mayfair the full process to ripen to at least an
interface of a definite offer and a possible corresponding acceptance within the 30-
day exclusive option time granted Mayfair, Carmelo abandoned negotiations, kept a
low profile for some time, and then sold, without prior notice to Mayfair, the entire
Claro M. Recto property to Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the
property in question, rescissible. We agree with respondent Appellate Court that the
records bear out the fact that Equatorial was aware of the lease contracts because its
lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot
tenably claim that to be a purchaser in good faith, and, therefore, rescission lies.
XXX
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights
of and to the prejudice of Mayfair. In fact, as correctly observed by the Court of
Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to
the sale. Equatorials knowledge of the stipulations therein should have cautioned it to
look further into the agreement to determine if it involved stipulations that would
prejudice its own interests.
Since Mayfair had a right of first refusal, it can exercise the right only if the fraudulent
sale is first set aside or rescinded. All of these matters are now before us and so there
should be no piecemeal determination of this case and leave festering sores to
deteriorate into endless litigation. The facts of the case and considerations of justice
and equity require that we order rescission here and now. Rescission is a relief
allowed for the protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause or to protect some incompatible
and preferred right by the contract. The sale of the subject real property should now
be rescinded considering that Mayfair, which had substantial interest over the subject
property, was prejudiced by the sale of the subject property to Equatorial without
Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day
stipulate period.[27]
In Paranaque Kings Enterprises, Inc. vs. Court of Appeals,[28] the Court held that
the allegations in a complaint showing violation of a contractual right of first option or
priority to buy the properties subject of the lease constitute a valid cause of action
enforceable by an action for specific performance. Summarizing the rulings in the two
previously cited cases, the Court affirmed the nature of and concomitant rights and
obligations of parties under a right of first refusal. Thus:
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 P9,000,000.00, the price for which they were finally sold to respondent
Raymundo, should have likewise been offered to petitioner.
The Court has made an extensive and lengthy discourse on the concept of, and
obligations under, a right of first refusal in the case of Guzman, Bocaling & Co. vs.
Bonnevie. In that case, under a contract of lease, the lessees (Raul and Christopher
Bonnevie) were given a "right of first priority" to purchase the leased property in case
the lessor (Reynoso) decided to sell. The selling price quoted to the Bonnevies was
600,000.00 to be fully paid in cash, less a mortgage lien of P100,000.00. On the other
hand, the selling price offered by Reynoso to and accepted by Guzman was only
P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to
be paid only when the property was cleared of occupants. We held that even if the
Bonnevies could not buy it at the price quoted (P600,000.00), nonetheless, Reynoso
could not sell it to another for a lower price and under more favorable terms and
conditions without 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.
XXX
This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair
Theater, Inc. which was decided en banc. This Court upheld the right of first refusal of
the lessee Mayfair, and rescinded the sale of the property by the lessor Carmelo to
Equatorial Realty "considering that Mayfair, which had substantial interest over the
subject property, was prejudiced by its sale to Equatorial without Carmelo conferring
to Mayfair every opportunity to negotiate within the 30-day stipulated period"
In that case, two contracts of lease between Carmelo and Mayfair provided "that if the
LESSOR should desire to sell the leased premises, the LESSEE shall be given 30
days exclusive option to purchase the same." Carmelo initially offered to sell the
leased property to Mayfair for six to seven million pesos. Mayfair indicated interest in
purchasing the property though it invoked the 30-day period. Nothing was heard
thereafter from Carmelo. Four years later, the latter sold its entire Recto Avenue
property, including the leased premises, to Equatorial for P11,300,000.00 without
priorly informing Mayfair. The Court held that both Carmelo and Equatorial acted in
bad faith: Carmelo for knowingly violating the right of first option of Mayfair, and
Equatorial for purchasing the property despite being aware of the contract
stipulation. In addition to rescission of the contract of sale, the Court ordered Carmelo
to allow Mayfair to buy the subject property at the same price of P11,300,000.00.
In the recent case of Litonjua vs. L&R Corporation,[29] the Court, also citing the
case of Guzman, Bocaling & Co. vs. Bonnevie, held that the sale made therein in
violation of a right of first refusal embodied in a mortgage contract, was
rescissible. Thus:
While petitioners question the validity of paragraph 8 of their mortgage contract, they
appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9
grants upon L&R Corporation the right of first refusal over the mortgaged property in
the event the mortgagor decides to sell the same. We see nothing wrong in this
provision. The right of first refusal has long been recognized as valid in our
jurisdiction. The consideration for the loan mortgage includes the consideration for the
right of first refusal. L&R Corporation is in effect stating that it consents to lend out
money to the spouses Litonjua provided that in case they decide to sell the property
mortgaged to it, then L&R Corporation shall be given the right to match the offered
purchase price and to buy the property at that price. Thus, while the spouses Litonjua
had every right to sell their mortgaged property to PWHAS without securing the prior
written consent of L&R Corporation, they had the obligation under paragraph 9, which
is a perfectly valid provision, to notify the latter of their intention to sell the property
and give it priority over other buyers. It is only upon the failure of L&R Corporation to
exercise its right of first refusal could the spouses Litonjua validly sell the subject
properties to the others, under the same terms and conditions offered to L&R
Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporation's
contractual right of first refusal? On this score, we agree with the Amended Decision
of the Court of Appeals that the sale made to PWHAS is rescissible. The case
of Guzman, Bocaling & Co. v. Bonnevie is instructive on this point.
XXX
It was then held that the Contract of Sale there, which violated the right of first refusal,
was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted
to L & R Corporation over the subject properties since the Deed of Real Estate
Mortgage containing such a provision was duly registered with the Register of
Deeds. As such, PWHAS is presumed to have been notified thereof by registration,
which equates to notice to the whole world.
XXX
All things considered, what then are the relative rights and obligations of the
parties? To recapitulate: the sale between the spouses Litonjua and PWHAS is valid,
notwithstanding the absence of L & R Corporation's prior written consent
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender
of the redemption price, as successor-in-interest of the spouses Litonjua, within the
one-year period should have been accepted as valid by the L & R
Corporation. However, while the sale is, indeed, valid, the same is rescissible
because it ignored L & R Corporation's right of first refusal.
 Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract
of sale entered into in violation of a right of first refusal of another person, while valid,
is rescissible.
There is, however, a circumstance which prevents the application of this doctrine
in the case at bench. In the cases cited above, the Court ordered the rescission of sales
made in violation of a right of first refusal precisely because the vendees therein could
not have acted in good faith as they were aware or should have been aware of the right
of first refusal granted to another person by the vendors therein. The rationale for this
is found in the provisions of the New Civil Code on rescissible contracts. Under Article
1381 of the New Civil Code, paragraph 3, a contract validly agreed upon may be
rescinded if it is undertaken in fraud of creditors when the latter cannot in any manner
collect the claim due them. Moreover, under Article 1385, rescission shall not take place
when the things which are the object of the contract are legally in the possession of
third persons who did not act in bad faith.[30]
It must be borne in mind that, unlike the cases cited above, the right of first refusal
involved in the instant case was an oral one given to respondents by the deceased
spouses Tiangco and subsequently recognized by their heirs. As such, in order to hold
that petitioners were in bad faith, there must be clear and convincing proof that
petitioners were made aware of the said right of first refusal either by the respondents
or by the heirs of the spouses Tiangco.
It is axiomatic that good faith is always presumed unless contrary evidence is
adduced.[31] A purchaser in good faith is one who buys the property of another without
notice that some other person has a right or interest in such a property and pays a full
and fair price at the time of the purchase or before he has notice of the claim or interest
of some other person in the property.[32] In this regard, the rule on constructive notice
would be inapplicable as it is undisputed that the right of first refusal was an oral one
and that the same was never reduced to writing, much less registered with the Registry
of Deeds. In fact, even the lease contract by which respondents derive their right to
possess the property involved was an oral one.
On this point, we hold that the evidence on record fails to show that petitioners
acted in bad faith in entering into the deed of sale over the disputed property with the
heirs of the spouses Tiangco. Respondents failed to present any evidence that prior to
the sale of the property on September 4, 1990, petitioners were aware or had notice of
the oral right of first refusal.
Respondents point to the letter dated June 1, 1990 [33] as indicative of petitioners
knowledge of the said right. In this letter, a certain Atty. Erlinda Aguila demanded that
respondent Irene Guillermo vacate the structure they were occupying to make way for
its demolition.
We fail to see how the letter could give rise to bad faith on the part of the
petitioner. No mention is made of the right of first refusal granted to respondents. The
name of petitioner Rosencor or any of it officers did not appear on the letter and the
letter did not state that Atty. Aguila was writing in behalf of petitioner. In fact, Atty. Aguila
stated during trial that she wrote the letter in behalf of the heirs of the spouses
Tiangco. Moreover, even assuming that Atty. Aguila was indeed writing in behalf of
petitioner Rosencor, there is no showing that Rosencor was aware at that time that
such a right of first refusal existed.
Neither was there any showing that after receipt of this June 1, 1990 letter,
respondents notified Rosencor or Atty. Aguila of their right of first refusal over the
property. Respondents did not try to communicate with Atty. Aguila and inform her
about their preferential right over the disputed property. There is even no showing that
they contacted the heirs of the spouses Tiangco after they received this letter to remind
them of their right over the property.
Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de
Leon, where she recognized the right of first refusal of respondents, as indicative of the
bad faith of petitioners. We do not agree. Eufrocina de Leon wrote the letter on her own
behalf and not on behalf of petitioners and, as such, it only shows that Eufrocina de
Leon was aware of the existence of the oral right of first refusal. It does not show that
petitioners were likewise aware of the existence of the said right. Moreover, the letter
was made a month after the execution of the Deed of Absolute Sale on September 4,
1990 between petitioner Rosencor and the heirs of the spouses Tiangco. There is no
showing that prior to the date of the execution of the said Deed, petitioners were put on
notice of the existence of the right of first refusal.
Clearly, if there was any indication of bad faith based on respondents evidence,
it would only be on the part of Eufrocina de Leon as she was aware of the right of first
refusal of respondents yet she still sold the disputed property to Rosencor. However,
bad faith on the part of Eufrocina de Leon does not mean that petitioner Rosencor
likewise acted in bad faith. There is no showing that prior to the execution of the Deed
of Absolute Sale, petitioners were made aware or put on notice of the existence of the
oral right of first refusal. Thus, absent clear and convincing evidence to the contrary,
petitioner Rosencor will be presumed to have acted in good faith in entering into the
Deed of Absolute Sale over the disputed property.
Considering that there is no showing of bad faith on the part of the petitioners, the
Court of Appeals thus erred in ordering the rescission of the Deed of Absolute Sale
dated September 4, 1990 between petitioner Rosencor and the heirs of the spouses
Tiangco. The acquisition by Rosencor of the property subject of the right of first refusal
is an obstacle to the action for its rescission where, as in this case, it was shown that
Rosencor is in lawful possession of the subject of the contract and that it did not act in
bad faith.[34]
This does not mean however that respondents are left without any remedy for the
unjustified violation of their right of first refusal. Their remedy however is not an action
for the rescission of the Deed of Absolute Sale but an action for damages against the
heirs of the spouses Tiangco for the unjustified disregard of their right of first refusal [35].
WHEREFORE, premises considered, the decision of the Court of Appeals dated
June 25, 1999 is REVERSED and SET ASIDE. The Decision dated May 13, 1996 of
the Quezon City Regional Trial Court, Branch 217 is hereby REINSTATED insofar as
it dismisses the action for rescission of the Deed of Absolute Sale dated September 4,
1990 and orders the payment of monthly rentals of P1,000.00 per month reckoned from
May 1990 up to the time respondents leave the premises.
SO ORDERED.
 Subdivision, and that it intends to complete the first phase under its amended
SECOND DIVISION development plan within three (3) years from the date of this Agreement. x x x

5.15. The BUYER agrees to give the SELLERS a first option to purchase four
developed lots next to the Retained Area at the prevailing market price at the
[G.R. No. 149734. November 19, 2004] time of the purchase.

The parties are agreed that the development plan referred to in paragraph 5.7 is
not Conduits development plan, but Ayalas amended development plan which
DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners vs. AYALA was still to be formulated as of the time of the MOA. While in the Conduit plan,
CORPORATION,respondent. the 4 lots to be offered for sale to the Vasquez Spouses were in the first phase
thereof or Village 1, in the Ayala plan which was formulated a year later, it was
DECISION in the third phase, or Phase II-c.

TINGA, J.: Under the MOA, the Vasquez spouses made several express warranties, as follows:

The rise in value of four lots in one of the countrys prime residential developments, 3.1. The SELLERS shall deliver to the BUYER:
Ayala Alabang Village in Muntinlupa City, over a period of six (6) years only, represents
big money. The huge price difference lies at the heart of the present controversy.
Petitioners insist that the lots should be sold to them at 1984 prices while respondent xxx
maintains that the prevailing market price in 1990 should be the selling price.
3.1.2. The true and complete list, certified by the Secretary and Treasurer of the
Dr. Daniel Vazquez and Ma. Luisa Vazquez[1] filed this Petition for Review on Company showing:
Certiorari[2] dated October 11, 2001 assailing the Decision[3] of the Court of Appeals
dated September 6, 2001 which reversed the Decision[4] of the Regional Trial Court
(RTC) and dismissed their complaint for specific performance and damages against xxx
Ayala Corporation.
D. A list of all persons and/or entities with whom the Company has pending contracts,
Despite their disparate rulings, the RTC and the appellate court agree on the if any.
following antecedents:[5]
xxx
On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter,
Vasquez spouses) entered into a Memorandum of Agreement (MOA) with Ayala
Corporation (hereafter, AYALA) with AYALA buying from the Vazquez spouses, all of 3.1.5. Audited financial statements of the Company as at Closing date.
the latters shares of stock in Conduit Development, Inc. (hereafter, Conduit). The
main asset of Conduit was a 49.9 hectare property in Ayala Alabang, Muntinlupa, 4. Conditions Precedent
which was then being developed by Conduit under a development plan where the
land was divided into Villages 1, 2 and 3 of the Don Vicente Village. The development All obligations of the BUYER under this Agreement are subject to fulfillment prior to or
was then being undertaken for Conduit by G.P. Construction and Development Corp. at the Closing, of the following conditions:
(hereafter, GP Construction).
4.1. The representations and warranties by the SELLERS contained in this
Under the MOA, Ayala was to develop the entire property, less what was defined as Agreement shall be true and correct at the time of Closing as though such
the Retained Area consisting of 18,736 square meters. This Retained Area was to be representations and warranties were made at such time; and
retained by the Vazquez spouses. The area to be developed by Ayala was called the
Remaining Area. In this Remaining Area were 4 lots adjacent to the Retained Area
and Ayala agreed to offer these lots for sale to the Vazquez spouses at the prevailing xxx
price at the time of purchase. The relevant provisions of the MOA on this point are:
6. Representation and Warranties by the SELLERS
5.7. The BUYER hereby commits that it will develop the Remaining Property
into a first class residential subdivision of the same class as its New Alabang
The SELLERS jointly and severally represent and warrant to the BUYER that at the
time of the execution of this Agreement and at the Closing:
xxx
6.2.3. There are no actions, suits or proceedings pending, or to the knowledge of the
SELLERS, threatened against or affecting the SELLERS with respect to the Shares or
the Property; and
7. Additional Warranties by the SELLERS
7.1. With respect to the Audited Financial Statements required to be submitted at
Closing in accordance with Par. 3.1.5 above, the SELLER jointly and severally
warrant to the BUYER that:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing,
the Company shall own the Remaining Property, free from all liens and
encumbrances and that the Company shall have no obligation to any party
except for billings payable to GP Construction & Development Corporation and
advances made by Daniel Vazquez for which BUYER shall be responsible in
accordance with Par. 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial
Statements of the Company as of Closing, and those disclosed to BUYER, the
Company as of the date thereof, has no liabilities of any nature whether
accrued, absolute, contingent or otherwise,including, without limitation, tax
liabilities due or to become due and whether incurred in respect of or measured in
respect of the Companys income prior to Closing or arising out of transactions or
state of facts existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis
for any assertion against the Company as at closing or any liability of any
nature and in any amount not fully reflected or reserved against such Audited
Financial Statements referred to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the
Closing, the Company is not engaged in or a party to, or to the best of the
knowledge of the SELLERS, threatened with, any legal action or other
proceedings before any court or administrative body, nor do the SELLERS know
or have reasonable grounds to know of any basis for any such action or proceeding or
of any governmental investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or
condition of any instrument or agreement to which the company is a party or by
which it is bound, and no condition exists which, with notice or lapse of time or
both, will constitute such default or breach.
After the execution of the MOA, Ayala caused the suspension of work on Village 1 of
the Don Vicente Project. Ayala then received a letter from one Maximo Del Rosario of
Lancer General Builder Corporation informing Ayala that he was claiming the amount
of P1,509,558.80 as the subcontractor of G.P. Construction...
G.P. Construction not being able to reach an amicable settlement with Lancer, on
March 22, 1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court
of First Instance of Manila in Civil Case No. 82-8598. G.P. Construction in turn filed a
cross-claim against Ayala. G.P. Construction and Lancer both tried to enjoin Ayala
from undertaking the development of the property. The suit was terminated only on
February 19, 1987, when it was dismissed with prejudice after Ayala paid both Lancer
and GP Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots adjacent to the Retained
Area within 3 years from the date of the MOA, the Vasquez spouses sent several
reminder letters of the approaching so-called deadline. However, no demand after
April 23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. On
the contrary, one of the letters signed by their authorized agent, Engr. Eduardo Turla,
categorically stated that they expected development of Phase 1 to be completed by
February 19, 1990, three years from the settlement of the legal problems with the
previous contractor.
By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered
for sale. The four lots were then offered to be sold to the Vasquez spouses at the
prevailing price in 1990. This was rejected by the Vasquez spouses who wanted to
pay at 1984 prices, thereby leading to the suit below.
After trial, the court a quo rendered its decision, the dispositive portion of which
states:
THEREFORE, judgment is hereby rendered in favor of plaintiffs and against
defendant, ordering defendant to sell to plaintiffs the relevant lots described in the
Complaint in the Ayala Alabang Village at the price of P460.00 per square meter
amounting to P1,349,540.00; ordering defendant to reimburse to plaintiffs attorneys
fees in the sum of P200,000.00 and to pay the cost of the suit.
In its decision, the court a quo concluded that the Vasquez spouses were not
obligated to disclose the potential claims of GP Construction, Lancer and Del Rosario;
Ayalas accountants should have opened the records of Conduit to find out all claims;
the warranty against suit is with respect to the shares of the Property and the Lancer
suit does not affect the shares of stock sold to Ayala; Ayala was obligated to develop
within 3 years; to say that Ayala was under no obligation to follow a time frame was to
put the Vasquezes at Ayalas mercy; Ayala did not develop because of a slump in the
real estate market; the MOA was drafted and prepared by the AYALA who should
suffer its ambiguities; the option to purchase the 4 lots is valid because it was
supported by consideration as the option is incorporated in the MOA where the
parties had prestations to each other. [Emphasis supplied]
Ayala Corporation filed an appeal, alleging that the trial court erred in holding that
petitioners did not breach their warranties under the MOA [6] dated April 23, 1981; that
it was obliged to develop the land where the four (4) lots subject of the option to
purchase are located within three (3) years from the date of the MOA; that it was in
delay; and that the option to purchase was valid because it was incorporated in the
MOA and the consideration therefor was the commitment by Ayala Corporation to
petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the
RTC Decision. According to the appellate court, Ayala Corporation was never informed
beforehand of the existence of the Lancer claim. In fact, Ayala Corporation got a copy
of the Lancer subcontract only on May 29, 1981 from G.P. Constructions lawyers. The
Court of Appeals thus held that petitioners violated their warranties under the MOA
when they failed to disclose Lancers claims. Hence, even conceding that Ayala
Corporation was obliged to develop and sell the four (4) lots in question within three (3)
years from the date of the MOA, the obligation was suspended during the pendency of
the case filed by Lancer.
Interpreting the MOAs paragraph 5.7 above-quoted, the appellate court held that
Ayala Corporation committed to develop the first phase of its own amended
development plan and not Conduits development plan. Nowhere does the MOA provide
that Ayala Corporation shall follow Conduits development plan nor is Ayala Corporation
prohibited from changing the sequence of the phases of the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there was no delay
as petitioners never made a demand for Ayala Corporation to sell the subject lots to
them. According to the appellate court, what petitioners sent were mere reminder letters
the last of which was dated prior to April 23, 1984 when the obligation was not yet
demandable. At any rate, the Court of Appeals found that petitioners in fact waived the
three (3)-year period when they sent a letter through their agent, Engr. Eduardo Turla,
stating that they expect that the development of Phase I will be completed by 19
February 1990, three years from the settlement of the legal problems with the previous
contractor.[7]
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an
option contract but a right of first refusal there being no separate consideration therefor.
Since petitioners refused Ayala Corporations offer to sell the subject lots at the reduced
1990 price of P5,000.00 per square meter, they have effectively waived their right to
buy the same.
In the instant Petition, petitioners allege that the appellate court erred in ruling that
they violated their warranties under the MOA; that Ayala Corporation was not obliged
to develop the Remaining Property within three (3) years from the execution of the
MOA; that Ayala was not in delay; and that paragraph 5.15 of the MOA is a mere right
of first refusal. Additionally, petitioners insist that the Court should review the factual
findings of the Court of Appeals as they are in conflict with those of the trial court.
Ayala Corporation filed a Comment on the Petition[8] dated March 26, 2002,
contending that the petition raises questions of fact and seeks a review of evidence
which is within the domain of the Court of Appeals. Ayala Corporation maintains that
the subcontract between GP Construction, with whom Conduit contracted for the
development of the property under a Construction Contract dated October 10, 1980,
and Lancer was not disclosed by petitioners during the negotiations. Neither was the
liability for Lancers claim included in the Audited Financial Statements submitted by
petitioners after the signing of the MOA. These justify the conclusion that petitioners
breached their warranties under the afore-quoted paragraphs of the MOA. Since the
Lancer suit ended only in February 1989, the three (3)-year period within which Ayala
Corporation committed to develop the property should only be counted thence. Thus,
when it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in
delay.
In response to petitioners contention that there was no action or proceeding
against them at the time of the execution of the MOA on April 23, 1981, Ayala
Corporation avers that the facts and circumstances which gave rise to the Lancer claim
were already extant then. Petitioners warranted that their representations under the
MOA shall be true and correct at the time of Closing which shall take place within four
(4) weeks from the signing of the MOA.[9] Since the MOA was signed on April 23, 1981,
Closing was approximately the third week of May 1981. Hence, Lancers claims,
articulated in a letter which Ayala Corporation received on May 4, 1981, are among the
liabilities warranted against under paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the MOA are not
just against suits but against all kinds of liabilities not reflected in the Audited Financial
Statements. It cannot be faulted for relying on the express warranty that except for
billings payable to GP Construction and advances made by petitioner Daniel Vazquez
in the amount of P38,766.04, Conduit has no other liabilities. Hence, petitioners cannot
claim that Ayala Corporation should have examined and investigated the Audited
Financial Statements of Conduit and should now assume all its obligations and liabilities
including the Lancer suit and the cross-claim of GP Construction.
Furthermore, Ayala Corporation did not make a commitment to complete the
development of the first phase of the property within three (3) years from the execution
of the MOA. The provision refers to a mere declaration of intent to develop the first
phase of its (Ayala Corporations) own development plan and not Conduits. True to its
intention, Ayala Corporation did complete the development of the first phase (Phase II-
A) of its amended development plan within three (3) years from the execution of the
MOA. However, it is not obliged to develop the third phase (Phase II-C) where the
subject lots are located within the same time frame because there is no contractual
stipulation in the MOA therefor. It is free to decide on its own the period for the
development of Phase II-C. If petitioners wanted to impose the same three (3)-year
timetable upon the third phase of the amended development plan, they should have
filed a suit to fix the time table in accordance with Article 1197[10] of the Civil Code.
Having failed to do so, Ayala Corporation cannot be declared to have been in delay.
Ayala Corporation further contends that no demand was made on it for the
performance of its alleged obligation. The letter dated October 4, 1983 sent when
petitioners were already aware of the Lancer suit did not demand the delivery of the
subject lots by April 23, 1984. Instead, it requested Ayala Corporation to keep
petitioners posted on the status of the case. Likewise, the letter dated March 4, 1984
was merely an inquiry as to the date when the development of Phase 1 will be
completed. More importantly, their letter dated June 27, 1988 through Engr. Eduardo
Turla expressed petitioners expectation that Phase 1 will be completed by February 19,
1990.
 Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of
first refusal and not an option contract.
Petitioners filed their Reply[11] dated August 15, 2002 reiterating the arguments in
their Petition and contending further that they did not violate their warranties under the
MOA because the case was filed by Lancer only on April 1, 1982, eleven (11) months
and eight (8) days after the signing of the MOA on April 23, 1981. Ayala Corporation
admitted that it received Lancers claim before the Closing date. It therefore had all the
time to rescind the MOA. Not having done so, it can be concluded that Ayala
Corporation itself did not consider the matter a violation of petitioners warranty.
Moreover, petitioners submitted the Audited Financial Statements of Conduit and
allowed an acquisition audit to be conducted by Ayala Corporation. Thus, the latter
bought Conduit with open eyes.
Petitioners also maintain that they had no knowledge of the impending case
against Conduit at the time of the execution of the MOA. Further, the MOA makes Ayala
Corporation liable for the payment of all billings of GP Construction. Since Lancers
claim was actually a claim against GP Construction being its sub-contractor, it is Ayala
Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change the
sequence of its development plan, it is obliged under the MOA to develop the entire
area where the subject lots are located in three (3) years.
They also assert that demand was made on Ayala Corporation to comply with
their obligation under the MOA. Apart from their reminder letters dated January 24,
February 18 and March 5, 1984, they also sent a letter dated March 4, 1984 which they
claim is a categorical demand for Ayala Corporation to comply with the provisions of
the MOA.
The parties were required to submit their respective memoranda in
the Resolution[12] dated November 18, 2002. In compliance with this directive,
petitioners submitted their Memorandum[13] dated February 14, 2003 on even date,
while Ayala Corporation filed its Memorandum[14] dated February 14, 2003 on February
17, 2003.
We shall first dispose of the procedural question raised by the instant petition.
It is well-settled that the jurisdiction of this Court in cases brought to it from the
Court of Appeals by way of petition for review under Rule 45 is limited to reviewing or
revising errors of law imputed to it, its findings of fact being conclusive on this Court as
a matter of general principle. However, since in the instant case there is a conflict
between the factual findings of the trial court and the appellate court, particularly as
regards the issues of breach of warranty, obligation to develop and incurrence of delay,
we have to consider the evidence on record and resolve such factual issues as an
exception to the general rule.[15] In any event, the submitted issue relating to the
categorization of the right to purchase granted to petitioners under the MOA is legal in
character.
The next issue that presents itself is whether petitioners breached their warranties
under the MOA when they failed to disclose the Lancer claim. The trial court declared
they did not; the appellate court found otherwise.
Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly
breached when they failed to disclose the Lancer claim:
a) Clause 7.1.1. that Conduit shall not be obligated to anyone except to GP
Construction for P38,766.04, and for advances made by Daniel Vazquez;
b) Clause 7.1.2. that except as reflected in the audited financial statements Conduit
had no other liabilities whether accrued, absolute, contingent or otherwise;
c) Clause 7.2. that there is no basis for any assertion against Conduit of any liability of
any value not reflected or reserved in the financial statements, and those disclosed to
Ayala;
d) Clause 7.6.3. that Conduit is not threatened with any legal action or other
proceedings; and
e) Clause 7.6.4. that Conduit had not breached any term, condition, or covenant of
any instrument or agreement to which it is a party or by which it is bound. [16]
The Court is convinced that petitioners did not violate the foregoing warranties.
The exchanges of communication between the parties indicate that petitioners
substantially apprised Ayala Corporation of the Lancer claim or the possibility thereof
during the period of negotiations for the sale of Conduit.
In a letter[17] dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala
Corporations Mr. Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of
Conduit, Ayala Corporation asked for and was given information that GP Construction
sub-contracted, presumably to Lancer, a greater percentage of the project than it was
allowed. Petitioners gave this information to Ayala Corporation because the latter
intimated a desire to break the contract of Conduit with GP. Ayala Corporation did not
deny this. In fact, Mr. Duartes letter[18] dated March 6, 1984 indicates that Ayala
Corporation had knowledge of the Lancer subcontract prior to its acquisition of Conduit.
Ayala Corporation even admitted that it tried to explorelegal basis to discontinue the
contract of Conduit with GP but found this not feasible when information surfaced about
the tacit consent of Conduit to the sub-contracts of GP with Lancer.
At the latest, Ayala Corporation came to know of the Lancer claim before the date
of Closing of the MOA. Lancers letter[19]dated April 30, 1981 informing Ayala
Corporation of its unsettled claim with GP Construction was received by Ayala
Corporation on May 4, 1981, well before the Closing [20] which occurred four (4) weeks
after the date of signing of the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder likewise
indicate that certain matters pertaining to the liabilities of Conduit were disclosed by
petitioners to Ayala Corporation although the specifics thereof were no longer included
in the MOA:
7.1.1 The said Audited Financial Statements shall show that on the day of Closing,
the Company shall own the Remaining Property, free from all liens and
encumbrances and that the Company shall have no obligation to any party except for
billings payable to GP Construction & Development Corporation and advances made
by Daniel Vazquez for which BUYER shall be responsible in accordance with
Paragraph 2 of this Agreement.
7.1.2 Except to the extent reflected or reserved in the Audited Financial
Statements of the Company as of Closing, and those disclosed to BUYER, the
Company as of the date hereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation, tax liabilities due or to
become due and whether incurred in respect of or measured in respect of the
Companys income prior to Closing or arising out of transactions or state of facts
existing prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for
any assertion against the Company as at Closing of any liability of any nature and in
any amount not fully reflected or reserved against such Audited Financial Statements
referred to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the
Closing, the Company is not engaged in or a party to, or to the best of the knowledge
of the SELLERS, threatened with, any legal action or other proceedings before any
court or administrative body, nor do the SELLERS know or have reasonable grounds
to know of any basis for any such action or proceeding or of any governmental
investigation relative to the Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or condition of
any instrument or agreement to which the Company is a party or by which it is bound,
and no condition exists which, with notice or lapse of time or both, will constitute such
default or breach.[21] [Emphasis supplied]
Hence, petitioners warranty that Conduit is not engaged in, a party to, or
threatened with any legal action or proceeding is qualified by Ayala Corporations actual
knowledge of the Lancer claim which was disclosed to Ayala Corporation before the
Closing.
At any rate, Ayala Corporation bound itself to pay all billings payable to GP
Construction and the advances made by petitioner Daniel Vazquez. Specifically, under
paragraph 2 of the MOA referred to in paragraph 7.1.1, Ayala Corporation undertook
responsibility for the payment of all billings of the contractor GP Construction &
Development Corporation after the first billing and any payments made by the company
and/or SELLERS shall be reimbursed by BUYER on closing which advances to date
is P1,159,012.87.[22]
The billings knowingly assumed by Ayala Corporation necessarily include the
Lancer claim for which GP Construction is liable. Proof of this is Ayala Corporations
letter[23] to GP Construction dated before Closing on May 4, 1981, informing the latter
of Ayala Corporations receipt of the Lancer claim embodied in the letter dated April 30,
1981, acknowledging that it is taking over the contractual responsibilities of Conduit,
and requesting copies of all sub-contracts affecting the Conduit property. The pertinent
excerpts of the letter read:
In this connection, we wish to inform you that this morning we received a letter from
Mr. Maximo D. Del Rosario, President of Lancer General Builders Corporation
apprising us of the existence of subcontracts that they have with your corporation.
They have also furnished us with a copy of their letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of Conduit Development,
Inc., we believe that it is necessary, at this point in time, that you furnish us with
copies of all your subcontracts affecting the property of Conduit, not only with Lancer
General Builders Corporation, but all subcontracts with other parties as well[24]
Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief[25] dated July
9, 1992 a copy of the letter[26] dated May 28, 1981 of GP Constructions counsel
addressed to Conduit furnishing the latter with copies of all sub-contract agreements
entered into by GP Construction. Since it was addressed to Conduit, it can be presumed
that it was the latter which gave Ayala Corporation a copy of the letter thereby disclosing
to the latter the existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their warranties under
the MOA. The Lancer sub-contract and claim were substantially disclosed to Ayala
Corporation before the Closing date of the MOA. Ayala Corporation cannot disavow
knowledge of the claim.
Moreover, while in its correspondence with petitioners, Ayala Corporation did
mention the filing of the Lancer suit as an obstacle to its development of the property,
it never actually brought up nor sought redress for petitioners alleged breach of
warranty for failure to disclose the Lancer claim until it filed its Answer[27] dated
February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this
paragraph express a commitment or a mere intent on the part of Ayala Corporation to
develop the property within three (3) years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the Remaining Property into a
first class residential subdivision of the same class as its New Alabang Subdivision,
and that it intends to complete the first phase under its amended development plan
within three (3) years from the date of this Agreement.[28]
Notably, while the first phrase of the paragraph uses the word commits in
reference to the development of the Remaining Property into a first class residential
subdivision, the second phrase uses the word intends in relation to the development of
the first phase of the property within three (3) years from the date of the MOA. The
variance in wording is significant. While commit[29] connotes a pledge to do something,
intend[30] merely signifies a design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporations legal
division who assisted in drafting the MOA, testified:
 COURT
You only ask what do you mean by that intent. Just answer on that
point.
ATTY. BLANCO
Dont talk about standard.
WITNESS
A Well, the word intent here, your Honor, was used to emphasize the
tentative character of the period of development because it will be
noted that the sentence refers to and I quote to complete the first
phase under its amended development plan within three (3) years
from the date of this agreement, at the time of the execution of this
agreement, your Honor. That amended development plan was not yet
in existence because the buyer had manifested to the seller that the
buyer could amend the subdivision plan originally belonging to the
seller to conform with its own standard of development and second,
your Honor, (interrupted)[31]
It is thus unmistakable that this paragraph merely expresses an intention on Ayala
Corporations part to complete the first phase under its amended development plan
within three (3) years from the execution of the MOA. Indeed, this paragraph is so
plainly worded that to misunderstand its import is deplorable.
More focal to the resolution of the instant case is paragraph 5.7s clear reference
to the first phase of Ayala Corporations amended development plan as the subject of
the three (3)-year intended timeframe for development. Even petitioner Daniel Vazquez
admitted on cross-examination that the paragraph refers not to Conduits but to Ayala
Corporations development plan which was yet to be formulated when the MOA was
executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is
stated as follows: The Buyer hereby commits that to develop the
remaining property into a first class residential subdivision of the
same class as New Alabang Subdivision, and that they intend to
complete the first phase under its amended development plan within
three years from the date of this agreement.
Now, my question to you, Dr. Vasquez is that there is no dispute that
the amended development plan here is the amended development
plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit D-5 which is the original plan of Conduit?
A: No, it is not.
Q: This Exhibit D-5 was the plan that was being followed by GP
Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the date of the
agreement, this amended development plan was still to be formulated
by Ayala?
A: Yes, sir.[32]
As correctly held by the appellate court, this admission is crucial because while
the subject lots to be sold to petitioners were in the first phase of the Conduit
development plan, they were in the third or last phase of the Ayala Corporation
development plan. Hence, even assuming that paragraph 5.7 expresses a commitment
on the part of Ayala Corporation to develop the first phase of its amended development
plan within three (3) years from the execution of the MOA, there was no parallel
commitment made as to the timeframe for the development of the third phase where
the subject lots are located.
Lest it be forgotten, the point of this petition is the alleged failure of Ayala
Corporation to offer the subject lots for sale to petitioners within three (3) years from
the execution of the MOA. It is not that Ayala Corporation committed or intended to
develop the first phase of its amended development plan within three (3) years.
Whether it did or did not is actually beside the point since the subject lots are not located
in the first phase anyway.
We now come to the issue of default or delay in the fulfillment of the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the following
requisites be present: (1) that the obligation be demandable and already liquidated; (2)
that the debtor delays performance; and (3) that the creditor requires the performance
judicially or extrajudicially.[33]
 Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain
has been fixed shall be demandable only when that day comes. However, no such day
certain was fixed in the MOA. Petitioners, therefore, cannot demand performance after
the three (3) year period fixed by the MOA for the development of the first phase of the
property since this is not the same period contemplated for the development of the
subject lots. Since the MOA does not specify a period for the development of the subject
lots, petitioners should have petitioned the court to fix the period in accordance with
Article 1197[34] of the Civil Code. As no such action was filed by petitioners, their
complaint for specific performance was premature, the obligation not being
demandable at that point. Accordingly, Ayala Corporation cannot likewise be said to
have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala Corporation to
develop the subject lots within three (3) years from date thereof, Ayala Corporation
could still not be held to have been in delay since no demand was made by petitioners
for the performance of its obligation.
As found by the appellate court, petitioners letters which dealt with the three (3)-
year timetable were all dated prior to April 23, 1984, the date when the period was
supposed to expire. In other words, the letters were sent before the obligation could
become legally demandable. Moreover, the letters were mere reminders and not
categorical demands to perform. More importantly, petitioners waived the three (3)-year
period as evidenced by their agent, Engr. Eduardo Turlas letter to the effect that
petitioners agreed that the three (3)-year period should be counted from the termination
of the case filed by Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it was undertaken
by your goodselves to complete the development of Phase I within three (3) years. Dr.
& Mrs. Vazquez were made to understand that you were unable to accomplish this
because of legal problems with the previous contractor. These legal problems were
resolved as of February 19, 1987, and Dr. & Mrs. Vazquez therefore expect that the
development of Phase I will be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor. The reason for this is,
as you know, that security-wise, Dr. & Mrs. Vazquez have been advised not to
construct their residence till the surrounding area (which is Phase I) is developed and
occupied. They have been anxious to build their residence for quite some time now,
and would like to receive assurance from your goodselves regarding this, in
compliance with the agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr. & Mrs.
Vazquez to exercise their option to purchase the two lots on each side (a total of 4
lots) adjacent to their Retained Area. They are concerned that although over a year
has elapsed since the settlement of the legal problems, you have not presented them
with the size, configuration, etc. of these lots. They would appreciate being provided
with these at your earliest convenience.[35]
Manifestly, this letter expresses not only petitioners acknowledgement that the
delay in the development of Phase I was due to the legal problems with GP
Construction, but also their acquiescence to the completion of the development of
Phase I at the much later date of February 19, 1990. More importantly, by no stretch of
semantic interpretation can it be construed as a categorical demand on Ayala
Corporation to offer the subject lots for sale to petitioners as the letter merely articulates
petitioners desire to exercise their option to purchase the subject lots and concern over
the fact that they have not been provided with the specifications of these lots.
The letters of petitioners children, Juan Miguel and Victoria Vazquez, dated
January 23, 1984[36] and February 18, 1984[37]can also not be considered categorical
demands on Ayala Corporation to develop the first phase of the property within the
three (3)-year period much less to offer the subject lots for sale to petitioners. The letter
dated January 23, 1984 reads in part:
You will understand our interest in the completion of the roads to our property, since
we cannot develop it till you have constructed the same. Allow us to remind you of our
Memorandum of Agreement, as per which you committed to develop the roads to our
property as per the original plans of the company, and that
1. The back portion should have been developed before the front portion which has
not been the case.
2. The whole project front and back portions be completed by 1984.[38]
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum
of Agreement which states respectively:[39]
Even petitioner Daniel Vazquez letter[40] dated March 5, 1984 does not make out
a categorical demand for Ayala Corporation to offer the subject lots for sale on or before
April 23, 1984. The letter reads in part:
and that we expect from your goodselves compliance with our Memorandum of
Agreement, and a definite date as to when the road to our property and the
development of Phase I will be completed.[41]
At best, petitioners letters can only be construed as mere reminders which cannot
be considered demands for performance because it must appear that the tolerance or
benevolence of the creditor must have ended.[42]
The petition finally asks us to determine whether paragraph 5.15 of the MOA can
properly be construed as an option contract or a right of first refusal. Paragraph 5.15
states:
5.15 The BUYER agrees to give the SELLERS first option to purchase four developed
lots next to the Retained Area at the prevailing market price at the time of the
purchase.[43]
 The Court has clearly distinguished between an option contract and a right of first Corporation reduced the price to P5,000.00/square meter but again, petitioners
refusal. An option is a preparatory contract in which one party grants to another, for a rejected the offer and instead made a counter-offer in the amount of P2,000.00/square
fixed period and at a determined price, the privilege to buy or sell, or to decide whether meter.[49] Ayala Corporation rejected petitioners counter-offer. With this rejection,
or not to enter into a principal contract. It binds the party who has given the option not petitioners lost their right to purchase the subject lots.
to enter into the principal contract with any other person during the period designated,
and within that period, to enter into such contract with the one to whom the option was It cannot, therefore, be said that Ayala Corporation breached petitioners right of
granted, if the latter should decide to use the option. It is a separate and distinct contract first refusal and should be compelled by an action for specific performance to sell the
from that which the parties may enter into upon the consummation of the option. It must subject lots to petitioners at the prevailing market price in 1984.
be supported by consideration.[44] WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.
In a right of first refusal, on the other hand, while the object might be made SO ORDERED.
determinate, the exercise of the right would be dependent not only on the grantors
eventual intention to enter into a binding juridical relation with another but also on terms,
including the price, that are yet to be firmed up.[45]
Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal
and not an option contract. Although the paragraph has a definite object, i.e., the sale
of subject lots, the period within which they will be offered for sale to petitioners and,
necessarily, the price for which the subject lots will be sold are not specified. The phrase
at the prevailing market price at the time of the purchase connotes that there is no
definite period within which Ayala Corporation is bound to reserve the subject lots for
petitioners to exercise their privilege to purchase. Neither is there a fixed or
determinable price at which the subject lots will be offered for sale. The price is
considered certain if it may be determined with reference to another thing certain or if
the determination thereof is left to the judgment of a specified person or persons. [46]
Further, paragraph 5.15 was inserted into the MOA to give petitioners the first
crack to buy the subject lots at the price which Ayala Corporation would be willing to
accept when it offers the subject lots for sale. It is not supported by an independent
consideration. As such it is not governed by Articles 1324 and 1479 of the Civil
Code, viz:

Art. 1324. 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 a consideration, as something
paid or promised.

Art. 1479. 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 promissor if the promise is supported by a consideration distinct
from the price.

Consequently, the offer may be withdrawn anytime by communicating the withdrawal

to the other party.[47]
In this case, Ayala Corporation offered the subject lots for sale to petitioners at
the price of P6,500.00/square meter, the prevailing market price for the property when
the offer was made on June 18, 1990.[48] Insisting on paying for the lots at the prevailing
market price in 1984 of P460.00/square meter, petitioners rejected the offer. Ayala

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.
DECISION
DE LEON, JR., J.:
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 Rivieras 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 Rivieras 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 Rivieras 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 Rivieras final decision.
In a letter dated December 2, 1988, Angeles wrote Reyes confirming Rivieras
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 Rivieras 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 Rivieras 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 Rivieras 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 Rivieras 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 plaintiffs 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 RIVIERAs 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. RIVIERAs 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 CORNHILLS 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 x x x. (Defendants-Appellees
Cypress and Cornhills 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
CORNHILLs counter-offer to RIVIERA resulted in the sale of the subject property at
equal or less than RIVIERAs offer; in which case, REYES would have been rightly
accused of cunningly circumventing RIVIERAs right of first refusal. But the
incontrovertible antecedents obtaining here clearly reveal REYES earnest efforts in
respecting RIVIERAs 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 Courts 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 RIVIERAs 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 PETITIONERS 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 correctible 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 correctible 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 latters 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. Bonnevieand 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 Rivieras 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 Rivieras 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 Rivieras highly disadvantageous offer.
Nary a howl of protest or shout of defiance spewed forth from Rivieras 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 court and the appellate court. Besides, the Court has already acquired jurisdiction over
Thousand Three Hundred Pesos (P5,300.00) of Cypress and Cornhill it would have the heirs of Reyes by voluntarily submitting themselves to our jurisdiction. [58]
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 In view of all the foregoing, the Court is convinced that the appellate court
would be just a futile effort on the part of Reyes. Reyes was under no obligation to committed no reversible error in its challenged Decision.
disclose the same. Pursuant to Article 1339[46] of the New Civil Code, silence or WHEREFORE, the instant petition is hereby DENIED, and the Decision of the
concealment, by itself, does not constitute fraud, unless there is a special duty to Court of Appeals dated June 6, 1994 in CA-G.R. CV No. 26513 is AFFIRMED. No
disclose certain facts, or unless according to good faith and the usages of commerce pronouncement as to costs.
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 SO ORDERED.
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
latters 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

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 106837 August 4, 1993
HENRY MACION and ANGELES MACION, petitioners,
vs.
HON. JAPAL M. GUIANI, in his capacity as Presiding Judge of the Regional Trial
Court Branch 14, Cotabato City and DELA VIDA INSTITUTE represented by MS.
JOSEPHINE LANZADERAS, respondents.
Leonardo J. Rendon for petitioners.
Mama Dalandag for private respondent Dela Vida Institute.
ROMERO, J.:
The subject of this litigation revolves around two (2) parcels of adjoining lots owned
by petitioners which are the proposed extension sites of De La Vida Institute, an
educational institution located in Cotabato City.
On April 26, 1991, the petitioners and private respondent entered into a contract to
sell under which terms, private respondent, as president of De la Vida Institute,
assured petitioners that they would buy the said properties on or before July 31, 1991
in the amount of P1,750,000.00. In the meantime, petitioners surrendered the
physical possession of the two lots to private respondent who promptly built an edifice
worth P800,000.00.1
But on July 31, 1991, the sale did not materialize. Consequently, petitioners filed a
complaint for unlawful detainer against private respondent (MTCC Civil Case No.
2739). In retaliation, private respondent filed a complaint for reformation of the
contract to sell executed on April 26, 1991 (Civil Case 592). 2 Afterwards, the parties
met to settle their differences.
On February 6, 1992, the parties entered into a compromise agreement which
stipulated among others that petitioners would give private respondent five (5) months
to raise the amount of P2,060,000.00;3 that in the event of failure to raise the said
amount within the designated period, private respondent would vacate the premises
immediately. The compromise agreement, inter alia, provided:
6. that upon the execution of this agreement, the defendant will
furnish the plaintiff with xerox copy of the land title for each lot
which the latter may use for the purpose of providing information in
securing a loan from any financing or banking institution of their
choice.
7. that if within the period of five (5) months from and after February
6, 1992, the plaintiff succeeds in obtaining funds for the purpose of
settling their obligations with defendants in the total sum of
P2,060,000.00 the latter shall oblige themselves to execute, sign
and deliver to the former the corresponding Deed of Sale for the
two (2) lots which is the subject of this case and turn-over to said
plaintiff the owner's duplicate copy of TCT Nos. T-22004 and T-
22005 of the Registry of Deeds for the City of Cotabato.
In affirmation of the compromise agreement, the Board of Trustees of De La Vida
College passed thereafter a resolution expressing full support to the said agreement
entered into between the parties.4
On March 10, 1992, private respondent wrote petitioners that "the compromise
agreement we have had in the presence of Judge Guiani is not the same as per
attached xerox copy you gave us." In that letter, which essentially was a counter
proposal, private respondent said that the price of P2,060,000.00 was higher than
they were willing to pay in the amount of P2,000,000.00 only. 5 Other matters taken up
in the letter were: De la Vida Institute would admit students and hold classes until July
6, 1992 but in case they (private respondent) fail to deliver the said amount, they
would voluntarily vacate the premises and that "in the event that the bank and other
lending institutions give its nod and approval to our loan and require the submission of
other documents, you will give to us the Deed of Sale and Owner's copies of the
Titles of the two (2) to t expedite release of the amount concerned." 6
On March 25, 1992, the trial court approved the compromise agreement dated
February 6, 1992.
Two (2) months after, private respondents, alleging that they had negotiated a loan
from the Bank of the Philippine Islands, wrote letters dated May 19, 20 and 26
requesting petitioners to execute with them a contract to sell in their favor. On May
28, 1992, private respondent filed with the trial court an urgent motion for an order
directing petitioners to execute a contract to sell in private respondent's favor in
accordance with paragraph 7 of the compromise agreement.7
On July 8, 1992, petitioners filed a motion for execution of judgement alleging that
after a lapse of five (5) months from February 6, 1992, private respondent have failed
to settle their obligations with petitioners.8
In its order dated August 6, 1992, respondent judge denied the motion for execution
and directed petitioners to execute the required contract to sell in favor of private
respondent. Respondent judge opined that the proximate cause of private
respondent's failure to comply with the compromise agreement was the refusal of
petitioners to execute a contract to sell as required under the agreement. Respondent
judge added that petitioners should have executed the contract to sell because
anyway they would not be prejudiced since there was no transfer of ownership
involved in a contract to sell.9
Hence this instant petition for certiorari, with prayer for a temporary restraining order
enjoining respondent judge from enforcing its August 6, 1992 order.
On October 7, 1992, petitioners filed an Omnibus Urgent Motion praying that private
respondent be ordered to consign with the court below P135,000.00 representing
rentals from May 1991 to January 1992. In our resolution dated November 18, 1992,
we granted said prayer. On March 9, 1992, private respondent consigned with the
Office of the Clerk of Court the sum of P135,000.00. On March 29, 1993, petitioners
filed with the lower court a motion to withdraw the consigned amount and on April 5,
1993, the trial court released the consigned amount to petitioners. 10
The issue in the case at bar is whether or not respondent judge committed grave
abuse of discretion in ordering petitioner to execute a contract to sell in favor of
private respondent.
We dismiss the petition.
The resolution of this case hinges on whether the compromise agreement gives
private respondent-buyer the right to demand from petitioner-sellers the execution of
a contract to sell in favor of the former.
Apparently, paragraph 7 of the compromise agreement does not give such right to
private respondent-buyer. To wit:
7. that if within the period of five (5) months from and after February
6, 1992, the plaintiff succeeds in obtaining funds for the purpose of
settling their obligations with defendants in the total sum of
P2,060,000.00 the latter shall oblige themselves to execute, sign
and deliver to the former the corresponding Deed of Sale for the
two (2) lots which is the subject of this case and turn-over to said
plaintiff the owner's duplicate copy of TCT Nos. T-22004 and T-
22005 of the Registry of Deeds for the City of Cotabato. (Italics
provided).
From the aforecited paragraph, it is clear that the seller is obliged to execute a Deed
of Sale and not a Contract to Sell upon payment of the full price of P2.06 million.
Thereafter, the sellers would turn over to the buyers, respondents herein, the owner's
duplicate copy of Transfer Certificate of Title Nos. T-22004 and T-22005.
However, in the interpretation of the compromise agreement, we must delve in the
contemporaneous and subsequent acts of the parties to fathom the real intention of
the parties. 11 A review of the facts reveal that even prior to the signing of the
compromise agreement and the filing of Civil Case No. 592 before the trial court, the
parties had already entered into a contract to sell. Thereafter, when the transaction
failed to materialize, the parties filed suits against each other; petitioners, their
unlawful detainer case, and private respondent a complaint for reformation of
contract, alleging that petitioners in fact had caused the preparation of the contract to
sell dated April 26, 1991 with the understanding that the land would be used as a
collateral in obtaining a loan with DBP.
Said contract to sell was superseded by the compromise agreement entered into on
February 6, 1992 containing the abovequoted paragraph. It must be recalled that
private respondent was given five (5) months from February 6, 1992, i. e., on or
before July 6, 1992 to secure the purchase price of the two (2) lots. We note that
within the time frame agreed upon by the parties, private respondents wrote three (3)
letters dated may 19, 20 and 26 requesting petitioners to execute a contract to sell in
its favor.
Under these factual circumstances, we opine that the compromise agreement must
be interpreted as bestowing upon private respondent-buyer the power to demand a
contract to sell from petitioner-sellers. Where the seller promised to execute a deed of
absolute sale upon completing payment of the price, it is a contract to sell. 12 In the
case at bar, the sale is still in the executory stage since the passing of title is subject
to a suspensive condition, namely, that if private respondent is able to secure the
needed funds to be used in the purchased of the two (2) lots owned by petitioners. A
mere executory sale, one where the sellers merely promise to transfer the property at
some future date, or where some conditions have to be fulfilled before the contract is
converted from an executory to an executed one, does not pass ownership over the
real estate being sold. 13
In our jurisdiction, it has been that an accepted bilateral promise to buy and sell is in a
sense similar to, but not exactly the same, as a perfected contract of sale because
there is already a meeting of minds upon the thing which is the object of the contract
and upon the price. 14 But a contract of sale is consummated only upon the delivery
and payment. It cannot be denied that the compromise agreement, having been
signed by both parties, is tantamount to a bilateral promise to buy and sell a certain
thing for a price certain. Hence, this gives the contracting parties rights in personam,
such that each has the right to demand from the other the fulfillment of their
respective undertakings. 15 Demandability may be exercised at any time after the
execution of the Deed. 16
The order of respondent judge directing petitioners to issue a contract to sell does not
place petitioners in any danger of losing their property without consideration, for, to
repeat, in a contract to sell there is no immediate transfer of ownership. In contracts to
sell, payment is a positive suspensive condition, failure of which does not constitute a
breach but an event that prevents the obligation of the vendor to convey title from
materializing, in accordance with Article 1184 of the Civil Code. 17 Petitioners as
promisors were never obliged to convey title before the happening of the suspensive
condition. In fact, nothing stood in the way of their selling the property to another after
a unsuccessful demand for said price upon the expiration of the time agreed upon.

Since the period given by the petitioners under the compromise agreement has
already lapsed, we order the trial court to fix anew a period within which private
respondents could secure the needed funds for the purchase of the
land. 18 Moreover, considering that private respondents have only consigned rentals
from May 1991 to January 1992 and have since accepted students for the present
school year, it is only proper that they be ordered to deposit the monthly rentals
collected thereafter with the trial court.

WHEREFORE, the instant petition is DISMISSED. Petitioners are hereby ordered to

EXECUTE a contract to sell in favor of private respondents. On the other hand,
private respondent is ordered to DEPOSIT with the trial court current rentals pending
consummation of the transaction between the parties. The trial court is ordered to FIX
anew the period within which private respondents may be given the opportunity to
raise funds for the purchase of the two (2) adjoining lots owned by petitioners.

SO ORDERED.