EQUATORIAL REALTY DEVELOPMENT, INC., vs. MAYFAIR THEATER, INC..docx

7/25/2019 EQUATORIAL REALTY DEVELOPMENT, INC., vs. MAYFAIR THEATER, INC..docx

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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, IN . ! ARMELO ! "AUERMANN, IN ., petitioners,vs.MAY#AIR T$EATER, IN ., respondent.

$ERMO%I%IMA, &R., J.:

Before us is a petition for review of the decision 1 of the Court of Appeals 2 involving questions in the resolution of which the respondent appellate court analyzed andinterpreted particular provisions of our laws on contracts and sales. In its assailed decision, therespondent court reversed the trial court 3 which, in dismissing the complaint for specific performancewith damages and annulment of contract, ' found the option clause in the lease contracts entered intoby private respondent Mayfair heater, Inc. !hereafter, Mayfair" and petitioner Carmelo # Bauermann,Inc. !hereafter, Carmelo" to be impossible of performance and unsupported by a consideration and thesubsequent sale of the sub$ect property to petitioner %quatorial &ealty 'evelopment, Inc. !hereafter,%quatorial" to have been made without any breach of or pre$udice to, the said lease contracts. (

(e reproduce below the facts as narrated by the respondent court, which narration, we note, is almostverbatim the basis of the statement of facts as rendered by the petitioners in their pleadings)

Carmelo owned a parcel of land, together with two *+storey buildings constructed thereon located atClaro M &ecto Avenue, Manila, and covered by C o. - /*0 issued in its name by the &egister of 'eeds of Manila.

1n 2une -, -034 Carmelo entered into a contract of lease with Mayfair for the latter5s lease of a portionof Carmelo5s property particularly described, to wit)

A 61& I1 17 8% 9%C1 ' 7:11& of the two+storey building, situated at C.M. &ecto Avenue,Manila, with a floor area of -,3-; square meters.

8% 9%C1 ' 7:11& A ' M%


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:%991& is bound and obligated, as it hereby binds and obligates itself, to stipulate in the 'eed of 9alehereof that the purchaser shall recognize this lease and be bound by all the terms and conditionsthereof.

9ometime in August -04 , Mr. 8enry 6ascal of Carmelo informed Mr. 8enry Dang, 6resident of

Mayfair, through a telephone conversation that Carmelo was desirous of selling the entire Claro M.&ecto property. Mr. 6ascal told Mr. Dang that a certain 2ose Araneta was offering to buy the wholeproperty for 9 'ollars -,*;;,;;;, and Mr. 6ascal as=ed Mr. Dang if the latter was willing to buy theproperty for 9i? to 9even Million 6esos.

Mr. Dang replied that he would let Mr. 6ascal =now of his decision. 1n August *@, -04 , Mayfair repliedthrough a letter stating as follows)

It appears that on August -0, -04 your Mr. 8enry 6ascal informed our client5s Mr. 8enry Dang throughthe telephone that your company desires to sell your above+mentioned C.M. &ecto Avenue property.

nder your company5s two lease contracts with our client, it is uniformly provided)

. hat if the :%991& should desire to sell the leased premises the :%99%% shall be given @;+dayse?clusive option to purchase the same. In the event, however, that the leased premises is sold tosomeone other than the :%99%%, the :%991& is bound and obligated, as it is ! sic " herebinds ! sic "and obligates itself, to stipulate in the 'eed of 9ale thereof that the purchaser shall recognize thislease and be bound by all the terms and conditions hereof ! sic ".

Carmelo did not reply to this letter.

1n 9eptember - , -04 , Mayfair sent another letter to Carmelo purporting to e?press interest inacquiring not only the leased premises but >the entire building and other improvements if the price isreasonable. 8owever, both Carmelo and %quatorial questioned the authenticity of the second letter.

7our years later, on 2uly @;, -04 , Carmelo sold its entire C.M. &ecto Avenue land and building, whichincluded the leased premises housing the >Ma?im> and >Miramar> theatres, to %quatorial by virtue of a'eed of Absolute 9ale, for the total sum of 6--,@;;,;;;.;;.

In 9eptember -04 , Mayfair instituted the action a quo for specific performance and annulment of thesale of the leased premises to %quatorial. In its Answer, Carmelo alleged as special and affirmativedefense !a" that it had informed Mayfair of its desire to sell the entire C.M. &ecto Avenue property andoffered the same to Mayfair, but the latter answered that it was interested only in buying the areasunder lease, which was impossible since the property was not a condominiumE and !b" that the optionto purchase invo=ed by Mayfair is null and void for lac= of consideration. %quatorial, in its Answer,pleaded as special and affirmative defense that the option is void for lac= of consideration ! sic " and isunenforceable by reason of its impossibility of performance because the leased premises could not besold 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 e?traordinarydevaluation of the currency. %quatorial li=ewise cross+claimed against co+defendant Carmelo for indemnification in respect of Mayfair5s claims.

'uring the pre+trial conference held on 2anuary *@, -040, the parties stipulated on the following)

-. hat there was a deed of sale of the contested premises by the defendant Carmelo . . . in favor of defendant %quatorial . . .E

*. hat in both contracts of lease there appear ! sic " the stipulation granting the plaintiff e?clusive optionto purchase the leased premises should the lessor desire to sell the same !admitted sub$ect to thecontention that the stipulation is null and void"E

@. hat the two buildings erected on this land are not of the condominium planE

. hat the amounts stipulated and mentioned in paragraphs @ !a" and !b" of the contracts of leaseconstitute the consideration for the plaintiff5s occupancy of the leased premises, sub$ect of the samecontracts of lease, %?hibits A and BE

??? ??? ???


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3. hat there was no consideration specified in the option to buy embodied in the contractE

4. hat Carmelo # Bauermann owned the land and the two buildings erected thereonE

. hat the leased premises constitute only the portions actually occupied by the theatersE and

0. hat what was sold by Carmelo # Bauermann to defendant %quatorial &ealty is the land and the twobuildings erected thereon.

??? ??? ???

After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which reads as follows)

(8%&%71&%, $udgment is hereby rendered)

!-" 'ismissing the complaint with costs against the plaintiffE

!*" 1rdering plaintiff to pay defendant Carmelo # Bauermann 6 ;,;;;.;; by way of attorney5s fees onits counterclaimE

!@" 1rdering plaintiff to pay defendant %quatorial &ealty 6@/,;;;.;; per month as reasonablecompensation for the use of areas not covered by the contract ! sic " of lease from 2uly @-, -040 untilplaintiff vacates said area ! sic " plus legal interest from 2uly @-, -04 E 64;,;;; ;; per month asreasonable compensation for the use of the premises covered by the contracts ! sic " of lease dated!2une -, -034 from 2une -, -0 4 until plaintiff vacates the premises plus legal interest from 2une -,-0 4E 6//,;;;.;; per month as reasonable compensation for the use of the premises covered by thecontract of lease dated March @-, -030 from March @;, -0 0 until plaintiff vacates the premises pluslegal interest from March @;, -0 0E and 6 ;,;;;.;; as attorney5s feesE

! " 'ismissing defendant %quatorial5s crossclaim against defendant Carmelo # Bauermann.

he contracts of lease dated 2une -, -034 and March @-, -030 are declared e?pired and all personsclaiming rights under these contracts are directed to vacate the premises. 6

he trial court ad$udged the identically worded paragraph found in both aforecited lease contracts tobe an option clause which however cannot be deemed to be binding on Carmelo because of lac= of distinct consideration therefor.

he court a quo ratiocinated)

9ignificantly, 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. (ithout a consideration, the option is therefore not bindingon defendant Carmelo # Bauermann to sell the C.M. &ecto property to the former. he option invo=edby the plaintiff appears in the contracts of lease . . . in effect there is no option, on the ground that thereis no consideration. Article -@/* of the Civil Code, provides)

Contracts without cause or with unlawful cause, produce no effect whatever. he cause is unlawful if itis contrary to law, morals, good custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever. Article -@* provides)

(hen the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at anytime before acceptance by communicating such withdrawal, e?cept when the option is founded uponconsideration, as something paid or promised.

in relation with Article - 40 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 thepromissor if the promise is supported by a consideration distinct from the price.


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he plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes the e?istence of a distinct consideration. In other words, the promisee has the burden of proving the consideration. he consideration cannot be presumed as in Article -@/ )

Although the cause is not stated in the contract, it is presumed that it e?ists and is lawful unless the

debtor proves the contrary.

where consideration is legally presumed to e?ists. Article -@/ applies to contracts in general, whereaswhen it comes to an option it is governed particularly and more specifically by Article - 40 whereby thepromisee has the burden of proving the e?istence of consideration distinct from the price. hus, in thecase of Sanchez vs . Rigor , / 9C&A @3 , @4*+@4@, the Court said)

!-" Article -@/ applies to contracts in general, whereas the second paragraph of Article - 40 refers tosales in particular, and, more specifically, to an accepted unilateral promise to buy or to sell. In other words, Article - 40 is controlling in the case at bar.

!*" In order that said unilateral promise may be binding upon the promissor, Article - 40 requires theconcurrence of a condition, namely, that the promise be supported by a consideration distinct from theprice.

Accordingly, the promisee cannot compel the promissor to comply with the promise, unless the former establishes the e?istence of said distinct consideration. In other words, the promisee has the burden of proving such consideration. 6laintiff herein has not even alleged the e?istence thereof in his complaint.)

It follows that plaintiff cannot compel defendant Carmelo # Bauermann to sell the C.M. &ecto propertyto the former.

Mayfair ta=ing e?ception to the decision of the trial court, the battleground shifted to the respondentCourt of Appeals. &espondent appellate court reversed the court a quo and rendered $udgment)

-. &eversing and setting aside the appealed 'ecisionE

*. 'irecting the plaintiff+appellant Mayfair heater Inc. to pay and return to %quatorial the amount of 6--,@;;,;;;.;; within fifteen !-/" days from notice of this 'ecision, and ordering %quatorial &ealty'evelopment, Inc. to accept such paymentE

@. pon payment of the sum of 6--,@;;,;;;, directing %quatorial &ealty 'evelopment, Inc. to e?ecutethe deeds and documents necessary for the issuance and transfer of ownership to Mayfair of the lotregistered under C os. -4@/;, -- 3-*, 3;0@3, and /*/4-E and

. 9hould plaintiff+appellant Mayfair heater, Inc. be unable to pay the amount as ad$udged, declaringthe 'eed of Absolute 9ale between the defendants+appellants Carmelo # Bauermann, Inc. and%quatorial &ealty 'evelopment, Inc. as valid and binding upon all the parties. *

&ereading the law on the matter of sales and option contracts, respondent Court of Appealsdifferentiated between Article -@* and Article - 40 of the Civil Code, analyzed their application to thefacts of this case, and concluded that since paragraph of the two lease contracts does not state afi?ed price for the purchase of the leased premises, which is an essential element for a contract of saleto be perfected, what paragraph is, must be a right of first refusal and not an option contract. Ite?plicated)

7irstly, the court a quo misapplied the provisions of Articles -@* and - 40, second paragraph, of theCivil Code.

Article -@* spea=s of an >offer> made by an offeror which the offeree may or may not accept within acertain period. nder this article, the offer may be withdrawn by the offeror before the e?piration of theperiod and while the offeree has not yet accepted the offer. 8owever, the offer cannot be withdrawn bythe offeror within the period if a consideration has been promised or given by the offeree in e?changefor the privilege of being given that period within which to accept the offer. he consideration is distinctfrom the price which is part of the offer. he contract that arises is =nown as option. In the case of Beaumont vs . Prieto , - 6hil. 34;, the 9upreme court, citing Bouvier, defined an option as follows) >Acontract by virtue of which A, in consideration of the payment of a certain sum to B, acquires theprivilege of buying from or selling to B, certain securities or properties within a limited time at a


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specified price,> !pp. 3 3+4".

Article - 40, second paragraph, on the other hand, contemplates of an >accepted unilateral promise tobuy or to sell a determinate thing for a price within !which" is binding upon the promisee if the promiseis supported by a consideration distinct from the price.> hat >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 acontract !&osenstoc= vs. Bur=e, 3 6hil. *-4". o constitute a legal offer, the proposal must be certainas to the ob$ect, the price and other essential terms of the contract !Art. -@-0, Civil Code".

Based on the foregoing discussion, it is evident that the provision granting Mayfair >@;+days e?clusiveoption to purchase> the leased premises is 1 A 16 I1 in the conte?t of Arts. -@* and - 40,second paragraph, of the Civil Code. Although the provision is certain as to the ob$ect !the sale of theleased premises" the price for which the ob$ect is to be sold is not stated in the provision 1therwisestated, the questioned stipulation is not by itself, an >option> or the >offer to sell> because the clausedoes not specify the price for the sub$ect property.

Although the provision giving Mayfair >@;+days e?clusive option to purchase> cannot be legallycategorized as an option, it is, nevertheless, a valid and binding stipulation. (hat the trial court failed toappreciate was the intention of the parties behind the questioned proviso.

??? ??? ???

he provision in question is not of the pro+forma type customarily found in a contract of lease. %venappellees have recognized that the stipulation was incorporated in the two Contracts of :ease at theinitiative and behest of Mayfair. %vidently, the stipulation was intended to benefit and protect Mayfair inits rights as lessee in case Carmelo should decide, during the term of the lease, to sell the leasedproperty. his intention of the parties is achieved in two ways in accordance with the stipulation. hefirst is by giving Mayfair >@;+days e?clusive option to purchase> the leased property. he second is, incase Mayfair would opt not to purchase the leased property, >that the purchaser !the new owner of theleased property" shall recognize the lease and be bound by all the terms and conditions thereof.>

In other words, paragraph of the two Contracts of lease, particularly the stipulation giving Mayfair >@;+days e?clusive option to purchase the !leased premises",> was meant to provide Mayfair theopportunity to purchase and acquire the leased property in the event that Carmelo should decide todispose of the property. In order to realize this intention, the implicit obligation of Carmelo once it haddecided to sell the leased property, was not only to notify Mayfair of such decision to sell the property,but, more importantly, to ma=e an offer to sell the leased premises to Mayfair, giving the latter a fair andreasonable opportunity to accept or re$ect the offer, before offering to sell or selling the leased propertyto third parties. he right vested in Mayfair is analogous to the right of first refusal, which means thatCarmelo 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, thenCarmelo must first give Mayfair the opportunity to match that offer.

In fact, Mr. 6ascal understood the provision as giving Mayfair a right of first refusal when he made thetelephone call to Mr. Dang in -04 . Mr. 6ascal thus testified)

F Can you tell this 8onorable Court how you made the offer to Mr. 8enry Dang by telephoneG

A I have an offer from another party to buy the property and having the offer we decided to ma=e anoffer to 8enry Dang on a first+refusal basis. ! 9 ovember , -0 @, p. -*.".

and on cross+e?amination)

F (hen you called Mr. Dang on August -04 can you remember e?actly what you have told him inconnection with that matter, Mr. 6ascalG

A More or less, I told him that I received an offer from another party to buy the property and I wasoffering him first choice of the enter property. ! 9 , ovember *0, -0 @, p. - ".

(e rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties. 9

Besides the ruling that paragraph vests in Mayfair the right of first refusal as to which the requirementof distinct consideration indispensable in an option contract, has no application, respondent appellatecourt also addressed the claim of Carmelo and %quatorial that assuming arguendo that the option is


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valid and effective, it is impossible of performance because it covered only the leased premises andnot the entire Claro M. &ecto property, while Carmelo5s offer to sell pertained to the entire property inquestion. he Court of Appeals ruled as to this issue in this wise)

(e are not persuaded by the contentions of the defendants+appellees. It is to be noted that the 'eed

of Absolute 9ale between Carmelo and %quatorial covering the whole Claro M. &ecto property, madereference to four titles) C os. -4@/;, -- 3-*, 3;0@3 and /*/4-. Based on the informationsubmitted by Mayfair in its appellant5s Brief !pp. / and 3" which has not been controverted by theappellees, and which (e, therefore, ta=e $udicial notice of the two theaters stand on the parcels of landcovered by C o. -4@/; with an area of 3**.-; sq. m and C o. -- 3-* with an area of *,-;;.-;sq. m. he e?istence of four separate parcels of land covering the whole &ecto property demonstratesthe legal and physical possibility that each parcel of land, together with the buildings and improvementsthereof, could have been sold independently of the other parcels.

At the time both parties e?ecuted the contracts, they were aware of the physical and structuralconditions of the buildings on which the theaters were to be constructed in relation to the remainder of the whole &ecto property. he peculiar language of the stipulation would tend to limit Mayfair5s rightunder paragraph of the Contract of :ease to the acquisition of the leased areas only. Indeed, what is

being contemplated by the questioned stipulation is a departure from the customary situation whereinthe buildings and improvements are included in and form part of the sale of the sub$acent land. Although this situation is not common, especially considering the non+condominium nature of thebuildings, the sale would be valid and capable of being performed. A sale limited to the leasedpremises only, if hypothetically assumed, would have brought into operation the provisions of co+ownership under which Mayfair would have become the e?clusive owner of the leased premises and atthe same time a co+owner with Carmelo of the sub$acent land in proportion to Mayfair5s interest over the premises sold to it. 10

Carmelo and %quatorial now comes before us questioning the correctness and legal basis for thedecision of respondent Court of Appeals on the basis of the following assigned errors)

I

8% C1 & 17 A66%A:9 &AH%:D %&&%' I C1 C: 'I 8A 8% 16 I1 C:A 9% I8% C1 &AC 9 17 :%A9% I9 AC A::D A &I 8 17 7I&9 &%7 9A: 6&1HI91. I '1I

91 8% C1 & 17 A66%A:9 'I9&% A&'%' 8% C1 &AC 9 17 :%A9% (8IC8 C:%A&:D A ' %F IH1CA::D 6&1HI'% 71& A 16 I1 , A ' 8% A'MI99I1 17 8% 6A& I%9 179 C8 16 I1 I 8%I& 9 I6 :A I1 17 7AC 9.

II

(8% 8%& A 16 I1 1& &I 8 17 7I&9 &%7 9A:, 8% C1 & 17 A66%A:9 %&&%' I'I&%C I %F A 1&IA: 1 % %C % A '%%' 17 9A:% %I 8 %% !- " D%A&9 A7 %&MAD7AI& 7AI:%' 1 % %&CI9% I 9 16 I1 !1&, %H% I 9 &I 8 17 7I&9 &%7 9A:

A99 MI I (A9 1 %" (8% 8% C1 &AC 9 :IMI %' 8% % %&CI9% 17 9 C8 16 I11 @; 'AD9 7&1M 1 IC%.

III

8% C1 & 17 A66%A:9 &I%H1 9:D %&&%' (8% I 'I&%C %' IM6:%M% A I1 17 I 9'%CI9I1 %H% B%71&% I 9 7I A:I D, A ' (8% I &A %' MAD7AI& A &%:I%7 8A (A9

1 %H% 6&AD%' 71& I 8% C1M6:AI .

IH

8% C1 & 17 A66%A:9 HI1:A %' I 9 1( I %& A: & :%9 I 8% A99I M% 17 A66%A:%' CA9%9 (8% I A::1(%' 8% 9AM% 'IHI9I1 II, 6A& IC :A&:D 2 9 IC%

MA %: 8%&&%&A, 1 &%91:H% A:: 8% M1 I1 9 I 8% >C1M6:% I1 6&1C%99> A ' 19 I:: &%91:H% 8% M%&I 9 17 8% CA9% I 8% >'%CI9I1 9 A %>. 11

(e shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of thiscase in the Court of Appeals. 9uffice it to say that in our &esolution, 12 dated 'ecember 0, -00*, we


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already too= note of this matter and set out the proper applicable procedure to be the following)

1n 9eptember *;, -00*, counsel for petitioner %quatorial &ealty 'evelopment, Inc. wrote a letter+complaint to this Court alleging certain irregularities and infractions committed by certain lawyers, and2ustices of the Court of Appeals and of this Court in connection with case CA+ .&. CH o. @*0- !now

.&. o. -;3;3@". his parta=es of the nature of an administrative complaint for misconduct againstmembers of the $udiciary. (hile the letter+complaint arose as an incident in case CA+ .&. CH o.@*0- !now .&. o. -;3;3@", the disposition thereof should be separate and independent from Case

.&. o. -;3;3@. 8owever, for purposes of receiving the requisite pleadings necessary in disposing of the administrative complaint, this 'ivision shall continue to have control of the case. pon completionthereof, the same shall be referred to the Court En Banc for proper disposition. 13

his court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and%quatorial, to be an independent and separate sub$ect for an administrative complaint based onmisconduct by the lawyers and $ustices implicated therein, it is the correct, prudent and consistentcourse of action not to pre+empt the administrative proceedings to be underta=en respecting the saidirregularities. Certainly, a discussion thereupon by us in this case would entail a finding on the meritsas to the real nature of the questioned procedures and the true intentions and motives of the players

therein.

In essence, our tas= is two+fold) !-" to define the true nature, scope and efficacy of paragraph stipulated in the two contracts of lease between Carmelo and Mayfair in the face of conflicting findingsby the trial court and the Court of AppealsE and !*" to determine the rights and obligations of Carmeloand Mayfair, as well as %quatorial, in the aftermath of the sale by Carmelo of the entire Claro M. &ectoproperty to %quatorial.

Both contracts of lease in question provide the identically worded paragraph , which reads)

hat if the :%991& should desire to sell the leased premises, the :%99%% shall be given @;+dayse?clusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the :%99%%, the:%991& is bound and obligated, as it hereby binds and obligates itself, to stipulate in the 'eed of 9alethereof that the purchaser shall recognize this lease and be bound by all the terms and conditionsthereof. 1'

(e agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for aright 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 -0-3, in the case of Beaumont vs . Prieto , 1( unequivocal was our characterization of anoption contract as one necessarily involving the choice granted to another for a distinct and separateconsideration as to whether or not to purchase a determinate thing at a predetermined fi?ed price.

It is unquestionable that, by means of the document %?hibit %, to wit, the letter of 'ecember , -0--,quoted at the beginning of this decision, the defendant Haldes granted to the plaintiff Borc= the right topurchase the agta$an 8acienda belonging to Benito :egarda, during the period of three months andfor its assessed valuation, a grant which necessarily implied the offer or obligation on the part of thedefendant Haldes to sell to Borc= the said hacienda during the period and for the price mentioned . . .

here was, therefore, a meeting of minds on the part of the one and the other, with regard to thestipulations made in the said document. But it is not shown that there was any cause or considerationfor that agreement, and this omission is a bar which precludes our holding that the stipulationscontained in %?hibit % 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 :aw 'ictionary, edition of - 04, 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 theprivilege of buying from, or selling to B, certain securities or properties within a limited time at aspecified price. !9tory vs. 9alamon, 4- .D., *;."

7rom vol. 3, page /;;-, of the wor= >(ords and 6hrases,> citing the case of Ide vs . Leiser !* 6ac.,


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30/E -; Mont., /E * Am. 9t. &ep., -4" the following quotation has been ta=en)

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 propertyagrees with another person that he shall have the right to buy his property at a fixed price within a

certain time. 8e does not sell his landE he does not then agree to sell itE but he does sell somethingEthat is, the right or privilege to buy at the election or option of the other party. he second party gets inpraesenti, not lands, nor an agreement that he shall have lands, but he does get something of valueEthat is, the right to call for and receive lands if he elects. he owner parts with his right to sell his lands,e?cept to the second party, for a limited period. he second party receives this right, or, rather, from hispoint 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 sub$ect of the agreementmade by the partiesE while in the case at bar there was no such cause or consideration. 16 !%mphasisours."

he rule so early established in this $urisdiction is that the deed of option or the option clause in acontract, in order to be valid and enforceable, must, among other things, indicate the definite price atwhich the person granting the option, is willing to sell.

otably, in one case we held that the lessee loses his right to buy the leased property for a namedprice per square meter upon failure to ma=e the purchase within the time specifiedE 1) in one other casewe freed the landowner from her promise to sell her land if the prospective buyer could raise 6 ,/;;.;;in three wee=s because such option was not supported by a distinct considerationE 1* in the same veinin yet one other case, we also invalidated an instrument entitled, >1ption to 6urchase> a parcel of landfor the sum of 6-,/-;.;; because of lac= of considerationE 19 and as an e?ception to the doctrineenumerated in the two preceding cases, in another case, we ruled that the option to buy the leasedpremises for 6-*,;;;.;; as stipulated in the lease contract, is not without consideration for inreciprocal contracts, li=e 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 ob$ect thereof is always predetermined and

specified in the option clause in the contract or in the separate deed of option. (e elucidated, thus, inthe very recent case of Ang u Asuncion vs . !ourt of Appeals 21 that)

. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the contractis perfected when a person, called the seller, obligates himself, for a price certain, to deliver and totransfer ownership of a thing or right to another, called the buyer, over which the latter agrees. Article- / of the Civil Code provides)

Art. - / . By the contract of sale one of the contracting parties obligates himself to transfer theownership of and to deliver a determinate thing, and the other to pay therefor a price certain in moneyor its equivalent.

A contract of sale may be absolute or conditional.

(hen the sale is not absolute but conditional, such as in a >Contract to 9ell> where invariably theownership 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 conveytitle from acquiring an obligatory force. . . .

An unconditional mutual promise to buy and sell, as long as the ob$ect is made determinate and theprice is fi?ed, can be obligatory on the parties, and compliance therewith may accordingly be e?acted.

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, whencoupled with a valuable consideration distinct and separate from the price, is what may properly betermed a perfected contract of option. his contract is legally binding, and in sales, it conforms with the

second paragraph of Article - 40 of the Civil Code, viz )

Art. - 40. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding uponthe promisor if the promise is supported by a consideration distinct from the price. !- /-a".

1bserve, however, that the option is not the contract of sale itself. he optionee has the right, but not


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the obligation, to buy. 1nce the option is e?ercised 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 tocomply with their respective underta=ings.

:et us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise !policitacion"

is merely an offer. 6ublic advertisements or solicitations and the li=e are ordinarily construed as mereinvitations to ma=e offers or only as proposals. hese relations, until a contract is perfected, are notconsidered binding commitments. hus, at any time prior to the perfection of the contract, either negotiating party may stop the negotiation. he offer, at this stage, may be withdrawnE the withdrawal iseffective immediately after its manifestation, such as by its mailing and not necessarily when theofferee learns of the withdrawal !:audico vs. Arias, @ 6hil. *4;". (here a period is given to the offereewithin which to accept the offer, the following rules generally govern)

!-" If the period is not itself founded upon or supported by a consideration, the offeror is still free andhas the right to withdraw the offer before its acceptance, or if an acceptance has been made, beforethe offeror5s coming to =now of such fact, by communicating that withdrawal to the offeree !see Art.-@* , Civil CodeE see also At=ins, Jroll # Co. vs. Cua, -;* 6hil. 0 , holding that this rule is applicableto a unilateral promise to sell under Art. - 40, modifying the previous decision in 9outh (estern 9ugar

vs. Atlantic ulf, 04 6hil. * 0E see also Art. -@-0, Civil CodeE &ural Ban= of 6araKaque, Inc. vs.&emolado, -@/ 9C&A ;0E 9anchez vs. &igos, / 9C&A @3 ". he right to withdraw, however, mustnot be e?ercised whimsically or arbitrarilyE otherwise, it could give rise to a damage claim under Article-0 of the Civil Code which ordains that >every person must, in the e?ercise of his rights and in theperformance of his duties, act with $ustice, give everyone his due, and observe honesty and goodfaith.>

!*" If the period has a separate consideration, a contract of >option> deemed perfected, and it would bea breach of that contract to withdraw the offer during the agreed period. he option, however, is anindependent contract by itselfE and it is to be distinguished from the pro$ected main agreement !sub$ectmatter of the option" which is obviously yet to be concluded. If, in fact, the optioner+offeror withdrawsthe offer before its acceptance !e?ercise of the option" by the optionee+offeree, the latter may not suefor specific performance on the proposed contract !>ob$ect> of the option" since it has failed to reach its

own stage of perfection. he optioner+offeror, however, renders himself liable for damages for breachof the opinion. . .

In the light of the foregoing disquisition and in view of the wording of the questioned provision in thetwo lease contracts involved in the instant case, we so hold that no option to purchase in contemplationof the second paragraph of Article - 40 of the Civil Code, has been granted to Mayfair under the saidlease contracts.

&espondent Court of Appeals correctly ruled that the said paragraph grants the right of first refusal toMayfair and is not an option contract. It also correctly reasoned that as such, the requirement of aseparate consideration for the option, has no applicability in the instant case.

here is nothing in the identical 6aragraphs > > of the 2une -, -034 and March @-, -030 contractswhich would bring them into the ambit of the usual offer or option requiring an independentconsideration.

An option is a contract granting a privilege to buy or sell within an agreed time and at a determinedprice. It is a separate and distinct contract from that which the parties may enter into upon theconsummation 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. he consideration is built into the reciprocalobligations of the parties.

o rule that a contractual stipulation such as that found in paragraph of the contracts is governed by Article -@* on withdrawal of the offer or Article - 40 on promise to buy and sell would render ineffectual or >inutile> the provisions on right of first refusal so commonly inserted in leases of real estatenowadays. he Court of Appeals is correct in stating that 6aragraph was incorporated into thecontracts of lease for the benefit of Mayfair which wanted to be assured that it shall be given the firstcrac= or the first option to buy the property at the price which Carmelo is willing to accept. It is not alsocorrect to say that there is no consideration in an agreement of right of first refusal. he stipulation ispart and parcel of the entire contract of lease. he consideration for the lease includes theconsideration for the right of first refusal. hus, Mayfair is in effect stating that it consents to lease thepremises and to pay the price agreed upon provided the lessor also consents that, should it sell theleased property, then, Mayfair shall be given the right to match the offered purchase price and to buythe property at that price. As stated in "da . #e $uirino vs . Palarca , 23 in reciprocal contract, the


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obligation or promise of each party is the consideration for that of the other.

he respondent Court of Appeals was correct in ascertaining the true nature of the aforecitedparagraph to be that of a contractual grant of the right of first refusal to Mayfair.

(e shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and%quatorial.

he different facts and circumstances in this case call for an amplification of the precedent in Ang u Asuncion vs . !ourt of Appeals . 2'

7irst and foremost is that the petitioners acted in bad faith to render 6aragraph >inutile>.

(hat Carmelo and Mayfair agreed to, by e?ecuting the two lease contracts, was that Mayfair will havethe right of first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelodid recognize this right of Mayfair, for it informed the latter of its intention to sell the said property in-04 . here was an e?change of letters evidencing the offer and counter+offers made by both parties.Carmelo, however, did not pursue the e?ercise to its logical end. (hile it initially recognized Mayfair5sright of first refusal, Carmelo violated such right when without affording its negotiations with Mayfair thefull process to ripen to at least an interface of a definite offer and a possible corresponding acceptancewithin the >@;+day e?clusive option> time granted Mayfair, Carmelo abandoned negotiations, =ept a lowprofile for some time, and then sold, without prior notice to Mayfair, the entire Claro M &ecto propertyto %quatorial.

9ince %quatorial is a buyer in bad faith, this finding renders the sale to it of the property in questionrescissible. (e agree with respondent Appellate Court that the records bear out the fact that %quatorialwas aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts.

As such, %quatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescissionlies.

. . . Contract of 9ale was not voidable but rescissible. nder Article -@ ; to -@ -!@" of the Civil Code, acontract otherwise valid may nonetheless be subsequently rescinded by reason of in$ury to thirdpersons, li=e creditors. he status of creditors could be validly accorded the Bonnevies for they hadsubstantial interests that were pre$udiced by the sale of the sub$ect property to the petitioner withoutrecognizing their right of first priority under the Contract of :ease.

According to olentino, rescission is a remedy granted by law to the contracting parties and even tothird persons, to secure reparation for damages caused to them by a contract, even if this should bevalid, 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 thirdpersons from all in$ury and damage the contract may cause, or to protect some incompatible andpreferent right created by the contract. &escission implies a contract which, even if initially valid,produces a lesion or pecuniary damage to someone that $ustifies its invalidation for reasons of equity.

It is true that the acquisition by a third person of the property sub$ect of the contract is an obstacle tothe action for its rescission where it is shown that such third person is in lawful possession of thesub$ect of the contract and that he did not act in bad faith. 8owever, this rule is not applicable in thecase before us because the petitioner is not considered a third party in relation to the Contract of 9alenor may its possession of the sub$ect property be regarded as acquired lawfully and in good faith.

Indeed, uzman, Bocaling and Co. was the vendee in the Contract of 9ale. Moreover, the petitioner cannot be deemed a purchaser in good faith for the record shows that it categorically admitted it wasaware of the lease in favor of the Bonnevies, who were actually occupying the sub$ect property at thetime it was sold to it. Although the Contract of :ease was not annotated on the transfer certificate of title in the name of the late 2ose &eynoso and Africa &eynoso, the petitioner cannot deny actual=nowledge 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 thatsome other person has a right to or interest in such property and pays a full and fair price for the sameat the time of such purchase or before he has notice of the claim or interest of some other person inthe property. ood faith connotes an honest intention to abstain from ta=ing unconscientiousadvantage of another. ested by these principles, the petitioner cannot tenably claim to be a buyer ingood faith as it had notice of the lease of the property by the Bonnevies and such =nowledge shouldhave cautioned it to loo= deeper into the agreement to determine if it involved stipulations that would


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pre$udice its own interests.

he petitioner insists that it was not aware of the right of first priority granted by the Contract of :ease. Assuming this to be true, we nevertheless agree with the observation of the respondent court that)

If uzman+Bocaling failed to inquire about the terms of the :ease Contract, which includes 6ar. *; onpriority right given to the Bonnevies, it had only itself to blame. 8aving =nown that the property it wasbuying was under lease, it behooved it as a prudent person to have required &eynoso or the bro=er toshow to it the Contract of :ease in which 6ar. *; is contained. 2(

6etitioners assert the alleged impossibility of performance because the entire property is indivisibleproperty. It was petitioner Carmelo which fi?ed the limits of the property it was leasing out. Commonsense and fairness dictate that instead of nullifying the agreement on that basis, the stipulation shouldbe given effect by including the indivisible appurtenances in the sale of the dominant portion under theright of first refusal. A valid and legal contract where the ascendant or the more important of the twoparties is the landowner should be given effect, if possible, instead of being nullified on a selfish prete?tposited by the owner. 7ollowing the arguments of petitioners and the participation of the owner in theattempt to strip Mayfair of its rights, the right of first refusal should include not only the propertyspecified in the contracts of lease but also the appurtenant portions sold to %quatorial which areclaimed by petitioners to be indivisible. Carmelo acted in bad faith when it sold the entire property to%quatorial without informing Mayfair, a clear violation of Mayfair5s rights. (hile there was a series of e?changes of letters evidencing the offer and counter+offers between the parties, Carmelo abandonedthe negotiations without giving Mayfair full opportunity to negotiate within the @;+day period.

Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair beauthorized to e?ercise its right of first refusal under the contract to include the entirety of the indivisibleproperty. %he &oundaries of the property sold should &e the &oundaries of the offer under the right of first refusal . As to the remedy to enforce Mayfair5s right, the Court disagrees to a certain e?tent with theconcluding part of the dissenting opinion of 2ustice Hitug. he doctrine enunciated in Ang u Asuncionvs . !ourt of Appeals should be modified, if not amplified under the peculiar facts of this case.

As also earlier emphasized, the contract of sale between %quatorial and Carmelo is characterized bybad faith, since it was =nowingly entered into in violation of the rights of and to the pre$udice of Mayfair.In fact, as correctly observed by the Court of Appeals, %quatorial admitted that its lawyers had studiedthe contract of lease prior to the sale. %quatorial5s =nowledge of the stipulations therein should havecautioned it to loo= further into the agreement to determine if it involved stipulations that wouldpre$udice its own interests.

9ince Mayfair has a right of first refusal, it can e?ercise the right only if the fraudulent sale is first setaside or rescinded. All of these matters are now before us and so there should be no piecemealdetermination of this case and leave festering sores to deteriorate into endless litigation. he facts of the case and considerations of $ustice and equity require that we order rescission here and now.&escission is a relief allowed for the protection of one of the contracting parties and even third personsfrom all in$ury and damage the contract may cause or to protect some incompatible and preferred rightby the contract. 26 he sale of the sub$ect real property by Carmelo to %quatorial should now berescinded considering that Mayfair, which had substantial interest over the sub$ect property, waspre$udiced by the sale of the sub$ect property to %quatorial without Carmelo conferring to Mayfair everyopportunity to negotiate within the @;+day stipulated period. 2)

his Court has always been against multiplicity of suits where all remedies according to the facts andthe law can be included. 9ince Carmelo sold the property for 6--,@;;,;;;.;; to %quatorial, the price atwhich Mayfair could have purchased the property is, therefore, fi?ed. It can neither be more nor less.

here is no dispute over it. he damages which Mayfair suffered are in terms of actual in$ury and lostopportunities. he fairest solution would be to allow Mayfair to e?ercise its right of first refusal at theprice which it was entitled to accept or re$ect which is 6--,@;;,;;;.;;. his is clear from the records.

o follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to thelatter of the disputed property would be un$ust and un=ind to Mayfair because it is once morecompelled to litigate to enforce its right. It is not proper to give it an empty or vacuous victory in thiscase. 7rom the viewpoint of Carmelo, it is li=e as=ing a fish if it would accept the choice of being thrownbac= into the river. (hy should Carmelo be rewarded for and allowed to profit from, its wrongdoingG6rices of real estate have s=yroc=eted. After having sold the property for 6--,@;;,;;;.;;, why should itbe given another chance to sell it at an increased priceG

nder the Ang u Asuncion vs . !ourt of Appeals decision, the Court stated that there was nothing to


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e?ecute because a contract over the right of first refusal belongs to a class of preparatory $uridicalrelations governed not by the law on contracts but by the codal provisions on human relations . hismay apply here if the contract is limited to the buying and selling of the real property. 8owever, theobligation of Carmelo to first offer the property to Mayfair is embodied in a contract. It is 6aragraph on the right of first refusal which created the obligation. It should &e enforced according to the la' on

contracts instead of the panoramic and indefinite rule on human relations . he latter remedyencourages multiplicity of suits. here is something to e?ecute and that is for Carmelo to comply withits obligation to the property under the right of the first refusal according to the terms at which theyshould have been offered then to Mayfair, at the price when that offer should have been made. Also,Mayfair has to accept the offer. his $uridical relation is not amorphous nor is it merely preparatory.6aragraphs of the two leases can be e?ecuted according to their terms.

1n the question of interest payments on the principal amount of 6--,@;;,;;;.;;, it must be borne inmind that both Carmelo and %quatorial acted in bad faith. Carmelo =nowingly and deliberately bro=e acontract entered into with Mayfair. It sold the property to %quatorial with purpose and intend to withholdany notice or =nowledge of the sale coming to the attention of Mayfair. All the circumstances point to acalculated and contrived plan of non+compliance with the agreement of first refusal.

1n the part of %quatorial, it cannot be a buyer in good faith because it bought the property with noticeand full =nowledge that Mayfair had a right to or interest in the property superior to its own. Carmeloand %quatorial too= unconscientious advantage of Mayfair.

either may Carmelo and %quatorial avail of considerations based on equity which might warrant thegrant of interests. he vendor received as payment from the vendee what, at the time, was a full andfair price for the property. It has used the 6--,@;;,;;;.;; all these years earning income or interestfrom the amount. %quatorial, on the other hand, has received rents and otherwise profited from the useof the property turned over to it by Carmelo. In fact, during all the years that this controversy was beinglitigated, Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property.Mayfair is under no obligation to pay any interests arising from this $udgment to either Carmelo or %quatorial.

(8%&%71&%, the petition for review of the decision of the Court of Appeals, dated 2une *@, -00*, inCA+ .&. CH o. @*0- , is 8%&%BD '% I%'. he 'eed of Absolute 9ale between petitioners%quatorial &ealty 'evelopment, Inc. and Carmelo # Bauermann, Inc. is hereby deemed rescindedEpetitioner Carmelo # Bauermann is ordered to return to petitioner %quatorial &ealty 'evelopment thepurchase price. he latter is directed to e?ecute the deeds and documents necessary to returnownership to Carmelo and Bauermann of the disputed lots. Carmelo # Bauermann is ordered to allowMayfair heater, Inc. to buy the aforesaid lots for 6--,@;;,;;;.;;.

91 1&'%&%'.

Regalado( #avide( )r*( Bellosillo( +elo( Puno( ,apunan( +endoza and -rancisco( ))*( concur*

.arvasa( !*)*( too/ no part*

%e+ r -e O+ / o/

PADILLA, &., concurring)

I am of the considered view !li=e Mr. 2ustice 2ose A. &.Melo" that the Court in this case should categorically


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recognize Mayfair5s right of first refusal under its contractof lease with Carmelo and Bauermann, Inc. !hereafter,Carmelo" and, because of Carmelo5s and %quatorial5sbad faith in riding >roughshod> over Mayfair5s right of firstrefusal, the Court should order the rescission of the saleof the Claro M. &ecto property by the latter to %quatorial!Art. -@ ;+-@ -L@ , Civil Code". he Court should, in thissame case, to avoid multiplicity of suits, li=ewise allowMayfair to effectively e?ercise said right of first refusal, bypaying Carmelo the sum of 6--,@;;,;;;.;; for the entire

sub$ect property, without any need of instituting aseparate action for damages against Carmelo andNor %quatorial.

I do not agree with the proposition that, in addition to theaforesaid purchase price, Mayfair should be required topay a compounded interest of -*O per annum of saidamount computed from - August -04 . nder the CivilCode, a party to a contract may recover interest asindemnity for damages in the following instances)

Art. **;0. If the obligation consists in the payment of asum of money, and the debtor incurs in delay, theindemnity for damages, there being no stipulation to thecontrary, shall be the payment of the interest agreedupon, and in the absence of stipulation, the legal interest,which is si? per cent per annum .

Art. **-;. Interest may, in the discretion of the court, beallowed upon damages awarded for breach of contract.

here appears to be no basis in law for adding -*O per annum compounded interest to the purchase price of 6--,@;;,;;;.;; payable by Mayfair to Carmelo sincethere was no such stipulation in writing between theparties !Mayfair and Carmelo" but, more importantly,because Mayfair neither incurred in delay in theperformance of its obligation nor committed any breach


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of contract. Indeed, why should Mayfair be penalized byway of ma=ing it pay -*O per annum compoundedinterest when it was Carmelo which violated Mayfair5sright of first refusal under the contractG

he equities of the case support the foregoing legaldisposition. 'uring the intervening years between -

August -04 and this date, %quatorial !after acquiring theC.M. &ecto property for the price of 6--,@;;,;;;.;;" hadbeen leasing the property and deriving rental income

therefrom. In fact, one of the lessees in the property wasMayfair. Carmelo had, in turn, been using the proceedsof the sale, investment+wise andNor operation+wise in itsown business.

It may appear, at first blush, that Mayfair is undulyfavored by the solution submitted by this opinion,because the price of 6--,@;;,;;;.;; which it has to pay

Carmelo in the e?ercise of its right of first refusal, hasbeen sub$ected to the inroads of inflation so that itspurchasing power today is less than when the sameamount was paid by %quatorial to Carmelo. But then itcannot be overloo=ed that it was Carmelo5s breach of Mayfair5s right of first refusal that prevented Mayfair frompaying the price of 6--,@;;,;;;.;; to Carmelo at aboutthe same time the amount was paid by %quatorial toCarmelo. Moreover, it cannot be ignored that Mayfair hadalso incurred consequential or >opportunity> losses byreason of its failure to acquire and use the propertyunder its right of first refusal. In fine, any loss inpurchasing power of the price of 6--,@;;,;;;.;; is for Carmelo to incur or absorb on account of its bad faith inbreaching Mayfair5s contractual right of first refusal to thesub$ect property.

ACC1&'I :D, I vote to order the rescission of thecontract of sale between Carmelo and %quatorial of theClaro M. &ecto property in question, so that within thirty


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!@;" days from the finality of the Court5s decision, theproperty should be retransferred and delivered by%quatorial to Carmelo with the latter simultaneouslyreturning to %quatorial the sum of 6--,@;;, ;;;.;;.

I also vote to allow Mayfair to e?ercise its right of firstrefusal, by paying to Carmelo the sum of 6--,@;;,;;;.;;without interest for the entire sub$ect property, withinthirty !@;" days from re+acquisition by Carmelo of thetitles to the property, with the corresponding obligation of

Carmelo to sell and transfer the property to Mayfair within the same period of thirty !@;" days.

PANGANI"AN, &., concurring)

In the main, I concur with the ponencia of my esteemedcolleague, Mr. 2ustice &egino C. 8ermosisima, 2r.,especially with the following doctrinal pronouncements)

-. hat while no option to purchase within the meaning of the second paragraph of Article - 40 of the Civil Codewas given to Mayfair heater, Inc. !>Mayfair>", under thetwo lease contracts a right of first refusal was in factgranted, for which no separate consideration is required

by law to be paid or given so as to ma=e it binding uponCarmelo # Bauermann, Inc. !>Carmelo>"E

*. hat such right was violated by the latter when it soldthe entire property to %quatorial &ealty 'evelopment,Inc. !>%quatorial>" on 2uly @;, -04 , for the sum of 6--,@;;,;;;.;;E

@. hat %quatorial is a buyer in bad faith as it was awareof the lease contracts, its own lawyers having studiedsaid contracts prior to the saleE and

. hat, consequently, the contract of sale is rescissible.


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/. hat, finally, under the proven facts, the right of firstrefusal may be enforced by an action for specificperformance.

here appears to be unanimity in the Court insofar asitems -, * and @ above are concerned. It is in items and / that there is a mar=ed divergence of opinion.8ence, I shall limit the discussion in this 9eparateConcurring 1pinion to such issues, namely) Is thecontract of sale &et'een !armelo and Equatorial

rescissi&le( and corollarily( may the right of first refusal granted to +ayfair &e enforced &y an action for specific performance G

It is with a great amount of trepidation that I respectfullydisagree with the legal proposition espoused by twoequally well+respected colleagues, Mme. 2ustice 7lerida&uth 6. &omero and Mr. 2ustice 2ose C. Hitug P who

are both ac=nowledged authorities on Civil :aw P that abreach of the covenanted right of first refusal, whilewarranting a suit for damages under Article -0 of theCivil Code, cannot sanction an action for specificperformance without thereby negating the indispensableelement of con+sensuality in the perfection of contracts.

Ang u Asuncion .ot In Point

9uch statement is anchored upon a pronouncement in Ang u Asuncion vs . CA, 1 which was penned by Mr. 2ustice Hitug himself. I

respectfully submit, however, that that case turned largely on the issue of whether or not the sale of animmovable in breach of a right of first refusal that had been decreed in a final $udgment 'ould 0ustify the issuance of certain orders of execution in the same case. he validity of said orders was thesub$ect of the attac= before this Court. hese orders had not only directed the defendants to e?ecute adeed of sale in favor of the plaintiffs, when there was nothing in the $udgment itself decreeing it, but hadalso set aside the sale made in breach of said right of first refusal and even canceled the title that hadbeen issued to the buyer, who was not a party to the suit and had obviously not been given its day incourt. It was thus aptly held)

he final $udgment in Civil Case o. 4+ -;/ , it must be stressed, has merely accorded a >right of firstrefusal> in favor of petitioners. he consequence of such a declaration entails no more than what hasheretofore been said. In fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failureof private respondents to honor the right of first refusal, the remedy is not a 'rit of execution on the

0udgment( since there is none to execute , but an action for damages in a proper forum for the purpose.

7urthermore, whether private respondent Buen &ealty 'evelopment Corporation, the allegedpurchaser of the property, has acted in good faith or bad faith and whether or not it should, in any case,


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be considered bound to respect the registration of the lis pendens in Civil Case o. 4+ -;/ arematters that must be independently addressed in appropriate proceedings. Buen Realty( not having &een impleaded in !ivil !ase .o* 12345671( cannot &e held su&0ect to the 'rit of execution issued &y respondent )udge( let alone ousted from the o'nership and possession of the property( 'ithout first &eing duly afforded its day in court . 2

In other words, the question of whether specific performance of one5s right of first refusal is available asa remedy in case of breach thereof was not before the 9upreme Court at all in Ang Du Asuncion.Consequently, the pronouncements there made bearing on such unlitigated question were mere o&iter .Moreover, as will be shown later, the pronouncement that a breach of the right of first refusal would notsanction an action for specific performance but only an action for damages !at p. 3-/" is at bestdebatable !and in my humble view, imprecise or incorrect", on top of its being contradicted by e?tant

$urisprudence.

(orth bearing in mind is the fact that two $uridical relations, both contractual, are involved in the instantcase) !-" the deed of sale between the petitioners dated 2uly @;, -04 , and !*" the contract clauseestablishing Mayfair5s right of first refusal which was violated by said sale.

(ith respect to the sale of the property, Mayfair was not a party. It therefore had no personality to suefor its annulment, since Art. -@04 of the Civil Code provides, inter alia , that >!t"he action for theannulment 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 ma=e out a case for rescission under Art.--44, in relation to Art. -@ -!@", of the Civil Code, which pertinently read as follows)

Art. --44. he creditors, after having pursued the property in possession of the debtor to satisfy their claims, may e?ercise all the rights and bring all the actions of the latter for the same purpose, savethose which are inherent in his personE they may also impugn the acts 'hich the de&tor may havedone to defraud them .

Art. -@ -. he following contracts are rescissible)

??? ??? ???

!@" hose underta=en in fraud of creditors when the latter cannot in any other manner collect the claimsdue themE

??? ??? ???

!emphasis supplied"

he term >creditors> as used in these provisions of the Civil Code is broad enough to include theobligee under an option contract 3 as well as under a right of first refusal, sometimes =nown as a rightof first priority. ' hus, in .ietes , the 9upreme Court, spea=ing through then Mr. Chief 2ustice &obertoConcepcion, repeatedly referred to the grantee or optionee as >the creditor> and to the grantor or optioner as >the debtor>. ( In any case, the personal elements of an obligation are the active andpassive sub$ects thereof, the former being =nown 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. --44, aforequoted, because the sale was an act done by thedebtor to defraud him of his right to acquire the property. ) &escission was also available under par. @,

Art. -@ -, abovequoted, as was e?pressly held in 8uzman( Bocaling 9 !o ., a case closely analogousto this one as it was also an action brought by the lessee to enforce his >right of first priority> P whichis $ust another name for the right of first refusal P and to annul a sale made by the lessor in violation of such right. In said case, this Court, spea=ing through Mr. 2ustice Isagani A. Cruz, affirmed theinvalidation of the sale and the enforcement of the lessee5s right of first priority this wise) *

he petitioner argues that assuming the Contract of 9ale to be voidable, only the parties thereto couldbring an action to annul it pursuant to Article -@04 of the Civil Code. It is stressed that privaterespondents are strangers to that agreement and therefore have no personality to see= its annulment.

he respondent court correctly held that the Contract of 9ale was not voidable but rescissi&le . nder Article!s" -@ ; to -@ - !@" of the Civil Code, a contract otherwise valid may nonetheless be


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subsequently rescinded by reason of in$ury to third persons, li=e creditors. %he status of creditors could &e validly accorded the Bonnevies for they had su&stantial interests that 'ere pre0udiced &y the sale of the su&0ect property to the petitioner 'ithout recognizing their right of first priority under the !ontract of Lease . !emphasis supplied"

By the same to=en, the status of a defrauded creditor can, and should, be granted to Mayfair, for itcertainly had substantial interests that were pre$udiced by the sale of the sub$ect property to petitioner %quatorial in open violation of Mayfair5s right of first refusal under its e?isting contracts with Carmelo.

In fact, the parity between that case and the present one does not stop there but e?tends to the crucialand critical fact that there was manifest bad faith on the part of the buyer. hus, in 8uzman , this Courtaffirmed in toto the appealed $udgment of the Court of Appeals which, in turn, had affirmed the trialcourt5s decision insofar as it invalidated the deed of sale in favor of the petitioner+buyer, cancelled its

C , and ordered the lessor to execute a deed of sale over the leased property in favor of the lesseefor the same price and :under the same terms and conditions: , aside from affirming as well thedamages awarded, but at a reduced amount. 9 In other words, the aggrieved party was allowed toacquire the property itself.

he inescapable conclusion from all of the foregoing is not only that rescission is the proper remedybut also P and more importantly P that specific performance was actually used and given free rein asan effective remedy to enforce a right of first refusal in the wa=e of its violation, in the cited case of 8uzman .

1n the other hand, and as already commented on above, the pronouncement in Ang u Asuncion tothe effect that specific performance is unavailable to enforce a violated right of first refusal is at best adebatable legal proposition, aside from being contradicted by e?tant $urisprudence. :et me e?plain why.

he consensuality required for a contract of sale is distinct from, and should not be confused with, theconsensuality attendant to the right of first refusal itself. (hile indeed, prior to the actual sale of theproperty to %quatorial and the filing of Mayfair5s complaint for specific performance, no perfectedcontract of sale involving the property ever e?isted 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"ia&le Remedy

he question is) Can this right !of first refusal" be enforced by an action for specific performance upona showing of its breach by an actual sale of the property under circumstances showing palpable badfaith on the part of both seller and buyerG

he answer, I respectfully submit, should be 5yes5.

As already noted, Mayfair5s right of first refusal in the case before us is embodied in an e?presscovenant in the lease contracts between it as lessee and Carmelo as lessor, hence the right created isone springing from contract. 10 Indubitably, this had the force of law between the parties, who shouldthus comply with it in good faith. 11 Such right also esta&lished a correlative o&ligation on the part of !armelo to give or deliver to +ayfair a formal offer of sale of the property in the event !armelo decidesto sell it . he decision to sell was eventually made. But instead of giving or tendering to Mayfair theproper offer to sell, Carmelo gave it to its now co+petitioner, %quatorial, with whom it eventuallyperfected and consummated, on 2uly @;, -04 , an absolute sale of the property, doing so within theperiod of effectivity of Mayfair5s right of first refusal. :ess than two months later, or in 9eptember -04 ,with the lease still in full force, Mayfair filed the present suit.

(orth stressing at this $uncture is the fact that Mayfair had the right to require that the offer to sell theproperty be sent to it by Carmelo, and not to anybody else. his was violated when the offer was made

to %quatorial. nder 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. --3/ and --0-, CivilCode. 12 An action for specific performance and damages seasonably filed, fortified by a writ of preliminary in$unction, would have enabled Mayfair to prevent the sale to %quatorial from ta=ing placeand to compel Carmelo to sell the property to Mayfair for the same terms and price, for the reason thatthe filing of the action for specific performance may $uridically be considered as a solemn, formal, andunqualified acceptance by Mayfair of the specific terms of the offer of sale. ote that by that time, theprice and other terms of the proposed sale by Carmelo had already been determined, being set forth in


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the offer of sale that had 'rongfully been directed to %quatorial.

As it turned out, however, Mayfair did not have a chance to file such suit, for it learned of the sale to%quatorial only after it had ta=en 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. he act of promptly

filing this suit, coupled with the fact that it is one for specific performance, indicates beyond cavil or doubt Mayfair5s unqualified acceptance of the misdirected offer of sale , giving rise, thereby, to ademandable obligation on the part of Carmelo to e?ecute the corresponding document of sale upon thepayment of the price of 6--,@;;,;;;.;;. In other words, the principle of consensuality of a contract of sale should be deemed satisfied. he aggrieved party5s consent to, or acceptance of, the misdirectedoffer of sale should be legally presumed in the conte?t of the proven facts.

o 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 particularsof the sale since ostensibly no offer was ever made to, let alone accepted by, Mayfair, is to ignore theproven fact of presumed consent. o repeat, that consent was deemed given by Mayfair when it suedfor invalidation of the sale and for specific performance of Carmelo5s obligation to Mayfair. othing inthe law as it now stands will be violated, or even simply emasculated, by this holding. 1n the contrary,

the decision in 8uzman supports it.

Moreover, under the Civil Code provisions on the nature, effect and =inds of obligations, 13 Mayfair5sright of first refusal may be classified as one sub$ect to a suspensive condition P namely, if Carmeloshould decide to sell the leased premises during the life of the lease contracts, then it should ma=e anoffer of sale to Mayfair. 7uturity and uncertainty, which are the essential characteristics of a condition, 1'

were distinctly present. Before the decision to sell was made, Carmelo had absolutely no obligation tosell the property to Mayfair, nor even to ma=e an offer to sell, because in conditional obligations, wherethe condition is suspensive, the acquisition of rights depends upon the happening of the event whichconstitutes the condition. 1( 8ad the decision to sell not been made at all, or had it been made after thee?piry of the lease, the parties would have stood as if the conditional obligation had never e?isted. 16

But the decision to sell was in fact made. And it was made during the life and efficacy of the lease.ndoubtedly, the condition was duly fulfilledE the right of first refusal effectively accrued and became

enforceableE and correlatively, Carmelo5s obligation to ma=e and send the offer to Mayfair &ecameimmediately due and demanda&le . 1) hat obligation was to deliver to Mayfair an offer to sell adeterminate thing for a determinate price. As things turned out, a definite and specific offer to sell theentire property for the price of 6--,@;;,;;;.;; was actually made by Carmelo P but to the wrongparty. It was that particular offer, and no other, which Carmelo should have delivered to Mayfair, butfailed to deliver. 8ence, by the time the obligation of Carmelo accrued through the fulfillment of thesuspensive condition, the offer to sell had become a determinate thing.

Art. --3/ of the Civil Code, earlier quoted in footnote -*, indicates the remedies available to thecreditor 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 --4;, may compel the debtor to ma=e thedelivery,> clearly authorizing not only the recovery of damages under Art. --4; but also an action for specific performance.

But even assuming that Carmelo5s prestation did not involve the delivery of a determinate offer but onlya generic one, the second paragraph of Art. --3/ e?plicitly gives to the creditor the right >to as= that theobligation &e complied 'ith at the e?pense of the debtor.> he availability of an action for specificperformance is thus clear and beyond doubt. And the correctness of 8uzman becomes all the moremanifest.

pon the other hand, the o&iter in Ang u Asuncion is further wea=ened by the fact that the $urisprudence upon which it supposedly rests P namely, the cases of +adrigal 9 !; . vs . 9tevenson #Co. 1* and Salonga vs . -arrales 19 P did 1 involve a right of first refusal or of first priority. or didthose two cases involve an option to buy. In +adrigal , plaintiff sued defendant for damages claimingwrongful breach of an alleged contract of sale of *,;;; tons of coal. he 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 bro=er5s memorandum as buyer, erroneously thin=ing that the other party was thesellerQ In Salonga , a lessee, who was one of several lessees ordered by final $udgment to vacate theleased premises, sued the lessor to compel the latter to sell the leased premises to him, but his suitwas not founded upon any right of first refusal and was therefore dismissed on the ground that therewas no perfected sale in his favor. 8e $ust thought that because the lessor had decided to sell and infact sold portions of the property to her other lessees, she was li=ewise obligated to sell to him even inthe absence of a perfected contract of sale. In fine, neither of the two cases cited in support of the legalproposition that a breach of the right of first refusal does not sanction an action for specific


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performance but, at best, only one for damages, provides such support.

7inally, the fact that what was eventually sold to %quatorial was the entire property, not $ust the portionsleased to Mayfair, is no reason to deprive the latter of its right to receive a formal and specific offer. heoffer of a larger property might have led Mayfair to re$ect the offer, but until and unless such re$ection

was actually made, its right of first refusal still stood. pon the other hand, an acceptance by Mayfair would have saved all concerned the time, trouble, and e?pense of this protracted litigation. In any case,the disquisition by the Court of Appeals on this point can hardly be faultedE in fact, it amply $ustifies theconclusions reached in its decision, as well as the dispositions made therein.

I HI%( 17 8% 71&% 1I , I vote to '% D the petition and to A77I&M the assailed 'ecision.

ROMERO, J., concurring and dissenting)

I share the opinion that the right granted to Mayfair heater under the identical par of the 2une -,-034 and March @-, -030 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 andis usually supported by a consideration which is why, it may be regarded as a contract in itself. heoption results in a perfected contract of sale once the person to whom it is granted decides to e?erciseit. he right of first refusal is unli=e an option which requires a certainty as to the ob$ect andconsideration of the anticipated contract. (hen the right of first refusal is e?ercised, there is noperfected contract of sale because the other terms of the sale have yet to be determined. 8ence, incase the offeror reneges on his promise to negotiate with offeree, the latter may only recover damagesin the belief that a contract could have been perfected under Article -0 of the ew Civil Code.

I beg to disagree, however, with the ma$ority opinion that the contract of sale entered into by Carmeloand Bauermann, Inc. and %quatorial &ealty Inc., should be rescinded. 2ustice 8ermosisima, in citing

Art. -@ - !@" as ground for recission apparently relied on the case of 8uzman( Bocaling and !o . v .Bonnevie !*;3 9C&A 33 L-00* " where the offeree was li=ened to the status of a creditor. he case, inciting olentino, stated that rescission is a remedy granted by law to contracting parties and even tothird persons , to secure reparation for damages caused to them by a contract, even if this should bevalid, by means of restoration of things to their condition prior to celebration of the contract. It is myopinion that >third persons> should be construed to refer to the wards, creditors, absentees, heirs andothers enumerated under the law who are pre$udiced by the contract sought to be rescinded.

It should be borne in mind that rescission is an e?treme remedy which may be e?ercised only in thespecific instances provided by law. Article -@ - !@" specifically refers to contracts underta=en in fraudof creditors when the latter cannot in any manner collect the claims due them. If rescission wereallowed for analogous cases, the law would have so stated. (hile Article -@ - !/" itself says thatrescission may be granted to all other contracts specially declared by law to be sub$ect to rescission,

there is nothing in the law that states that an offeree who failed to e?ercise his right of refusal becauseof bad faith on the part of the offeror may rescind the subsequent contract entered into by the offeror and a third person. 8ence, there is no legal $ustification to rescind the contract between Carmelo andBauermann, Inc. and %quatorial &ealty.

either do I agree with 2ustice Melo that Mayfair heater should pay Carmelo and Bauermann, Inc. theamount of 6--,@;;,;;;.;; plus compounded interest of -*O p.a. 2ustice Melo rationalized that hadCarmelo and Bauermann sold the property to Mayfair, the latter would have paid the property for thesame price that %quatorial 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 negotiationsbetween the two parties were not pursued to its very end. (e cannot, even for reasons of equity,compel Carmelo to sell the entire property to Mayfair at 6--,@;;,;;;.;; without violating theconsensual nature of contracts.

I vote, therefore, not to rescind the contract of sale entered into by Carmelo and Bauermann, Inc. and%quatorial &ealty 'evelopment Corp.

VITUG, J., dissenting)


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I share the opinion that the right granted to Mayfair heater, Inc., is neither an offer nor an option butmerely a right of first refusal as has been so well and amply essayed in the ponencia of our distinguished colleague Mr. 2ustice &egino C. 8ermosisima, 2r.

nfortunately, it would seem that Article -@ - !paragraph @" of the Civil Code invo=ed to be the

statutory authority for the rescission of the contract of sale between Carmelo # Bauermann, Inc., and%quatorial &ealty 'evelopment, Inc., has been misapplied. he action for rescission under thatprovision of the law, unli=e in the resolution of reciprocal obligations under Article --0- of the Code, ismerely su&sidiary and relates to the specific instance when a debtor, in an attempt to defraud hiscreditor, enters into a contract with another that deprives the creditor to recover his $ust claim andleaves him 'ith no other legal means , than by rescission, to obtain reparation. hus, the rescission isonly to the e?tent necessary to cover the damages caused !Article -@ , Civil Code" and, consistentwith its subsidiary nature, would require the debtor to be an indispensable party in the action !see

igante vs. &epublic 9avings Ban=, -@/ 6hil. @/0".

he concept of a right of first refusal as a simple $uridical relation, and so governed !basically" by theCivil Code5s title on >8uman &elations,> is not altered by the fact alone that it might be among thestipulated 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 -0 of the Civil Code, as wellas its related provisions, but not to an action for specific performance set out under Boo= IH of theCode on >1bligations and Contracts.> hat right, standing by itself, is far distant from being theobligation referred to in Article --/0 of the Code which would have the force of law sufficient to compelcompliance per se or to establish a creditor+debtor or obligee+obligor relation between the parties. If, asit 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 legaleffect as, a duly perfected contract. It is not possible to cross out, such as we have said in Ang Du

Asuncion vs. Court of Appeals !*@ 9C&A 3;*", the indispensable element of consensuality in theperfection of contracts. It is basic that without mutual consent on the ob$ect and on the cause, acontract cannot e?ist !Art. -@;/, Civil Code"E corollary to it, no one can be forced, least of all perhapsby 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 %quatorial nor the directive to Carmelo tosell the property to Mayfair would be legally appropriate.

My brief disquisition should have ended here e?cept for some personal impressions e?pressed by myesteemed colleague, Mr. 2ustice Artemio H. 6anganiban, on the Ang u decision which perhaps needto be addressed.

he discussion by the Court in Ang u on the right of first refusal is branded as a mere o&iter dictum .2ustice 6anganiban states) he case >turned largely on the issue of whether or not the sale of animmovable in breach of a right of first refusal that had been decreed in a final $udgment 'ould 0ustify the issuance of certain orders of execution in the same case. . . . . In other words, the question of whether specific performance of one5s right of first refusal is available as a remedy in case of breach

thereof was not before the 9upreme Court at all in Ang u Asuncion .>

Blac= defines an o&iter dictum as >an opinion entirely unnecessary for the decision of the case> andthus >are not binding as precedent.> !Blac=5s :aw 'ictionary, 3th edition, -00;". A close loo= at theantecedents of Ang u as found by the Court of Appeals and as later quoted by this Court wouldreadily disclose that the >right of first refusal> was a ma$or point in the controversy. Indeed, the trial andthe appellate courts had rule on it. (ith due respect, I would not deem it >entirely unnecessary> for thisCourt to itself discuss the legal connotation and significance of the decreed !confirmatory" right of firstrefusal. I should add that when the ponencia recognized that, in the case of Buen &ealty 'evelopmentCorporation !the alleged purchaser of the property", the latter could not be held sub$ect of the writ of e?ecution and be ousted from the ownership and possession of the disputed property without firstaffording it due process, the Court decided to simply put a cap in the final disposition of the case but itcould not have intended to thereby mitigate the import of its basic ratio decidendi .

2ustice 6anganiban opines that the pronouncement in Ang u , i .e ., that a breach of the right of firstrefusal does not sanction an action for specific performance but only an action for damages, >is at bestdebatable !. . . imprecise or incorrect", on to top of its being contradicted by e?tant $urisprudence.> 8ethen comes up with the novel proposition that >Mayfair5s right of first refusal may be classified as onesub$ect to a suspensive condition P namely, if Carmelo should decide to sell the leased premisesduring the life of the lease contracts, then it should ma=e an offer of sale to Mayfair,> presumably


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enforceable by action for specific performance.

It would be perilous a $ourney, first of all, to try to see= out a common path for such $uridical relations ascontracts, options, and rights of first refusal since they differ, substantially enough, in their concepts,consequences and legal implications. Hery briefly, in the area on sales particularly, I borrow from Ang

u , a unanimous decision of the 9upreme Court En Banc , which held)

In the law on sales, the so+called >right of first refusal> is an innovative $uridical relation. eedless topoint out, it cannot be deemed a perfected contract of sale under Article - / of the Civil Code. either can the right of first refusal, understood in its normal concept, per se be brought within the purview of an option under the second paragraph of Article - 40, aforequoted, or possibly of an offer under Article-@-0 of the same Code. An option or an offer would require, among other things, a clear certainty onboth the ob$ect and the cause or consideration of the envisioned contract. In a right of first refusal,while the ob$ect might be made determinate, the e?ercise of the right, however, would be dependentnot only on the grantor5s eventual intention to enter into a binding $uridical relation with another but alsoon terms, including the price, that obviously are yet to be later firmed up. 6rior thereto, it can at best beso described as merely belonging to a class of preparatory $uridical relations governed not by contracts!since the essential elements to establish the vinculum 0uris would still be indefinite and inconclusive"

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EQUATORIAL REALTY DEVELOPMENT, INC., vs. MAYFAIR THEATER, INC..docx