Lease, Sell, Rescind. Repeat.

“You know what, Abigail? You’re right—it is selfish. But there’s nothing inherently immature about making a selfish choice. It is hard to put what you know is right for you first, when you know people you love don’t respect your choices. It is hard to say ‘what I want is worthy.’ It is hard to say ‘I know myself and what I need, even if everyone else thinks otherwise.” 
- Dahlia Adler, Right of First Refusal

If you think that I am going to discuss to you Right of First Refusal, you are partially correct. I am going to discuss the right of first refusal, alright, but my right of first refusal does not involve romance, but refers to a contract involving real property. Interesting, eh?

Supposing that X owns a lot which has a two-storey building somewhere in the beautiful and historical Quiapo, adjacent to the infamous Quiapo Church. Y, wanting to open his bookstore, offered X to lease the first and second floors of his building. X agreed and so Y was able to open International Bookstore, the other class of a known bookstore here in the country.

Business was good since most students from Manila would purchase their books from International Bookstore. However, customers are complaining of the hot weather and are always asking Y where they can hangout to chill and read their books.

So Y asked X if he can again lease another portion of his building, also involving the first and second floors. Y opened a snack house named Star Buko since their menu are all coconut themed. In both the lease contracts entered into by X and Y, they had a clause that says, “That if X should offer to sell the lot and building, Y shall be given a 30-day exclusive option to purchase the same.”

After a few years, X called Y and informed the latter that Z, a billionaire offered to buy the whole building for 15 Million Pesos.  Y, observing the terms of their lease contracts, within 30 days, wrote a letter to X expressing his intent to buy not only the portion occupied by International Bookstore and Star Buko but the whole building and the lot. X did not reply.

After four years, X sold the lot and building to C, who is aware that Y is leasing two portions of X’s building. Y got mad and went to court asking that the sale of the building and lot be rescinded, stating that the above-mentioned clause gives him the right of first refusal. X contends that the said clause is not a contract of first refusal but an option contract.

Question: What are the nature and the effect of the clause, “That if X should offer to sell the lot and building, Y shall be given a 30-day exclusive option to purchase the same.”

Answer: In the landmark case of Equatorial Realty Development, Inc. v. Mayfair Theater, Inc. [G.R. No. 106063 (November 21, 1996)], the Supreme Court En Banc held, as to its nature, that:

“An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration. In the instant case, the right of first refusal is an integral part of the contracts of lease. The consideration is built into the reciprocal obligations of the parties.

 xxx “The Court of Appeals is correct in stating that [the above-mentioned clause] was incorporated into the contracts of lease for the benefit of [Y] 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 [X] 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, Y is in effect stating that it consents to lease the premises and to pay the price agreed upon provided [X] also consents that, should it sell the leased property, then, [Y] shall be given the right to match the offered purchase price and to buy the property at that price.”

As to its effect, the act of C in purchasing the lot and building despite the knowledge that Y is leasing 2 portions of the building constitutes bad faith since C has notice of the claim or interest of Y in the property. The sale of the lot and building by X to C should now be rescinded considering that Y, which had substantial interest over the subject property, was prejudiced by the sale of the lot and building to C without X conferring to Y every opportunity to negotiate within the 30-day stipulated period.

Hence, the Deed of Absolute Sale between X and Y is rescinded. 

In other words, X should return to C the purchase price. C, then, must execute the deeds and documents necessary to return ownership of the lot and building to X. Thereafter, X, should allow Y to buy the of the lot and building for same price that C had bought it.