EQUATORIAL REALTY DEVELOPMENT, INC.
ISSUE
AND CARMELO & BAUERMANN vs. MAYFAIR THEATER, INC.
J. Hermosisima | November 21, 1996
TOPIC: RIGHT OF FIRST REFUSAL
FACTS
Carmelo owned a parcel of land with two 2-storey buildings constructed thereon at
Recto Avenue, Manila. On June 1, 1967, Carmelo leased to Mayfair a portion of the
2nd floor (1,610 SQM) and the mezzanine (150 SQM) for use by Mayfair as a motion
picture theatre for a term of 20 years. Later, Mayfair constructed thereon a movie
house known as “Maxim Theatre.”
nd
2 years later, on March 31, 1969, Mayfair entered into a 2 contract of lease with
Carmelo for the least of another portion of Carmelo’s property for a similar use as a
movie theatre and for a similar term of 20 years. Mayfair put up another movie house
thereon known as “Miramar Theatre.”
Both contracts of lease provide identically worded paragraph 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 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.
In August 1974, Carmelo informed Mayfair that the former was desirous of selling the
entire property. Carmelo told Mayfair that a certain Jose Araneta was offering to buy
the whole property for $1,200,000. Carmelo asked Mayfair if the latter was willing to
buy the property for PHP 6-7,000,000. On Sep. 18, 1974, Mayfair sent a letter to
Carmelo purporting to express interest in acquiring the entire property.
4 years later, on July 30, 1978, Carmelo sold the entire property including the theatres
to Equatorial for the total sum of PHP 11,300,000. In Sep. 1978, Mayfair filed an
action for specific performance and annulment of the sale to Equatorial.
The trial court dismissed Mayfair’s complaint and ordered it to pay Equatorial PHP
35,000 per month as for the use of areas not covered by the contracts of lease, PHP
75,000 per month for the use of the areas covered by lease, and 55,000 per month for
the areas covered by the 2nd lease.
The trial court adjudged the identically worded paragraph 8 found in both
lease contracts to be an option clause which however cannot be deemed
binding on Carmelo because of lack of distinct consideration therefor.
(1) WON the option clause in the lease contracts is actually a right of first refusal
proviso – YES
(2) What are the rights and obligations of Carmelo, Mayfair, and Equatorial, in the
aftermath of the sale by Carmelo of the entire property to Equatorial?
RATIO
(1) The SC agrees with CA that paragraph 8 provides for a right of first refusal
in favor of Mayfair. It is not an option clause or an option contract.
Citing Beaumont vs. Prieto (1916), the SC characterized 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.
The rule established is that 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.
Relying on Ang Yu Asuncion vs. CA (1994), the SC held that paragraph 8 provides no
option to purchase, in contemplation of NCC 1479 (2), has been granted to Mayfair
under the lease contracts.
The SC held that the CA 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
this case. There is nothing in paragraph 8 which would bring them into the ambit of
the usual offer or option requiring an independent consideration.
An option is a contract granting a privilege to buy or sell within an agreed time and at
a determined price. It is a separate and distinct contract from that which the parties
may enter into upon the consummation of the option. It must be supported by
consideration. In the instant case, the right of first refusal is an integral part of the
contracts of lease. The consideration is built into the reciprocal obligations of the
parties.
To rule that paragraph 8 is governed by NCC 1324 on withdrawal of the offer or NCC
1479 on promise to buy and sell would render ineffectual the provisions on right of
first refusal so commonly inserted in leases of real estate. Thus, the CA is right in
stating that paragraph 8 was incorporated into the contracts for the benefit of Mayfair
which wanted to be assured that it shall be given the first option to buy the property at
the price which Carmelo is willing to accept. Also, it is not 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 provided Carmelo also consents that, should it sell the property, then, Mayfair
shall be given the right to match the offered purchase price and to buy the property at
that price. As stated in Vda. De Quirino vs. Palarca, in reciprocal contracts, the
obligation or promise of each party is the consideration for that of the other.
Thus, the CA is correct in ascertaining that the real nature of paragraph 8 is that of a
contractual grant of the right of first refusal to Mayfair.
(2) On the consequential rights, obligations and liabilities of Carmelo, Mayfair,
and Equatorial.
First, the petitioners acted in bad faith to render paragraph 8 ineffectual.
Carmelo and Mayfair agreed that the latter will have the right of first refusal in the
event Carmelo sells the leased premises. It is undisputed that Carmelo did not
recognize this right of Mayfair.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the
property in question rescissible. The SC agrees with the CA that the records bear out
the fact that Equatorial was aware of the lease contracts because its lawyers had
studied the said contracts prior to the sale. As such, Equatorial cannot tenably claim
to be a purchaser in good faith, and therefore, rescission lies.
Carmelo and Equatorial asserts that Mayfair’s right of first refusal is impossible to
recognize as the property was indivisible. However, the SC held that common sense
dictates that instead of nullifying the agreement on this basis, the right of first refusal
should be given effect by including the indivisible appurtenances in the sale of the
dominant portion.
As such, even as it recognizes the right of first refusal, the SC 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 contract between Equatorial and Carmelo is characterized by bad faith. In fact,
Equatorial admitted that its lawyers studied the lease contracts before the sale. Since
Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is
first set aside or rescinded.
Considerations of justice and equity require that the SC order rescission here and
now. The sale of the property by Carmelo to Equatorial should be rescinded
considering that Mayfair, which had substantial interest over the property, was
prejudiced by the sale of the property without Carmelo conferring to Mayfair every
opportunity to negotiate within the 30-day stipulated period.
Since Carmelo sold the property to Equatorial for PHP 11,300,000, the price at which
Mayfair could have purchased the property is, therefore fixed. 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 PHP 11,300,000.
Under Ang Yu Asuncion vs. CA, the SC stated that there was nothing to execute
because a contract over the right of first refusal belongs to a class of preparatory
juridical relations governed not by law on contracts but by the codal provisions on
human relations.
However, Ang Yu Asuncion vs. CA cannot apply here as the obligation of Carmelo to
first offer the property to Mayfair is embodied in a contract. As such, it should be
enforced according to the law on contracts instead of the panoramic and indefinite
rule on human relations.
Here, there is something to execute and that is for Carmelo to comply with its
obligation under its lease contracts with Mayfair.
DISPOSITIVE
(1) The Deed of Absolute Sale between Equatorial and Carmelo is hereby rescinded.
(2) Carmelo is ordered to return to Equatorial the purchase price.
(3) Equatorial is directed to execute the deeds and documents necessary to return
ownership to Carmelo of the undisputed lots.
(4) Carmelo is ordered to allow Mayfair to buy the aforesaid lots for PHP 11,300,000
DISSENTING OPINIONS
(1) J. VITUG:
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.
An obligation, and so a conditional obligation as well, can only be “a juridical
necessity to give, to or not to do”, and one that is constituted by law, contracts, quasi-
contracts, delicts, and quasi-delicts which all have their respective legal significance
rather than well settled in law.
The law certainly must have meant to provide appropriate, albeit relative,
consequences to its provision. Interpretare et concordore legibus est optimus
interpretendi. (To interpret and harmonize laws is the best method of interpretation.)
As a valid source of an obligation, a contract must have the concurrence of (a)
consent of the contracting parties, (b) object certain, and (c) cause. These
requirements, clearly defined, are essential.
The consent contemplated by 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.
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.
(2) J. ROMERO:
J. Romero disagrees with the majority opinion that the contract of sale entered into by
Carmelo and Equatorial should be rescinded.
J. Hermosisima, in citing NCC 1381 (3) as ground for rescission apparently relied on
the case of Guzman vs. Bonnevie 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 Equatorial.