c. Right of First Refusal

Right of first refusal

It is a contractual grant, not of the sale of a property, but of the first priority to buy the property in the event the owner sells the same. (Villegas v. Court of Appeals, G.R. Nos. 111495 & 122404, August 18, 2006)

NOTE: Where a time is stated in an offer for its acceptance, the offer is terminated at the expiration of the time given for its acceptance.

Pre-emption

Redemption presupposes that the property was already sold or transferred to another. In preemption, the right is present before the sale; there is a right to purchase ahead of or before it can be sold or transferred to other persons.

E.g., whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of preemption at a reasonable price. (Civil Code, Art. 1622)

Basis of the right of first refusal

It is based on the current offer to sell of the seller or offer to purchase of any prospective buyer. Only after the optionee fails to exercise its right of first priority under the same terms and within the period contemplated could the owner validly offer to sell the property to a third person, again, under the same terms as offered to the optionee. (Tanay Recreation Center and Development Corp. v. Fausto, G.R. No. 140182, April 12, 2005, citing Parañaque Kings Enterprises, Inc. v. CA)

Updated: A right of first refusal in a government contract may be void if it circumvents statutory public bidding (Osmena v. Power Sector Assets, G.R. No. 212686, 28 September 2015; Light Rail Transit Authority v. Joy Mart Consolidated Inc, G.R. No. 211281, 15 February 2022).

Effect of sale of a property in violation of the right of first refusal

The resulting contract is RESCISSIBLE by the person in whose favor the right of first refusal was given and even though no particular price is stated in the covenant granting the right of first refusal, the same price by which the third-party buyer bought the property shall be deemed to be the price by which the right of first refusal shall therefore be exercisable. (Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., G.R. No. 106063, November 21, 1996)

Q: Dux leased his house to Iris for a period of 2 years, at the rate of P25,000.00 monthly, payable annually in advance. The contract stipulated that it may be renewed for another 2-year period upon mutual agreement of the parties. The contract also granted Iris the right of first refusal to purchase the property at any time during the lease, if Dux decides to sell the property at the same price that the property is offered for sale to a third party. 23 months after the execution of the lease contract, Dux sold the house. Dux said there was no breach because the property was sold to his mother who is not a third party. Iris filed an action to rescind the sale and to compel Dux to sell the property to her at the same price. Alternatively, she asked the court to extend the lease for another 2 years on the same terms. Can Iris seek rescission of the sale of the property to Dux’s mother?

A: YES. The right of first refusal is included in the contract signed by the parties. Only if the lessee failed to exercise the right of first refusal could the lessor lawfully sell the subject property to others, under no less than the same terms and conditions previously offered to the lessee. Granting that the mother is not a third party, this would make her privy to the agreement of Dux and Iris, aware of the right of first refusal. This makes the mother a buyer in bad faith, hence giving more ground for rescission of the sale to her. (Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., G.R. No. 106063, November 21, 1996)

Right of first refusal must be contained in a written contract

Right of first refusal must have a clear basis in law or agreement

The right of first refusal must have a clear basis in law or agreement and the grant of such right must be clear and express. A written contract is not invariably required.

Q: Pozzolanic entered into a long-term contract with the National Power Corporation (NPC) for the purchase of all fly ash to be produced by the latter’s future power plants. In the contract, NPC granted Pozzolanic a right of first refusal to purchase the fly ash that may be generated in the future. When NPC’s two new power plants started operation, it published an invitation to interested buyers for the purchase of the fly ash. Pozzolanic sent letters to NPC reminding its right of first refusal. NPC deferred its public bidding with the first power plant’s fly ash but it nevertheless continued with the bidding of the second power plant’s fly ash. Pozzolanic filed a complaint, but during the pendency of the case, NPC decided to likewise dispose the fly ash from the first power plant without allowing Pozzolanic to exercise its right of first refusal. Can Pozzolanic exercise its right of first refusal?

A: NO. The right of first refusal granted in favor of Pozzolanic is invalid for being contrary to public policy as the same violates the requirement of competitive public bidding in the award of government contracts. In this jurisdiction, public bidding is the established procedure in the grant of government contracts. (PSALM Corp., v. Pozzolanic, G.R. No. 183789, August 24, 2011)

Right of first refusal may be waived

Like other rights, the right of first refusal may be waived or when a party entered into a compromise agreement. Waiver of the right of first refusal must be supported by competent and credible evidence. (Spouses Valderama v. Macalde, G.R. No. 165005, September 16, 2005)

Availment of sublessee of the right of first refusal of the lessee

GR: The sublessee is a stranger to the lessor who is bound to respect the right of first refusal in favor of the lessee only

XPN: When the contract of lease granted the lessee the right to assign the lease, the assignee would be entitled to exercise such right as he steps into the shoes of the original lessee (assignor).

Q: Tess leased her 1,500 sq. m. lot in Antipolo City to Ruth for a period of three (3) years to February 2013. On March 19, 2011, Tess sent a letter to Ruth, part of which read as follows:

“I am offering you to buy the property you are presently leasing at P5,000.00 per sq. m. or for a total of P7,500,000.00. You can pay the contract price by installment for two (2) years without interest. I will give you a period of one (1) year from the receipt of this letter to decide whether you will buy the property.”

After the expiration of the lease contract, Tess sold the property to her niece for a total consideration of P4 Million. Ruth filed a complaint for the annulment of the sale, reconveyance and damages against Tess and her niece. Ruth alleged that the sale of the leased property violated her right to buy under the principle of right of first refusal. Is the allegation of Ruth tenable?

A: NO, the allegation of Ruth is not tenable. The letter written by Tess did not grant a right of first refusal to Ruth. At most, it is to be construed as an option contract whereby Ruth was given the right to buy or not to buy the leased property. An option is itself not a purchase, but it merely secures the privilege to buy. However, without consideration distinct from the price of the property, Tess’s promise was not binding as an option contract and could be withdrawn before acceptance. (NCC, Art. 1479) Also, Ruth did not accept the offer within the stated one-year period; that period had expired before Tess sold the property to her niece.

Earnest Money in Contract of Sale and Contract to Sell