Right of First Refusal

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Upon birth we are already in possession of rights. One of our rights is to own property and transfer them to any person. Just like any other rights however, this is not absolute and there are limits to one’s right to sell or donate property such as the “right of first refusal”. This is a concept which is not that popular since not many have real properties to sell or transfer. It is also known as “priority right” to purchase wherein the lessor is under obligation to offer the property first to the lessee before he can sell it to other persons. Tanay vs. Fausto (G.R. No. 140182, April 12, 2005) is a very simple case demonstrating the force and effect of a stipulation of “right of first refusal” in a contract of lease.

Tanay vs. Fausto

Tanay Recreation Center and Development Corp. (TRCDC) was the lessee of a property owned by Catalina Fausto. A contract of lease was executed with a period of 20 years which may be extended. In said contract, a stipulation provides “that should Fausto decide to sell the property, petitioner shall have the “priority right” to purchase the same.” When TRCDC wrote the land owner with the intention of renewing the lease contract, Fausto’s daughter Anunciacion, replied saying that she is now the new owner since the property was already sold to her. She also demanded that the former vacate the property since she will not be renewing the contract. TRCDC filed a case before the Regional Trial Court for the annulment of the deed of sale, injunction, specific performance and damages. The RTC ruled that the lease should be extended for seven more years but on appeal, the Court of Appeals decided in favor of Anunciacion ordering TRCDC to vacate the property immediately. The CA declared that although the stipulation of “priority right” is valid, it does not apply if the property is sold to a relative. TRCDC appealed to the Supreme Court.

The Right Applies

The Supreme Court reversed the ruling of the CA. The “right of first refusal” applies regardless of the relationship of the owner and the buyer. The Court explained: “When a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to the latter at a certain price and the lessee has failed to accept it. The lessee has a right that the lessor’s first offer shall be in his favor. Petitioner’s right of first refusal is an integral and indivisible part of the contract of lease and is inseparable from the whole contract. The consideration for the lease includes the consideration for the right of first refusal and is built into the reciprocal obligations of the parties.” The terms of the contract of lease stated clearly that “That should the LESSOR decide to sell the leased premises, the LESSEE shall have the priority right to purchase the same”. This could not have any other interpretation other than that the lessor cannot sell the property to another unless the lessee to whom it is offered refuses to buy it or waives his right. If this stipulation is violated by the lessor, the lessee has the remedy of having the deed of sale rescinded or annulled. The SC went on to elucidate that “a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers and a contract of sale entered into in violation of a right of first refusal of another person, while valid, is rescissible”. It was therefore erroneous for the CA to rule that the right of first refusal does not apply if the buyer is a relative of the owner/lessor.

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