Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 106063 November 21, 1996
EQUATORIAL REALTY E!ELOPMENT, INC. " CARMELO " #AUERMANN,
INC., petitioners,
vs.
MAY$AIR T%EATER, INC., respondent.

%ERMOSISIMA, &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 anal!ed and interpreted particular provisions of our laws on contracts and
sales. "n its assailed decision, the respondent court reversed the trial court
3
which,
in dis#issing the co#plaint for specific perfor#ance with da#ages and annul#ent
of contract,
'
found the option clause in the lease contracts entered into b private
respondent Mafair $heater, "nc. %hereafter, Mafair& and petitioner Car#elo '
Bauer#ann, "nc. %hereafter, Car#elo& to be i#possible of perfor#ance and
unsupported b a consideration and the subsequent sale of the sub(ect propert to
petitioner Equatorial Realt )evelop#ent, "nc. %hereafter, Equatorial& to have been
#ade without an breach of or pre(udice to, the said lease contracts.
(
*e reproduce below the facts as narrated b the respondent court, which narration,
we note, is al#ost verbati# the basis of the state#ent of facts as rendered b the
petitioners in their pleadings+
Car#elo owned a parcel of land, together with two ,-store buildings
constructed thereon located at Claro M Recto Avenue, Manila, and
covered b $C$ No. ./0,1 issued in its na#e b the Register of )eeds of
Manila.
2n 3une ., .145 Car#elo entered into a contract of lease with Mafair for
the latter6s lease of a portion of Car#elo6s propert particularl described,
to wit+
A P2R$"2N 27 $8E 9EC2N) 7:22R of the two-
store building, situated at C.M. Recto Avenue, Manila,
with a floor area of .,4.; square #eters.
$8E 9EC2N) 7:22R AN) ME<<AN"NE of the two-
store building, situated at C.M. Recto Avenue, Manila,
with a floor area of .0; square #eters.
for use b Mafair as a #otion picture theater and for a ter# of twent
%,;& ears. Mafair thereafter constructed on the leased propert a #ovie
house =nown as >Ma?i# $heatre.>
$wo ears later, on March @., .141, Mafair entered into a second
contract of lease with Car#elo for the lease of another portion of
Car#elo6s propert, to wit+
A P2R$"2N 27 $8E 9EC2N) 7:22R of the two-
store building, situated at C.M. Recto Avenue, Manila,
with a floor area of .,;4A square #eters.
$8E $*2 %,& 9$2RE 9PACE9 A$ $8E BR2CN)
7:22R and ME<<AN"NE of the two-store building
situated at C.M. Recto Avenue, Manila, with a floor
area of @;; square #eters and bearing street nu#bers
./5. and ./50,
for si#ilar use as a #ovie theater and for a si#ilar ter# of twent %,;&
ears. Mafair put up another #ovie house =nown as >Mira#ar $heatre>
on this leased propert.
Both contracts of lease provides %sic& identicall worded paragraph /,
which reads+
$hat if the :E992R should desire to sell the leased
pre#ises, the :E99EE shall be given @;-das
e?clusive option to purchase the sa#e.
"n the event, however, that the leased pre#ises is sold
to so#eone other than the :E99EE, the :E992R is
bound and obligated, as it hereb binds and obligates
itself, to stipulate in the )eed of 9ale hereof that the
purchaser shall recogni!e this lease and be bound b
all the ter#s and conditions thereof.
9o#eti#e in August .15A, Mr. 8enr Pascal of Car#elo infor#ed Mr.
8enr Dang, President of Mafair, through a telephone conversation that
Car#elo was desirous of selling the entire Claro M. Recto propert. Mr.
Pascal told Mr. Dang that a certain 3ose Araneta was offering to bu the
whole propert for C9 )ollars .,,;;,;;;, and Mr. Pascal as=ed Mr. Dang
if the latter was willing to bu the propert for 9i? to 9even Million Pesos.
1
Mr. Dang replied that he would let Mr. Pascal =now of his decision. 2n
August ,@, .15A, Mafair replied through a letter stating as follows+
"t appears that on August .1, .15A our Mr. 8enr
Pascal infor#ed our client6s Mr. 8enr Dang through
the telephone that our co#pan desires to sell our
above-#entioned C.M. Recto Avenue propert.
Cnder our co#pan6s two lease contracts with our
client, it is unifor#l provided+
/. $hat if the :E992R should desire to sell the leased
pre#ises the :E99EE shall be given @;-das
e?clusive option to purchase the sa#e. "n the event,
however, that the leased pre#ises is sold to so#eone
other than the :E99EE, the :E992R 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 recogni!e this lease and be bound b
all the ter#s and conditions hereof %sic&.
Car#elo did not repl to this letter.
2n 9epte#ber ./, .15A, Mafair sent another letter to Car#elo purporting
to e?press interest in acquiring not onl the leased pre#ises but >the
entire building and other i#prove#ents if the price is reasonable.
8owever, both Car#elo and Equatorial questioned the authenticit of the
second letter.
7our ears later, on 3ul @;, .15/, Car#elo sold its entire C.M. Recto
Avenue land and building, which included the leased pre#ises housing
the >Ma?i#> and >Mira#ar> theatres, to Equatorial b virtue of a )eed of
Absolute 9ale, for the total su# of P..,@;;,;;;.;;.
"n 9epte#ber .15/, Mafair instituted the action a quo for specific
perfor#ance and annul#ent of the sale of the leased pre#ises to
Equatorial. "n its Answer, Car#elo alleged as special and affir#ative
defense %a& that it had infor#ed Mafair of its desire to sell the entire C.M.
Recto Avenue propert and offered the sa#e to Mafair, but the latter
answered that it was interested onl in buing the areas under lease,
which was i#possible since the propert was not a condo#iniu#E and %b&
that the option to purchase invo=ed b Mafair is null and void for lac= of
consideration. Equatorial, in its Answer, pleaded as special and affir#ative
defense that the option is void for lac= of consideration %sic& and is
unenforceable b reason of its i#possibilit of perfor#ance because the
leased pre#ises could not be sold separatel fro# the other portions of
the land and building. "t counterclai#ed for cancellation of the contracts of
lease, and for increase of rentals in view of alleged supervening
e?traordinar devaluation of the currenc. Equatorial li=ewise cross-
clai#ed against co-defendant Car#elo for inde#nification in respect of
Mafair6s clai#s.
)uring the pre-trial conference held on 3anuar ,@, .151, the parties
stipulated on the following+
.. $hat there was a deed of sale of the contested
pre#ises b the defendant Car#elo . . . in favor of
defendant Equatorial . . .E
,. $hat in both contracts of lease there appear %sic& the
stipulation granting the plaintiff e?clusive option to
purchase the leased pre#ises should the lessor desire
to sell the sa#e %ad#itted sub(ect to the contention
that the stipulation is null and void&E
@. $hat the two buildings erected on this land are not of
the condo#iniu# planE
A. $hat the a#ounts stipulated and #entioned in
paragraphs @ %a& and %b& of the contracts of lease
constitute the consideration for the plaintiff6s
occupanc of the leased pre#ises, sub(ect of the sa#e
contracts of lease, E?hibits A and BE
??? ??? ???
4. $hat there was no consideration specified in the
option to bu e#bodied in the contractE
5. $hat Car#elo ' Bauer#ann owned the land and the
two buildings erected thereonE
/. $hat the leased pre#ises constitute onl the
portions actuall occupied b the theatersE and
1. $hat what was sold b Car#elo ' Bauer#ann to
defendant Equatorial Realt is the land and the two
buildings erected thereon.
??? ??? ???
After assessing the evidence, the court a quo rendered the appealed
decision, the decretal portion of which reads as follows+
*8ERE72RE, (udg#ent is hereb rendered+
2
%.& )is#issing the co#plaint with costs against the
plaintiffE
%,& 2rdering plaintiff to pa defendant Car#elo '
Bauer#ann PA;,;;;.;; b wa of attorne6s fees on
its counterclai#E
%@& 2rdering plaintiff to pa defendant Equatorial
Realt P@0,;;;.;; per #onth as reasonable
co#pensation for the use of areas not covered b the
contract %sic& of lease fro# 3ul @., .151 until plaintiff
vacates said area %sic& plus legal interest fro# 3ul @.,
.15/E P5;,;;; ;; per #onth as reasonable
co#pensation for the use of the pre#ises covered b
the contracts %sic& of lease dated %3une ., .145 fro#
3une ., .1/5 until plaintiff vacates the pre#ises plus
legal interest fro# 3une ., .1/5E P00,;;;.;; per
#onth as reasonable co#pensation for the use of the
pre#ises covered b the contract of lease dated March
@., .141 fro# March @;, .1/1 until plaintiff vacates the
pre#ises plus legal interest fro# March @;, .1/1E and
PA;,;;;.;; as attorne6s feesE
%A& )is#issing defendant Equatorial6s crossclai#
against defendant Car#elo ' Bauer#ann.
$he contracts of lease dated 3une ., .145 and March
@., .141 are declared e?pired and all persons clai#ing
rights under these contracts are directed to vacate the
pre#ises.
6
$he trial court ad(udged the identicall worded paragraph / found in both aforecited
lease contracts to be an option clause which however cannot be dee#ed to be
binding on Car#elo because of lac= of distinct consideration therefor.
$he court a quo ratiocinated+
9ignificantl, during the pre-trial, it was ad#itted b the parties that the
option in the contract of lease is not supported b a separate
consideration. *ithout a consideration, the option is therefore not binding
on defendant Car#elo ' Bauer#ann to sell the C.M. Recto propert to
the for#er. $he option invo=ed b the plaintiff appears in the contracts of
lease . . . in effect there is no option, on the ground that there is no
consideration. Article .@0, of the Civil Code, provides+
Contracts without cause or with unlawful cause,
produce no effect whatever. $he cause is unlawful if it
is contrar to law, #orals, good custo#, public order or
public polic.
Contracts therefore without consideration produce no effect whatsoever.
Article .@,A provides+
*hen the offeror has allowed the offeree a certain
period to accept, the offer #a be withdrawn at an
ti#e before acceptance b co##unicating such
withdrawal, e?cept when the option is founded upon
consideration, as so#ething paid or pro#ised.
in relation with Article .A51 of the sa#e Code+
A pro#ise to bu and sell a deter#ine thing for a price
certain is reciprocall de#andable.
An accepted unilateral pro#ise to bu or to sell a
deter#ine thing for a price certain is binding upon the
pro#issor if the pro#ise is supported b a
consideration distinct fro# the price.
$he plaintiff cannot co#pel defendant Car#elo to co#pl with the
pro#ise unless the for#er establishes the e?istence of a distinct
consideration. "n other words, the pro#isee has the burden of proving the
consideration. $he consideration cannot be presu#ed as in Article .@0A+
Although the cause is not stated in the contract, it is
presu#ed that it e?ists and is lawful unless the debtor
proves the contrar.
where consideration is legall presu#ed to e?ists. Article .@0A applies to
contracts in general, whereas when it co#es to an option it is governed
particularl and #ore specificall b Article .A51 whereb the pro#isee
has the burden of proving the e?istence of consideration distinct fro# the
price. $hus, in the case of Sanchez vs. Rigor, A0 9CRA @4/, @5,-@5@, the
Court said+
%.& Article .@0A applies to contracts in general,
whereas the second paragraph of Article .A51 refers to
sales in particular, and, #ore specificall, to an
accepted unilateral pro#ise to bu or to sell. "n other
words, Article .A51 is controlling in the case at bar.
%,& "n order that said unilateral pro#ise #a be binding
upon the pro#issor, Article .A51 requires the
concurrence of a condition, na#el, that the pro#ise
be supported b a consideration distinct fro# the price.
Accordingl, the pro#isee cannot co#pel the
pro#issor to co#pl with the pro#ise, unless the
3
for#er establishes the e?istence of said distinct
consideration. "n other words, the pro#isee has the
burden of proving such consideration. Plaintiff herein
has not even alleged the e?istence thereof in his
co#plaint.
)
"t follows that plaintiff cannot co#pel defendant Car#elo ' Bauer#ann to
sell the C.M. Recto propert to the for#er.
Mafair ta=ing e?ception to the decision of the trial court, the battleground shifted to
the respondent Court of Appeals. Respondent appellate court reversed the court a
quo and rendered (udg#ent+
.. Reversing and setting aside the appealed )ecisionE
,. )irecting the plaintiff-appellant Mafair $heater "nc. to pa and return to
Equatorial the a#ount of P..,@;;,;;;.;; within fifteen %.0& das fro#
notice of this )ecision, and ordering Equatorial Realt )evelop#ent, "nc.
to accept such pa#entE
@. Cpon pa#ent of the su# of P..,@;;,;;;, directing Equatorial Realt
)evelop#ent, "nc. to e?ecute the deeds and docu#ents necessar for the
issuance and transfer of ownership to Mafair of the lot registered under
$C$ Nos. .5@0;, ../4.,, 4;1@4, and 0,05.E and
A. 9hould plaintiff-appellant Mafair $heater, "nc. be unable to pa the
a#ount as ad(udged, declaring the )eed of Absolute 9ale between the
defendants-appellants Car#elo ' Bauer#ann, "nc. and Equatorial Realt
)evelop#ent, "nc. as valid and binding upon all the parties.
*
Rereading the law on the #atter of sales and option contracts, respondent Court of
Appeals differentiated between Article .@,A and Article .A51 of the Civil Code,
anal!ed their application to the facts of this case, and concluded that since
paragraph / of the two lease contracts does not state a fi?ed price for the purchase
of the leased pre#ises, which is an essential ele#ent for a contract of sale to be
perfected, what paragraph / is, #ust be a right of first refusal and not an option
contract. "t e?plicated+
7irstl, the court a quo #isapplied the provisions of Articles .@,A and
.A51, second paragraph, of the Civil Code.
Article .@,A spea=s of an >offer> #ade b an offeror which the offeree
#a or #a not accept within a certain period. Cnder this article, the offer
#a be withdrawn b the offeror before the e?piration of the period and
while the offeree has not et accepted the offer. 8owever, the offer cannot
be withdrawn b the offeror within the period if a consideration has been
pro#ised or given b the offeree in e?change for the privilege of being
given that period within which to accept the offer. $he consideration is
distinct fro# the price which is part of the offer. $he contract that arises is
=nown as option. "n the case ofBeaumont vs. Prieto, A. Phil. 45;, the
9upre#e court, citing Bouvier, defined an option as follows+ >A contract b
virtue of which A, in consideration of the pa#ent of a certain su# to B,
acquires the privilege of buing fro# or selling to B, certain securities or
properties within a li#ited ti#e at a specified price,> %pp. 4/4-5&.
Article .A51, second paragraph, on the other hand, conte#plates of an
>accepted unilateral pro#ise to bu or to sell a deter#inate thing for a
price within %which& is binding upon the pro#isee if the pro#ise is
supported b a consideration distinct fro# the price.> $hat >unilateral
pro#ise to bu or to sell a deter#inate thing for a price certain> is called
an offer. An >offer>, in laws, is a proposal to enter into a contract
%Rosenstoc= vs. Bur=e, A4 Phil. ,.5&. $o constitute a legal offer, the
proposal #ust be certain as to the ob(ect, the price and other essential
ter#s of the contract %Art. .@.1, Civil Code&.
Based on the foregoing discussion, it is evident that the provision granting
Mafair >@;-das e?clusive option to purchase> the leased pre#ises is
N2$ AN 2P$"2N in the conte?t of Arts. .@,A and .A51, second
paragraph, of the Civil Code. Although the provision is certain as to the
ob(ect %the sale of the leased pre#ises& the price for which the ob(ect is to
be sold is not stated in the provision 2therwise stated, the questioned
stipulation is not b itself, an >option> or the >offer to sell> because the
clause does not specif the price for the sub(ect propert.
Although the provision giving Mafair >@;-das e?clusive option to
purchase> cannot be legall categori!ed as an option, it is, nevertheless, a
valid and binding stipulation. *hat the trial court failed to appreciate was
the intention of the parties behind the questioned proviso.
??? ??? ???
$he provision in question is not of the pro-for#a tpe custo#aril found in
a contract of lease. Even appellees have recogni!ed that the stipulation
was incorporated in the two Contracts of :ease at the initiative and behest
of Mafair. Evidentl, the stipulation was intended to benefit and protect
Mafair in its rights as lessee in case Car#elo should decide, during the
ter# of the lease, to sell the leased propert. $his intention of the parties
is achieved in two was in accordance with the stipulation. $he first is b
giving Mafair >@;-das e?clusive option to purchase> the leased propert.
$he second is, in case Mafair would opt not to purchase the leased
propert, >that the purchaser %the new owner of the leased propert& shall
recogni!e the lease and be bound b all the ter#s and conditions
thereof.>
"n other words, paragraph / of the two Contracts of lease, particularl the
stipulation giving Mafair >@;-das e?clusive option to purchase the
%leased pre#ises&,> was #eant to provide Mafair the opportunit to
purchase and acquire the leased propert in the event that Car#elo
should decide to dispose of the propert. "n order to reali!e this intention,
4
the i#plicit obligation of Car#elo once it had decided to sell the leased
propert, was not onl to notif Mafair of such decision to sell the
propert, but, #ore i#portantl, to #a=e an offer to sell the leased
pre#ises to Mafair, giving the latter a fair and reasonable opportunit to
accept or re(ect the offer, before offering to sell or selling the leased
propert to third parties. $he right vested in Mafair is analogous to the
right of first refusal, which #eans that Car#elo should have offered the
sale of the leased pre#ises to Mafair before offering it to other parties,
or, if Car#elo should receive an offer fro# third parties to purchase the
leased pre#ises, then Car#elo #ust first give Mafair the opportunit to
#atch that offer.
"n fact, Mr. Pascal understood the provision as giving Mafair a right of
first refusal when he #ade the telephone call to Mr. Dang in .15A. Mr.
Pascal thus testified+
F Can ou tell this 8onorable Court
how ou #ade the offer to Mr.
8enr Dang b telephoneG
A " have an offer fro# another part
to bu the propert and having the
offer we decided to #a=e an offer
to 8enr Dang on a first-refusal
basis. %$9N Nove#ber /, .1/@, p.
.,.&.
and on cross-e?a#ination+
F *hen ou called Mr. Dang on
August .15A can ou re#e#ber
e?actl what ou have told hi# in
connection with that #atter, Mr.
PascalG
A More or less, " told hi# that "
received an offer fro# another part
to bu the propert and " was
offering hi# first choice of the enter
propert. %$9N, Nove#ber ,1,
.1/@, p. ./&.
*e rule, therefore, that the foregoing interpretation best renders effectual
the intention of the parties.
9
Besides the ruling that paragraph / vests in Mafair the right of first refusal as to
which the require#ent of distinct consideration indispensable in an option contract,
has no application, respondent appellate court also addressed the clai# of Car#elo
and Equatorial that assu#ing arguendo that the option is valid and effective, it is
i#possible of perfor#ance because it covered onl the leased pre#ises and not the
entire Claro M. Recto propert, while Car#elo6s offer to sell pertained to the entire
propert in question. $he Court of Appeals ruled as to this issue in this wise+
*e are not persuaded b the contentions of the defendants-appellees. "t
is to be noted that the )eed of Absolute 9ale between Car#elo and
Equatorial covering the whole Claro M. Recto propert, #ade reference to
four titles+ $C$ Nos. .5@0;, ../4.,, 4;1@4 and 0,05.. Based on the
infor#ation sub#itted b Mafair in its appellant6s Brief %pp. 0 and A4&
which has not been controverted b the appellees, and which *e,
therefore, ta=e (udicial notice of the two theaters stand on the parcels of
land covered b $C$ No. .5@0; with an area of 4,,..; sq. # and $C$
No. ../4., with an area of ,,.;;..; sq. #. $he e?istence of four
separate parcels of land covering the whole Recto propert de#onstrates
the legal and phsical possibilit that each parcel of land, together with
the buildings and i#prove#ents thereof, could have been sold
independentl of the other parcels.
At the ti#e both parties e?ecuted the contracts, the were aware of the
phsical and structural conditions of the buildings on which the theaters
were to be constructed in relation to the re#ainder of the whole Recto
propert. $he peculiar language of the stipulation would tend to li#it
Mafair6s right under paragraph / of the Contract of :ease to the
acquisition of the leased areas onl. "ndeed, what is being conte#plated
b the questioned stipulation is a departure fro# the custo#ar situation
wherein the buildings and i#prove#ents are included in and for# part of
the sale of the sub(acent land. Although this situation is not co##on,
especiall considering the non-condo#iniu# nature of the buildings, the
sale would be valid and capable of being perfor#ed. A sale li#ited to the
leased pre#ises onl, if hpotheticall assu#ed, would have brought into
operation the provisions of co-ownership under which Mafair would have
beco#e the e?clusive owner of the leased pre#ises and at the sa#e ti#e
a co-owner with Car#elo of the sub(acent land in proportion to Mafair6s
interest over the pre#ises sold to it.
10
Car#elo and Equatorial now co#es before us questioning the correctness and
legal basis for the decision of respondent Court of Appeals on the basis of the
following assigned errors+
"
$8E C2CR$ 27 APPEA:9 BRAHE:D ERRE) "N C2NC:C)"NB $8A$
$8E 2P$"2N C:AC9E "N $8E C2N$RAC$9 27 :EA9E "9 AC$CA::D
A R"B8$ 27 7"R9$ RE7C9A: PR2H"92. "N )2"NB 92 $8E C2CR$
27 APPEA:9 )"9REBAR)E) $8E C2N$RAC$9 27 :EA9E *8"C8
C:EAR:D AN) CNEFC"H2CA::D PR2H")E 72R AN 2P$"2N, AN)
$8E A)M"99"2N 27 $8E PAR$"E9 27 9CC8 2P$"2N "N $8E"R
9$"PC:A$"2N 27 7AC$9.
""
5
*8E$8ER AN 2P$"2N 2R R"B8$ 27 7"R9$ RE7C9A:, $8E C2CR$
27 APPEA:9 ERRE) "N )"REC$"NB EFCA$2R"A: $2 EIECC$E A
)EE) 27 9A:E E"B8$EEN %./& DEAR9 A7$ER MAD7A"R 7A":E) $2
EIERC"9E "$9 2P$"2N %2R, EHEN "$9 R"B8$ 27 7"R9$ RE7C9A:
A99CM"NB "$ *A9 2NE& *8EN $8E C2N$RAC$9 :"M"$E) $8E
EIERC"9E 27 9CC8 2P$"2N $2 @; )AD9 7R2M N2$"CE.
"""
$8E C2CR$ 27 APPEA:9 BR"EH2C9:D ERRE) *8EN "$ )"REC$E)
"MP:EMEN$A$"2N 27 "$9 )EC"9"2N EHEN BE72RE "$9 7"NA:"$D,
AN) *8EN "$ BRAN$E) MAD7A"R A RE:"E7 $8A$ *A9 N2$ EHEN
PRADE) 72R "N $8E C2MP:A"N$.
"H
$8E C2CR$ 27 APPEA:9 H"2:A$E) "$9 2*N "N$ERNA: RC:E9 "N
$8E A99"BNMEN$ 27 APPEA:E) CA9E9 *8EN "$ A::2*E) $8E
9AME )"H"9"2N I"", PAR$"CC:AR:D 3C9$"CE MANCE: 8ERRERA,
$2 RE92:HE A:: $8E M2$"2N9 "N $8E >C2MP:E$"2N PR2CE99>
AN) $2 9$":: RE92:HE $8E MER"$9 27 $8E CA9E "N $8E
>)EC"9"2N 9$ABE>.
11

*e shall first dispose of the fourth assigned error respecting alleged irregularities in
the raffle of this case in the Court of Appeals. 9uffice it to sa that in our
Resolution,
12
dated )ece#ber 1, .11,, we alread too= note of this #atter and set
out the proper applicable procedure to be the following+
2n 9epte#ber ,;, .11,, counsel for petitioner Equatorial Realt
)evelop#ent, "nc. wrote a letter-co#plaint to this Court alleging certain
irregularities and infractions co##itted b certain lawers, and 3ustices of
the Court of Appeals and of this Court in connection with case CA-B.R.
CH No. @,1./ %now B.R. No. .;4;4@&. $his parta=es of the nature of an
ad#inistrative co#plaint for #isconduct against #e#bers of the (udiciar.
*hile the letter-co#plaint arose as an incident in case CA-B.R. CH No.
@,1./ %now B.R. No. .;4;4@&, the disposition thereof should be separate
and independent fro# Case B.R. No. .;4;4@. 8owever, for purposes of
receiving the requisite pleadings necessar in disposing of the
ad#inistrative co#plaint, this )ivision shall continue to have control of the
case. Cpon co#pletion thereof, the sa#e 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 Car#elo and Equatorial, to be an independent and separate sub(ect for an
ad#inistrative co#plaint based on #isconduct b the lawers and (ustices
i#plicated therein, it is the correct, prudent and consistent course of action not to
pre-e#pt the ad#inistrative proceedings to be underta=en respecting the said
irregularities. Certainl, a discussion thereupon b us in this case would entail a
finding on the #erits as to the real nature of the questioned procedures and the true
intentions and #otives of the plaers therein.
"n essence, our tas= is two-fold+ %.& to define the true nature, scope and efficac of
paragraph / stipulated in the two contracts of lease between Car#elo and Mafair
in the face of conflicting findings b the trial court and the Court of AppealsE and %,&
to deter#ine the rights and obligations of Car#elo and Mafair, as well as
Equatorial, in the after#ath of the sale b Car#elo of the entire Claro M. Recto
propert to Equatorial.
Both contracts of lease in question provide the identicall worded paragraph /,
which reads+
$hat if the :E992R should desire to sell the leased pre#ises, the
:E99EE shall be given @;-das e?clusive option to purchase the sa#e.
"n the event, however, that the leased pre#ises is sold to so#eone other
than the :E99EE, the :E992R is bound and obligated, as it hereb binds
and obligates itself, to stipulate in the )eed of 9ale thereof that the
purchaser shall recogni!e this lease and be bound b all the ter#s and
conditions thereof.
1'
*e agree with the respondent Court of Appeals that the aforecited contractual
stipulation provides for a right of first refusal in favor of Mafair. It is not an option
clause or an option contract. "t is a contract of a right of first refusal.
As earl as .1.4, in the case of Beaumont vs. Prieto,
1(
unequivocal was our
characteri!ation of an option contract as one necessaril involving the choice
granted to another for a distinct and separate consideration as to whether or not to
purchase a deter#inate thing at a predeter#ined fi?ed price.
"t is unquestionable that, b #eans of the docu#ent E?hibit E, to wit, the
letter of )ece#ber A, .1.., quoted at the beginning of this decision, the
defendant Haldes granted to the plaintiff Borc= the right to purchase the
Nagta(an 8acienda belonging to Benito :egarda, during the period of
three #onths and for its assessed valuation, a grant which necessaril
i#plied the offer or obligation on the part of the defendant Haldes to sell to
Borc= the said hacienda during the period and for the price #entioned . . .
$here was, therefore, a #eeting of #inds on the part of the one and the
other, with regard to the stipulations #ade in the said docu#ent. But it is
not shown that there was an cause or consideration for that agree#ent,
and this o#ission is a bar which precludes our holding that the
stipulations contained in E?hibit E is a contract of option, for, . . . there can
be no contract without the requisite, a#ong others, of the cause for the
obligation to be established.
"n his :aw )ictionar, edition of ./15, Bouvier defines an option as a
contract, in the following language+
6
A contract b virtue of which A, in consideration of
the payment of a certain sum to B, acquires the
privilege of buing fro#, or selling to B, certain
securities or properties within a li#ited ti#e at a
specified price. %9tor vs. 9ala#on, 5. N.D., A,;.&
7ro# vol. 4, page 0;;., of the wor= >*ords and Phrases,> citing the case
of Ide vs. Leiser %,A Pac., 410E .; Mont., 0E ,A A#. 9t. Rep., .5& the
following quotation has been ta=en+
An agree#ent in writing to give a person the option to
purchase lands within a given ti#eat a named price is
neither a sale nor an agree#ent to sell. "t is si#pl a
contract b which the owner of propert agrees with
another person that he shall have the right to bu his
propert at a fixed price within a certain ti#e. 8e does
not sell his landE he does not then agree to sell itE but
he does sell so#ethingE that is, the right or privilege to
bu at the election or option of the other part. $he
second part gets in praesenti, not lands, nor an
agree#ent that he shall have lands, but he does get
so#ething of valueE that 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 part, for a
li#ited period. $he second part receives this right, or,
rather, fro# his point of view, he receives the right to
elect to bu.
But the two definitions above cited refer to the contract of option, or, what
a#ounts to the sa#e thing, to the case where there was cause or
consideration for the obligation, the sub(ect of the agree#ent #ade b the
partiesE while in the case at bar there was no such cause or
consideration.
16
%E#phasis ours.&
$he rule so earl established in this (urisdiction is that the deed of option or the
option clause in a contract, in order to be valid and enforceable, #ust, a#ong other
things, indicate the definite price at which the person granting the option, is willing
to sell.
Notabl, in one case we held that the lessee loses his right to bu the leased propert for a
na#ed price per square #eter upon failure to #a=e the purchase within the ti#e
specifiedE
1)
in one other case we freed the landowner fro# her pro#ise to sell her land if the
prospective buer could raise PA,0;;.;; in three wee=s because such option was not
supported b a distinct considerationE
1*
in the sa#e vein in et one other case, we also
invalidated an instru#ent entitled, >2ption to Purchase> a parcel of land for the su# of
P.,0.;.;; because of lac= of considerationE
19
and as an e?ception to the doctrine
enu#erated in the two preceding cases, in another case, we ruled that the option to bu the
leased pre#ises for P.,,;;;.;; as stipulated in the lease contract, is not without
consideration for in reciprocal contracts, li=e lease, the obligation or pro#ise of each part is
the consideration for that of the other.
20
"n all these cases, the selling price of the ob(ect
thereof is alwas predeter#ined and specified in the option clause in the contract or in the
separate deed of option. *e elucidated, thus, in the ver recent case of Ang u Asuncion
vs. !ourt of Appeals
21
that+
. . . "n sales, particularl, to which the topic for discussion about the case
at bench belongs, the contract is perfected when a person, called the
seller, obligates hi#self, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buer, over which the
latter agrees. Article .A0/ of the Civil Code provides+
Art. .A0/. B the contract of sale one of the
contracting parties obligates hi#self to transfer the
ownership of and to deliver a deter#inate thing, and
the other to pa therefor a price certain in #one or its
equivalent.
A contract of sale #a be absolute or conditional.
*hen the sale is not absolute but conditional, such as in a >Contract to
9ell> where invariabl the ownership of the thing sold in retained until the
fulfill#ent of a positive suspensive condition %nor#all, the full pa#ent of
the purchase price&, the breach of the condition will prevent the obligation
to conve title fro# acquiring an obligator force. . . .
An unconditional #utual pro#ise to bu and sell, as long as the ob(ect is
#ade deter#inate and the price is fi?ed, can be obligator on the parties,
and co#pliance therewith #a accordingl be e?acted.
An accepted unilateral pro#ise which specifies the thing to be sold and
the price to be paid, when coupled with a valuable consideration distinct
and separate fro# the price, is what #a properl be ter#ed a perfected
contract of option. $his contract is legall binding, and in sales, it
confor#s with the second paragraph of Article .A51 of the Civil Code, viz+
Art. .A51. . . .
An accepted unilateral pro#ise to bu or to sell a
deter#inate thing for a price certain is binding upon
the pro#isor if the pro#ise is supported b a
consideration distinct fro# the price. %.A0.a&.
2bserve, however, that the option is not the contract of sale itself. $he
optionee has the right, but not the obligation, to bu. 2nce the option is
e?ercised ti#el, i.e., the offer is accepted before a breach of the option, a
bilateral pro#ise to sell and to bu ensues and both parties are then
reciprocall bound to co#pl with their respective underta=ings.
:et us elucidate a little. A negotiation is for#all initiated b an offer. An
i#perfect pro#ise %policitacion& is #erel an offer. Public advertise#ents
7
or solicitations and the li=e are ordinaril construed as #ere invitations to
#a=e offers or onl as proposals. $hese relations, until a contract is
perfected, are not considered binding co##it#ents. $hus, at an ti#e
prior to the perfection of the contract, either negotiating part #a stop the
negotiation. $he offer, at this stage, #a be withdrawnE the withdrawal is
effective i##ediatel after its #anifestation, such as b its #ailing and not
necessaril when the offeree learns of the withdrawal %:audico vs. Arias,
A@ Phil. ,5;&. *here a period is given to the offeree within which to accept
the offer, the following rules generall govern+
%.& "f the period is not itself founded upon or supported b a consideration,
the offeror is still free and has the right to withdraw the offer before its
acceptance, or if an acceptance has been #ade, before the offeror6s
co#ing to =now of such fact, b co##unicating that withdrawal to the
offeree %see Art. .@,A, Civil CodeE see also At=ins, Jroll ' Co. vs. Cua,
.;, Phil. 1A/, holding that this rule is applicable to a unilateral pro#ise to
sell under Art. .A51, #odifing the previous decision in 9outh *estern
9ugar vs. Atlantic Bulf, 15 Phil. ,A1E see also Art. .@.1, Civil CodeE Rural
Ban= of ParaKaque, "nc. vs. Re#olado, .@0 9CRA A;1E 9anche! vs.
Rigos, A0 9CRA @4/&. $he right to withdraw, however, #ust not be
e?ercised whi#sicall or arbitrarilE otherwise, it could give rise to a
da#age clai# under Article .1 of the Civil Code which ordains that >ever
person #ust, in the e?ercise of his rights and in the perfor#ance of his
duties, act with (ustice, give everone his due, and observe honest and
good faith.>
%,& "f the period has a separate consideration, a contract of >option>
dee#ed perfected, and it would be a breach of that contract to withdraw
the offer during the agreed period. $he option, however, is an independent
contract b itselfE and it is to be distinguished fro# the pro(ected #ain
agree#ent %sub(ect #atter of the option& which is obviousl et to be
concluded. "f, in fact, the optioner-offeror withdraws the offer before its
acceptance %e?ercise of the option& b the optionee-offeree, the latter #a
not sue for specific perfor#ance 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 hi#self liable for da#ages for breach of
the opinion. . .
"n the light of the foregoing disquisition and in view of the wording of the questioned
provision in the two lease contracts involved in the instant case, we so hold that no
option to purchase in conte#plation of the second paragraph of Article .A51 of the
Civil Code, has been granted to Mafair under the said lease contracts.
Respondent Court of Appeals correctl ruled that the said paragraph / grants the
right of first refusal to Mafair and is not an option contract. "t also correctl
reasoned that as such, the require#ent of a separate consideration for the option,
has no applicabilit in the instant case.
$here is nothing in the identical Paragraphs >/> of the 3une ., .145 and March @.,
.141 contracts which would bring the# into the a#bit of the usual offer or option
requiring an independent consideration.
An option is a contract granting a privilege to bu or sell within an agreed ti#e and
at a deter#ined price. "t is a separate and distinct contract fro# that which the
parties #a enter into upon the consu##ation of the option. "t #ust be supported
b consideration.
22
"n the instant case, the right of first refusal is an integral part of
the contracts of lease. $he consideration is built into the reciprocal obligations of
the parties.
$o rule that a contractual stipulation such as that found in paragraph / of the
contracts is governed b Article .@,A on withdrawal of the offer or Article .A51 on
pro#ise to bu and sell would render in effectual or >inutile> the provisions on right
of first refusal so co##onl inserted in leases of real estate nowadas. $he Court
of Appeals is correct in stating that Paragraph / was incorporated into the contracts
of lease for the benefit of Mafair which wanted to be assured that it shall be given
the first crac= or the first option to bu the propert at the price which Car#elo is
willing to accept. "t is not also correct to sa that there is no consideration in an
agree#ent of right of first refusal. $he stipulation is part and parcel of the entire
contract of lease. $he consideration for the lease includes the consideration for the
right of first refusal. $hus, Mafair is in effect stating that it consents to lease the
pre#ises and to pa the price agreed upon provided the lessor also consents that,
should it sell the leased propert, then, Mafair shall be given the right to #atch the
offered purchase price and to bu the propert at that price. As stated in "da. #e
$uirino vs. Palarca,
23
in reciprocal contract, the obligation or pro#ise of each part
is the consideration for that of the other.
$he respondent Court of Appeals was correct in ascertaining the true nature of the
aforecited paragraph / to be that of a contractual grant of the right of first refusal to
Mafair.
*e shall now deter#ine the consequential rights, obligations and liabilities of
Car#elo, Mafair and Equatorial.
$he different facts and circu#stances in this case call for an a#plification of the
precedent in Ang u Asuncion vs. !ourt of Appeals.
2'
7irst and fore#ost is that the petitioners acted in bad faith to render Paragraph /
>inutile>.
*hat Car#elo and Mafair agreed to, b e?ecuting the two lease contracts, was
that Mafair will have the right of first refusal in the event Car#elo sells the leased
pre#ises. "t is undisputed that Car#elo did recogni!e this right of Mafair, for it
infor#ed the latter of its intention to sell the said propert in .15A. $here was an
e?change of letters evidencing the offer and counter-offers #ade b both parties.
Car#elo, however, did not pursue the e?ercise to its logical end. *hile it initiall
recogni!ed Mafair6s right of first refusal, Car#elo violated such right when without
affording its negotiations with Mafair the full process to ripen to at least an
interface of a definite offer and a possible corresponding acceptance within the >@;-
da e?clusive option> ti#e granted Mafair, Car#elo abandoned negotiations, =ept
a low profile for so#e ti#e, and then sold, without prior notice to Mafair, the entire
Claro M Recto propert to Equatorial.
8
9ince Equatorial is a buer in bad faith, this finding renders the sale to it of the
propert in question rescissible. *e agree with respondent Appellate Court that the
records bear out the fact that Equatorial was aware of the lease contracts because
its lawers had, prior to the sale, studied the said contracts. As such, Equatorial
cannot tenabl clai# to be a purchaser in good faith, and, therefore, rescission lies.
. . . Contract of 9ale was not voidable but rescissible. Cnder Article .@/;
to .@/.%@& of the Civil Code, a contract otherwise valid #a nonetheless
be subsequentl rescinded b reason of in(ur to third persons, li=e
creditors. $he status of creditors could be validl accorded the Bonnevies
for the had substantial interests that were pre(udiced b the sale of the
sub(ect propert to the petitioner without recogni!ing their right of first
priorit under the Contract of :ease.
According to $olentino, rescission is a re#ed granted b law to the
contracting parties and even to third persons, to secure reparation for
da#ages caused to the# b a contract, even if this should be valid, b
#eans of the restoration of things to their condition at the #o#ent prior to
the celebration of said contract. "t is a relief allowed for the protection of
one of the contracting parties and even third persons fro# all in(ur and
da#age the contract #a cause, or to protect so#e inco#patible and
preferent right created b the contract. Rescission i#plies a contract
which, even if initiall valid, produces a lesion or pecuniar da#age to
so#eone that (ustifies its invalidation for reasons of equit.
"t is true that the acquisition b a third person of the propert sub(ect of
the contract is an obstacle to the action for its rescission where it is shown
that such third person is in lawful possession of the sub(ect of the contract
and that he did not act in bad faith. 8owever, this rule is not applicable in
the case before us because the petitioner is not considered a third part in
relation to the Contract of 9ale nor #a its possession of the sub(ect
propert be regarded as acquired lawfull and in good faith.
"ndeed, Bu!#an, Bocaling and Co. was the vendee in the Contract of
9ale. Moreover, the petitioner cannot be dee#ed a purchaser in good
faith for the record shows that it categoricall ad#itted it was aware of the
lease in favor of the Bonnevies, who were actuall occuping the sub(ect
propert at the ti#e it was sold to it. Although the Contract of :ease was
not annotated on the transfer certificate of title in the na#e of the late
3ose Renoso and Africa Renoso, the petitioner cannot den actual
=nowledge of such lease which was equivalent to and indeed #ore
binding than presu#ed notice b registration.
A purchaser in good faith and for value is one who bus the propert of
another without notice that so#e other person has a right to or interest in
such propert and pas a full and fair price for the sa#e at the ti#e of
such purchase or before he has notice of the clai# or interest of so#e
other person in the propert. Bood faith connotes an honest intention to
abstain fro# ta=ing unconscientious advantage of another. $ested b
these principles, the petitioner cannot tenabl clai# to be a buer in good
faith as it had notice of the lease of the propert b the Bonnevies and
such =nowledge should have cautioned it to loo= deeper into the
agree#ent to deter#ine if it involved stipulations that would pre(udice its
own interests.
$he petitioner insists that it was not aware of the right of first priorit
granted b the Contract of :ease. Assu#ing this to be true, we
nevertheless agree with the observation of the respondent court that+
"f Bu!#an-Bocaling failed to inquire about the ter#s of
the :ease Contract, which includes Par. ,; on priorit
right given to the Bonnevies, it had onl itself to bla#e.
8aving =nown that the propert it was buing was
under lease, it behooved it as a prudent person to
have required Renoso or the bro=er to show to it the
Contract of :ease in which Par. ,; is contained.
2(
Petitioners assert the alleged i#possibilit of perfor#ance because the entire
propert is indivisible propert. "t was petitioner Car#elo which fi?ed the li#its of the
propert it was leasing out. Co##on sense and fairness dictate that instead of
nullifing the agree#ent on that basis, the stipulation should be given effect b
including the indivisible appurtenances in the sale of the do#inant portion under the
right of first refusal. A valid and legal contract where the ascendant or the #ore
i#portant of the two parties is the landowner should be given effect, if possible,
instead of being nullified on a selfish prete?t posited b the owner. 7ollowing the
argu#ents of petitioners and the participation of the owner in the atte#pt to strip
Mafair of its rights, the right of first refusal should include not onl the propert
specified in the contracts of lease but also the appurtenant portions sold to
Equatorial which are clai#ed b petitioners to be indivisible. Car#elo acted in bad
faith when it sold the entire propert to Equatorial without infor#ing Mafair, a clear
violation of Mafair6s rights. *hile there was a series of e?changes of letters
evidencing the offer and counter-offers between the parties, Car#elo abandoned
the negotiations without giving Mafair full opportunit to negotiate within the @;-
da period.
Accordingl, even as it recogni!es the right of first refusal, this Court should also
order that Mafair be authori!ed to e?ercise its right of first refusal under the
contract to include the entiret of the indivisible propert. %he &oundaries of the
property sold should &e the &oundaries of the offer under the right of first refusal. As
to the re#ed to enforce Mafair6s right, the Court disagrees to a certain e?tent with
the concluding part of the dissenting opinion of 3ustice Hitug. $he doctrine
enunciated in Ang u Asuncion vs.!ourt of Appeals should be #odified, if not
a#plified under the peculiar facts of this case.
As also earlier e#phasi!ed, the contract of sale between Equatorial and Car#elo is
characteri!ed b bad faith, since it was =nowingl entered into in violation of the
rights of and to the pre(udice of Mafair. "n fact, as correctl observed b the Court
of Appeals, Equatorial ad#itted that its lawers had studied the contract of lease
prior to the sale. Equatorial6s =nowledge of the stipulations therein should have
cautioned it to loo= further into the agree#ent to deter#ine if it involved stipulations
that would pre(udice its own interests.
9
9ince Mafair has a right of first refusal, it can e?ercise the right onl if the
fraudulent sale is first set aside or rescinded. All of these #atters are now before us
and so there should be no piece#eal deter#ination of this case and leave festering
sores to deteriorate into endless litigation. $he facts of the case and considerations
of (ustice and equit require that we order rescission here and now. Rescission is a
relief allowed for the protection of one of the contracting parties and even third
persons fro# all in(ur and da#age the contract #a cause or to protect so#e
inco#patible and preferred right b the contract.
26
$he sale of the sub(ect real
propert b Car#elo to Equatorial should now be rescinded considering that
Mafair, which had substantial interest over the sub(ect propert, was pre(udiced b
the sale of the sub(ect propert to Equatorial without Car#elo conferring to Mafair
ever opportunit to negotiate within the @;-da stipulated period.
2)
$his Court has alwas been against #ultiplicit of suits where all re#edies
according to the facts and the law can be included. 9ince Car#elo sold the propert
for P..,@;;,;;;.;; to Equatorial, the price at which Mafair could have purchased
the propert is, therefore, fi?ed. "t can neither be #ore nor less. $here is no dispute
over it. $he da#ages which Mafair suffered are in ter#s of actual in(ur and lost
opportunities. $he fairest solution would be to allow Mafair to e?ercise its right of
first refusal at the price which it was entitled to accept or re(ect which is
P..,@;;,;;;.;;. $his is clear fro# the records.
$o follow an alternative solution that Car#elo and Mafair #a resu#e negotiations
for the sale to the latter of the disputed propert would be un(ust and un=ind to
Mafair because it is once #ore co#pelled to litigate to enforce its right. "t is not
proper to give it an e#pt or vacuous victor in this case. 7ro# the viewpoint of
Car#elo, it is li=e as=ing a fish if it would accept the choice of being thrown bac=
into the river. *h should Car#elo be rewarded for and allowed to profit fro#, its
wrongdoingG Prices of real estate have s=roc=eted. After having sold the propert
for P..,@;;,;;;.;;, wh should it be given another chance to sell it at an increased
priceG
Cnder the Ang u Asuncion vs. !ourt of Appeals decision, the Court stated that
there was nothing to e?ecute because a contract over the right of first refusal
belongs to a class of preparator (uridical relations governed not b the law on
contracts but b the codal provisions on human relations. $his #a appl here if the
contract is li#ited to the buing and selling of the real propert. 8owever, the
obligation of Car#elo to first offer the propert to Mafair is e#bodied in a contract.
"t is Paragraph / 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 re#ed encourages #ultiplicit of
suits. $here is so#ething to e?ecute and that is for Car#elo to co#pl with its
obligation to the propert under the right of the first refusal according to the ter#s at
which the should have been offered then to Mafair, at the price when that offer
should have been #ade. Also, Mafair has to accept the offer. $his (uridical relation
is not a#orphous nor is it #erel preparator. Paragraphs / of the two leases can
be e?ecuted according to their ter#s.
2n the question of interest pa#ents on the principal a#ount of P..,@;;,;;;.;;, it
#ust be borne in #ind that both Car#elo and Equatorial acted in bad faith.
Car#elo =nowingl and deliberatel bro=e a contract entered into with Mafair. "t
sold the propert to Equatorial with purpose and intend to withhold an notice or
=nowledge of the sale co#ing to the attention of Mafair. All the circu#stances
point to a calculated and contrived plan of non-co#pliance with the agree#ent of
first refusal.
2n the part of Equatorial, it cannot be a buer in good faith because it bought the
propert with notice and full =nowledge that Mafair had a right to or interest in the
propert superior to its own. Car#elo and Equatorial too= unconscientious
advantage of Mafair.
Neither #a Car#elo and Equatorial avail of considerations based on equit which
#ight warrant the grant of interests. $he vendor received as pa#ent fro# the
vendee what, at the ti#e, was a full and fair price for the propert. "t has used the
P..,@;;,;;;.;; all these ears earning inco#e or interest fro# the a#ount.
Equatorial, on the other hand, has received rents and otherwise profited fro# the
use of the propert turned over to it b Car#elo. "n fact, during all the ears that this
controvers was being litigated, Mafair paid rentals regularl to the buer who had
an inferior right to purchase the propert. Mafair is under no obligation to pa an
interests arising fro# this (udg#ent to either Car#elo or Equatorial.
*8ERE72RE, the petition for review of the decision of the Court of Appeals, dated
3une ,@, .11,, in CA-B.R. CH No. @,1./, is 8EREBD )EN"E). $he )eed of
Absolute 9ale between petitioners Equatorial Realt )evelop#ent, "nc. and
Car#elo ' Bauer#ann, "nc. is hereb dee#ed rescindedE petitioner Car#elo '
Bauer#ann is ordered to return to petitioner Equatorial Realt )evelop#ent the
purchase price. $he latter is directed to e?ecute the deeds and docu#ents
necessar to return ownership to Car#elo and Bauer#ann of the disputed lots.
Car#elo ' Bauer#ann is ordered to allow Mafair $heater, "nc. to bu the aforesaid
lots for P..,@;;,;;;.;;.
92 2R)ERE).
10