Ang Yu Asuncion et al. vs. Court of Appeals and Buen Realty Corp.

(G.R. No. 109125, December 2, 1994)

Ponente: Vitug

Topic: Sales; Contract of sale v. Contract to sell; remedies for violation of right of first refusal

Facts:

Petitioners Ang Yu Asuncion et. al. are lessees of residential and commercial spaces owned by the Unjiengs. They have been leasing the property and possessing it since 1935 and have been paying rentals.

In 1986, the Unjiengs informed Petitioners Ang Yu Asuncion that the property was being sold and that Petitioners were being given priority to acquire them (Right of First Refusal). They agreed on a price of P5M but they had not yet agreed on the terms and conditions. Petitioners wrote to the Unjiengs twice, asking them to specify the terms and conditions for the sale but received no reply. Later, the petitioners found out that the property was already about to be sold, thus they instituted this case for Specific Performance [of the right of first refusal].

The Trial Court dismissed the case. The trial court also held that the Unjieng’s offer to sell was never accepted by the Petitioners for the reason that they did not agree upon the terms and conditions of the proposed sale, hence, there was no contract of sale at all. Nonetheless, the lower court ruled that should the defendants subsequently offer their property for sale at a price of P11-million or below, plaintiffs will have the right of first refusal.

The Court of Appeals affirmed the decision of the Trial Court.

In the meantime, in 1990, the property was sold to De Buen Realty, Private Respondent in this case. The title to the property was transferred into the name of De Buen and demanded that the Petitioners vacate the premises.

Because of this, Petitioners filed a motion for execution of the CA judgement. At first, CA directed the Sheriff to execute an order directing the Unjiengs to issue a Deed of Sale in the Petitioner’s favour and nullified the sale to De Buen Realty. But then, the CA reversed itself when the Private Respondents Appealed.

Issues:

1. Whether or not the Contract of Sale is perfected by the grant of a Right of First Refusal.
2. Whether or not a Right of First Refusal may be enforced in an action for Specific Performance.

Held:

1. No. A Right of First Refusal is not a Perfected Contract of Sale under Art. 1458 or an option under Par. 2 Art 1479 or an offer under Art. 1319. In a Right of First Refusal, only the object of the contract is determinate. This means that no vinculum juris is created between the seller-offeror and the buyer-offeree.
2. No. Since a contractual relationship does not exist between the parties, a Right of First Refusal may not be enforced through an action for specific performance. Its conduct is governed by the law on human relations under Art. 19-21 of the Civil Code and not by contract law.

Therefore, the Supreme Court held that the CA could not have decreed at the time the execution of any deed of sale between the Unjiengs and Petitioners.

Other Rules, Comments and Discussion:

This case is notable because it lays down the rules on options contracts and right of first refusal as well as promises to buy and sell. First, the Supreme Court discussed the stages of the formation of a sales contract, these are:

1. Negotiation – covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected).
2. Perfection – takes place upon the concurrence of the essential elements thereof. In a sales contract this is governed by Art. 1458
3. Consummation – begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof

Until the contract is perfected (No. 2), it cannot, as an independent source of obligation, serve as a binding juridical relation. A sales contract is perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over which the latter agrees (Art 1458).

Under Art. 1458, there is no perfection of a sale under a “Contract to Sell”. A Contract to Sell is characterized as a conditional sale and the breach of the suspensive condition will prevent the obligation to transfer title from acquiring obligatory force.

Promises to Buy and Sell

Unconditional mutual promise to buy and sell – As long as the object is made determinate and the price is fixed, can be obligatory on the parties, and compliance therewith may accordingly be exacted. The Right of First Refusal falls under this classification.

Accepted unilateral promise – If it specifies the thing to be sold and the price to be paid and when coupled with a valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract of option. This contract is legally binding. (Par. 2 Art. 1458) Note however, that the option is a contract separate and distinct from the contract of sale. Once the option is exercised before it is withdrawn, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings.

Offers with a Period

Where a period is given to the offeree within which to accept the offer, the following rules generally govern:

1. If the period is not itself founded upon or supported by a consideration – Offeror may withdraw offer at any time before its acceptance (or knowledge of its acceptance). However, the right to withdraw must not be exercised whimsically or arbitrarily otherwise it can give rise to damages under Art. 19 of the New Civil Code
2. If period is founded on a separate consideration – This is a perfected contract of option. Withdrawal of the offer within the period of the option is deemed a breach of the contract of option (not the sale). “If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract (“object” of the option) since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for damages for breach of the option.”
3. Earnest money – This is not an offer with a period. Earnest money is distinguished from the option contract if the consideration given will be considered as a part of the purchase price of the object of the sale. Earnest money is evidence of a perfected contract of sale. (Art. 1482)

Right of First Refusal

This is “an innovative juridical relation” because it is neither a perfected contract of sale under Art. 1458 nor an option contract under par. 2 Art 1479. The object might be made determinate, the exercise of the right, however, is dependent on the offeror’s eventual intention to enter into a binding juridical relation with another but also on terms and conditions such as price. There is no juridical tie or vinculum juris.

Breach of the right cannot justify correspondingly an issuance of a writ of execution under a court judgement that recognizes its existence, such as in Ang Yu Asuncion. An action for Specific Performance is not allowed under a Right of First Refusal because doing so would negate the indispensable element of consensuality in the perfection of contracts.

This right is not inconsequential because it gives right to an action for damages under Art. 19.

Other Acts that Won’t Bind

Public advertisements or solicitations – Construed as mere invitations to make offers and/or proposals.

Related Cases

The cases of Equatorial v. Mayfair and Parañaque Kings v. Court of Appeals held that if a sale happens in violation of a Right of First Refusal where the buyer is aware of the existence of that right in favor of another (such as when it is written in a lease contract), the sale may be rescinded and the seller may be forced to offer the property to the party with the Right of First Refusal.

However, the case of Ang Yu Asuncion may still be good law for cases not involving a third party buyer in bad faith.