Tanay Recreation Center v. Fausto
REITERATIONFacts
The Antecedents: Petitioner Tanay Recreation Center and Development Corp. (TRCDC) was the lessee of a property owned by Catalina Matienzo Fausto under a Contract of Lease executed on August 1, 1971, which included a stipulation granting TRCDC the "priority right" to purchase the property should Fausto decide to sell it. The lease term was 20 years, subject to renewal. On August 8, 1990, Fausto sold the property to her daughter, respondent Anunciacion Fausto Pacunayen, for ₱10,000.00, and title was transferred to Pacunayen's name. On June 17, 1991, TRCDC informed Fausto of its intention to renew the lease. Pacunayen replied, asserting her ownership and demanding TRCDC vacate. Procedural History: TRCDC filed an Amended Complaint for Annulment of Deed of Sale, Specific Performance with Damages, and Injunction. The Regional Trial Court (RTC) extended the lease for seven years at ₱10,000.00 monthly rental and dismissed the damages claim. The Court of Appeals (CA) affirmed with modifications, ordering TRCDC to vacate, allowing Pacunayen to withdraw a deposit, ordering an accounting of unpaid rentals, and ordering TRCDC to pay monthly rentals for its continued stay after the extended period. The CA acknowledged TRCDC's priority right but interpreted it as applicable only to sales to strangers, not relatives, and ruled that TRCDC waived its right by acknowledging the transfer. The Petition: TRCDC filed a petition for review on certiorari, arguing that the CA erred in limiting the right of first refusal to sales to strangers and in holding that the right was inconsequential.
Issue(s)
Whether the Court of Appeals erred in holding that the contractual stipulation granting petitioner the priority right to purchase the leased premises shall only apply if the lessor decides to sell the same to strangers. Whether the Court of Appeals erred in holding that petitioner's priority right to purchase the leased premises is inconsequential. Whether the sale of the property to respondent Pacunayen, in violation of the right of first refusal, is rescissible. Whether the heirs of the deceased lessor are bound by the contract of lease and the right of first refusal; and whether petitioner waived its right of first refusal or is estopped from exercising it. Whether petitioner is entitled to actual damages, lost goodwill, moral damages, exemplary damages, attorney's fees, and costs of suit.
Ruling
The petition is partially granted. The Court rescinded the deed of sale between Fausto and Pacunayen, ordered the heirs of Fausto, represented by Pacunayen, to recognize TRCDC's priority right to purchase under reasonable terms, and ordered Pacunayen to pay TRCDC ₱20,000.00 as actual damages with legal interest and ₱10,000.00 as attorney's fees. The title shall remain with Pacunayen, to be cancelled only upon TRCDC's successful purchase. The case is remanded to the RTC for determination of reasonable terms.
Ratio Decidendi
On the scope of the right of first refusal: The Court held that the right of first refusal, as expressly provided in the contract of lease, is plain and unambiguous. It does not provide for any qualification that it may be exercised only when the sale is made to strangers. Therefore, the lessor had a legal duty to offer the property first to the lessee before selling it to anyone, including relatives. The CA's interpretation that the right only applies to sales to strangers was erroneous. On the validity and rescissibility of the sale: The Court reiterated the prevailing doctrine that a sale made in violation of a right of first refusal, while valid, is rescissible. This means the aggrieved party, TRCDC, may pursue an action for specific performance to enforce its right to purchase the property under the same terms and conditions offered to the third party, or under reasonable terms and conditions as determined by the Court in this case. On the binding effect of the contract on heirs: The Court affirmed that a lease contract is not essentially personal and its rights and obligations are transmissible to the heirs. Therefore, the heirs of Catalina Matienzo Fausto, including respondent Pacunayen, are bound by the lease contract and the right of first refusal. They stepped into the shoes of the deceased lessor and are obligated to fulfill the terms and conditions of the contract. On estoppel: The Court found no evidence that TRCDC waived its right of first refusal or is estopped from exercising it. TRCDC's actions, such as seeking a renewal of the lease and meeting with Pacunayen, were attempts to resolve the conflict and did not constitute an intentional and unequivocal abandonment of its right. Pacunayen was aware of TRCDC's right, and the sale to her was admitted to be a formality. On damages: The Court awarded ₱20,000.00 as actual damages for the closure of the cockpit, based on a reasonable estimation of lost income from rentals. Claims for lost goodwill, moral damages, and exemplary damages were denied for lack of sufficient proof or legal basis (e.g., corporations cannot claim moral damages). Attorney's fees of ₱10,000.00 were awarded as TRCDC was compelled to litigate to protect its interests.
Main Doctrine
A right of first refusal in a contract of lease is an integral part of the contract and is binding upon the heirs of the lessor. A sale made in violation of this right is valid but rescissible, and the lessee may exercise its option to purchase under reasonable terms and conditions.