Rosencor Development Corporation v. Inquing
REITERATIONFacts
The Antecedents: Respondents were lessees of a property since 1971, allegedly granted a verbal pre-emptive right to purchase by the lessors, spouses Tiangco. After the lessors' death, their heirs, represented by Eufrocina de Leon, allegedly continued to recognize this right. In June 1990, the lessees received a letter demanding they vacate for demolition. Later, de Leon offered to sell the property to them for P2,000,000.00. The lessees offered P1,000,000.00, but received no answer. In November 1990, Rene Joaquin introduced himself as the new owner. In January 1991, lessees received another letter demanding they vacate. De Leon then advised them the heirs sold the property to Rosencor Development Corporation (Rosencor). Atty. Aguila, representing Rosencor/Joaquin, sent letters demanding they vacate. Lessees discovered the Deed of Absolute Sale between de Leon and Rosencor was executed on September 4, 1990, for P726,000.00, after de Leon had offered to sell to them in October 1990. They offered to reimburse de Leon P726,000.00 plus P274,000.00 to match their P1,000,000.00 offer, which was refused. Procedural History: Respondents filed a complaint for annulment, later amended to rescission, of the deed of sale. Intervenors also filed a complaint-in-intervention. The Regional Trial Court (RTC) dismissed the complaint, holding the oral right of redemption (first refusal) was unenforceable under the Statute of Frauds and ordered respondents to pay back rentals. The Court of Appeals (CA) reversed the RTC, ordering rescission of the deed of sale, reconveyance to de Leon, and affording respondents 30 days to exercise their right of first refusal by paying P1,000,000.00, while ordering respondents to pay back rentals. The Petition: Petitioners Rosencor and Rene Joaquin seek reversal of the CA decision, arguing the CA erred in ordering rescission, mandating the exercise of the right of first refusal, and concluding the right was established despite the Statute of Frauds defense.
Issue(s)
Whether a right of first refusal is covered by the Statute of Frauds. Whether the respondents satisfactorily proved their right of first refusal. Whether the Deed of Absolute Sale between Rosencor and Eufrocina de Leon should be rescinded due to the violation of the respondents' right of first refusal. Whether the petitioners acted in bad faith in purchasing the property, and the appropriate remedy for the respondents.
Ruling
The Supreme Court reversed the Court of Appeals decision and reinstated the RTC decision dismissing the action for rescission, but maintained the order for payment of monthly rentals. The Court held that while a right of first refusal need not be in writing to be enforceable, a contract of sale violating such right is rescissible only if the buyer acted in bad faith. Since the petitioners were found to have acted in good faith, the sale to them cannot be rescinded. The remedy for the respondents is an action for damages against the vendor.
Ratio Decidendi
On the applicability of the Statute of Frauds to a right of first refusal: The Court held that a right of first refusal is not among the contracts enumerated in Article 1403, paragraph 2 of the Civil Code that are covered by the Statute of Frauds. Therefore, such a right need not be in writing to be enforceable and may be proven by oral evidence. The Statute of Frauds applies only to specific kinds of transactions and presupposes the existence of a perfected contract, which a right of first refusal is not. It is merely a contractual grant of a preferential right, not a perfected contract of sale. On the satisfactory proof of the right of first refusal: The Court agreed with the Court of Appeals that the respondents adequately proved the existence of their right of first refusal. This was based on the uniform testimonies of the lessees who were allegedly promised this right by the lessors and their heirs. Furthermore, Eufrocina de Leon's letter offering to sell the property to the respondents at a certain price was considered strong evidence recognizing their right. The petitioners' failure to present contradictory evidence before the trial court, particularly the lack of testimony from Eufrocina de Leon, further supported the finding that the right was substantially proven. On the rescission of the Deed of Absolute Sale: The Court distinguished this case from previous rulings where rescission was ordered. In those cases, the vendees were found to have acted in bad faith, being aware of the right of first refusal. In the present case, the Court found no clear and convincing proof that petitioners Rosencor and Rene Joaquin were aware of the oral right of first refusal prior to the sale on September 4, 1990. The letter from Atty. Aguila did not mention the right of first refusal, and Eufrocina de Leon's letter recognizing the right was dated after the sale. Therefore, petitioners could not be deemed to have acted in bad faith. The Court reiterated that rescission under Article 1381 of the Civil Code requires proof of fraud or injury to third persons, and Article 1385 provides that rescission shall not take place if the property is legally in the possession of a third person who did not act in bad faith. On the petitioners' good faith and the respondents' remedy: The Court reiterated the presumption of good faith. It found that the respondents failed to present evidence showing that petitioners were aware of the oral right of first refusal before the sale. The oral nature of the lease and the right of first refusal meant that constructive notice through registration was inapplicable. Consequently, absent clear and convincing evidence of bad faith, petitioners were presumed to have acted in good faith in purchasing the property. Since rescission was not proper due to the petitioners' good faith, the Court held that the respondents' remedy was not to rescind the sale but to file an action for damages against the heirs of the spouses Tiangco for the unjustified disregard of their right of first refusal. This aligns with the ruling in Ang Yu Asuncion v. Court of Appeals.
Main Doctrine
A right of first refusal, being an agreement not enumerated under Article 1403, paragraph 2 of the Civil Code, is not covered by the Statute of Frauds and need not be in writing to be enforceable. However, a contract of sale entered into in violation of a right of first refusal is rescissible only if the vendee acted in bad faith; otherwise, the remedy is an action for damages against the vendor.