Equatorial Realty v. Mayfair Theater
G.R. No. 106063November 21, 1996
Study material, not legal advice. Written and checked by the PhilippineLaws team to the best of our knowledge; not reviewed by a lawyer. A digest is a summary — the full decision is the authority, so read it before you cite it.
Cited for
Right of First Refusal
Why it matters
A lease clause giving the lessee the first chance to buy if the lessor decides to sell is a right of first refusal, not an option, and needs no consideration separate from the lease. A sale to a third person who knew of that right is rescissible, and the grantee may be allowed to buy the property at the price the third person paid. On this remedy the Court modified, or at least amplified, Ang Yu Asuncion, which had confined the remedy to damages.
Digest
Carmelo & Bauermann, Inc. (Carmelo) owned land and two buildings on C.M. Recto Avenue, Manila. In 1967 and 1969 it leased portions to Mayfair Theater, Inc. (Mayfair) for 20 years each, and Mayfair operated two movie theaters there. Paragraph 8 of both leases stated: "if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to purchase the same," and required any other buyer to respect the lease. In August 1974 Carmelo told Mayfair by telephone that it wanted to sell the entire property and asked whether Mayfair would buy it for six to seven million pesos. Mayfair replied by letter invoking paragraph 8, but Carmelo did not answer. In July 1978 Carmelo sold the whole property to Equatorial Realty Development, Inc. (Equatorial) for P11,300,000. Mayfair sued for specific performance and annulment of the sale. The defendants argued that the "option" was void for lack of a separate consideration and could not be performed because the leased portions could not be sold separately. The trial court dismissed the complaint. The Court of Appeals reversed, treating paragraph 8 as a right of first refusal.
- 1Whether paragraph 8 is an option contract that requires a separate consideration under Art. 1479 of the Civil Code, or a right of first refusal.
- 2Whether the sale to Equatorial may be rescinded and Mayfair allowed to buy the property.
Paragraph 8 grants a right of first refusal, not an option. An option under Art. 1479, par. 2 requires a consideration distinct from the price and a fixed price, and paragraph 8 fixed no price. The right is "an integral part of the contracts of lease. The consideration is built into the reciprocal obligations of the parties." In reciprocal contracts, each party's promise is the consideration for the other's (Vda. de Quirino v. Palarca). The sale was rescinded, and Mayfair may buy the property. Carmelo breached the right by abandoning negotiations and selling without notice to Mayfair. Equatorial was a buyer in bad faith because its lawyers had studied the leases before the sale. Following Guzman, Bocaling & Co. v. Bonnevie, the sale is rescissible under Arts. 1380 and 1381(3). The claimed indivisibility of the property was no excuse: "The boundaries of the property sold should be the boundaries of the offer under the right of first refusal." The Court stated that Ang Yu Asuncion "should be modified, if not amplified" on these facts. Because the obligation to offer the property first was embodied in a contract, it may be enforced under the law on contracts, and not only through damages under the provisions on human relations. To avoid multiple suits, the Court allowed Mayfair to buy at P11,300,000, the price Carmelo had accepted. Mayfair owes no interest because both Carmelo and Equatorial acted in bad faith. The petition was denied. The sale was deemed rescinded, Carmelo was ordered to return the price to Equatorial, Equatorial was directed to reconvey the property to Carmelo, and Carmelo was ordered to allow Mayfair to buy it for P11,300,000.
Checked against the full decision by the PhilippineLaws team on September 21, 2026. Not reviewed by a lawyer.
Separate opinions
Agrees the sale should be rescinded and that Mayfair may buy the entire property for P11,300,000, but without the 12% compounded interest another Justice had proposed.
Agrees paragraph 8 is a right of first refusal, but holds its breach gives only damages under Art. 19. Art. 1381(3) covers contracts in fraud of creditors, so she would neither rescind the sale nor compel a sale at P11,300,000.
A right of first refusal is not a contract; under Ang Yu its breach supports only damages, not specific performance. Art. 1381(3) was misapplied. He would reinstate the trial court's judgment. Torres, Jr., J. joined.
Labelled a Separate Concurring Opinion. Agrees the sale is rescissible and the right of first refusal may be enforced by specific performance; treats Ang Yu's contrary statement as obiter and debatable.