Case Digest (G.R. No. 140479)
Facts:
Petitioners Rosencor Development Corporation and Rene Joaquin sought review of the Court of Appeals' June 25, 1999 reversal of the RTC decision in Civil Case No. Q-93-18582, an action filed Dec. 10, 1993 by Paterno Inquing, Irene Guillermo, and Federico Bantugan (with intervention by Fernando Magbanua and Lizza Tiangco) for rescission of a Deed of Absolute Sale dated Sept. 4, 1990 over a Tomas Morato Ave. property which respondents, longtime oral lessees since 1971, claimed they had an oral right of first refusal to purchase. The RTC dismissed the complaint by decision dated May 13, 1996; the Court of Appeals ordered rescission, reconveyance, and afforded respondents thirty days to exercise their option for P1,000,000, prompting this petition.
Issues:
- Did the Court of Appeals err in ordering the rescission of the Deed of Absolute Sale between Eufrocina de Leon and Rosencor?
- Did the Court of Appeals err in directing Eufrocina de Leon and the heirs to afford respondents the opportunity to exercise their right of first refusal?
- Can respondents’ oral right of first refusal be enforced despite petitioners’ reliance on the statute of frauds (Art. 1403, New Civil Code)?
Ruling:
The Court REVERSED the Court of Appeals and REINSTATED the RTC decision insofar as it dismissed the action for rescission and ordered payment of monthly rentals of P1,000.00 from May 1990 until respondents vacate. The Court held that while a right of first refusal need not be in writing and may be proved orally, rescission of the sale was inappropriate because petitioners acted in good faith and were in lawful possession.
Ratio:
The Court ruled that Article 1403 (the statute of frauds) does not encompass a right of first refusal, which is a preparatory grant and not a perfected sale, and thus may be proven by oral evidence. Rescission of a valid sale for violation of such a right is available where the purchaser acted in bad faith or had notice, as in Guzman, Equatorial, Litonjua precedents; here respondents failed to prove by clear and convincing evidence that Rosencor had notice of the oral right, registration or constructive notice being absent, so good faith was presumed and Art. 1385 barred rescission; respondents’ proper remedy was damages against the heirs, not rescission.
Doctrine:
- A right of first refusal is not covered by the statute of frauds (Art. 1403, New Civil Code) and may be proved orally.
- A contract of sale entered into in violation of a right of first refusal is valid but rescissible when the purchaser acted in bad faith or had notice of the prior right.
- Constructive or registered notice does not apply to an unrecorded oral right; good faith of the purchaser is presumed absent clear and convincing evidence to the contrary.
- When rescission is barred by the purchaser’s good faith possession, the injured party’s remedy is an action for damages, not automatic reconveyance.