Case Summary (G.R. No. 202050)
Key Dates
• 6 August 1976 – Lease agreement executed between Lusteveco and Keppel
• 2000 – Keppel attains 60% Filipino ownership and notifies PNOC of its intent to exercise purchase option
• 26 September 2003 – Keppel files for specific performance
• 12 January 2006 – RTC of Batangas City rules in favor of Keppel
• 19 December 2011 – CA affirms RTC decision
• 14 May 2012 – CA denies PNOC’s motion for reconsideration
• 25 July 2016 – Supreme Court decision
Applicable Law
• 1987 Philippine Constitution, Article XII, Section 7 (nationalization of land ownership)
• Civil Code Articles 1318, 1324, 1354, 1458, 1460, and 1479
• Jurisprudence on alien landholding and option contracts: Philippine Banking Corp. v. Lui She; Vda. de Quirino v. Palarca; Sanchez v. Rigos; Gamboa v. Teves
Facts
• Lusteveco leased 11 hectares in Bauan, Batangas, to Keppel for 25 years at ₱2.1 million, with rent convertible into Keppel equity.
• Paragraph 5 granted Keppel an absolute option to buy at ₱4.09 million at the end of Year 25 (discounted if earlier) and, if still unqualified, renewed the lease another 25 years with a purchase option exercisable up to Year 30 for ₱100.
• Paragraph 6 prohibited Lusteveco from selling or assigning the land without Keppel’s prior written consent.
• PNOC acquired the land and assumed the lease; the agreement was annotated on PNOC’s title.
• Keppel achieved Filipino majority ownership (60%) by December 2000 and repeatedly demanded sale; PNOC refused.
• Keppel sued for specific performance; RTC and CA ruled for Keppel. PNOC elevated to the Supreme Court.
Issues
- Does the 1976 lease-and-option scheme constitute a “virtual sale” in violation of the constitutional ban on alien landholding?
- Is the option to purchase supported by a separate consideration as required by Civil Code Article 1479?
- Has Keppel complied with the 60% Filipino equity requirement to qualify for land ownership under the Constitution and Gamboa v. Teves?
Supreme Court Ruling
Constitutionality of the Agreement
– The lease-and-option arrangement is constitutional. Unlike Lui She’s residential lease, this agreement served an industrial shipyard purpose, justified by Keppel’s substantial investments (₱60 million in preliminary works and ₱177 million in improvements).
– Lusteveco retained the ability to transfer the land with Keppel’s consent and did so in favor of PNOC, negating any staged divestment of ownership rights.
Validity of the Option Contract
– No separate, clearly specified consideration supports the purchase option within the lease. Under Article 1479, an option must identify a distinct benefit or detriment; here, rent payments and equity conversion rights form part of the sale consideration, not a standalone option consideration.
– Nevertheless, an option unsupported by separate consideration remains a mere offer. Per Articles 1324 and 1479 (as harmonized by Sanchez v. Rigos), PNOC’s failure to withdraw that offer before
Case Syllabus (G.R. No. 202050)
Facts of the Lease Agreement and Option to Purchase
- On 6 August 1976, Luzon Stevedoring Corporation (Lusteveco) leased 11 hectares of land in Bauan, Batangas to Keppel Philippines Holdings, Inc. (then Keppel Philippines Shipyard, Inc.) for 25 years at ₱2.1 million.
- Lusteveco had the option to convert all or part of the rental fee into equity shares of Keppel at ₱100 per share upon two months’ written notice within four years of the agreement.
- At the end of the 25-year term, Keppel had a “firm and absolute option to purchase” the land for ₱4.09 million, discounted at 16% per annum for early exercise, provided Keppel was then qualified under Philippine law to own land (i.e., ≥ 60% Filipino shareholding).
- If Keppel remained unqualified in 2001, the lease automatically renewed for another 25 years on the same terms (except rent set at ₱4.09 million) with the same purchase option extended through year 30 at a nominal ₱100 consideration.
- Lusteveco warranted not to sell or assign its rights without Keppel’s prior written consent during the lease’s lifetime.
- In 1979, PNOC’s subsidiary acquired Lusteveco’s assets (including the leased land), and eventually PNOC took over the lease agreement, which was annotated on PNOC’s title as Entry No. 65340.
Procedural History
- 8 December 2000: Keppel notified PNOC that it had achieved ≥ 60% Filipino ownership and stood ready to exercise its purchase option.
- PNOC did not accede and referred the matter to the Government Corporate Counsel, which opined Keppel was not yet entitled to purchase.
- 26 September 2003: Keppel filed a complaint for specific performance against PNOC in RTC Batangas City (Civil Case No. 7364).
- PNOC answered, alleging (a) the agreement was a scheme to evade the constitutional ban on alien landholding, (b) the option lacked separate consideration, and (c) PNOC was not privy to the original contract.
- 12 January 2006: RTC rendered judgment in favor of Keppel, ordering PNOC to execute a deed of absolute sale upon Keppel’s payment of ₱4.09 million.
- PNOC appealed to the Court of Appeals (CA-G.R. CV No. 86830).
- 19 December 2011: CA affirmed the RTC decision in toto, upholding the validity of the option embedded in the reciprocal contract.
- 14 May 2012: CA denied PNOC’s motion for reconsideration.
- PNOC filed a Rule 45 petition before the Supreme Court to challenge the CA decisions.
Parties’ Contentions
- PNOC argues:
- The agreement’s 25-year lease renewable for another 25 years, the nominal ₱100 option between years 25 a