Case Summary (G.R. No. 84728)
Applicable Law
1987 Philippine Constitution (contract impairment clause), Civil Code provisions on lease (Articles 1643–1670) and on option and right of first refusal.
Factual Background
In the 1960s, NDC held a 10-hectare property in Sta. Mesa, Manila. In 1977–78, it executed two ten-year leases with GHRC over 2,407 m2 and 3,222.80 m2, each renewable by mutual consent and granting GHRC an “option to purchase” at a price to be negotiated when exercised.
Lease Agreements and Improvements
GHRC built P5 million worth of permanent industrial and warehouse structures, leased to various enterprises, generating employment. Under the contracts, improvements became NDC’s upon lease expiry.
Exercise of Renewal and Discovery of Sale
On June 13 and August 12, 1988, GHRC formally sought renewal and priority to negotiate purchase; NDC did not respond but continued to accept rents. GHRC later learned NDC was negotiating sale to a third party.
Governmental Transfer Pursuant to Memorandum Order No. 214
By Memorandum Order No. 214 (Jan 6, 1989), President Aquino directed transfer of the NDC Compound to the national government and conveyance to PUP at acquisition cost (P554.74/m2), extinguishing NDC’s indebtedness.
Injunctive Relief and Third-Party Intervention
On Feb 20, 1989, the RTC enjoined NDC and agents from disposing the leased premises. PUP moved to intervene as purchaser pendente lite and was admitted as defendant-intervenor.
Conflicting Proceedings and Temporary Restraint
PUP filed an ejectment case against GHRC in January 1991. GHRC amended its complaint in the RTC of Makati to enjoin that ejectment; the court restrained PUP and the MeTC judge from proceeding.
Legal Challenges to the Memorandum Order
GHRC alleged Memorandum Order No. 214 violated the injunction, the constitutional prohibition on impairment of contracts, legislative prerogatives, and amounted to a bill of attainder. Alternatively, it sought enforcement of its purchase option.
Coordination with Related Firestone Case
Proceedings were suspended pending this Court’s resolution of a similar case involving Firestone Ceramics, Inc., another NDC lessee whose right of first refusal was allegedly violated by NDC’s sale to PUP.
Supreme Court Ruling on Firestone Ceramics
In G.R. Nos. 143513/143590 (Nov 14, 2001), this Court held Firestone’s right of first refusal under its interrelated leases was violated and ordered NDC to reconvey at P1,500/m2, recognizing the unitary nature of adjacent leased parcels and their purchase option clause.
RTC Judgment on GHRC’s Right of First Refusal
On Nov 25, 2004, the RTC of Makati upheld GHRC’s right of first refusal, ordered a ground survey and reconveyance to GHRC at P554.74/m2, and awarded P100,000 attorney’s fees against NDC.
Court of Appeals’ Affirmation
By Decision dated June 25, 2008, the CA affirmed the RTC, finding (1) implied renewal of lease upon NDC’s silence and acceptance of rent, (2) interrelation of both lease contracts as a commercial complex, and (3) violated right of first refusal under the second contract covering 3,222.80 m2.
PUP’s Contentions on Option Expiry and Implied Renewal
PUP argued the option to purchase expired with the original ten-year leases in September 1988; any implied month-to-month renewal did not carry over the purchase option under Article 1670 of the Civil Code.
NDC’s Arguments on Lease Renewal and Consideration
NDC contended renewal required “mutual consent” and that post-expiry monthly tenancy excluded option rights. It further argued the P554.74/m2 price applied only to inter-agency transfer and was not the fair market value for a private sale.
Issue on Applicability of Precedent
Whether this Court’s Firestone ruling applies to GHRC’s claim that NDC’s sale to PUP violated its right of first refusal and whether GHRC remains entitled to purchase under its lease-option.
Distinction Between Option and Right of First Refusal
An “option” fixes price and period; a “right of first refusal” grants priority to match terms when the owner decides to sell. GHRC’s clause, with no fixed purchase price or period, functioned as a right of first refusal.
Breach of Right of First Refusal Prior to Lease Expiry
Evidence showed NDC negotiated sale with the national government as early as July 15, 1988—before lease expiry—while GHRC had formally exercised its option in August 1988, rendering NDC’s sale negotiations a breach of GHRC’s first refusal right.
Irrelevance of Implied Renewal to Violation Timeline
Because breach occurred before October 1, 1988 (expiration of ten-year period), the question of whether an implied month-to-month renewal carried over the right is moot; GHRC’s first refusal was still subsisting during negotiations.
Rejection of NDC’s Timing Argument
NDC’s claim that GHRC’s right ended at lease expiry ignores GHRC’s timely notices and NDC’s failure to respond, demonstrating NDC treated the leases as in force up to and beyond September 1988.
Evidence of GHRC’s Timely Exercise and NDC’s Dismissal
GHRC’s August 12, 1988 letter clearly invoked renewal and purchase option; NDC’s characterization of those communications as “mere requests” was contradicted by its conduct of accepting rent and pr
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Procedural History
- Consolidated petitions under Rule 45 of the 1997 Rules of Civil Procedure filed by Polytechnic University of the Philippines (PUP) and National Development Company (NDC) to reverse the June 25, 2008 Decision and August 22, 2008 Resolution of the Court of Appeals (CA) in CA-G.R. CV No. 84399.
- The CA had affirmed the November 25, 2004 Decision of the Regional Trial Court (RTC) of Makati City, Branch 144 in Civil Case No. 88-2238.
- Both PUP (G.R. No. 183612) and NDC (G.R. No. 184260) sought relief from this Court by separate petitions, consolidated for final disposition.
Undisputed Facts
- NDC, a government-owned and controlled corporation, owned a ten-hectare parcel along Pureza St., Sta. Mesa, Manila (“NDC Compound”) under Titles 92885, 110301, and 145470.
- PUP, a public non-profit educational institution, sought campus expansion adjacent to the NDC Compound.
- On September 7, 1977, NDC and Golden Horizon Realty Corporation (GHRC) executed Lease Contract C-33-77 for 2,407 sq. m. for ten years, renewable for another ten years by mutual consent.
- On May 4, 1978, a second lease, C-12-78, covered 3,222.80 sq. m., with similar ten-year term, mutual ten-year renewal option, and a lessee’s “option to purchase” at a to-be-negotiated price.
- GHRC constructed P5 million worth of “strong material” buildings and improvements that automatically belonged to NDC upon lease expiry and sub-leased to various manufacturers, generating hundreds of jobs.
Exercise of Option and Early Sale Plans
- On June 13, 1988, GHRC formally notified NDC of its intention to renew the lease for another ten years; a follow-up letter on August 12, 1988, reiterated renewal request and asked for priority to negotiate purchase.
- NDC ignored these notices but continued accepting rent and allowing GHRC’s possession.
- GHRC later discovered NDC’s clandestine negotiations to sell the entire compound to a third party (PUP/National Government).
Injunctive Proceedings and Intervention
- October 21, 1988: GHRC filed a complaint in the RTC for specific performance, damages, preliminary injunction, and TRO to stop NDC’s sale.
- January 6, 1989: President Aquino issued Memorandum Order No. 214 directing transfer of the NDC Compound to the National Government, to be conve