G.R. No. 117501 - Solid Homes, Inc. vs. Court of Appeals

Case Summary (G.R. No. 117501)

Key Dates and Procedural Posture

Lease commenced August 1, 1982 (ten-year renewable). Mortgage foreclosure and auction occurred prior to March 7, 1989 (redemption period). Riviera filed suit on August 31, 1989 to compel transfer of title alleging violation of its right of first refusal. Trial court (RTC, Branch 89) dismissed Riviera’s complaint (March 20, 1990). Court of Appeals affirmed (Decision dated June 6, 1994). Supreme Court denied the petition for review and affirmed the Court of Appeals (Decision dated April 5, 2002). Applicable constitutional framework: 1987 Philippine Constitution.

Factual Background and Negotiations

Reyes executed a lease to Riviera in November 1982. The leased parcel was subject to a mortgage in favor of Prudential Bank which was foreclosed; the mortgagee became highest bidder and redemption period expired March 7, 1989. Reyes attempted to sell the property and notified Riviera in accordance with paragraph 11. Over the negotiation period Reyes’ asking price was P6,000.00/sq.m.; Riviera’s initial position fluctuated between P3,500.00, P4,000.00, and ultimately a firm P5,000.00/sq.m., with a later offer specifying payment terms and a reduced offer in February 1989. Riviera repeatedly characterized P5,000.00 as its fixed and final price.

Offer Communications and Alinea’s Intercession

Atty. Irineo S. Juan (counsel for Reyes) served notice (Nov. 2, 1988) invoking Riviera’s right of first refusal and setting a ten-day period to exercise it. Riviera acknowledged interest (Nov. 22, 1988) but insisted on P5,000.00/sq.m. Subsequent exchanges included Reyes’ nephew, Atty. Estanislao Alinea, asking Riviera to raise its offer; Riviera declined to increase beyond P5,000.00. On December 5, 1988, counsel for Reyes informed Riviera that its failure to accept Reyes’ terms resulted in a waiver of the pre-emptive right. On December 5–6, 1988, Reyes negotiated with Traballo (Cypress president), who later, with Cornhill, redeemed the property and purchased it.

Sale and Post-Sale Transactions

Cypress and Cornhill redeemed the property in or about February 1989 and executed a Deed of Absolute Sale from Reyes on May 1, 1989 for P5,395,400.00 (equivalent to P5,300.00/sq.m.). On the same date, Cypress and Cornhill mortgaged the property to Urban Development Bank for P3,000,000.00. Riviera then sought resale of the property to it, claiming violation of its right of first refusal; after failed extrajudicial attempts, Riviera instituted the present action seeking specific performance by transfer upon payment.

Trial Court Findings

The trial court dismissed Riviera’s complaint and counterclaims, reasoning that Riviera had consistently refused to meet Reyes’ asking price and had been inflexible in negotiations. The court found that Reyes afforded Riviera repeated opportunities to buy and that Riviera’s fixed position effectively forfeited its right of first refusal. The court held that Reyes acted in good faith and that, given Riviera’s unbending stance, Reyes was not obliged to disclose intervening offers or further negotiate.

Court of Appeals Reasoning

The Court of Appeals affirmed the RTC judgment. It emphasized Riviera’s uncompromising counter-offer of P5,000.00/sq.m. on all occasions and treated that unilateral valuation as binding in the commercial context. The appellate court accepted the trial court’s view that Reyes had acted in good faith and had given Riviera extra leeway, that disclosure of Cypress/Cornhill’s offer would have been futile given Riviera’s intransigence, and that equity favored upholding the consummated sale. The appellate court also invoked estoppel principles, concluding Riviera could not belatedly claim it would have matched a higher offer after repeatedly declining to increase its own.

Issues Presented to the Supreme Court

Riviera raised four principal assignments of error: (I) grave abuse of discretion by the Court of Appeals in ruling Riviera lost its right of first refusal; (II) failure to find Reyes deceived Riviera; (III) denial of reconsideration by the Court of Appeals; and (IV) alleged nullity of the appellate decision due to Reyes’ death and initial lack of substitution.

Jurisdictional and Procedural Considerations

The Supreme Court treated the petition as a Rule 45 petition for review on certiorari (appeal) rather than a Rule 65 special civil action (certiorari), explaining the distinction that errors of judgment in exercise of jurisdiction are reviewable by appeal (Rule 45) while jurisdictional errors are appropriately addressed under certiorari (Rule 65). The Court noted that appeal from a final disposition of the Court of Appeals is by petition for review under Rule 45.

Applicable Law and Controlling Doctrines on Right of First Refusal

The Court reviewed the evolution of jurisprudence concerning a lessee’s right of first refusal, citing decisions beginning with Guzman, Bocaling & Co. v. Bonnevie (1992), the Court’s divergence in Ang Yu Asuncion (1994), and subsequent cases Equatorial Realty (1996) and Parañaque Kings (1997). The prevailing doctrine, as summarized by the Court, is that a right of first refusal requires identity of terms and conditions between the offer made to the lessee and the eventual sale to a third party; a contract of sale entered in violation of a right of first refusal is valid but rescissible. The Court, however, underscored that general propositions must be applied to the particular factual matrix of each case.

Principles of Contract Interpretation and Practical Construction

The Court reiterated cardinal rules of contract interpretation: the parties’ intentions are paramount; contemporaneous and subsequent acts are persuasive evidence of intent; and practical construction by the parties’ conduct is an important index of meaning (Article 1371, New Civil Code). The Court observed that where parties have adopted a practical construction through partial performance or conduct, the court should respect that construction in ascertaining mutual intent.

Court’s Application of Facts to Law: Good Faith, Silence, and Duty to Disclose

Applying the above principles, the Court found that the parties’ conduct reflected a shared understanding that the right of first refusal required Reyes to offer the property to Riviera, which he did repeatedly. Riviera’s repeated and explicit refusal to exceed P5,000.00/sq.m. demonstrated a firm, unbending position and exploitation of the time element (redemption period). The

Case Syllabus (G.R. No. 117501)

Procedural Posture

Petition for review on certiorari to the Supreme Court from the Decision of the Court of Appeals, Special Seventh Division, dated June 6, 1994 in CA-G.R. CV No. 26513, which affirmed the Regional Trial Court of Quezon City, Branch 89 Decision dated March 20, 1990 dismissing Civil Case No. Q-89-3371.
Civil Case No. Q-89-3371 was filed by Riviera Filipina, Inc. (Riviera) on August 31, 1989 to compel transfer of title covering a 1,018 square meter parcel of land along EDSA, Quezon City, alleging violation of its right of first refusal under a lease.
Riviera appealed the trial court dismissal to the Court of Appeals; the CA affirmed in full. Riviera filed a motion for reconsideration before the CA, which was denied by Resolution dated September 22, 1994.
Riviera then filed the instant petition to the Supreme Court, asserting specific errors by the Court of Appeals and alleging grave abuse of discretion.

Parties and Property

Petitioner: Riviera Filipina, Inc.
Respondents/Appellees: Court of Appeals; Juan L. Reyes (now deceased), subsequently substituted by his heirs Estefania B. Reyes, Juanita R. De La Rosa, Juan B. Reyes, Jr., and Fidel B. Reyes; Philippine Cypress Construction & Development Corporation (Cypress); Cornhill Trading Corporation (Cornhill); and Urban Development Bank.
Subject property: a 1,018 square meter parcel located along EDSA, Quezon City, covered by Transfer Certificate of Title No. 186326 in the name of Juan L. Reyes.
The subject parcel had been encumbered by a Real Estate Mortgage in favor of Prudential Bank; Prudential foreclosed extrajudicially and became highest bidder at the public auction; redemption period set to expire on March 7, 1989.

Lease Agreement and Right of First Refusal Provision

On November 23, 1982, Juan L. Reyes executed a Contract of Lease with Riviera: a ten-year renewable lease beginning August 1, 1982, covering the 1,018 sqm parcel (Doc. No. 365, etc.).
Paragraph 11 of the lease expressly provided that "a LESSEE shall have the right of first refusal should the LESSOR decide to sell the property during the term of the lease."
Riviera’s contention: that this contractual right of first refusal was violated when Reyes sold the property to Cypress and Cornhill.

Chronology of Negotiations Between Reyes and Riviera

Upon inability to redeem the foreclosed property by the redemption deadline, Reyes decided to sell the property and notified Riviera per Paragraph 11.
Initial offer by Reyes to Riviera, through Riviera President Vicente C. Angeles: P5,000.00 per square meter; Angeles counter-bargained at P3,500.00 per sqm (Reyes refused).
Angeles requested time to consult Riviera’s board.
Approximately seven months later (sometime in October 1988), Angeles communicated an offer of P4,000.00 per sqm to Reyes; Reyes rejected and asked P6,000.00 per sqm, citing increased value from Araneta plans.
November 2, 1988 letter from Atty. Irineo S. Juan, counsel for Reyes, informed Riviera that Reyes was selling at P6,000.00 per sqm, net of taxes and charges, and gave Riviera ten (10) days from receipt to exercise its right of first refusal under Paragraph 11, failing which Riviera would be deemed to have waived such right.
Riviera sent letter dated November 22, 1988 confirming interest and stating negotiations would take a couple of days to formalize.
Riviera increased its offer to P5,000.00 per sqm, but Reyes did not accept, insisting on P6,000.00 per sqm.
Angeles requested until the end of November 1988 for Riviera’s final decision.
December 2, 1988 letter from Angeles to Reyes confirmed Riviera’s final price of P5,000.00 per sqm, with complete payment within 60–90 days and requested Reyes’s written reply within 15 days since Riviera had other properties to consider.
December 5, 1988 letter from Atty. Juan informed Riviera that its offer was not acceptable and stated that Riviera had "failed to take advantage of such opportunity and thus lost your right of first refusal."
Reyes then approached Rolando P. Traballo (President of Cypress) on December 4, 1988, offering the property at P6,000.00 per sqm; the next day Traballo bargained P5,300.00 per sqm and Reyes accepted, though Traballo needed a partner to raise funds.
Reyes purportedly told Traballo that he had afforded Riviera its right of first refusal but that they could not agree because Riviera’s final offer was P5,000.00 per sqm.
In January 1989 Reyes again asked Riviera via his nephew Atty. Estanislao Alinea to increase Riviera’s offer above P5,000.00; Angeles reiterated that Riviera’s offer remained at P5,000.00 per sqm.
February 4, 1989 letter from Angeles (through Atty. Alinea) proposed price of P5,000.00 per sqm with 50% down within 30 days upon submission of certain documents in 3 days and balance payable in five years with 12% diminishing balance interest—an admitted downgrade from Riviera’s December 2, 1988 offer.
Atty. Alinea conveyed this second offer to Reyes; Reyes did not agree and requested further increase but Angeles refused to raise price.
Reyes did not expressly offer the property to Riviera at P5,300.00 per sqm (the Cypress/Cornhill purchase price).

Sale to Cypress and Cornhill; Mortgage to Urban Development Bank

Sometime in February 1989 Cypress and Cornhill obtained funds sufficient to cover redemption; Reyes redeemed the property from Prudential Bank.
On May 1, 1989, Reyes executed a Deed of Absolute Sale conveying the subject property to Cypress and Cornhill for P5,395,400.00 (which corresponds to P5,300.00 per sqm as reflected in the trial court’s discussion).
On the same date, Cypress and Cornhill mortgaged the subject property to Urban Development Bank for P3,000,000.00.

Trial Court Findings and Reasoning (RTC, Branch 89)

Trial court dismissed Riviera’s complaint and all counterclaims and cross-claims.
Trial court’s rationale (as quoted and summarized):
- Riviera was firm and steadfast throughout negotiations that it would not buy for more than P5,000.00 per sqm while Reyes asked P6,000.00 per sqm.
- The trial court found that Reyes gave Riviera adequate opportunity to exercise its right of first refusal, including a "last ditch effort" via Atty. Alinea seeking a slight increase above P5,000.00, showing Reyes’s willingness to sell at less than P6,000.00.
- The trial court concluded Riviera had lost its right of first refusal by failing to increase its price and thus could not validly claim deprivation of the right to buy at P5,300.00 per sqm.
- The trial court reasoned that it was unnecessary for Reyes to expressly offer