G.R. No. 140479 - Rosencor Development Corp. vs. Inquing

Case Summary (G.R. No. 140479)

Factual Background

Respondents were longtime, oral lessees since 1971 of a two-story apartment at No. 150 Tomas Morato Avenue, Quezon City, covered by TCT No. 96161 and owned by the late spouses Faustino and Cresencia Tiangco. The lease was not in writing and rental began at P150 per month, later rising to P1,000. The lessees alleged that the late spouses and later their heirs, represented by Eufrocina de Leon, verbally granted them a pre-emptive right or right of first refusal to purchase the property if ever sold. The lessees claimed to have expended between P50,000 and P100,000 on upkeep. In June 1990 they received a demand to vacate from Atty. Erlinda Aguila and were thereafter offered the property by de Leon by letter dated October 9, 1990 at P2,000,000; the lessees counteroffered P1,000,000. Unbeknownst to them, the property had been sold to Rosencor Development Corporation on September 4, 1990 for P726,000, a sale discovered by respondents only upon receipt of a copy of the Deed of Sale some months later. Respondents sought reconveyance or rescission and other reliefs after their offers to match or complete the purchase price were refused.

Trial Court Proceedings

Respondents filed suit initially for annulment of the Deed of Absolute Sale and later amended the complaint to seek rescission. A complaint-in-intervention by intervenors was admitted. After trial, the Regional Trial Court rendered a Decision dated May 13, 1996 dismissing the rescission action. The trial court held that the asserted right of first refusal was merely oral and therefore unenforceable under the Statute of Frauds, Art. 1403, New Civil Code, and ordered respondents to pay monthly rentals of P1,000 from May 1990 until they vacated.

Court of Appeals Ruling

Respondents appealed. On June 25, 1999 the Court of Appeals reversed and set aside the trial court decision. The appellate court ordered rescission of the Deed of Absolute Sale dated September 4, 1990, reconveyance of the premises to Eufrocina de Leon, and directed the heirs to afford respondents thirty days to exercise their right of first refusal by paying P1,000,000. The Court of Appeals also required the appellants to pay back rentals from May 1990 to promulgation of the decision. Petitioners’ motion for reconsideration was denied.

Issues Presented on Review

Petitioners raised three assignments of error: (1) that the Court of Appeals gravely erred in ordering rescission of the absolute deed of sale between Eufrocina de Leon and petitioner Rosencor; (2) that the appellate court committed manifest error in directing that de Leon afford respondents the opportunity to exercise a right of first refusal; and (3) that the appellate court erred in finding respondents had established a right of first refusal despite petitioners’ defense based on the Statute of Frauds.

Parties’ Evidence and Contentions Below

Respondents relied on uniform testimony that the late spouses and later the heirs promised them a right of first refusal and introduced Exhibit B, the October 9, 1990 letter from de Leon offering the property to respondents at P2,000,000. Respondents argued that de Leon’s offer recognized their preferential right. Petitioners presented the testimony of Rene Joaquin, Rosencor’s vice-president, who disclaimed personal knowledge of the sale details, and declined to present de Leon’s testimony. Petitioners maintained that the oral right was unenforceable under Art. 1403 and that they acquired the property in good faith.

Legal Question on the Statute of Frauds

The Supreme Court first examined whether a right of first refusal falls within the transactions enumerated in the Statute of Frauds under Art. 1403, par. 2(e), which renders unenforceable agreements for the sale of real property or an interest therein unless in writing. The Court reiterated that the Statute of Frauds enumerates specific kinds of transactions and presupposes a perfected contract where it applies, and that various other agreements affecting land have been held not to fall within the statute because they are not among the enumerated categories.

Supreme Court’s Ruling on the Statute of Frauds

The Court concluded that a right of first refusal is not equivalent to a perfected contract of sale and is not among the contracts enumerated in Art. 1403. The right is a contractual grant of a preferential option to purchase and not itself a sale. Consequently, a right of first refusal need not be in writing to be enforceable and may be proven by oral evidence.

Proof of Respondents’ Right of First Refusal

On the factual question of proof, the Court agreed with the findings of the Court of Appeals that respondents sufficiently proved their oral right of first refusal. The Court noted that the testimony of Federico Bantugan, Irene Guillermo, and Paterno Inquing was uniform and that Exhibit B, the October 9, 1990 letter from de Leon, corroborated recognition of respondents’ preferential right. The Court further observed that petitioners did not present evidence contradicting the right; they failed to produce de Leon to deny knowledge or existence of the right, and their witness admitted lack of personal knowledge of the sale details. Thus, in the absence of contrary evidence, the oral right was substantially proven before the lower court.

Rescission Doctrine and Good Faith Acquisition

The Court confronted whether a sale entered into in violation of a third party’s right of first refusal may be rescinded so that the third party may exercise that right. The Court summarized prior decisions—Guzman, Bocaling & Co., Inc. v. Bonnevie, Equatorial Realty & Development, Inc. v. Mayfair Theater, Inc., Paranaque Kings Enterprises, Inc. v. Court of Appeals, and Litonjua v. L & R Corporation—which established that a sale violating a right of first refusal, although valid, is rescissible where the purchaser acted in bad faith or had notice of the preexisting preferential right. The Court explained that rescission is available under the Civil Code to protect third persons prejudiced by a contract, but rescission is barred when the subject matter is legally in the possession of third persons who did not act in bad faith.

Application of Bad Faith Standard to the Present Case

The Court found that the circumstances in the cited precedents differed from the present case because petitioners here had not been shown to have knowledge of the oral right prior to acquisition. The Court emphasized that the right in this case was oral and unregistered; therefore the doctrine of constructive notice did not apply. The Court reviewed the proffered evidence of bad faith and found it inadequate: the June 1, 1990

Case Syllabus (G.R. No. 140479)

Parties and Procedural Posture

Rosencor Development Corporation and Rene Joaquin were petitioners before the Supreme Court and were defendants below in the action instituted by the respondents.
Paterno Inquing, Irene Guillermo, and Federico Bantugan were original plaintiffs and lessees who sued for rescission of a deed of sale and sought enforcement of a claimed right of first refusal.
Fernando Magbanua and Danna Lizza Tiangco intervened as plaintiffs and were admitted as plaintiffs-intervenors by the trial court.
The action originated in the Regional Trial Court, Branch 217, Quezon City, as Civil Case No. Q-93-18582 and resulted in a decision dated May 13, 1996 dismissing the complaint.
The plaintiffs appealed to the Court of Appeals, which rendered a decision dated June 25, 1999 reversing the trial court and ordering rescission and reconveyance.
Petitioners filed a petition for review on certiorari under Rule 45, Rules of Court, seeking reversal of the Court of Appeals decision.
Eufrocina de Leon, representing the heirs of Faustino and Cresencia Tiangco, did not appeal the Court of Appeals decision.

Key Facts

The disputed property was a two-story apartment at No. 150 Tomas Morato Ave., Quezon City, covered by TCT No. 96161 and owned by the late spouses Faustino and Cresencia Tiangco.
The respondents were longstanding lessees since 1971 under an oral lease and alleged that the late spouses and subsequently their heirs orally granted them a right of first refusal if the property were to be sold.
Respondents alleged that they spent between P50,000.00 and P100,000.00 for upkeep and that rentals rose to P1,000.00 per month.
Respondents received a letter dated October 9, 1990 from Eufrocina de Leon offering to sell the property to them at PHP 2,000,000.00 after receiving an outside offer.
Respondents later discovered that a Deed of Absolute Sale dated September 4, 1990 showed the property had been sold by de Leon to Rosencor for PHP 726,000.00 before the October offer to respondents.
Respondents offered to buy for PHP 1,000,000.00 and later offered to reimburse PHP 726,000.00 plus PHP 274,000.00 to match their earlier offer, but their offers were refused.

Procedural History

The trial court dismissed the complaint on May 13, 1996 on the ground that the alleged right of first refusal was oral and unenforceable under the statute of frauds articulated in Art. 1403, New Civil Code.
The plaintiffs appealed and on June 25, 1999 the Court of Appeals reversed and ordered rescission of the Deed of Absolute Sale, reconveyance to de Leon, and afforded respondents thirty days to exercise their right of first refusal at PHP 1,000,000.00.
Petitioners sought reconsideration before the Court of Appeals, which was denied on October 15, 1999, and thereafter filed the present petition for review on certiorari under Rule 45.

Issues Presented

Whether a right of first refusal is governed by the statute of frauds under Art. 1403, par. 2(e) of the New Civil Code.
Whether respondents proved their alleged oral right of first refusal with admissible oral evidence.
Whether a sale made in violation of a third party's right of first refusal is subject to rescission where the vendee acquired the property in good faith and without notice.
Whether the Court of Appeals erred in ordering rescission of the Deed of Absolute Sale and in directing reconveyance and allowance to exercise the right of first refusal.

Statutory Framework

Art. 1403, New Civil Code prescribes the contracts unenforceable unless evidenced by a writing and applies the statute of frauds to enumerated transactions including sales of real property and interests therein.
Art. 1380 to Art. 1385, New Civil Code supply the rules on rescissible contracts and the circumstances under which rescission is barred, including protection of third persons in good faith under Art. 1385.
The purpose of the statute of frauds is to prevent fraud and perjury by requiring certain contracts to be in writing and subscribed by the party to be charged.

Trial and Appellate Findings

The trial court found the alleged right of first refusal to be oral and unenforceable under Art. 1403, and dismissed the action while orderin