Right of First Refusal | Nature and Form | Contract of Sale | SPECIAL CONTRACTS

Right of First Refusal in Civil Law (Philippines):

I. Definition and Nature

The Right of First Refusal (ROFR) is a preferential right granted to a party (referred to as the "optionee") to purchase a specific property under terms to be offered by the owner, should the owner decide to sell it. It does not compel the owner to sell but merely ensures that the optionee has the first opportunity to purchase when the property is placed on the market.

II. Legal Basis

1. No Specific Codal Provision: The Civil Code of the Philippines does not explicitly define the ROFR. However, it is recognized as part of contractual obligations under Articles 1306, 1319, and 1159:

   • Article 1306: The contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
   • Article 1319: Consent is essential in contracts, and the ROFR derives its validity from the voluntary agreement of the parties.
   • Article 1159: Obligations arising from contracts have the force of law between the contracting parties.

2. Judicial Interpretation: Philippine jurisprudence has extensively developed the concept and enforceability of the ROFR.

III. Essential Characteristics

1. Consensual Nature: The ROFR arises solely from the agreement of the parties. Its validity is contingent on the consent of both parties and the existence of a valid contract.
2. Not a Sale: It is distinct from a contract of sale or an option contract. It does not obligate the grantor to sell; it only ensures that the grantee has the first opportunity to purchase if the grantor decides to sell.
3. Conditional Nature: The right becomes exercisable only upon the fulfillment of the condition—i.e., when the owner decides to sell the property.

IV. Key Elements

1. Grant of the ROFR:

   • The grant must be clear, unequivocal, and in writing to avoid disputes regarding its existence or scope.
   • It should specify the terms under which the right may be exercised.

2. Triggering Event:

   • The right is triggered only when the owner decides to sell the property to a third party.
   • It requires the owner to notify the holder of the ROFR of their intent to sell and the terms of the prospective sale.

3. Exercise of the ROFR:

   • The optionee must accept the terms offered by the owner within the prescribed period.
   • Failure to exercise within the stipulated period allows the owner to sell the property to another party under the same terms.

V. Jurisprudence on the ROFR

1. Ang Yu Asuncion v. Court of Appeals (G.R. No. 109125, December 2, 1994):

   • Landmark case clarifying that a ROFR is distinct from an option contract.
   • The ROFR does not bind the owner to sell the property but merely grants the grantee the first opportunity to purchase should the owner decide to sell.
   • Breach of the ROFR does not make the subsequent sale void but gives rise to an action for damages.

2. Equatorial Realty Development, Inc. v. Mayfair Theater, Inc. (G.R. No. 106063, November 21, 1996):

   • A ROFR in a lease agreement was upheld, and the lessor's breach of the ROFR entitled the lessee to damages.

3. Rosencor Development Corporation v. Inquing (G.R. No. 201315, March 23, 2016):

   • Affirmed that the ROFR requires full compliance with its terms and conditions. The optionee cannot unilaterally modify the terms presented by the owner.

4. Sps. Villonco v. Carlos (G.R. No. 139652, March 20, 2000):

   • Highlighted that the optionee must match the terms offered to third parties to exercise the ROFR.

VI. Enforceability

1. Writing Requirement:

   • While verbal agreements may suffice for general contracts, a ROFR, given its implications on property transactions, is best set in writing to ensure enforceability under Article 1403 (Statute of Frauds).

2. Specific Performance or Damages:

   • If the owner breaches the ROFR by selling to a third party without offering the property to the grantee, the remedy may include:
     • Damages: Compensation for the loss of opportunity to purchase.
     • Specific Performance: If the property has not been transferred in bad faith to an innocent purchaser for value, courts may order the transfer of the property to the grantee.

3. Limitations:

   • The ROFR must not be perpetual; the agreement must specify a reasonable period for its exercise.
   • It cannot contravene existing laws on public policy, such as restrictions under the Condominium Act or laws on foreign ownership of real estate.

VII. Common Issues in ROFR

1. Ambiguity in Terms:

   • Vague stipulations on the purchase price, payment terms, or exercise period may render the ROFR unenforceable.

2. Third-Party Purchasers:

   • If the property is sold to a third party in bad faith, the ROFR holder may pursue remedies such as rescission of the sale.

3. Failure to Notify the Grantee:

   • The owner's failure to notify the grantee of the intended sale may result in liability for damages or nullification of the subsequent sale.

VIII. Drafting Considerations

When drafting a ROFR, the following elements should be addressed:

1. Identification of the Property: Clearly specify the property subject to the ROFR.
2. Triggering Event: Define what constitutes the owner’s decision to sell (e.g., receipt of a bona fide offer from a third party).
3. Notification Mechanism: Include details on how the owner will notify the grantee and the timeline for such notification.
4. Acceptance Period: State a reasonable timeframe within which the grantee must exercise the right.
5. Purchase Terms: Specify the purchase price or the mechanism for determining it (e.g., matching a third-party offer).

IX. Conclusion

The Right of First Refusal is a powerful contractual right that safeguards a party’s interest in acquiring property before others. However, its enforceability hinges on meticulous drafting, clear terms, and adherence to legal principles. While the Civil Code does not directly govern ROFRs, jurisprudence ensures its recognition and protects the parties' rights through appropriate remedies.