Rosencor Development Corporation vs. Inquing

An oral right of first refusal is not covered by the Statute of Frauds and may be proven by oral evidence; however, a contract of sale entered into in violation of such right cannot be rescinded if the vendee is a purchaser in good faith without notice of the prior right.

Respondents were lessees of a residential apartment owned by spouses Faustino and Cresencia Tiangco. The lessors allegedly verbally granted the lessees a pre-emptive right to purchase the property should they decide to sell. Upon the lessors' death in 1975, management of the property passed to their heir, Eufrocina de Leon, who purportedly recognized the same right of first refusal. In September 1990, de Leon sold the property to petitioner Rosencor for P726,000.00. The following month, de Leon offered to sell the property to the respondents for P2,000,000.00. Respondents subsequently discovered the prior sale to Rosencor and attempted to match the P726,000.00 price, which was refused, prompting them to file an action for rescission of the deed of sale and reconveyance.

• Lease and Oral Promise: Respondents leased a two-story apartment from spouses Faustino and Cresencia Tiangco starting 1971 for P150.00 a month. The lease was oral, and the lessors verbally promised the lessees a pre-emptive right to purchase the property if ever sold.
• Succession of Lessors: Upon the spouses' death in 1975, their heir, Eufrocina de Leon, took over management. She allegedly recognized the same right of first refusal. Rentals increased to P1,000.00, and respondents spent between P50,000.00 and P100,000.00 for upkeep, amounts never deducted from rent.
• Sale to Rosencor: In June 1990, respondents received a demand to vacate for demolition. De Leon refused rental payments. In September 1990, de Leon sold the property to petitioner Rosencor for P726,000.00.
• Subsequent Offer to Lessees: In October 1990, de Leon offered the property to respondents for P2,000,000.00. Respondents offered P1,000,000.00, which de Leon said she would relay to the other heirs.
• Discovery of Sale: In January 1991, Rene Joaquin introduced himself as the new owner. Respondents later received a copy of the deed of sale in April 1992, discovering the property had been sold to Rosencor for P726,000.00 before de Leon's higher offer to them was made.
• Attempt to Match Price: Respondents offered to reimburse the P726,000.00 selling price plus an additional P274,000.00 to complete their earlier P1,000,000.00 offer. Upon refusal, they filed the action for rescission.

• Rescission Improper: Petitioner argued that the Court of Appeals gravely erred in ordering the rescission of the absolute deed of sale between de Leon and Rosencor.
• Mandating Exercise of Right: Petitioner maintained that the appellate court committed manifest error in mandating that de Leon afford respondents the opportunity to exercise their right of first refusal.
• Statute of Frauds: Petitioner argued that respondents failed to establish their right of first refusal because the alleged right was oral and thus unenforceable under the Statute of Frauds.

• Existence of Right: Respondents contended that their right of first refusal was sufficiently proven by their uniform testimony and corroborated by de Leon’s October 1990 letter offering the property to them.
• Waiver of Statute of Frauds: Respondents argued that petitioners waived the protection of the Statute of Frauds by failing to object to the presentation of oral evidence of the right before the trial court.
• Rescission Proper: Respondents asserted that the sale to Rosencor violated their right of first refusal, justifying the rescission of the deed of sale and the reconveyance of the property to allow them to exercise their preferential right.

• Statute of Frauds Applicability: Whether an oral right of first refusal is unenforceable under the Statute of Frauds.
• Rescission of Sale: Whether a contract of sale entered into in violation of an oral right of first refusal may be rescinded if the vendee is a purchaser in good faith without notice of the prior right.
• Proper Remedy: What is the proper remedy available to an aggrieved party when a right of first refusal is violated but rescission is unavailable due to the good faith of the vendee.

• Statute of Frauds Applicability: The Statute of Frauds does not apply to a right of first refusal. Article 1403(2)(e) of the Civil Code presupposes a perfected, albeit unwritten, contract of sale of real property. A right of first refusal is not a perfected contract of sale but merely a contractual grant of a preferential right. Accordingly, an oral right of first refusal need not be reduced to writing to be enforceable and may be proven by oral evidence.
• Rescission of Sale: Rescission was denied because Rosencor was a purchaser in good faith. While a sale violating a right of first refusal is generally rescissible under Article 1381(3) of the Civil Code, Article 1385 prohibits rescission when the object of the contract is legally in the possession of a third person who did not act in bad faith. Because the right of first refusal was oral and unregistered, the rule on constructive notice was inapplicable. No clear and convincing evidence was presented showing Rosencor had knowledge of the respondents' right prior to the sale; thus, good faith was presumed.
• Proper Remedy: The proper remedy for the unjustified violation of an oral right of first refusal, where rescission is precluded by the good faith of the vendee, is an action for damages against the vendor under Article 19 of the Civil Code, not rescission of the sale.

• Right of First Refusal vis-à-vis Statute of Frauds — A right of first refusal is not among the contracts enumerated under Article 1403(2) of the Civil Code. It is not a perfected contract of sale but a contractual grant of a preferential right to purchase. Consequently, it need not be in writing to be enforceable and may be proven by oral evidence.
• Rescission and Good Faith Purchasers — Under Article 1385 of the Civil Code, rescission of a contract does not lie when the thing subject of the contract is legally in the possession of a third person who did not act in bad faith. A purchaser in good faith is one who buys property without notice of another's right or interest and pays a full and fair price. In the absence of constructive notice (such as registration) or actual knowledge, a vendee who buys property subject to an oral right of first refusal is presumed to act in good faith, precluding rescission.
• Remedy for Violation of Right of First Refusal — When rescission is unavailable due to the good faith of a third-party purchaser, the remedy of the party whose right of first refusal was unjustifiably disregarded by the vendor is an action for damages against the vendor.

• "A right of first refusal is not among those listed as unenforceable under the statute of frauds. Furthermore, the application of Article 1403, par. 2(e) of the New Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale. A right of first refusal, such as the one involved in the instant case, is not by any means a perfected contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of the right of first refusal over the property sought to be sold."
• "It is axiomatic that good faith is always presumed unless contrary evidence is adduced. ... In this regard, the rule on constructive notice would be inapplicable as it is undisputed that the right of first refusal was an oral one and that the same was never reduced to writing, much less registered with the Registry of Deeds."
• "This does not mean however that respondents are left without any remedy for the unjustified violation of their right of first refusal. Their remedy however is not an action for the rescission of the Deed of Absolute Sale but an action for damages against the heirs of the spouses Tiangco for the unjustified disregard of their right of first refusal."

• Guzman, Bocaling and Co, Inc. vs. Bonnevie, 206 SCRA 668 — Followed. Established that a contract of sale entered into in violation of a right of first refusal is rescissible, and a vendee aware of the lease is in bad faith, precluding their defense as a good faith purchaser.
• Equatorial Realty and Development, Inc. vs. Mayfair Theater, Inc., 264 SCRA 483 — Followed. Reiterated that a sale violating a right of first refusal is rescissible, especially when the vendee had knowledge of the lease contract stipulating the right.
• Ang Yu Asunscion vs. Court of Appeals, 238 SCRA 602 — Followed. Held that the breach of a right of first refusal cannot justify rescission if the purchaser is in good faith; the remedy is an action for damages under Article 19 of the Civil Code.
• Villanueva vs. Court of Appeals, 267 SCRA 89 — Cited. Stated that the application of the Statute of Frauds presupposes the existence of a perfected contract.
• Litonjua vs. L&R Corporation, 320 SCRA 405 — Cited. Affirmed that a sale made in violation of a registered right of first refusal is rescissible because the purchaser is presumed to have notice by registration.

• Article 1403(2), Civil Code — Enumerates the contracts unenforceable under the Statute of Frauds, including agreements for the sale of real property or an interest therein. Held inapplicable to a right of first refusal, which is not a perfected contract of sale.
• Article 1381(3), Civil Code — Defines rescissible contracts, including those undertaken in fraud of creditors when the latter cannot collect their claims. Applied to characterize sales violating a right of first refusal as rescissible in principle.
• Article 1385, Civil Code — Provides that rescission shall not take place when the things object of the contract are legally in the possession of third persons who did not act in bad faith. Applied to bar rescission in favor of the good faith purchaser, Rosencor.
• Article 19, Civil Code — Requires every person to act with justice, give everyone his due, and observe honesty and good faith. Identified as the basis for an action for damages against the vendor who violated the right of first refusal.

Melo, Vitug, Panganiban, and Sandoval-Gutierrez.