Vazquez vs. Ayala Corporation

A stipulation granting a "first option to purchase" at the prevailing market price at the time of purchase, without a fixed period or determinable price, constitutes a right of first refusal and not an option contract.

Spouses Daniel and Ma. Luisa Vazquez sold their shares in Conduit Development, Inc. to Ayala Corporation through a Memorandum of Agreement (MOA). Conduit's primary asset was a 49.9-hectare property in Ayala Alabang, Muntinlupa. Under the MOA, Ayala Corporation committed to develop the "Remaining Property" and agreed to give the Vazquez spouses a "first option to purchase" four developed lots adjacent to their retained area at the prevailing market price at the time of purchase. Disputes arose regarding the price of the lots and the timeline for development following a subcontractor's lawsuit and Ayala Corporation's subsequent development of the property.

• The Memorandum of Agreement: Spouses Vazquez sold their shares in Conduit Development, Inc. to Ayala Corporation. Under the MOA, Ayala Corporation committed to develop the "Remaining Property" into a first-class residential subdivision and "intended" to complete the first phase of its amended development plan within three years. Ayala Corporation also agreed to give the spouses a "first option to purchase" four developed lots next to their retained area at the prevailing market price at the time of purchase.
• The Lancer Claim: Prior to the MOA's closing date, Ayala Corporation received notice of a claim from Lancer, a subcontractor of GP Construction (Conduit's original developer). Lancer sued GP Construction, Conduit, and Ayala Corporation, which was dismissed with prejudice in February 1987 after Ayala Corporation paid the claimants.
• Development and Demand: The spouses sent reminder letters regarding the three-year development period. In 1988, their agent acknowledged the delay was due to the Lancer suit and expressed expectation that development would be completed by February 19, 1990.
• The Offer and Rejection: Ayala Corporation completed development of the lots' vicinity by early 1990 and offered them at the prevailing 1990 price of P6,500.00 per square meter. The spouses insisted on the 1984 price of P460.00 per square meter. Ayala Corporation reduced the price to P5,000.00 per square meter, but the spouses countered at P2,000.00 per square meter. Ayala Corporation rejected the counter-offer.

• Breach of Warranty: Petitioners argued they did not breach their warranties under the MOA because the Lancer claim arose after the MOA's execution, and Ayala Corporation had knowledge of the claim before the closing date anyway.
• Obligation to Develop: Petitioners maintained that Ayala Corporation was obligated to develop the entire area, including the subject lots, within three years from the execution of the MOA.
• Delay: Petitioners asserted that Ayala Corporation was in delay for failing to offer the lots within the three-year period, claiming their letters constituted demands for compliance.
• Nature of the Right: Petitioners insisted that Paragraph 5.15 of the MOA is an option contract supported by consideration, as it was incorporated into the MOA where the parties had mutual prestations.

• Breach of Warranty: Respondent countered that petitioners breached their warranties by failing to disclose the Lancer subcontract and claim, which were extant before the closing date.
• Obligation to Develop: Respondent argued that Paragraph 5.7 merely expressed an intent to develop the first phase of Ayala Corporation's own amended plan, not a commitment. The subject lots were in the third phase, for which no timeframe was stipulated.
• Delay: Respondent maintained that no demand for performance was ever made. Petitioners' 1988 letter waived the original three-year period by expecting completion in 1990.
• Nature of the Right: Respondent argued that Paragraph 5.15 is a mere right of first refusal, not an option contract, because it lacks a fixed period and determinable price, and is not supported by separate consideration.

• Breach of Warranty: Whether petitioners breached their warranties under the MOA by failing to disclose the Lancer claim.
• Obligation to Develop: Whether Ayala Corporation was obligated to develop the property and offer the subject lots for sale within three years from the MOA.
• Delay: Whether Ayala Corporation incurred delay in fulfilling its obligation.
• Nature of the Right: Whether Paragraph 5.15 of the MOA constitutes an option contract or a right of first refusal.

• Breach of Warranty: No breach of warranty was established. Ayala Corporation had actual knowledge of the Lancer claim before the closing date, as evidenced by its correspondence requesting subcontract details and its attachment of the subcontract agreement to its pre-trial brief. The warranties against undisclosed liabilities and suits were qualified by this prior disclosure.
• Obligation to Develop: No obligation to develop the subject lots within three years existed. Paragraph 5.7 uses the word "intends," signifying a mere design or proposition, in contrast to "commits," which connotes a pledge. Furthermore, the three-year period referred to the first phase of Ayala Corporation's amended plan, whereas the subject lots were in the third phase.
• Delay: No delay was incurred. The MOA did not fix a period for the development of the subject lots; petitioners should have sought judicial fixing of the period under Article 1197 of the Civil Code. Moreover, no valid demand was made, as the letters sent were mere reminders prior to the expiration of the period. Petitioners also waived the three-year period by expecting completion in 1990.
• Nature of the Right: Paragraph 5.15 constitutes a right of first refusal, not an option contract. An option contract requires a fixed period and a determined price, and must be supported by consideration distinct from the price. The stipulation lacked a fixed period and a determinable price, as "prevailing market price at the time of purchase" leaves the price to be firmed up in the future. By rejecting Ayala Corporation's offer and making a counter-offer, petitioners lost their right of first refusal.

• Option Contract vs. Right of First Refusal — An option is a preparatory contract granting a privilege to buy or sell for a fixed period and at a determined price, supported by consideration, binding the grantor not to enter into the principal contract with another. A right of first refusal, however, depends on the grantor's eventual intention to enter into a binding relation and on terms, including price, that are yet to be firmed up. The Court applied this to classify the "first option to purchase" as a right of first refusal because it lacked a fixed period and determinable price.
• Requisites of Default (Mora) — To incur delay, the following requisites must concur: (1) the obligation is demandable and liquidated; (2) the debtor delays performance; and (3) the creditor requires performance judicially or extrajudicially. The Court found no default because no demand was made and the obligation was not yet demandable.

• "In a right of first refusal, while the object might be made determinate, the exercise of the right would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up."
• "While 'commit' connotes a pledge to do something, 'intend' merely signifies a design or proposition."

• Rosario v. Court of Appeals, 369 Phil. 729 (1999) — Cited as controlling precedent for the exception to the general rule that the Supreme Court's jurisdiction in Rule 45 petitions is limited to questions of law, allowing factual review when the findings of the trial court and the appellate court conflict.
• Ang Yu Asuncion v. Court of Appeals, G.R. No. 109125, December 2, 1994, 238 SCRA 602 — Followed for the definition and elements of a right of first refusal.
• Litonjua v. L&R Corporation, 385 Phil. 538 (2000); Carceller v. Court of Appeals, 362 Phil. 332 (1999); Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 332 Phil. 525 (1996) — Followed for the definition and elements of an option contract.

• Article 1169, Civil Code — Defines when delay exists and enumerates the requisites of default. Applied to determine that Ayala Corporation was not in delay because no demand was made and the obligation was not demandable.
• Article 1193, Civil Code — Provides that obligations for whose fulfillment a day certain has been fixed shall be demandable only when that day comes. Applied to note that no day certain was fixed in the MOA for the subject lots.
• Article 1197, Civil Code — Authorizes courts to fix the duration of a period when it depends upon the will of the debtor or can be inferred from the circumstances. Applied to state that petitioners should have petitioned the court to fix the period for developing the subject lots.
• Article 1324, Civil Code — Provides that an option may be withdrawn before acceptance unless founded upon consideration. Applied to distinguish the right of first refusal from an option contract.
• Article 1469, Civil Code — Provides that the price is certain if it may be determined with reference to another thing certain. Applied to show that "prevailing market price at the time of purchase" is not a determinable price at the time of the contract.
• Article 1479, Civil Code — Provides that an accepted unilateral promise to buy or sell for a price certain is binding if supported by consideration distinct from the price. Applied to distinguish the right of first refusal, which lacks separate consideration.

Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ.