The Supreme Court held that a right of first refusal, when integrated into a contract like a lease or loan agreement, does not require a separate consideration to be valid. The consideration for the entire contract covers the right of first refusal. This means that if a property owner decides to sell, they must first offer it to the party holding the right of first refusal before selling to anyone else, ensuring fairness and upholding contractual obligations.

Unpacking First Refusal: Can a Contract Clause Stand Alone?

In Sps. Litonjua v. L & R Corporation, the central issue revolves around the enforceability of a right of first refusal clause within a loan and mortgage agreement. The petitioners, Sps. Litonjua, sought reconsideration of a previous decision, arguing that a specific clause (paragraph 9) granting the respondent, L & R Corporation, the right of first refusal was invalid. They contended that it was inseparable from another clause (paragraph 8) that had already been deemed void, and that it lacked a separate consideration, making it unenforceable. The Supreme Court was tasked with determining whether the right of first refusal was indeed valid and enforceable under Philippine law, despite these challenges.

The petitioners initially argued that paragraph 9, concerning the right of first refusal, was inherently linked to paragraph 8, which restricted the mortgagor’s right to sell the property. Since paragraph 8 was previously invalidated as a form of pactum commissarium (an agreement allowing the mortgagee to automatically appropriate the mortgaged property upon the mortgagor’s default), they reasoned that paragraph 9 should also be deemed invalid. However, the Court noted that this argument was raised belatedly. More crucially, the Court emphasized the divisibility of contracts, citing Article 1420 of the New Civil Code, which states:

“(I)n case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.”

The Court found that paragraphs 8 and 9 were distinct and separable. The invalidity of one did not automatically nullify the other. Thus, even if paragraph 8 was void, paragraph 9 could still be enforced if it was otherwise valid. This ruling underscores the principle that contracts should be interpreted to give effect to the intentions of the parties, as long as those intentions do not violate the law or public policy. This principle allows for the enforcement of valid provisions even when other parts of the contract are found to be defective.

Petitioners further argued that the right of first refusal lacked a separate consideration, rendering it void ab initio (from the beginning) under Article 1479 of the Civil Code. They asserted that the Court’s finding that the consideration for the loan encompassed the right of first refusal was baseless. The Court dismissed this argument, drawing a critical distinction between a right of first refusal and an option contract. The Court explained that the former does not require a separate consideration, while the latter does. This distinction is crucial in understanding the legal requirements for each type of agreement.

The Court cited the landmark case of Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc., which extensively discussed the difference between a right of first refusal and an option contract:

“An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration. In the instant case, the right of first refusal is an integral part of the contracts of lease. The consideration is built into the reciprocal obligations of the parties.”

The Court emphasized that in a right of first refusal, the consideration is integrated into the reciprocal obligations of the parties within the main contract. In this case, the consideration for the loan and mortgage agreement included the benefit conferred to L & R Corporation through the right of first refusal. Therefore, the absence of a separate, distinct consideration did not invalidate the right of first refusal.

The Court also addressed the petitioners’ claim that the contract was a contract of adhesion (a contract drafted by one party and offered to the other on a “take it or leave it” basis), which should be strictly construed against L & R Corporation. The Court, citing Ayala Corporation vs. Ray Burton Development Corporation, clarified that the rule on strict interpretation of contracts of adhesion is applied to protect parties at a disadvantage due to factors like moral dependence, ignorance, or indigence. In this case, the petitioners were educated businesspersons and could not claim such disadvantage. The Court emphasized that if the terms of a contract are clear and unambiguous, the literal meaning of its stipulations controls, and there is no need for construction. The Court found the contract provision regarding the right of first refusal to be plain and unambiguous, thus negating the need for strict interpretation against L & R Corporation.

Finally, the petitioners argued that the rescission of the Deed of Sale was improper because it was not invoked as a defense by L & R Corporation, thereby depriving them of due process. The Court rejected this argument, stating that L & R Corporation had consistently invoked its right of first refusal, which formed the basis for the rescission order. The rescission was a direct consequence of the violation of the right of first refusal. The petitioners had ample opportunity to address the issue of the right of first refusal, negating any claim of denial of due process. Therefore, the Court upheld its earlier decision and denied the motion for reconsideration.

FAQs

What is a right of first refusal?	A right of first refusal is a contractual right that gives a party the first opportunity to purchase a property or asset if the owner decides to sell it. The owner must offer the property to the party holding the right before offering it to others.
Is a separate consideration required for a right of first refusal to be valid?	No, a separate consideration is not required if the right of first refusal is integrated into another contract, such as a lease or loan agreement. The consideration for the main contract covers the right of first refusal as well.
How does a right of first refusal differ from an option contract?	An option contract grants a party the right to buy or sell an asset at a predetermined price within a specific period, and it requires a separate consideration. A right of first refusal, on the other hand, only gives the party the first chance to buy if the owner decides to sell, and it does not require a separate consideration if part of a larger agreement.
What is a contract of adhesion, and how is it interpreted?	A contract of adhesion is a contract drafted by one party and offered to the other on a “take it or leave it” basis. Courts generally interpret ambiguous terms in a contract of adhesion strictly against the party who drafted it, especially if the other party is at a disadvantage.
What is the effect of an illegal term in a contract?	If a contract is divisible, legal terms can be separated from illegal ones and enforced, provided the separation does not violate the parties’ intentions. However, an indivisible contract with an illegal term may be rendered entirely void.
What is pactum commissarium?	Pactum commissarium is an agreement allowing the mortgagee to automatically appropriate the mortgaged property upon the mortgagor’s default. Such agreements are generally prohibited under Philippine law.
Can a court order the rescission of a sale if a right of first refusal is violated?	Yes, if a party violates another’s right of first refusal by selling a property to someone else without first offering it to the right holder, a court can order the rescission of the sale. This means cancelling the sale and restoring the parties to their original positions.
How does due process relate to enforcing a right of first refusal?	Due process requires that all parties have the opportunity to be heard and present their case. If a party is given the chance to address the issue of a right of first refusal violation, they cannot claim a denial of due process simply because the court’s decision was unfavorable.

The Supreme Court’s decision reinforces the importance of upholding contractual agreements and respecting the rights of parties involved. It clarifies the distinction between a right of first refusal and an option contract, providing valuable guidance for interpreting and enforcing these types of agreements. This ruling underscores that when a right of first refusal is integrated into a broader contract, it is supported by the consideration for the entire agreement, ensuring its validity and enforceability.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: SPS. REYNALDO K. LITONJUA AND ERLINDA P. LITONJUA AND PHIL. WHITE HOUSE AUTO SUPPLY, INC. VS. L & R CORPORATION, VICENTE M. COLOYAN, G.R. No. 130722, March 27, 2000