Right of First Refusal: When Does a Seller Violate a Lessee’s Rights?

TLDR; This case clarifies that a right of first refusal isn’t a guarantee of sale, but a priority to buy if the owner decides to sell. If a lessee rejects an offer or fails to respond, the owner is free to sell to others under the same terms.

AGRIPINO VILLEGAS, ET AL. VS. THE COURT OF APPEALS, ET AL., G.R. NO. 111495 & 122404, AUGUST 18, 2006

Introduction

Imagine you’ve been renting a property for years, building your business or home on it. You believe you have the first shot if the owner decides to sell. But what happens when the owner entertains other offers, leaving you feeling sidelined? This is a common scenario that highlights the importance of understanding the right of first refusal in property sales.

This case, Agripino Villegas, et al. vs. The Court of Appeals, et al., revolves around a property in Quiapo, Manila, leased by the Villegas family since 1959. When the property owners decided to sell, a dispute arose over whether the lessees’ right of first refusal was violated. The Supreme Court’s decision provides crucial insights into the nature and limitations of this right.

Legal Context: Right of First Refusal and Legal Redemption

The right of first refusal is a contractual right, giving a party the priority to purchase an asset if the owner decides to sell. It does not compel the owner to sell but ensures the holder gets the first opportunity to buy under the offered terms. Legal redemption, on the other hand, is the right of a co-owner to buy out a share sold to a third party.

Key legal provisions relevant to this case include:

• Civil Code Article 1620: “A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person…”
• Civil Code Article 1623: “The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be…”

A critical aspect of exercising the right of redemption is providing a valid tender of payment. The case Conejero v. Court of Appeals (123 Phil. 605, 612-613 (1966)) clarifies that the redemption price must be fully offered in legal tender or validly consigned in court to demonstrate a serious intent to redeem.

Case Breakdown: The Villegas Property Dispute

The saga began when the heirs of Dr. Lorenzo C. Reyes, owners of the property, decided to sell. The Villegas family, long-time lessees, were informed of this decision and given the opportunity to exercise their right of first refusal. Here’s a breakdown of the key events:

1. Initial Offer: The heirs, via an Administrative Committee, offered the property to the Villegas family.
2. Counter-Offers: The Villegas family submitted a bid, but negotiations stalled over price and terms.
3. Final Offer: The heirs, representing 75% ownership, offered their share for P3,825,000.
4. Sale to Sy: When the Villegas family didn’t respond, the heirs sold their 75% interest to Lita Sy.
5. Villegas Purchase: The Villegas brothers later bought the remaining 25% from the other heirs.

The Villegas family then filed a case to annul the sale to Lita Sy, claiming their right of first refusal was violated. Lita Sy, in turn, sought to redeem the 25% share purchased by the Villegas brothers.

The Supreme Court emphasized that:

“A right of first refusal is a contractual grant, not of the sale of a property, but of the first priority to buy the property in the event the owner sells the same. The exercise of the right of first refusal is dependent not only on the owner’s eventual intention to sell the property but also on the final decision of the owner as regards the terms of the sale including the price.”

The Court also noted that:

“Petitioner-lessees already exercised their right of first refusal when they refused to respond to the latest offer of respondent-heirs, which amounted to a rejection of the offer. Upon petitioner-lessees’ failure to respond to this latest offer of respondent-heirs, the latter could validly sell the property to other buyers under the same terms and conditions offered to petitioner-lessees.”

Ultimately, the Court ruled that the sale to Lita Sy was valid because the Villegas family failed to respond to the final offer. Further, Lita Sy’s attempt to redeem the 25% share was invalid because she didn’t provide a valid tender of payment or consign the redemption price.

Practical Implications: Key Lessons for Property Owners and Lessees

This case offers important lessons for both property owners and lessees:

• For Lessees: Act promptly and decisively when offered the right of first refusal. A failure to respond can be interpreted as a rejection.
• For Lessors: Ensure clear communication and documentation of offers made to lessees with the right of first refusal.
• For Co-owners: When exercising the right of legal redemption, a valid tender of payment or consignation of the redemption price is crucial.

Key Lessons

• Respond Promptly: Don’t delay in responding to offers when you have a right of first refusal.
• Document Everything: Keep records of all communications, offers, and counter-offers.
• Tender Payment: When redeeming property, be prepared to make a valid tender of payment.

Frequently Asked Questions (FAQs)

Q: What is the difference between the right of first refusal and an option to purchase?

A: The right of first refusal gives you the chance to match an offer if the owner decides to sell. An option to purchase gives you the right to buy the property at a predetermined price within a specific timeframe, regardless of whether the owner is actively looking to sell.

Q: How long do I have to exercise my right of first refusal?

A: The timeframe should be specified in your contract. If not, a reasonable time is usually implied, depending on the circumstances.

Q: What happens if the seller doesn’t offer me the right of first refusal before selling to someone else?

A: You may have grounds to sue for breach of contract and seek damages or specific performance (forcing the seller to sell to you under the agreed terms).

Q: Do I have to match the offer exactly to exercise my right of first refusal?

A: Generally, yes. You need to match all material terms and conditions of the offer.

Q: What constitutes a valid tender of payment when exercising the right of redemption?

A: A valid tender of payment typically involves offering the full redemption price in legal tender or consigning the amount in court.

Q: Can the seller change the terms of the sale after offering it to me under the right of first refusal?

A: The seller can’t change the terms to make them less favorable to you. If they receive a better offer, they must present those new terms to you first.

Q: What should I do if I believe my right of first refusal has been violated?

A: Consult with a real estate attorney immediately to assess your options and protect your rights.

ASG Law specializes in real estate law and contract disputes. Contact us or email hello@asglawpartners.com to schedule a consultation.