EQUATORIAL REALTY DEVELOPMENT, INC.
& CARMELO & BAUERMANN, INC
vs. MAYFAIR THEATER, INC
G.R. No. 106063 1996 Nov 21 264 SCRA 483
FACTS:
Carmelo owned a parcel of land, together with two 2-storey buildings constructed
thereon. On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter’s
lease of a portion of Carmelo’s property. Two years later, on March 31, 1969, Mayfair entered
into a second contract of lease with Carmelo for the lease of another portion of Carmelo’s
property.
Both contracts of lease provide identically worded paragraph 8, which reads:
‘That if the LESSOR should desire to sell the leased premises, the LESSEE shall be
given 30-days exclusive option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the
LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself, to stipulate
in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the
terms and conditions thereof.
Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair, through a
telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property.
Mr. Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property for
US Dollars 1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the
property for Six to Seven Million Pesos.
Under your company’s two lease contracts with our client, it is uniformly provided:
‘8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given 30-
days exclusive option to purchase the same. In the event, however, that the leased premises is
sold to someone other than the LESSEE, the LESSOR is bound and obligated, as it here binds
and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this
lease and be bound by all the terms and conditions hereof.
Carmelo did not reply to this letter.
On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express
interest in acquiring not only the leased premises but ‘the entire building and other improvements
if the price is reasonable. However, both Carmelo and Equatorial questioned the authenticity of
the second letter.
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and
building, which included the leased premises housing the ‘Maxim’ and ‘Miramar’ theatres, to
Equatorial by virtue of a Deed of Absolute Sale, for the total sum of P11,300,000.00.
In September 1978, Mayfair instituted the action a quo for specific performance and
annulment of the sale of the leased premises to Equatorial. It dismissed the complaint with costs
against the plaintiff. The Court of Appeals reversed the decision of the trial court.
ISSUE:
Whether or not the decision of the Court of Appeals’ decision was correct.
RULING:
The Court agrees with the Court of Appeals that the aforecited contractual stipulation
provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option
contract. It is a contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto, unequivocal was our
characterization of an option contract as one necessarily involving the choice granted to another
for a distinct and separate consideration as to whether or not to purchase a determinate thing at a
predetermined fixed price.
Further, what Carmelo and Mayfair agreed to, by executing the two lease contracts, was
that Mayfair will have the right of first refusal in the event Carmelo sells the leased premises. It
is undisputed that Carmelo did recognize this right of Mayfair, for it informed the latter of its
intention to sell the said property in 1974. There was an exchange of letters evidencing the offer
and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its
logical end. While it initially recognized Mayfair’s right of first refusal, Carmelo violated such
right when without affording its negotiations with Mayfair the full process to ripen to at least an
interface of a definite offer and a possible corresponding acceptance within the “30-day
exclusive option” time granted Mayfair, Carmelo abandoned negotiations, kept a low profile for
some time, and then sold, without prior notice to Mayfair, the entire Claro M. Recto property to
Equatorial.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property
in question rescissible. We agree with respondent Appellate Court that the records bear out the
fact that Equatorial was aware of the lease contracts because its lawyers had, prior to the sale,
studied the said contracts. As such, Equatorial cannot tenably claim to be a purchaser in good
faith, and, therefore, rescission lies.
Hence, the petition was denied.
