When an Implied Lease Renewal Does Not Revive a Right of First Refusal

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When a lease contract expires but the lessee stays on and keeps paying rent, Philippine law treats the arrangement as an implied new lease. But does that implied renewal also revive every special right in the original contract—such as a right of first refusal to buy the property? In Mañas v. Nicolasora (G.R. No. 208845, February 3, 2020), the Supreme Court answered no, and in doing so clarified an important rule for lessees and property owners alike.

The Facts of the Case

In April 2005, Spouses Allan and Lena Isabelle Mañas leased a property in Tacloban City from Rosalina Nicolasora, whose husband owned the land. The one-year lease contract contained two notable provisions: a right of first refusal allowing the lessees to buy the property if the lessor decided to sell, and a clause requiring mediation and setting venue for any litigation in Tacloban City.

The lease lapsed in 2006 without an express renewal. The Mañas Spouses continued occupying the property and paying monthly rent, which the lessor accepted. In February 2008, the property owner sold several parcels—including the leased property—to Ma. Therese Roselle Uy-Cua. The Mañas Spouses were not informed of the sale or given the chance to buy.

When they learned of the sale, they filed a complaint for rescission of the contract of sale, cancellation of the certificate of title, and enforcement of their right of first refusal. The trial court dismissed the complaint for lack of cause of action, and the Court of Appeals affirmed.

The Issue

The central question was whether the implied renewal of the lease contract also revived the right of first refusal. The petitioners argued that because they continued occupying the property and paying rent, the entire contract—including the right of first refusal—was renewed.

The Ruling: Implied Renewal Is Limited

The Supreme Court denied the petition and affirmed the dismissal. The Court held that while the lease was indeed impliedly renewed, the right of first refusal was not part of that renewal.

Article 1670 of the Civil Code provides that when a lessee continues enjoying the leased property for fifteen days with the lessor's acquiescence, an implied new lease arises. However, the Court clarified that only terms "germane to the lessee's right of continued enjoyment of the property" are revived. Special agreements that are foreign to possession—such as an option to buy or a right of first refusal—are not automatically included.

The Court relied on Dizon v. Court of Appeals (361 Phil. 963 [1999]), which held that an implied new lease does not carry with it an implied revival of the lessee's option to purchase. The rationale: the presumption of implied renewal covers only terms related to possession, such as rental amount, payment dates, and care of the property. It does not extend to special agreements like purchase options.

The Court also addressed two other issues. First, the petitioners could not question the validity of the sale based on the buyer's alleged minority, because under Article 1397 of the Civil Code, persons who are capable cannot allege the incapacity of those with whom they contracted. Moreover, incapacity is a ground for annulment, not rescission.

Second, the petitioners failed to undergo barangay conciliation before filing their complaint. The Court cited the requirement under the Local Government Code that most disputes must first undergo barangay proceedings before going to court, unless an exception applies. The exact section number of that requirement is not specified in the Civil Code, but the Court applied it as a condition precedent in this case.

Practical Takeaways

• An implied lease renewal does not revive all original terms. Only provisions germane to the lessee's use and enjoyment of the property are carried over.
• A right of first refusal or option to buy expires with the original lease term unless expressly renewed. Lessees who want to preserve such rights should renew their lease in writing.
• Read the entire lease contract carefully. A "whereas" clause stating that the lessee is interested in buying the property does not create a binding right if the operative provisions do not clearly grant one.
• Choose the correct cause of action. A contract entered into by a minor is voidable and subject to annulment, not rescission. Only the proper parties may bring an annulment action.
• Comply with barangay conciliation. Under the Local Government Code, most disputes must first undergo barangay proceedings before going to court, unless an exception applies.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.