Right of First Refusal in Land Leases: When It Applies and When It Does Not

The right of first refusal is a powerful protection for tenants, but it is not available to everyone who occupies land. In Spouses Delos Santos v. Court of Appeals (G.R. No. 127465, October 25, 2001), the Supreme Court clarified that this right belongs only to legitimate tenants — not to occupants by mere tolerance — and that it applies only within declared urban land reform areas.

The case also sheds light on when a lease is considered to have a definite period, and why the prohibition on ejectment after a sale of the property has limits.

The Dispute: Occupants Claim Lease Rights Against New Owner

Maunlad Homes, Inc. bought a parcel of land in Malolos, Bulacan from the Sandiko brothers. The petitioners occupied portions of the property and claimed they were lessees of the former owners. When Maunlad filed an action to recover possession, the petitioners argued that:

• Their occupation was based on a lease, not mere tolerance;
• The sale to Maunlad did not terminate the lease under Batas Pambansa Blg. 877 and Article 1687 of the Civil Code;
• They had a right of first refusal under Presidential Decree No. 1517, and the sale violated that right.

The trial court and the Court of Appeals ruled against the petitioners, finding they were not legitimate tenants but occupants by tolerance. The Supreme Court affirmed.

The Right of First Refusal Under P.D. 1517: Who Qualifies?

Presidential Decree No. 1517, which governs urban land reform, grants legitimate tenants the right of first refusal — the right to buy the land they occupy before it is sold to a third party. However, the Court held that this right does not extend to:

• Usurpers or deforciants (those who occupy land without any legal right);
• Occupants by mere tolerance of the owner.

In this case, the Court of Appeals found that no rental was collected from or paid by the petitioners after 1986, and that Maunlad had made formal demands for them to vacate. These facts showed the petitioners were not legitimate tenants.

The Territorial Limit: Only Declared Urban Zones

Even if the petitioners had been legitimate tenants, P.D. 1517 would still not apply. The law operates only in areas specifically declared as urban land reform areas.

The Court took judicial notice that no part of Bulacan had been declared or classified as an urban land reform area. This territorial requirement is a hard limit on the law's reach — a tenant cannot invoke the right of first refusal unless the land sits within a declared urban zone.

Lease Protection Under B.P. 877: The Definite Period Rule

Batas Pambansa Blg. 877, as amended, protects residential lessees from ejectment. Its Section 5 lists the exclusive grounds for ejectment, and the last paragraph prohibits a lessor or successor-in-interest from ejecting a lessee on the ground that the property has been sold or mortgaged.

But this protection has a crucial exception. Under Section 5(f), ejectment is allowed when the period of the lease contract has expired. The Court explained that a lease with a fixed period — even one that is renewed yearly — expires at the end of each period. If the lease is not renewed, the lessor may eject the lessee.

Here, the lease agreements did not fix a specific term but provided for yearly rental payments. The Court treated this as a lease for a definite period that expired at the end of each year. Since the leases were not renewed, the prohibition on ejectment did not apply.

The Statute of Frauds: Unenforceable Sale

The petitioners also claimed there was a perfected contract of sale between them and the former owners. The Court rejected this claim on procedural grounds: under the statute of frauds (Article 1403, paragraph 2(f) of the Civil Code), a sale of real property is unenforceable unless it is reduced to writing. An alleged oral sale could not be enforced.

Practical Takeaways

• Right of first refusal is not automatic. It protects only legitimate tenants, not occupants by tolerance, usurpers, or deforciants. Proof of a genuine lease — such as payment of rent — is essential.
• Location matters. P.D. 1517 applies only in areas declared as urban land reform zones. Tenants outside these zones cannot invoke its protections.
• Yearly leases can expire. A lease that provides for yearly rental payments may be considered a lease for a definite period that expires each year. If not renewed, the lessor can lawfully eject the lessee.
• Sale of the property does not always block ejectment. While B.P. 877 prohibits ejectment on the ground of sale, this protection yields when the lease period has already expired.
• Real property sales must be in writing. An oral agreement to sell land is unenforceable under the statute of frauds.

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