Right to Top in Government Asset Sales: The Osmeña v. PSALM Ruling

The Supreme Court's 2015 decision in Osmeña III v. Power Sector Assets and Liabilities Management Corporation (G.R. No. 212686) tackles a recurring question in the privatization of government assets: when does a contractual right to top — a lessee's privilege to match or exceed a winning bid — become invalid for defeating the public policy requiring competitive bidding? The ruling offers practical guidance for businesses dealing with government-owned properties and for agencies tasked with disposing of public assets.

The Case Background

The Power Sector Assets and Liabilities Management Corporation (PSALM), created under Republic Act No. 9136 (the EPIRA law), manages the privatization of National Power Corporation assets. In 2009, PSALM sold the 55-MW Naga Land-Based Gas Turbine (LBGT) to SPC Power Corporation, with a lease agreement for the underlying land. That lease contained a right to top clause: if PSALM later sold or leased nearby property not part of the leased premises, SPC could top the winning bid by five percent.

In 2014, PSALM conducted a bidding for the separate 153.1-MW Naga Power Plant Complex. Therma Power Visayas, Inc. (TPVI) submitted the highest bid. SPC then exercised its right to top, matching TPVI's bid plus five percent, and was declared the winning bidder. Senator Sergio Osmeña III challenged the validity of the right to top provision, arguing it violated the policy on competitive public bidding.

The Legal Issue

The central question was whether the right to top provision in the LBGT lease agreement contravened public policy on competitive bidding, making PSALM's award to SPC a grave abuse of discretion.

The Court's Ruling

The Supreme Court ruled in favor of Osmeña, declaring the right to top provision void for being contrary to public policy. The Court distinguished this case from earlier rulings that upheld similar provisions.

Right of First Refusal vs. Option Contract. The Court clarified that a right to top is a variation of a right of first refusal, not an option contract. An option requires separate consideration, but a right of first refusal embodied in a lease contract is supported by the lease's consideration. So the petitioner's argument that the right lacked consideration failed.

The Critical Distinction: Vested Interest. The Court emphasized that a right of first refusal is upheld only when the holder has a vested interest in the object of the right. In JG Summit Holdings, Inc. v. Court of Appeals, the right to top was valid because the holder was a joint venture partner with an existing interest in the shares. In PSALM v. Pozzolanic Philippines, Inc., the right was invalid because the holder had no existing interest in fly ash from future power plants.

Applying this test, the Court found that SPC's right to top over the Naga Power Plant Complex had no basis. SPC's interest was limited to the LBGT land it leased; it had no vested interest in the separate NPPC property. The right effectively allowed SPC to block genuine competition for a property it had no existing stake in, depriving the government of the benefits of open bidding.

Public Policy on Competitive Bidding. The Court reiterated that public bidding is the established procedure for awarding government contracts, designed to protect public interest through open competition. While a right to top does not automatically violate bidding rules — as JG Summit showed — it becomes invalid when it dispenses with public bidding for future sales of distinct assets, as in Pozzolanic.

Practical Takeaways

• A "right to top" or right of first refusal in a government lease is valid only if the holder has a vested interest in the specific property subject to the right. A general interest in nearby or similar assets is not enough.
• Government agencies cannot grant preferential rights over future, separate assets beyond what was bidded upon. Such provisions are void for being contrary to public policy.
• The validity of a right to top does not depend on separate consideration if it is part of a lease contract — but it must still pass the public policy test on competitive bidding.
• Bidders in government privatization should carefully review bid documents for disclosed preferential rights; a disclosed right does not automatically make it valid if it lacks a legal basis.
• For businesses, this ruling means that preferential rights over government property must be tied to an existing, concrete interest in that same property — not speculative advantages over future transactions.

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