Right of First Refusal in Lease Agreements: A Philippine Law Analysis

The right of first refusal is a common clause in Philippine lease agreements, giving a lessee the first chance to buy the property if the lessor decides to sell. But who can actually enforce this right? A 1997 Supreme Court decision, Sadwani v. Court of Appeals (G.R. No. 128119), provides a clear answer: the right belongs only to the named lessee, and a sublessee cannot claim it unless the lessor expressly consents to an assignment of the lease. This case offers practical guidance for landlords, tenants, and subtenants navigating property rights in the Philippines.

The Facts of the Case

Homobono Sawit owned a 2,030 square-meter lot in Pasig City, which he leased to Orient Electronics Corporation from 1981 to 1989. The lease contract gave Orient Electronics a right of first refusal: if Sawit decided to sell the property, Orient Electronics would have the first chance to buy it. The contract also allowed Orient Electronics to sublease the property.

Orient Electronics then subleased portions of the property to the Sadhwani petitioners. The sublease contracts stated that the original Sawit-Orient lease was attached as an "integral part" of the sublease agreements.

In December 1988, six months before the lease expired, Sawit sold the property to Silver Swan Manufacturing Co., Inc. The Sadhwanis protested, claiming they had inherited Orient Electronics' right of first refusal through their sublease contracts. They sued to annul the sale and compel Sawit to sell the property to them.

The Legal Issue

The central question was whether the Sadhwanis, as sublessees, could enforce the right of first refusal that was originally granted to Orient Electronics, their lessor. The Supreme Court also examined whether the Sadhwanis had proven that Sawit had personally offered to sell them the property.

The Ruling: Sublessees Cannot Enforce the Lessee's Right

The Supreme Court denied the Sadhwanis' petition and affirmed the Court of Appeals' decision. The Court held that the Sadhwanis had no right of first refusal.

The Court emphasized a fundamental principle in contract law: a contract binds only the parties to it. The right of first refusal was between Sawit and Orient Electronics. The Sadhwanis were not parties to that contract.

Although the sublease contracts incorporated the Sawit-Orient lease as an "integral part," the Court found no evidence that Sawit consented to an assignment of the lease to the Sadhwanis. Under the Civil Code, a lessee cannot assign a lease without the lessor's consent unless there is a stipulation to the contrary. The Court noted that Sawit only agreed to allow Orient Electronics to sublease the property, not to assign the lease itself.

The Court also distinguished this case from Equatorial Development, Inc. v. Mayfair Theater (G.R. No. 106063, 1996), where the lessee's right of first refusal was undisputed. In the Sadwani case, the right itself was doubtful because it was never assigned to the petitioners.

On the Alleged Offer to Sell

The Sadhwanis also claimed that Sawit's sister-in-law had offered to sell them the property for P4 million, and that they had countered with P3.5 million. The Court found this claim unproven. The alleged offer rested solely on the petitioners' testimony, with no corroborating evidence. Moreover, the Court noted that the sister-in-law directed the petitioners to negotiate directly with Sawit, suggesting she had no authority to bind him.

Practical Takeaways

• A right of first refusal in a lease contract is personal to the named lessee. It does not automatically pass to a sublessee.
• To transfer a right of first refusal to a sublessee, the lessor must expressly consent to an assignment of the lease, not merely to a sublease.
• Incorporating a lease contract by reference into a sublease does not, by itself, transfer the lessor's obligations or the lessee's rights to the sublessee.
• A sublessee who wants protection against a future sale should negotiate directly with the property owner for a separate right of first refusal.
• Mere allegations of an offer to sell are not enough; parties must present documentary evidence, such as written offers or receipts, to prove their claims in court.

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