Right of First Refusal in Property Sales: Understanding Legal Obligations

A right of first refusal in a lease agreement gives the lessee the first chance to buy the property if the owner decides to sell. But this right is not unlimited—it depends on the owner's final terms, including price. In Villegas v. Court of Appeals (G.R. No. 111495, August 18, 2006), the Supreme Court clarified how this right works and when it may be lost.

What Is a Right of First Refusal?

A right of first refusal is a contractual grant giving the holder priority to buy the property if the owner sells it. It does not mean the property is already sold to the holder. The exercise of this right depends on two things: the owner's intention to sell and the final terms of the sale, especially the price.

When a lease contains this right, the lessor cannot sell the property to anyone else until the lessee has been given the chance to buy it and has failed to accept the offer. Only after the lessee declines can the owner sell to others, under the same terms offered to the lessee or better ones.

The Facts of the Case

The heirs of Dr. Lorenzo C. Reyes owned a property in Quiapo, Manila. The Villegas family and others had been leasing the property since 1959 and owned the building on it. In May 1988, the heirs informed the lessees they were selling the property and gave them the chance to exercise their right of first refusal.

The lessees initially bid P4 million. The heirs later offered the property at P5 million, giving the lessees until August 11, 1988 to accept. Instead of accepting, the lessees requested a conference. During the meeting, the heirs raised the price to P5.1 million net of taxes, but no agreement was reached.

On October 18, 1988, the lessees wrote accepting the P5 million price. The heirs replied that some co-owners no longer wanted to sell the entire property, but those holding a 75% share offered to sell their portion for P3,825,000. The lessees did not respond. The 75% owners then sold their share to Lita Sy for P3,825,000, plus P412,500 for taxes and expenses. The remaining 25% was later sold to the Villegas brothers.

The Court's Ruling on Right of First Refusal

The Supreme Court ruled that there was no violation of the lessees' right of first refusal. The Court explained that when an offer states a time for acceptance, the offer expires at the end of that period. The lessees' request for a conference was not an acceptance but effectively a counter-offer. When the parties failed to agree on price, the original P5 million offer lapsed.

The lessees' October 18 letter accepting P5 million was merely another counter-offer, not a perfected contract. The heirs' last offer—75% of the property for P3,825,000—was not accepted by the lessees. Their silence amounted to rejection. Once the lessees failed to respond, the heirs could validly sell to other buyers.

The Court also noted that Lita Sy actually paid more than what was offered to the lessees. She paid P4,237,500 total for the 75% share, which was not lower than the price offered to the lessees.

The Issue of Legal Redemption

The second issue involved Lita Sy's claim of legal redemption. Under the Civil Code, a co-owner may redeem shares sold to a third person. However, the law requires that the right be exercised within 30 days from written notice of the sale.

The Villegas brothers argued that Lita Sy failed to redeem within the 30-day period. The Court agreed, but for a different reason. Lita Sy invoked her right to redeem in her answer to a complaint, but she never made a valid tender or consignation of the redemption price.

The Court cited Conejero v. Court of Appeals, which held that a formal offer to redeem must be accompanied by a valid tender of the redemption price. A mere promise to pay later is not enough. The buyer must be certain that the redemptioner can and will pay immediately. Without a valid tender or court consignation, the right of redemption is not effectively exercised.

Practical Takeaways

• A right of first refusal does not guarantee a sale—it only gives priority to buy under the owner's final terms.
• An offer with a deadline expires if not accepted within that period. A request for more time or a meeting is not acceptance.
• A counter-offer terminates the original offer. The parties must reach a new agreement on all terms, especially price.
• To exercise legal redemption as a co-owner, one must make a valid tender of the full redemption price within the 30-day period, or file a court action with consignation of the price.
• Silence after receiving an offer can be treated as rejection, allowing the owner to sell to others.

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