Right of First Refusal in Lease Agreements and Property Sales in the Philippines

The right of first refusal in lease agreements is a common provision that gives tenants the first chance to buy leased property before it is sold to outsiders. When a property changes hands—especially through foreclosure—questions arise about whether this right survives. The Supreme Court addressed this in Cebu Bionic Builders Supply, Inc. v. Development Bank of the Philippines (G.R. No. 154366, November 17, 2010), clarifying how these rights operate under Philippine law.

The Facts of the Case

In 1981, Rudy Robles mortgaged a property in Cebu to the Development Bank of the Philippines (DBP) to secure a loan. He then leased a portion of the building to Cebu Bionic Builders Supply, Inc. The lease contract contained a provision giving the lessee the "first option to buy" the property and to "match offers from outside parties" if the lessor decided to sell.

When Robles defaulted, DBP foreclosed on the property and became its owner in 1987. DBP wrote to Cebu Bionic, offering to continue the lease under new terms, including a right of first refusal. Although Cebu Bionic paid rentals and made a time deposit, no new written lease was executed.

In 1990, DBP advertised the property for negotiated sale. Cebu Bionic submitted an offer with a 10% deposit, but DBP returned the documents. Shortly after the acceptance period ended, DBP sold the property to third-party buyers. Cebu Bionic sued, claiming its right of first refusal was violated.

The Legal Issue

The central question was whether DBP, as the new owner, was bound by the right of first refusal in the original lease contract. The Court also examined whether an implied new lease under Article 1670 of the Civil Code would revive that right.

The Supreme Court's Ruling

The Court ruled in favor of DBP and the buyers, reversing the lower courts' decisions. The key holdings were:

First, DBP did not assume the original lease contract. When DBP acquired the property through foreclosure, it offered Cebu Bionic a new lease with different terms. Cebu Bionic never accepted these terms by executing a new contract, so the original lease's right of first refusal did not bind DBP.

Second, Article 1670 of the Civil Code creates an implied new lease when a lessee continues occupying property with the lessor's consent after the lease expires. However, the Court clarified that only terms "germane to the lessee's right of continued enjoyment" are revived—not ancillary rights like an option to purchase. The Court cited Dizon v. Court of Appeals for this principle.

Third, the Court emphasized that a right of first refusal is a contractual right. It does not automatically transfer to a new owner unless that owner expressly assumes the obligation. The acceptance of rentals alone does not constitute such assumption.

Practical Takeaways

• Right of first refusal is contractual: It binds only the parties to the contract. A new owner who acquires property through foreclosure is not automatically bound by this right unless it expressly assumes the lease's terms.
• Foreclosure changes the picture: When a bank forecloses and takes ownership, it may offer new lease terms. If the tenant does not accept those terms, the original lease—including any right of first refusal—does not carry over.
• Implied new leases have limits: Under Article 1670, an implied new lease revives only terms related to the tenant's continued possession. Options to purchase are not among them.
• Document everything: Tenants who want to preserve a right of first refusal after a property changes hands should insist on a written agreement with the new owner.
• Act promptly: In this case, the tenant's offer to buy was returned, and no follow-up was made. Tenants should formally assert their rights in writing and keep records of all communications.

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