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

The right of first refusal is a common concern for business lessees who occupy a property for years and hope to buy it when the owner decides to sell. A recent Supreme Court ruling clarifies that this right is not automatic—it must be clearly granted by law or by contract. In Sen Po Ek Marketing Corporation v. Martinez (G.R. No. 134117, February 9, 2000), the Court explained when a lessee may claim preference to purchase leased premises and when a sale to a third party will be upheld.

The Facts of the Case

Sofia P. Martinez owned two parcels of land in Tacloban City. In 1961, she leased these lots to Yu Siong, whose family later formed Sen Po Ek Marketing Corporation. The lease contract required the lessee to construct a commercial building on the property, which would become Sofia's property upon expiration of the lease.

The lease was renewed several times over the years. The last written contract expired in January 1987, but Sen Po Ek continued occupying the premises and paying monthly rentals to Sofia until her death in August 1989.

In November 1989, Sofia's daughter, Teodora Martinez, sent Sen Po Ek a letter stating her intention to sell the property and authorizing an agent to negotiate the sale "with any and all interested parties." Sen Po Ek received the letter on December 12, 1989, and later made a written offer to buy at P6,000 per square meter.

Meanwhile, the Tiu Uyping brothers learned of the sale, made inquiries, and on December 23, 1989, Teodora executed an option to purchase in their favor. On January 12, 1990, she sold the property to them for P800,000.

The Legal Issue

The central question was whether Sen Po Ek, as the long-time lessee, had a right of first refusal or preferential right to buy the leased premises, which would invalidate the sale to the Tiu Uyping brothers.

The Court's Ruling

The Supreme Court denied Sen Po Ek's petition, holding that the lessee had no enforceable right of first refusal.

No statutory basis for the right. The Court examined the laws Sen Po Ek cited and found them inapplicable:

• Presidential Decree No. 1517 (Urban Land Reform Act) applies only to areas proclaimed as urban land reform zones. Tacloban City had no such proclamation.
• Republic Act No. 1162 deals with expropriation of lands in the City of Manila only.
• Article 1622 of the Civil Code grants pre-emption or redemption rights only to adjoining lot owners for small urban lands bought for speculation—not to lessees.

No contractual basis for the right. The Court noted that a right of first refusal may be stipulated in a lease contract. However, none of the several lease agreements between Sen Po Ek and Sofia contained such a provision. The lessee's claim that Teodora verbally assured them of first priority had no proof.

No perfected contract of sale. The Court also found that Teodora's November 1989 letter was merely a notice of intention to sell, not an offer to sell. It did not quote any price. Under Article 1479 of the Civil Code, a promise to buy or sell must involve a determinate thing for a price certain to be binding. Since no meeting of minds occurred on the price before Teodora sold to the Tiu Uypings, no contract was perfected between Teodora and Sen Po Ek.

Practical Takeaways

• A right of first refusal must be expressly stated in writing. A lessee who wants the first chance to buy leased property should negotiate for this right in the lease contract, with clear terms on price, procedure, and timing.
• A mere notice of intention to sell is not an offer. Property owners who inform tenants of a planned sale are not automatically bound to sell to them, especially if no price is quoted.
• Act promptly on a sale notice. In this case, the lessee's delay in formalizing its offer allowed the owner to accept another buyer's offer first. A lessee who receives a sale notice should respond quickly and in writing.
• Statutory preferential rights are limited. Laws like P.D. 1517 and R.A. 1162 apply only in specific situations (proclaimed urban land reform zones or Manila expropriation areas). A lessee should not assume these laws protect them outside those contexts.
• Owners may sell to whom they choose. Absent a legal or contractual restriction, a property owner may dispose of property to any buyer on any terms, even if a tenant has occupied the premises for many years.

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