In the Philippines, a lessor’s offer to sell property to a lessee at a set price within a specific timeframe constitutes an option contract. If the lessee fails to accept within the stipulated period, they forfeit their right to purchase, and the owner is free to offer the property to others. This distinction between an option contract and a right of first refusal is crucial in real estate transactions.

Property Promises: Option Contract or Right of First Refusal?

This case, Roberto D. Tuazon v. Lourdes Q. Del Rosario-Suarez, revolves around a dispute over a property sale. Roberto Tuazon, the lessee, claimed that Lourdes Del Rosario-Suarez, the lessor, violated his right of first refusal when she sold the property to her relatives, the De Leons, without offering it to him at the same lower price. Tuazon argued that he had a right to purchase the property under the same terms as the De Leons. The central legal question is whether the agreement between Tuazon and Del Rosario-Suarez constituted a valid option contract or merely a right of first refusal, and what rights Tuazon had based on that agreement.

The Supreme Court (SC) ultimately ruled that the agreement was an option contract, not a right of first refusal. To understand this, let’s delve into the definitions of both. An option contract, as defined in Beaumont v. Prieto, grants a person the privilege of buying property within a limited time at a specified price. In contrast, a right of first refusal, as elucidated in Ang Yu Asuncion v. Court of Appeals, depends on the grantor’s intention to enter into a binding agreement and on terms, including price, that are yet to be determined.

In a right of first refusal, while the object might be made determinate, the exercise of the right, however, would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up.

The SC emphasized that an option contract requires a fixed period and a determined price, while a right of first refusal lacks these essential elements. In this case, the letter from Del Rosario-Suarez to Tuazon specified a price of P37,541,000.00 and a two-year period for acceptance. This, according to the Court, established an option contract. Therefore, Tuazon had a defined window to exercise his option to buy at the specified price.

However, Tuazon did not accept the offer within the given timeframe. Instead, he attempted to negotiate a lower price, which the SC deemed a counter-offer. According to Article 1319 of the Civil Code, a qualified acceptance constitutes a counter-offer. Since Del Rosario-Suarez did not accept Tuazon’s counter-offer, no contract was perfected. As such, Tuazon had no legal basis to demand the property’s sale to him at the price offered to the De Leons, nor could he seek to annul the sale to the De Leons.

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer.

The SC also addressed Tuazon’s reliance on Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., a landmark case on the right of first refusal. The Court distinguished the two cases, noting that in Equatorial, the lease contract explicitly granted the lessee a 30-day exclusive option to purchase the property if the lessor desired to sell. No such provision existed in the lease contract between Tuazon and Del Rosario-Suarez. The offer to sell in this case was a separate agreement, distinct from the lease, and thus not subject to the same considerations as a right of first refusal embedded in a lease contract.

Furthermore, the SC highlighted that even if Tuazon had accepted Del Rosario-Suarez’s offer, the agreement would still not be binding without a distinct consideration. Article 1324 and 1479 of the Civil Code govern option contracts. Article 1324 allows an offeror to withdraw an offer before acceptance unless the option is founded upon a consideration. Article 1479 requires a consideration distinct from the price for a unilateral promise to buy or sell to be binding.

Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.

The Court cited Sanchez v. Rigos, which clarified that even an accepted unilateral promise is only binding if supported by consideration. Since Tuazon provided no separate consideration for the option, Del Rosario-Suarez was not legally bound to honor the offer. The argument that Del Rosario-Suarez’s liberality served as consideration was dismissed, as her motive was primarily financial need, not generosity.

Finally, the SC addressed the failure of Del Rosario-Suarez to file an appellee’s brief in the Court of Appeals. The Court clarified that this failure did not automatically lead to a decision in favor of Tuazon. Instead, it was deemed a waiver of her right to file the brief, allowing the Court of Appeals to resolve the case based on Tuazon’s brief and the records from the Regional Trial Court, as stated in De Leon v. Court of Appeals. Therefore, the appellate court still had jurisdiction to decide the case on its merits.

FAQs

What is the difference between an option contract and a right of first refusal?	An option contract gives someone the right to buy property at a specific price within a set time, while a right of first refusal requires the owner to offer the property to a specific person before selling to anyone else, with terms to be determined later.
What are the key elements of an option contract?	The key elements are a fixed period within which the option can be exercised and a determined price for the property. Without these elements, it’s likely a right of first refusal.
What happens if the offeree in an option contract makes a counter-offer?	A counter-offer is considered a rejection of the original offer, meaning the original option is no longer valid unless the offeror agrees to the new terms.
Is an accepted unilateral promise to sell binding?	An accepted unilateral promise to sell is only binding if supported by a consideration distinct from the price. Without this separate consideration, the promisor can withdraw the offer.
What was the main reason the Supreme Court ruled against Tuazon?	The SC ruled against Tuazon because the agreement was an option contract that he did not accept within the specified timeframe. Also, he did not provide a separate consideration to make the offer binding.
How did the Equatorial Realty case differ from the Tuazon case?	In Equatorial Realty, the right of first refusal was explicitly stated in the lease contract. In Tuazon, the offer to sell was a separate communication made after the lease commenced, not part of the original agreement.
What is the effect of an appellee’s failure to file a brief in the Court of Appeals?	The appellee is deemed to have waived their right to file the brief, but the Court of Appeals can still decide the case based on the appellant’s brief and the trial court records.
Can liberality be considered as a distinct consideration in an option contract?	No, liberality, by itself, is typically not sufficient as a distinct consideration in an option contract. The consideration must be something of value bargained for and given in exchange for the option.

Understanding the nuances between option contracts and rights of first refusal is vital in Philippine real estate law. This case highlights the importance of clear agreements, timely acceptance, and the role of consideration in creating binding obligations. Lessees and lessors must be aware of these distinctions to protect their interests in property transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Roberto D. Tuazon v. Lourdes Q. Del Rosario-Suarez, G.R. No. 168325, December 08, 2010