RIVIERA FILIPINA, INC., PETITIONER, VS. COURT OF APPEALS, JUAN L. REYES, (NOW DECEASED), SUBSTITUTED BY HIS HEIRS, NAMELY, ESTEFANIA B. REYES, JUANITA R. DE LA ROSA, JUAN B. REY…

Riviera Filipina versus Reyes

The Case

This is a petition for review on certiorari brought by Riviera Filipina, Incorporated against the Court of Appeals and the heirs of Juan L. Reyes, substituted for the deceased lessor. Riviera was the lessee of a parcel of land along Epifanio de los Santos Avenue in Quezon City under a ten-year renewable lease that carried a stipulation granting it the right of first refusal should the lessor decide to sell during the term. When Reyes sold the property to Cypress Construction and Development Corporation and Cornhill Trading Corporation, Riviera sued to compel the transfer of the title to itself, claiming that its right of first refusal had been violated. The case matters because it is the Court's careful statement of how a right of first refusal is actually exercised in the real world of bargaining, and of why a lessee who rigidly holds to a price lower than the seller's final price cannot later complain that the right was denied.

Procedural History

Riviera filed a complaint before the Regional Trial Court of Quezon City, seeking to compel Reyes, Cypress, Cornhill, and Urban Development Bank to transfer the title of the land to Riviera upon its payment of the price paid by Cypress and Cornhill. After trial on the merits, the trial court dismissed the complaint as well as the counterclaims and cross-claims, holding that the right of first refusal had not been violated. Both parties appealed. The Court of Appeals, through its Special Seventh Division, affirmed the trial court's decision in its entirety, adopting the trial court's reasoning and adding its own observations on Riviera's rigid and uncompromising counter-offer. Riviera's motion for reconsideration was denied. Riviera then came to the Supreme Court by petition, assigning grave abuse of discretion amounting to lack or excess of jurisdiction. The Court treated the petition as one for review under Rule 45 rather than as a special civil action for certiorari under Rule 65, since the errors assigned were errors of judgment, not of jurisdiction.

Facts

On November 23, 1982, Juan L. Reyes executed a contract of lease with Riviera over a 1,018 square meter parcel of land along Epifanio de los Santos Avenue, Quezon City, covered by a transfer certificate of title in his name. The lease began on August 1, 1982 and was for ten years, renewable. Paragraph 11 of the contract provided that the lessee shall have the right of first refusal should the lessor decide to sell the property during the term of the lease. The land was mortgaged to Prudential Bank, and when the loan went unpaid the bank extrajudicially foreclosed the mortgage and emerged as the highest bidder at the public auction. The redemption period was set to expire on March 7, 1989.

Unable to raise the redemption money in time, Reyes decided to sell. He offered the property to Riviera, through its President Vicente Angeles, at 5,000 pesos per square meter. Angeles bargained for 3,500 pesos. Seven months later, in October 1988, Angeles communicated Riviera's offer of 4,000 pesos per square meter, which Reyes refused, raising his price to 6,000 pesos because values in the area had appreciated. In a letter dated November 2, 1988, Reyes's counsel formally notified Riviera of the 6,000 peso price, net of taxes and charges, and gave Riviera ten days to exercise its right of first refusal, failing which the right would be deemed waived. Riviera replied expressing interest, later raised its offer to 5,000 pesos, and in a letter dated December 2, 1988 confirmed a fixed and final price of 5,000 pesos per square meter, complete payment within sixty to ninety days, stating that this offer is what it felt should be the market price of the property. Reyes's counsel replied on December 5, 1988 that the offer was unacceptable and that Riviera had failed to take advantage of its opportunity.

Meanwhile, on December 4, 1988, Reyes offered the property to Rolando Traballo, a family friend and President of Cypress, at 6,000 pesos per square meter. They met the next day and agreed on 5,300 pesos per square meter, with Traballo to look for a partner, which turned out to be Cornhill. In January 1989, anxious about the approaching redemption deadline, Reyes asked his nephew, Atty. Estanislao Alinea, to ask Angeles to raise his offer a little higher. Angeles said his offer remained 5,000 pesos per square meter, and in a letter dated February 4, 1989 he even downgraded the terms, proposing fifty percent down and the balance over five years at twelve percent interest. When Alinea again asked him to increase the price, Angeles said he could not add anymore. Reyes never expressly offered the property to Riviera at 5,300 pesos per square meter. In February 1989 Cypress and Cornhill raised the redemption money, and on May 1, 1989 Reyes executed a deed of absolute sale in their favor for 5,395,400 pesos. On the same date Cypress and Cornhill mortgaged the property to Urban Development Bank for 3,000,000 pesos. Riviera's demands for a resale failed, and it filed suit.

Issues

• Whether or not Riviera Filipina had already lost its right of first refusal when Reyes sold the property to Cypress and Cornhill.
• Whether or not Reyes deceived Riviera out of its right of first refusal by not disclosing to it the intervening offer of Cypress and Cornhill.
• Whether or not the Court of Appeals erred in denying Riviera's motion for reconsideration.
• Whether or not the Court of Appeals decision is null and void because it was rendered after the principal appellee had died and without proper substitution of his heirs.

Applicable Provisions

Paragraph 11 of the contract of lease, as quoted in the decision, provides:

LESSEE shall have the right of first refusal should the LESSOR decide to sell the property during the term of the lease.

This is the contractual source of Riviera's claim, and the whole case turns on how that stipulation is to be read and applied.

Article 1370 of the New Civil Code, which the Court invokes through the cardinal rule on the intention of the parties, provides:

The intention of the parties is the cardinal rule in the interpretation of contracts.

The Court uses this rule to read the right of first refusal in the light of what the parties actually did, not merely what the words say.

Article 1371 of the New Civil Code provides:

In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

This is the textual anchor for the Court's reliance on the exchange of letters and the series of offers and counter-offers between Reyes and Riviera.

Ruling

On the first issue, the Court held that Riviera had lost its right of first refusal. The prevailing doctrine is that a right of first refusal means identity of terms and conditions to be offered to the lessee and all other prospective buyers, and a sale made in violation of that right, while valid, is rescissible. But the Court stressed that general propositions do not decide specific cases, and that contracts must be read as the average person would read them, with the intention of the parties given primordial consideration and their contemporaneous and subsequent acts principally considered. Reading the contract through the parties' conduct, the Court found that they had given the stipulation a practical construction: should the lessor decide to sell, the sale should first be offered to Riviera. That is exactly what happened. Reyes offered the property to Riviera, which held firm to 5,000 pesos per square meter even when asked to raise its price a little, while Reyes was willing to sell at a little above 5,000 pesos. Riviera's rigid position, twice maintained, meant it had lost the right, and no express offer at 5,300 pesos was necessary, since to make one would have been a useless ceremony.

On the second issue, the Court held that no adverse inference could be drawn from Reyes's failure to disclose the Cypress and Cornhill counter-offer. Reyes approached Riviera not once but twice, the second time through Atty. Alinea precisely to invite a higher bid, showing good faith. Riviera, aware of Reyes's financial predicament, clung to its offer in the hope that he would succumb out of desperation. Equity tilted in favor of Reyes, Cypress, and Cornhill, and Reyes's fundamental right of ownership, which carries the exclusive right to dispose of the property to whoever he pleases, must prevail over a right of first refusal that Riviera unscrupulously tried to exercise.

On the third issue, the Court found no error in the denial of reconsideration, the appellate court having correctly affirmed the trial court.

On the fourth issue, the Court treated the petition as one for review under Rule 45, since the errors assigned were errors of judgment correctible only by appeal, not errors of jurisdiction reviewable by certiorari under Rule 65. An error committed by a court in the exercise of its jurisdiction does not deprive it of that jurisdiction.

Doctrine

A right of first refusal requires identity of terms and conditions to be offered to the holder and to all other prospective buyers; a sale made in violation of that right is valid but rescissible. The basis of the right must be the current offer to sell of the seller or the offer to purchase of a prospective buyer. But the right is not exercised in a vacuum: the contract is read as the average person would read it, and the intention of the parties, as shown by their contemporaneous and subsequent acts, is the cardinal rule of interpretation. A lessee who, when asked to raise its price a little higher, adamantly refuses and holds to a price below the seller's final price, thereby loses the right, and no express offer at the final price need be made, because it would be a useless ceremony. The seller's right of ownership, including the exclusive right to dispose of the property, prevails over a right of first refusal exercised whimsically to exploit the seller's financial distress.

Disposition

The petition was denied and the decision of the Court of Appeals, affirming the dismissal of Riviera's complaint, was upheld; Reyes, Cypress, and Cornhill won.

Remember This

The one line to memorize: a right of first refusal demands identity of terms and conditions, but a lessee who rigidly refuses to raise its price when asked has lost the right, and no express offer at the final price is required. Examiners use this case to test the practical construction of contracts under Articles 1370 and 1371, and to distinguish a rescissible sale in violation of a right of first refusal from a sale that the holder's own intransigence has already foreclosed.