EQUATORIAL REALTY v.

MAYFAIR

Carmelo owned a parcel of land + 2 two-storey buildings at Recto Ave

He entered into a contract of lease with Mayfair
Contract was 20 years Maxim Theatre
Two years later > march 31 1969 > 2 nd contract of lease with Carmelo > Miramar
Theatre
Both contracts provides >30 days exclusive option to Lessee for purchase
And, if other buys it, the lease shall be recognized on the Deed of Sale
On Aug 19, 1974 > Carmelo informed Mayfair the desire to sell the entire
Property to Jose Araneta for $1.2m
Carmelo asked if Mayfair was willing to buy the property for Six to Seven Million
Pesos August 19
Mayfair sent a letter August 23> reminding him of the stipulations under the
contract of lease
Carmleo did not reply
On September 18, Mayfair sent a letter to express interest in purchasing the
entire building
Carmelo and Equatorial questioned the authenticity of the 2nd letter
FOUR YEARS LATER > Carmelo sold the property to Equitorial for 11.3m pesos
Mayfair instituted an action a quo for spec performance and annulment of the
sale
DEFENSE of Carmelo > informed Mayfair > but only desired in purchasing the
leased area not the entire property
DEFENSE of Equitorial > purchase is impossible > cannot buy separately

RULING

The 30-day exclusive option to purchase IS NOT AN OPTION

Nor right of ownership was transferred from Carmelo to Equatorial since there was
failure to deliver the property to the buyer. Compound this with the fact that the sale
was even rescinded.

For property to be delivered, we need two things. Delivery of property or title, and
transfer of control or custody to the buyer.

Possession was never acquired by the petitioner. It therefore had no rights to rent.

ISSUE/TASKS

(1) to define the true nature, scope and efficacy of paragraph 8 stipulated in the two
contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the
trial court and the Court of Appeals; and
(2) to determine the rights and obligations of Carmelo and Mayfair, as well as
Equatorial, in the aftermath of the sale by Carmelo of the entire Claro M. Recto property
to Equatorial.

Both contracts of lease in question provide the identically worded paragraph 8,

which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE
shall be given 30-days exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other
than the LESSEE, the LESSOR is bound and obligated, as it hereby binds
and obligates itself, to stipulate in the Deed of Sale thereof that the
purchaser shall recognize this lease and be bound by all the terms and
conditions thereof.

It is not an option clause or an option contract. It is a contract of a right of first

refusal.

Option Contract meaning:

A contract by virtue of which A, in consideration of the payment of a certain sum to B,

acquires the privilege of buying from, or selling to B, certain securities or properties
within a limited time at a specified price.

Art. 1479. ...

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

..that the option is not the contract of sale itself. The optionee has the right, but
not the obligation, to buy.

Where a period is given to the offeree within which to accept the offer, the following
rules generally govern:

(1) If the period is not supported by a consideration, the offeror is still free and
has the right to withdraw the offer before its acceptance, or if an acceptance has been
made, before the offeror's coming to know of such fact, by communicating that
withdrawal to the offeree
(2) If the period has a separate consideration, a contract of "option" deemed
perfected, and it would be a breach of that contract to withdraw the offer during the
agreed period.

HENCE, in view the two lease contracts involved in the instant case
 we so hold that no option to purchase in contemplation of the second
paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under
the said lease contracts.

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the
right of first refusal to Mayfair and is NOT an option contract

An option is a contract granting a privilege to buy or sell within an agreed time and at
a determined price. It is a separate and distinct contract from that which the parties may
enter into upon the consummation of the option. It must be supported by consideration.

DEFINITION OF RIGHT OF FIRST REFUSAL:

In the instant case, the right of first refusal is an integral part of the contracts
of lease. The consideration is built into the reciprocal obligations of the parties.
it shall be given the first crack or the first option to buy the property at the price
which Carmelo is willing to accept.

THUS, Mayfair is in effect stating that it consents to lease the premises and to pay the
price agreed upon provided the lessor also consents that, should it sell the leased
property, then, Mayfair shall be given the right to match the offered purchase price and
to buy the property at that price in reciprocal contract, the obligation or promise of each
party is the consideration for that of the other.

Carmelo, however, did not pursue the exercise to its logical end. While it initially
recognized Mayfair's right of first refusal, Carmelo violated such right

Carmelo abandoned negotiations, kept a low profile for some time, and then sold,
without prior notice to Mayfair, the entire Claro M Recto property to Equatorial.

Since Equatorial is a buyer in BAD FAITH , this finding renders the sale to
it of the property in question rescissible.

It is true that the acquisition by a third person of the property subject of the contract is
an obstacle to the action for its rescission where it is shown that such third person is in
lawful possession of the subject of the contract and that he did not act in bad faith.

However, this rule is not applicable in the case before us because the petitioner
is NOT considered A THIRD PATY in relation to the Contract of Sale nor may its
possession of the subject property be regarded as acquired lawfully and in good faith.

BECAUSE, he was aware of the lease and the stipulations with Mayfair.
A purchaser in good faith and for value is one who buys the property of another
without notice that some other person has a right to or interest in such property and pays a
full and fair price for the same at the time of such purchase or before he has notice of the claim
or interest of some other person in the property.
Good faith connotes an honest intention to abstain from taking unconscientious advantage
of another. Tested by these principles, the petitioner cannot tenably claim to be a buyer in
good faith as it had notice of the lease of the property by the Bonnevies and such knowledge
should have cautioned it to look deeper into the agreement to determine if it involved
stipulations that would prejudice its own interests.

Accordingly, even as it recognizes the right of first refusal, this Court should also
order that Mayfair be authorized to exercise its right of first refusal under the contract to
include the entirety of the indivisible property. The boundaries of the property sold
should be the boundaries of the offer under the right of first refusal

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights of
and to the prejudice of Mayfair. Equatorial's knowledge of the stipulations therein should
have cautioned it to look further into the agreement to determine if it involved stipulations that
would prejudice its own interests.

The COURT orders RESCISSION. The sale of the subject real property by Carmelo to
Equatorial should now be rescinded considering that Mayfair, which had substantial interest
over the subject property, was prejudiced by the sale of the subject property to Equatorial
without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day
stipulated period.