PUP vs CA

Polytechnic University of the Philippines (PUP) vs CA and Firestone Ceramics Inc.; National Development
Corporation (NDC) vs Firestone Ceramics Inc. (2 cases)
Bellosillo, J (2001) kam

DOCTRINES:
 What is a sale?
- A contract of sale, as defined in the Civil Code, is a contract where one of the parties obligates
himself to transfer the ownership of and to deliver a determinate thing to the other or others who
shall pay therefore a sum certain in money or its equivalent. It is therefore a general requisite for
the existence of a valid and enforceable contract of sale that it be mutually obligatory, i.e., there
should be a concurrence of the promise of the vendor to sell a determinate thing and the promise
of the vendee to receive and pay for the property so delivered and transferred. The Civil Code
provision is, in effect, a “catchall” provision which effectively brings within its grasp a whole
gamut of transfers whereby ownership of a thing is ceded for a consideration.
-
 Elements of a sale: 1. Consent; 2. Determinate subject matter; and 3. Consideration

 Right of first refusal

- It is elementary that a party to a contract cannot unilaterally withdraw a right of first refusal that
stands upon valuable consideration.
- Where the stipulation for a right of first refusal is part and parcel of the contract of lease, the
consideration for the lease is the same as that for the option
- When a lease contract contains a right of first refusal, the lessor is under a legal duty to the lessee
not to sell to anybody at any price until after he has made an offer to sell to the latter at a certain
price and the lessee has failed to accept it.
- A right of first refusal is neither “amorphous nor merely preparatory” and can be enforced and
executed according to its terms.

FACTS:
In the 1960’s, NDC a GOCC had in its disposal a ten (10)-hectare property located along Pureza St., Sta. Mesa,
Manila known as the NDC compound. In May 1965 private respondent Firestone Ceramics Inc. (FIRESTONE)
manifested its desire to lease a portion of the property for its ceramic manufacturing business. In 1965, NDC
and FIRESTONE entered into a contract of lease covering a portion of the property 2.90118 hectares for use
as a manufacturing plant for a term of 10 years, renewable for another ten. Firestone built several
warehouses and facilities therein.

Prior to the expiration of the aforementioned contract, Firestone wrote NDC requesting for an extension of
their lease agreement. It was renewed with an express grant to Firestone of the first option to purchase the
leased premise in the event that it was decided "to dispose and sell the properties including the lot..."

Cognizant of the impending expiration of the leased agreement, Firestone informed NDC through letters and
calls that it was renewing its lease. The rest of its communications remained unacknowledged. There were
rumors of NDC's supposed plans to dispose of the subject property in favor of petitioner PUP. So, FIRESTONE
served notice on NDC conveying its desire to purchase the property in the exercise of its contractual right
of first refusal.

FIRESTONE instituted an action for specific performance to compel NDC to sell the leased property in its
favor. It was pre-empting the impending sale of the NDC compound to petitioner PUP in violation of its
leasehold rights. It also prayed for issuance of a writ of preliminary injunction to enjoin NDC from disposing
of the property.
PUP argued that a "purchaser pendente lite of property which is subject of a litigation is entitled to intervene
in the proceedings. It referred Memorandum Order No. 214 issued by then President Aquino ordering the
transfer of the whole NDC compound to the National Government, which in turn would convey the
aforementioned property in favor of PUP at acquisition cost. This was made in recognition of PUP's status as
the "Poor Man's University" as well as its serious need to extend its campus in order to accommodate the
growing student population. The order of conveyance would result in the cancellation of NDC's total
obligation in favor of the National Government in the amount of P57,193,201.64.

RULINGS OF THE LOWER COURT: The trial court granted PUP's motion to intervene. FIRESTONE moved
for reconsideration but was denied. On certiorari, the Court of Appeals affirmed the order of the trial court.
the SC upheld PUP's inclusion as party-defendant in the present controversy.

AS A RESULT OF THE RULING OF THE LOWER COURT: FIRESTONE amended its complaint and sought the
annulment of Memorandum Order No. 214. It alleged that PUP disregarded and violated its existing lease by
increasing the rental rate at P200,000.00 a month while demanding that it vacated the premises
immediately. FIRESTONE prayed that he property should be sold in its favor at the price for which it was
sold to PUP - P554.74 per square meter or for a total purchase price ofP14,423,240.00.

PUP’s contentions: PUP argued that the lease contract covering the property had expired long before the
institution of the complaint, and that further, the right of first refusal invoked by FIRESTONE applied solely
to the six-unit pre-fabricated warehouse and not the lot upon which it stood.

Judgment was rendered PUP was ordered and directed to sell to FIRESTONE the "2.6 hectare leased
premises at P1,500.00 per square meter.

Moreover, the Court of Appeals observed that as there was a sale of the subject property, NDC could not
excuse itself from its obligation TO OFFER THE PROPERTY FOR SALE FIRST TO FIRESTONE BEFORE IT
COULD TO OTHER PARTIES.

PUP moved for reconsideration asserting that in ordering the sale of the property in favor of FIRESTONE the
courts a quo unfairly created a contract to sell between the parties. It argued that the "court cannot
substitute or decree its mind or consent for that of the parties in determining whether or not a contract (has
been) perfected between PUP and NDC. PUP also advanced the theory that the enactment of Memorandum
Order No. 214 amounted to a withdrawal of the option to purchase the property granted to FIRESTONE. NDC,
for its part, vigorously contended that the contracts of lease executed between the parties had expired.

ISSUES [HELD]:
1. WON the courts a quo erred when they "conjectured" that the transfer of the leased property from NDC to
PUP amounted to a sale; in short – WON there was a valid sale between PUP and NDC? [YES]
2. WON FIRESTONE can rightfully invoke its right of first refusal? [YES]

RATIO:

1. The lower courts were right that that the conveyance of the property from NDC to PUP was one of absolute
sale, for a valuable consideration, and not a mere paper transfer as argued by petitioners.

A contract of sale, as defined in the Civil Code, is a contract where one of the parties obligates himself to
transfer the ownership of and to deliver a determinate thing to the other or others who shall pay therefore a
sum certain in money or its equivalent. It is therefore a general requisite for the existence of a valid and
enforceable contract of sale that it be mutually obligatory, i.e., there should be a concurrence of the promise
of the vendor to sell a determinate thing and the promise of the vendee to receive and pay for the property
so delivered and transferred. The Civil Code provision is, in effect, a "catch-all" provision which
effectively brings within its grasp a whole gamut of transfers whereby ownership of a thing is ceded
for a consideration.

The preponderance of evidence shows that NDC sold to PUP the whole NDC compound, including the leased
premises, without the knowledge much less consent of private respondent FIRESTONE which had a valid and
existing right of first refusal.

All three (3) essential elements of a valid sale, without which there can be no sale, were attendant in the
"disposition" and "transfer" of the property from NDC to PUP – (1) consent of the parties (manifested in
Memo No. 214), (2) determinate subject matter (property subject of the dispute), and (3) consideration
(cancellation of liabilities) therefor.

The cancellation of NDC's liabilities in favor of the National Government in the amount of P 57,193,201.64
constituted the "consideration" for the sale. As correctly observed by the Court of Appeals-
The defendants-appellants' interpretation that there was a mere transfer, and not a sale, apart from
being specious sophistry and a mere play of words, is too strained and hairsplitting. For it is
axiomatic that every sale imposes upon the vendor the obligation to transfer ownership as an
essential element of the contract. Transfer of title or an agreement to transfer title for a price paid,
or promised to be paid, is the very essence of sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid &
Oberly, Inc., v. RJL Martinez Fishing Corp., 166 SCRA 493).

2. YES. Such right was expressly stated by NDC and FIRESTONE in par. XV of their third contract, as found,
was interrelated to and inseparable from their first should the LESSOR desire to sell the leased premises
during the term of this Agreement, or any extension thereof, the LESSOR shall first give to the LESSEE, which
shall have the right of first option to purchase the leased premises subject to mutual agreement of both
parties.

In the instant case, the right of first refusal is an integral and indivisible part of the contract of lease and is
inseparable from the whole contract. The consideration for the right is built into the reciprocal obligations of
the parties. Thus, it is not correct for petitioners to insist that there was no consideration paid by FIRESTONE
to entitle it to the exercise of the right, inasmuch as the stipulation is part and parcel of the contract of lease
making the consideration for the lease the same as that for the option.

It is a settled principle in civil law that when a lease contract contains a right of first refusal, the lessor is
under a legal duty to the lessee not to sell to anybody at any price until after he has made an offer to sell to
the latter at a certain price and the lessee has failed to accept it. The lessee has a right that the lessor's first
offer shall be in his favor.

The option in this case was incorporated in the contracts of lease by NDC for the benefit of FIRESTONE
which, in view of the total amount of its investments in the property, wanted to be assured that it would be
given the first opportunity to buy the property at a price for which it would be offered. Consistent with their
agreement, it was then implicit for NDC to have first offered the leased premises of 2.60 hectares to
FIRESTONE

It now becomes apropos to ask whether the courts a quo were correct in fixing the proper
consideration of the sale at P1,500.00 per square meter. In contracts of sale, the basis of the right of first
refusal must be the current offer of the seller to sell or the offer to purchase of the prospective buyer. Only after
the lessee-grantee fails to exercise its right under the same terms and within the period contemplated can the
owner validly offer to sell the property to a third person, again, under the same terms as offered to the
grantee. Emphatically, we held that "(a right of first priority) should be enforced according to the law on
contracts instead of the panoramic and indefinite rule on human relations.