G.R. No. 70149 . January 30, 1989.
EUSEBIO C. LU, petitioner, vs. THE INTERMEDIATE APPELLATE COURT, HEIRS OF SANTIAGO BUSTOS and JOSEFINA ALBERTO, respondents.

FACTS

Josefina Alberto owned a parcel of land in Pangasinan. On February 3, 1967, she leased the entire property to Eusebio C. Lu under a 25-year Contract of Lease Agreement. A salient provision granted Lu the priority right to purchase the property should Alberto decide to sell. The contract was duly notarized and annotated on the title. Alberto later subdivided the property. One resulting lot, Lot No. 6, was occupied by tenant Santiago Bustos. In 1968, Alberto executed a note and a receipt acknowledging sums of money from Bustos, which the latter claimed were partial payments for the sale of Lot No. 6 to him. Alberto, however, contended these amounts were merely loans advanced to finance her litigation against Lu, intended to rescind his lease and preferential right, with the understanding they would be applied to the purchase price only if the suit succeeded.

ISSUE

The core issue is whether a valid contract of sale over Lot No. 6 was perfected between Alberto and Bustos, or whether the 1967 lease agreement granting Lu a preferential right to purchase remained controlling.

RULING

The Supreme Court reversed the Intermediate Appellate Court and reinstated the trial court’s decision, ruling no valid sale was consummated between Alberto and Bustos. The legal logic hinges on the nature and priority of contractual obligations. The 1967 lease agreement, being a notarized document, embodied a contractual stipulation in favor of Lu—a right of first refusal. This created a binding obligation on Alberto not to sell the property to another without first offering it to Lu under similar terms. The subsequent transactions with Bustos in 1968 could not validly override this prior contractual right. The Court found Alberto’s version credible: the sums from Bustos were conditional advances for litigation expenses, not absolute payments for a sale. This is corroborated by the note’s wording, which treated the amount as a loan to be deducted from a future lot purchase, and by the fact Bustos paid no further rentals, consistent with a contingent arrangement. Since the essential elements of a perfected sale—particularly a meeting of the minds on the object and price—were absent between Alberto and Bustos, and because any sale would violate Lu’s vested preferential right, Bustos acquired no valid title. The right of first refusal, being an integral part of the principal lease contract, was enforceable, and Alberto could not unilaterally defeat it by a later transaction with a third party.