Tenant Rights of First Refusal When Landlord Sells Property in the Philippines

Introduction

In the Philippines, the right of first refusal (also known as the right of pre-emption) is a legal mechanism that allows certain tenants to purchase the property they are occupying before the landlord can sell it to a third party. This right is designed to protect tenants from arbitrary displacement, promote stability in housing and land use, and align with broader social justice goals embedded in Philippine laws. It essentially requires the landlord to offer the property to the tenant on the same terms and conditions as any bona fide offer from an external buyer, giving the tenant the opportunity to match that offer.

This right is not universally applicable to all tenants but is contingent on specific contexts, such as urban residential areas or agricultural lands. It stems from statutory provisions rather than common law, and its absence in a lease contract does not automatically confer it unless provided by law. This article explores the legal framework, applicability, procedures, remedies, and limitations of this right in the Philippine context, distinguishing between urban, agricultural, and general scenarios.

Legal Basis

The right of first refusal for tenants is primarily anchored in several key legislations:

Presidential Decree No. 1517 (Urban Land Reform Act of 1978): This law proclaims certain urban areas as Urban Land Reform Zones (ULRZ) or Areas for Priority Development (APD) and grants qualified tenants the right of first refusal to purchase the land they occupy when the owner decides to sell.
Republic Act No. 7279 (Urban Development and Housing Act of 1992): This reinforces PD 1517 by prioritizing underprivileged citizens in socialized housing programs, including rights to acquire lands in designated areas, often through community mortgage programs or direct sales.
Republic Act No. 3844 (Agricultural Land Reform Code of 1963), as amended by Republic Act No. 6389 (Code of Agrarian Reforms of the Philippines): This provides agricultural lessees with a pre-emptive right to buy the farmland they till, along with a right of redemption if the land is sold without their knowledge.
Civil Code of the Philippines (Republic Act No. 386): While not directly granting a right of first refusal, Articles 1650-1652 on leases and Article 1623 on redemption rights indirectly support tenant protections, such as the continuation of leases upon sale (Article 1676) and redemption in certain real rights scenarios.
Contract Law Principles: Under the Civil Code (Articles 1305-1422), parties may stipulate a right of first refusal in the lease agreement, making it enforceable as a contractual obligation.

These laws reflect the Philippines' commitment to agrarian reform and urban housing equity, influenced by constitutional mandates under Article XIII of the 1987 Constitution on social justice and human rights.

Applicability and Conditions

The right of first refusal is not a blanket entitlement for all tenants. Its application depends on the type of tenancy, location, and tenant qualifications.

In Urban Areas (Residential and Non-Agricultural)

Under PD 1517, the right applies primarily in proclaimed ULRZ or APD, which include blighted urban communities, informal settlements, and priority development sites, often in Metro Manila and other major cities. The President, upon recommendation from the Housing and Urban Development Coordinating Council (HUDCC) or its successor agencies like the Department of Human Settlements and Urban Development (DHSUD), designates these areas.

Qualifications for Tenants:

Must be a "bona fide" or "legitimate" tenant, defined as:
- Individuals or families who have built their homes on the land with or without the owner's permission and have resided there continuously for at least 10 years.
- Tenants under a valid lease contract for residential purposes, also with at least 10 years of continuous occupancy.
The tenant must use the property primarily for dwelling (not commercial or industrial, unless mixed-use in designated zones).
The land must be suitable for residential development and not exceed certain size limits (e.g., 800 square meters in highly urbanized areas under related regulations).
Exclusions: Tenants in high-end condominiums, commercial spaces, or areas not proclaimed as ULRZ do not qualify unless specified in their lease.

RA 7279 extends this to beneficiaries of socialized housing programs, where informal settlers or low-income renters in government-identified sites have priority to purchase through mechanisms like the Community Mortgage Program (CMP).

In Agricultural Lands

For farmlands, RA 3844 grants agricultural lessees (those cultivating the land personally or through family labor) a pre-emptive right. This is part of the Comprehensive Agrarian Reform Program (CARP) under Republic Act No. 6657, which aims to redistribute land to tenant-farmers.

Qualifications for Tenants:

The lessee must hold an agricultural leasehold relationship, where they pay rent in produce or cash for tilling the land.
The land must be devoted to rice, corn, or other agricultural crops (excluding livestock or poultry farms).
No minimum residency period is required, but the lessee must be actively cultivating the land.
Exclusions: Share tenants (who share crops without fixed rent) may convert to leasehold under RA 1199, but the right applies post-conversion.

General Tenants (Commercial, Non-Designated Residential)

Outside ULRZ/APD or agricultural contexts, tenants have no statutory right of first refusal. For instance:

Apartment renters under Republic Act No. 9653 (Rent Control Act of 2009, extended periodically) are protected from excessive rent hikes and ejectment but not granted purchase rights upon sale.
Commercial tenants (e.g., store lessees) rely solely on lease terms.
However, if the lease includes a contractual clause for first refusal, it is binding, provided it does not violate public policy (e.g., perpetual options may be void under Civil Code Article 1306).

In all cases, the right does not apply if the sale is to a relative of the landlord (e.g., ascendants/descendants) or if the property is sold en masse with others, subject to court interpretation.

Procedures for Exercise

Urban Context (PD 1517/RA 7279)

Notification: The landlord must notify the tenant in writing of the intent to sell, including the price, terms, and conditions.
Offer Period: The tenant has a reasonable time (typically 30-90 days, as determined by courts) to accept or match any third-party offer.
Acceptance: If accepted, the sale proceeds like a regular transaction. If refused, the landlord may sell to others but must ensure the price is not lower than offered to the tenant.
Government Role: In APD, the DHSUD or local government units (LGUs) may mediate or facilitate financing for tenants.

Agricultural Context (RA 3844)

Notification: The landowner must send a written offer to the lessee via registered mail or personal delivery, detailing the price and terms.
Response Period: The lessee has 180 days to exercise the right by notifying the owner and depositing the price with the Department of Agrarian Reform (DAR) or a bank.
If Sold Without Offer: The lessee has a right of redemption within 180 days from notice of the sale, allowing them to repurchase at the sale price plus interest.

Contractual Scenarios

Procedures follow the lease terms, but defaults to Civil Code rules on offers (Articles 1319-1326), requiring clear acceptance within a specified period.

Rights and Obligations

Tenant Rights:

To be informed of any sale and given priority to buy.
Protection from ejectment during the process (under Batas Pambansa Blg. 877 for urban ejectment grounds).
In agricultural cases, access to DAR adjudication for disputes.

Tenant Obligations:

Prove qualification (e.g., residency proof, lease contract).
Match the offer promptly; failure waives the right.
Pay the full price; partial payments may not suffice without agreement.

Landlord Rights:

Sell if the tenant declines or fails to qualify.
Set a reasonable price based on fair market value.

Landlord Obligations:

Good faith offer; collusion with buyers to evade the right is punishable.
In urban zones, comply with proclamation requirements.

Remedies and Enforcement

If violated:

Urban Tenants: File a complaint with the DHSUD, HLURB (now under DHSUD), or regional trial courts for specific performance (forcing the sale to the tenant), damages, or annulment of the sale. Injunctions may prevent transfer.
Agricultural Tenants: Adjudicate through DAR Adjudication Board (DARAB), with appeals to the Court of Appeals. Penalties include fines or land forfeiture under CARP.
Contractual Breaches: Civil action for breach of contract, with damages under Civil Code Article 1170.

Prescription periods: Actions generally prescribe in 10 years for written contracts or 4 years for injury to rights (Civil Code Article 1144-1146).

Supreme Court jurisprudence emphasizes strict compliance, ruling that the right is a real right enforceable against third parties if registered or if the buyer had notice. Violations can lead to sale nullification.

Limitations and Exceptions

Non-Proclaimed Areas: No right exists.
Government Sales: Exempt if for public use.
Foreclosure or Execution Sales: Judicial sales may override the right.
Corporate Landlords: Complicated if shares are sold instead of the property.
Multiple Tenants: The right may be pro-rated or prioritized by seniority.

Recent extensions of rent control laws (e.g., up to 2025) do not expand purchase rights but complement anti-ejectment protections.

Conclusion

The right of first refusal in the Philippines serves as a vital safeguard for vulnerable tenants, rooted in laws promoting equitable land distribution. In urban settings, it prevents displacement in reform zones; in agriculture, it empowers farmers toward ownership. However, its scope is limited, underscoring the importance of lease stipulations for unprotected tenants. Landlords and tenants should consult legal experts or relevant agencies like DHSUD or DAR to navigate specifics, ensuring compliance and avoiding disputes. This framework balances property rights with social equity, evolving with the nation's housing and agrarian challenges.