Notice to mortgagor is required prior to extrajudicial foreclosure

Foreclosure of property is a remedy used to satisfy an obligation in case the debtor defaults on his or her obligation.

Foreclosure can be judicial or extrajudicial, the latter being governed by Act 3135, as amended by Act 4118, or "An act to regulate the sale of property under special powers inserted in or annexed to real estate mortgages."

A careful reading of this law shows that the only notice required is found in Section 3 thereof, which provides:

"SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city."

Notably, and as consistently ruled in the past by the Supreme Court, personal notice to the mortgagor is not required as the only notice required under this law is a notice of sale to the public. However, in the recent case of Philippine Savings Bank v. Josephine Co (GR 232004, Oct. 6, 2021, Ponente: Associate Justice Marvic M.V.F Leonen), the Supreme Court revisited this interpretation, stating:

"Notwithstanding the absence of an express directive under Act No. 3135, principles of due process and the utmost diligence of banks require that mortgagors be personally notified of extrajudicial foreclosures of their mortgages prior to public auctions.

"Due process requires that a mortgagor be notified, to afford him or her an opportunity to safeguard his or her rights prior to the extrajudicial foreclosure of his or her mortgage, and the sale of his or her property. The current reading of Act No. 3135 affords no safeguards whatsoever for the mortgagor. The publication requirement under Act No. 3135 is not intended as a notification for the mortgagor, but rather for the public, to enable participation in the auction sale of the foreclosed property."

The extrajudicial foreclosure made without your knowledge or personal notice may be held null and void as it violates your right to due process. Such action amounts to a deprivation on your part of any opportunity to exhaust all possible legal remedies to protect your interest.

Extrajudicial Foreclosure of Real Estate Mortgage

Real estate mortgage

A real estate mortgage is an accessory contract constituted by the owner of a real property (mortgagor) whereby he allows a lien to be constituted thereon for the purpose of securing in favor of the creditor (mortgagee) the fulfillment of a principal obligation. A real estate mortgage is a contract creating a real right. Hence, third persons who come into the possession of the real estate subject of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration laws (Article 1312, Civil Code). The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the secured obligation (Article 2127, Civil Code).

While registration is not essential for the validity of the real estate mortgage, the mortgage must be registered in order that it will bind third persons. Hence, an innocent purchaser for value who acquires a land subject of an unregistered real estate mortgage is not bound by the mortgage (Article 2125, Civil Code; Sections 44 and 51 of the Property Registration Decree).

Foreclosure

Foreclosure of real estate mortgage is the proceeding whereby the property subject of the real estate mortgage is sold at public auction for the payment of the principal obligation in favor of the mortgagee. (Article 2087, Civil Code). It is called foreclosure because the purpose of the action is to foreclose or divest the rights in the property of the mortgagor and junior encumbrancers and to vest their rights in the purchaser (Section 3 of Rule 68, Rules of Court).

Extrajudicial foreclosure

Foreclosure of real estate mortgage may be done judicially under Rule 68 of the Rules of Court or extrajudicially pursuant to Act No. 3135 and to Supreme Court A.M. No. 99-10-05-0. For extrajudicial foreclosure, it is required that there be a special power of attorney inserted in or annexed to the deed of mortgage empowering the mortgagee to sell the land at public auction (Sec. 1, Act No. 3135).

In a case, the real estate mortgage provided that in the event of nonpayment of the loan, “the mortgagors expressly agree to the extrajudicial foreclosure of the mortgaged property.” The Supreme Court held that this provision was not sufficient to authorize extrajudicial foreclosure. It was a mere expression of the parties’ amenability to extrajudicial foreclosure as the means of foreclosing the mortgage but did not constitute the special power or authority to sell the mortgaged property to enable the mortgagees to recover the unpaid obligations (Baysa v. Plantilla, 13 July 2015).

Procedure for extrajudicial foreclosure

All applications for extra-judicial foreclosure of real estate mortgage whether under the direction of the sheriff or a notary public, pursuant to Act 3135, shall be filed with the Executive Judge that has jurisdiction over the area where the property is situated, through the Clerk of Court who is also the Ex-Officio Sheriff (SC A.M. No. 99-10-05-0).

Notices of the sale shall be posted for not less than twenty days in at least three public places of the municipality or city where the property is situated, and such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city (Section 3, Act No. 3135).

The general rule is that personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary. Section 3 of Act No. 3135 requires only the (1) posting of the notice of extrajudicial foreclosure sale in three public places; and (2) publication of the said notice in a newspaper of general circulation. The exception is when the parties stipulate that personal notice is additionally required to be given to the mortgagor. Failure to abide by the stipulation renders the foreclosure proceedings null and void (Planters Dev’t Bank v. Lubiya Agro Industrial Corp., 14 November 2018, Reyes, J.).

The public auction sale shall be conducted under the direction and control of the sheriff or of a notary public pursuant to Section 4 of Act No. 3135.

In Ochoa v. China Bank, 23 March 2011, Nachura, J., it was held that a venue stipulation providing that all actions arising from a real estate mortgage should be brought only in Makati City does not apply to an application for extrajudicial foreclosure. The Court stated that the provisions of Section 4, Rule 4 of the Rules of Court on venue do not apply since extrajudicial foreclosure is not an action. Pursuant to Act. No. 3135, the sale must be held in Parañaque City where the real property was located.

An application for the appointment of a receiver may not be availed of in extrajudicial foreclosure since Section 1(b), Rule 59 of the Rules of Court on receivership speaks of “an action by the mortgagee for the foreclosure of the mortgage” (Development Bank of the Phils. v. Doyon, 25 March 2009).

Restraint or injunction against foreclosure proceedings

Any petition in court to enjoin or restrain the conduct of foreclosure proceedings by banks, quasi-banks, and trust entities shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all damages which the bank, quasi-bank, or trust entity may suffer by the enjoining or restraint of the foreclosure proceeding (Section 47, General Banking Law).

No temporary restraining order or writ of preliminary injunction against the extrajudicial foreclosure of real estate mortgage shall be issued on the allegation that the loan secured by the mortgage has been paid or is not delinquent unless the application is verified and supported by evidence of payment (SC Resolution dated 20 February 2007).

No temporary restraining order or writ of preliminary injunction against the extrajudicial foreclosure of real estate mortgage shall be issued on the allegation that the interest on the loan is unconscionable, unless the debtor pays the mortgagee at least six percent per annum interest on the principal obligation as stated in the application for foreclosure sale, which shall be updated monthly while the case is pending (Id.; Tumon v. Radiowealth Finance Co., 18 March 2021, Caguioa, J.).

Action to recover the deficiency

If the proceeds of the foreclosure sale are not adequate to satisfy the mortgage obligation, the mortgagee may file an action for the recovery of the deficiency (Development Bank of the Philippines v. Mirang, 8 August 1975). An action to recover the deficiency after extrajudicial foreclosure of a real estate mortgage is a personal action since it does not affect title to or possession of real property or any interest therein. Hence, venue may be laid in the city where the mortgagee bank has its main office. (BPI Family Bank v. Yujuico, 22 July 2015, Bersamin, J.).

Right of redemption

The mortgagor or junior encumbrancer may redeem the real property sold within one year from the registration of the certificate of sale (Gorospe v. Santos, 30 January 1976). Such redemption shall be made pursuant to the provisions of Rule 39 of the Rules of Court, i.e., by paying the purchase or bid price with interest of 1% per month, and any assessments or taxes which the purchaser may have paid after the purchase with interest thereon at the same rate (Section 28, Rule 39 of the Rules of Court in relation to Act No. 3135).

During the redemption period, the mortgagor remains the owner of the foreclosed property and may thus mortgage it to a third party (Medida v. Court of Appeals, 208 SCRA 887 [1992]).

The period to redeem a property sold in an extrajudicial foreclosure sale is not extendible. A pending action to annul the foreclosure sale does not toll the running of the one-year period of redemption under Act No. 3135 (Mahinay v. Dura Tire & Rubber Industries, Inc., 5 June 2017, Leonen, J.).

In extrajudicial foreclosure where the mortgagee is a bank, quasi-bank, or trust entity and the mortgagor is a juridical person, the redemption period is until the registration of the foreclosure sale or until three months after the foreclosure, whichever is earlier (Sec. 47, General Banking Law). Section 47 does not violate the equal protection clause which permits reasonable classification. The difference in the treatment of juridical persons and natural persons was based on the nature of the properties foreclosed — whether these are used as residence, for which the more liberal one-year redemption period is retained, or used for industrial or commercial purposes, in which case a shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee­ banks to dispose sooner of these acquired assets (Goldenway Merchandising Corporation v. Equitable PCI Bank, 706 Phil. 427 [2013]).

As a rule, there is no right of redemption in judicial foreclosure. The exceptions would be: (1) the right of redemption by a junior encumbrancer who was not impleaded in the foreclosure suit (1 FLORENZ D. REGALADO, REMEDIAL LAW COMPENDIUM 750-751 [7th rev. ed.]); and (2) the right of redemption by the mortgagor in judicial foreclosure by a bank, quasi-bank, or trust entity pursuant to Section 47 of the General Banking Law.

Note that the redemption price under the General Banking Law is the amount due under the mortgage deed with interest thereon at the rate specified in the mortgage deed, not the purchase or bid price plus interest of 1% per month stated in Section 28, Rule 39 of the Rules of Court in relation to Act No. 3135 (Sy v. Court of Appeals, 172 SCRA 125).

Petition for writ of possession

The rule is that the mortgagor is entitled to the possession of the mortgaged property during the redemption period.

The purchaser may however file with the RTC where the property is situated a petition for issuance of writ of possession, furnishing bond in an amount equal to the use of the property for 12 months, to indemnify the mortgagor in case the sale was made without any violation of the mortgage or without complying with the requirements of Act No. 3135. The petition shall be under oath and in the form of an ex parte motion. The court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff who shall execute said order immediately.

Note however that in foreclosure of real estate mortgage by a bank, quasi-bank, or trust entity, the purchaser at the auction sale shall have the right to enter and take possession of the property immediately after the confirmation of the auction sale without need of posting a bond (Section 47, General Banking Law).

While denominated as a petition for writ of possession, such petition is not an initiatory pleading since under Section 7 of Act No. 3135, the petition is filed in the form of an ex parte motion. In other words, the petition for writ of possession is in substance merely a motion. Hence, the petition need not be accompanied by a certification against forum shopping (Metrobank v. Abad Santos, 15 December 2009).

Disobedience or resistance to the writ of possession is not punishable by contempt because the writ is directed at the sheriff and not at the occupants of the property. The sheriff must oust the occupants with the assistance, if necessary, of the appropriate peace officers (Lipata v. Tutaan, L-16643, 29 September 1983).

After the lapse of the redemption period, the purchaser who cannot take possession because of the adverse possession of the mortgagor or a third person may file a petition for writ of possession, without need of posting a bond. The reason is that the purchaser is already entitled to possession as a matter of right because ownership of the property has vested in him (IFC Service Leasing & Acceptance Corporation v. Nera, 30 January 1967; Hernandez v. Ocampo, 15 August 2016).

The Supreme Court has held that Section 6 of Rule 39 is not applicable to an ex parte petition for the issuance of the writ of possession because it is not in the nature of a civil action governed by the Rules of Civil Procedure, but a judicial proceeding governed separately by Section 7 of Act No. 3135. Hence, a writ of possession may be enforced even after more than five years from its issuance (Topacio v. Banco Filipino, 17 November 2010, Brion, J.).

Remedies of mortgagor against the writ of possession

Before the lapse of redemption period, the mortgagor may file in the proceedings in which possession was requested a petition to set aside the sale and the writ of possession on the ground that the mortgage was not violated or on the ground of irregularity or invalidity of the sale. The petition should be filed not more than 30 days after the purchaser was given possession. The mortgagor may appeal from the order denying the petition (Section 8, Act No. 3135).

After the lapse of the redemption period, Section 8 of Act No. 3135 is no longer applicable. Hence, the remedy of the mortgagor is to file a separate civil action, e.g., for recovery of ownership or for annulment of the mortgage/foreclosure sale (Jayag v. BDO, 14 September 2021, Gesmundo, C.J.).

Issuance of writ of possession is a ministerial duty; exception

The issuance of a writ of possession in favor of the purchaser is a ministerial duty of the court. The mortgagor does not need to be impleaded in or notified of the proceedings which are ex parte. The issuance of a writ of possession is not stayed by a pending action for annulment of the mortgage or of the foreclosure. This is in line with the ministerial character of the writ (Gatuslao v. Yanson, 21 January 2015, Del Castillo, J.).

The writ of possession shall issue unless a third party is actually holding the property adversely to the judgment obligor. The Supreme Court has held that the last paragraph of Section 33, Rule 39 of the Rules of Court is applicable to extrajudicial foreclosure (Cabling v. Lumapas, 18 June 2014). The third party holding the property adversely to the judgment obligor is one who is not a mere transferee or successor-in-interest of the mortgagor (such as a buyer or heir) but one who has an independent right which he can assert even against the mortgagor, such as a co-owner, usufructuary, or trustee (Id.).

Source: Legisperit

The redemption period after the foreclosure of real estate mortgage by a bank

What is a Redemption Period?

The time duration offered to borrowers, during or even after a foreclosure in some cases, to return the borrowed money - pay off the debt owed to the bank, and reclaim their assets, is called the Redemption Period in Real Estate Foreclosures.

How long is the so called "redemption period"?

The "redemption period" given to you by law in order to redeem your property is one (1) year from the registration of the foreclosure sale. To elucidate this point, pay attention to the provisions of Republic Act Number 8791, otherwise known as the "General Banking Law of 2000." Succinctly, Section 47 of the aforementioned law reads:

"Section 47. Foreclosure of Real Estate Mortgage. - In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration."

The foregoing dictates that in case of foreclosure by a bank, whether the same be judicial or extrajudicial, the mortgagor has a period of one (1) year from the sale of the real estate to redeem the property.

Thus kindly take note of the date of the registration of sale, which shall serve as the reckoning point of the one (1) year redemption period.

Also, in so far as the redemption amount is concerned, it must also be noted that the same not only includes the amount stated in the mortgage deed but also the interests at the rate specified in the mortgage, and all the costs, and expenses incurred by the bank from the sale and custody of said property less the income, if any, derived therefrom.

Source: Manila Times