Sale of Mortgaged Property to Creditor Per Se Is Not Prohibited

When dealing with mortgaged properties, many people assume that selling such assets to the creditor is legally prohibited. However, this is not necessarily the case. Under the right legal framework, the sale of a mortgaged property to the creditor is allowed, provided that it does not violate laws on foreclosure, dation in payment, or the prohibition against pactum commissorium.

How Mortgages Can Be Paid

A mortgage is a security interest granted over a property to secure the performance of an obligation, typically the repayment of a loan. The debtor can satisfy the mortgage in several ways:

1. Full Payment of the Loan – The most straightforward way to release the mortgage is by repaying the debt in full. Once the debt is fully paid, the creditor must execute a release of mortgage, which should then be registered with the relevant land registry.

2. Foreclosure Sale – If the debtor fails to pay, the creditor may initiate a foreclosure process to sell the property, either through a judicial or extrajudicial foreclosure proceeding. The proceeds from the sale are then used to settle the outstanding debt.

3. Dation in Payment (Dacion en Pago) – Instead of paying in cash, the debtor may transfer ownership of the mortgaged property to the creditor in satisfaction of the debt. This is a voluntary arrangement between both parties and is valid as long as it does not constitute a disguised pactum commissorium.

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Relationship Between Dation in Payment and Pactum Commissorium

Dation in Payment (Dacion en Pago)

Dation in payment occurs when the debtor transfers ownership of the mortgaged property to the creditor in exchange for the extinguishment of the debt. This is a negotiated and consensual agreement between both parties. The key difference between dation in payment and a foreclosure sale is that in dation, the debtor willingly conveys ownership as an alternative means of settling the obligation.

For the dation to be valid, it must be agreed upon by both parties and must not be forced upon the debtor. It is a lawful and commonly used method of settling obligations when cash payment is not feasible.

Pactum Commissorium: The Prohibited Clause

Pactum commissorium, on the other hand, is an illegal provision in a mortgage or pledge that allows the creditor to automatically appropriate the mortgaged property in case of non-payment. This is prohibited because it is considered oppressive and inequitable to the debtor, as it bypasses the due process of foreclosure or voluntary dation.

For a transaction to be considered a prohibited pactum commissorium, two elements must be present:

1. A security arrangement (such as a mortgage or pledge).

2. An automatic transfer clause in favor of the creditor upon default.

Unlike dation in payment, which is voluntarily agreed upon after default, pactum commissorium is a pre-arranged forfeiture mechanism that is deemed invalid under the law.

Conclusion

The sale of a mortgaged property to the creditor is not inherently prohibited. It can be done through legitimate means, such as dation in payment or foreclosure. However, what is illegal is the automatic appropriation of the property by the creditor without due process, as seen in pactum commissorium. Understanding these legal concepts helps ensure that mortgage transactions remain fair and within the bounds of the law.

Source: Ziggurat Real Estate

Mortgage contracts in the Philippines

A mortgage contract is a crucial legal instrument in the Philippines, particularly for those looking to secure loans using real estate as collateral. This article will delve into how mortgage contracts work, their legal requirements, and the implications for both the mortgagor (borrower) and mortgagee (lender).

What is a Mortgage?

A mortgage is a contract where a debtor (mortgagor) offers an immovable property, such as land or a building, as security for a loan or obligation to a creditor (mortgagee). If the debtor fails to fulfill the obligation, the creditor has the right to sell the property to recover the debt.

Legal Requirements for a Mortgage Contract

1. Principal Obligation: The mortgage must secure the fulfillment of a principal obligation, such as a loan.

2. Ownership and Disposal: The mortgagor must be the absolute owner of the property and have the legal capacity to dispose of it.

3. Public Document: The mortgage contract must be in the form of a public document, notarized by a notary public.

4. Registration: To be valid against third parties, the mortgage must be registered with the Registry of Property.

Steps to Enter into a Mortgage Contract

1. Execution of the Document: The mortgagor and mortgagee must execute a mortgage contract detailing the terms of the agreement.

2. Notarization: The contract must be notarized by a notary public to ensure its authenticity and legality.

3. Payment of Taxes: The documentary stamp tax must be paid within the first five days of the succeeding month after the execution of the mortgage.

4. Registration: The notarized mortgage contract must be registered with the Registry of Property to be enforceable against third parties.

Implications of a Mortgage Contract

• For the Mortgagor: The mortgagor retains ownership of the property but grants a lien to the mortgagee. If the mortgagor defaults on the loan, the property can be sold at a public auction to satisfy the debt.

• For the Mortgagee: The mortgagee gains a security interest in the property, ensuring that the loan is backed by a tangible asset. In case of default, the mortgagee can foreclose on the property and recover the loan amount from the sale proceeds.

Foreclosure Process

If the mortgagor fails to pay the debt, the mortgagee can initiate foreclosure proceedings. There are two types of foreclosure in the Philippines:

1. Judicial Foreclosure: This involves filing a case in court to obtain a judgment for the sale of the mortgaged property.

2. Extrajudicial Foreclosure: This is conducted without court intervention, provided it is stipulated in the mortgage contract and follows the procedure outlined in Act No. 3135, as amended.

Conclusion

Understanding the intricacies of mortgage contracts in the Philippines is essential for both borrowers and lenders. Ensuring that all legal requirements are met can prevent future disputes and protect the interests of both parties. If you are considering entering into a mortgage contract, it is advisable to seek legal counsel to navigate the complexities of property and mortgage law.

The Mortgagor’s Right of Redemption

Congratulations! Your multimillion-peso loan was approved by your bank. You were called to sign the voluminous bank documents necessary to complete your loan, one of which is a mortgage document. The bank explained that you will be signing a Real Estate Mortgage constituted over your real property which contains a proviso that, in case of non-payment, the bank is authorized to extra-judicially foreclose the mortgage.

(This means that in case of mortgagor’s default, the sale of the mortgaged property may be conducted by the sheriff without the need for court intervention.)

Having been informed of such an arrangement and confident of your ability to pay off your loan obligation, you nonetheless agreed and signed the bank documents. These kinds of arrangement are customary and perfectly legal as they are necessary to protect the creditor’s interest in case of the default of the debtor. Unfortunately, for one reason or another, you failed to pay your loan obligation on maturity.

The bank decided to exercise its right under the Real Estate Mortgage to extra-judicially foreclosure the mortgage and you learned that the Sheriff has issued a Notice of Sale informing the public that your property shall be sold in a public auction to satisfy your loan obligation.

Do not fret. Not all is lost for you. As a debtor-mortgagor, you have a number of remedies available to you to remedy your situation.

At any time prior to the scheduled foreclosure sale of the mortgaged property, you may either pay off the entire obligation to prevent the auction sale (including all expenses arising from the foreclosure) or file an action to stop the scheduled extra-judicial foreclosure sale, should the circumstances warrant it. After the property is auctioned off at the foreclosure sale, you may either redeem the property within the period allowed by law or file a case to annul the mortgage and/or the extrajudicial foreclosure sale, should the circumstances warrant it.

We focus on the right of redemption. The exercise of debtor-mortgagor’s right of redemption depends on a number of circumstances.

As a general rule, the mortgagor may redeem the foreclosed property within one (1) year from the date of the sale (see Act No. 3135, as amended). The Supreme Court had the occasion to explain that the “date of the sale” under Act No. 3135 is the date the certificate of sale is registered with the Register of Deeds since the sale of registered land does not ‘”take effect as a conveyance, or bind the land’ until it is registered.”

The General Banking law reduced the redemption period to three months from registration of the certificate of foreclosure sale or three months after foreclosure, whichever is earlier, if the following elements are cumulatively present: a) the mortgagor is a juridical person; b ) the mortgagee is a banking or credit institution; and, c ) the mode of foreclosure is extra-judicial under Act 3135, as amended. (Section 47 of RA 8791, otherwise known as the new General Banking Law).

Only after the lapse of the redemption period shall the buyer at the auction sale may consolidate its ownership over the foreclosed property.

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 (1)-year period of redemption under Act No. 3135 (Mahinay vs. Dura Tire, G.R. No. 194152, 5 June 2017). The one (1)-year period of redemption is fixed, hence, non-extendible, to “avoid prolonged economic uncertainty over the ownership of the thing sold (BPI Family Savings Bank, Inc. vs. Spouses Veloso, GR No. 141974, 9 August 2004) and to prevent a dangerous precedent of filing of frivolous suits for annulment of mortgage intended merely to give the mortgagor more time to redeem the mortgaged property.

Therefore, the right to redeem becomes functus officio on the date of its expiry, and its exercise after the period is not really one of redemption but a repurchase. Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption.

Repurchase, however, of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is entirely within his discretion to set a higher price, for, after all, the property already belongs to him as owner (Lucasan vs. Phil. Deposit Insurance Corp., GR No. 176929, 4 July 2008).

The right of redemption being statutory, the mortgagor may compel the purchaser to sell back the property within the redemption period. If the purchaser refuses, the mortgagor may tender payment to the Sheriff who conducted the foreclosure sale or consign the payment in court.

The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment. This constitutes the exercise of the right to repurchase. Bona fide redemption necessarily implies a reasonable and valid tender of the entire purchase price, otherwise, the rule on the redemption period fixed by law can easily be circumvented.

There is no cogent reason for requiring the vendee to accept payment by installments from the redemptioner, as it would ultimately result in an indefinite extension of the redemption period. Nevertheless, it has been the policy of the law to aid rather than defeat the right of redemption. Where no injury will follow, a liberal construction is given to our redemption laws as well as to the exercise of the right of redemption (GE Money Bank, Inc. vs. Spouses Dizon, GR No. 184301, 23 March 2015).

Source: Devina Law