Almost duped

Philip is an uneducated and impoverished farmer who owns a large agricultural land. Fearing he will lose his land, which he mortgaged to the bank, he approached his university educated neighbors, spouses Guy and Lily.

On bended knees, he asked for their help. Filled with pity, Guy and Lily extended Philip a loan sufficient enough to pay his bank loan and redeem his property.


Help, however, came with a price. Philip was made to sign a deed of absolute sale. Driven by need, he mindlessly signed the deed even if the contents thereof were never explained to him. Gus and Lily were then able to transfer the title in their names.

Gus and Lily allowed the lowly farmer to retain possession of the entire lot, subject only to the condition that Philip will regularly deliver a portion of the property’s produce. Philip thank the Lord for his benevolent neighbors.


After 17 years, Philip stopped delivering any produce. He was just all to glad to break free from the loan he obtained from the couple.

Alas, his joy was short-lived.

Gus and Lily, armed with the Deed of Absolute Sale, claimed ownership over the land and demanded that he vacate the same.

Q: What is the test in determining the real nature of the contract that was entered into by the parties?

A: Courts are not bound by the title or name given by the parties. The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement.

Q: What is the test to determine whether a deed of sale is really a simple loan accommodation secured by a mortgage?

A: There is no single conclusive test to determine whether a deed of sale, absolute on its face, is really a simple loan accommodation secured by a mortgage. However, the law enumerates several instances when a contract, purporting to be, and in fact styled as, an absolute sale, is presumed to be an equitable mortgage, thus:


Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

When the price of a sale withright to repurchase is unusually inadequate;

When the vendor remains in possession as lessee or otherwise;

When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

When the purchaser retains for himself a part of the purchase price;

When the vendor binds himself to pay the taxes on the thing sold;

In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

The presence of any of the circumstances set forth therein suffices for a contract to be deemed an equitable mortgage. No concurrence or an overwhelming number is needed (Art. 1602, Civil Code; Spouses Solitarios vs. Sps. Jarque, G.R. No. 199852, November 12, 2014)

Q: What is the nature of the transaction between Philip and spouses Gus and Lily?

A: The transaction is actually one of equitable mortgage given the confluence of the following: (a) Philip remained in possession of the subject property and exercised acts of ownership over the said lot even after the purported absolute sale of lot; (b) He was allowed to till the land and enjoy the produce thereof even after the lot that sold to to Guy and Lily.

Retention by the vendor of the possession of the property is inconsistent with the vendee’s acquisition of ownership under a true sale.

It discloses, in the alleged vendee, a lack of interest in the property that belies the truthfulness of the sale. (Spouses Solitarios vs. Sps. Jarque, G.R. No. 199852, November 12, 2014)

Q: Can the court disregard the fact that Philip indeed signed the deed of absolute?

A: Yes. In negotiating the transactions, the parties did not deal with each other on equal terms. Vendors covered by Art. 1602, as above cited, usually find themselves in an unequal position when bargaining with the vendees, and will readily sign onerous contracts to get the money they need.

Necessitous men are not really free men in the sense that to answer a pressing emergency they will submit to any terms that the crafty may impose on them. This is precisely the evil that Art. 1602 seeks to guard against. (Spouses Solitarios vs. Sps. Jarque, G.R. No. 199852, November 12, 2014)

Still another fact which militates against the spouses’ cause is their failure to explain to Philip the real nature of the contract they were entering into, especially since Philip was uneducated.

The law requires that in case one of the parties to a contract is unable to read (or maybe of low education), and fraud is alleged, the person enforcing the contract must show that the term thereof have been fully explained to the former (Spouses Solitarios vs. Sps. Jarque, G.R. No. 199852, November 12, 2014 citing Spouses Nena Arriola and Francisco Adolfo, et.al. vs. Demetrio Lolita, Pedro, Nena, Braulio and Dominga, all surnamed Mahilum, et. al. G.R. No. 123490, August 9, 2000).

Q: What is the real nature of the transfer of ownership of the subject property?

A: The transfer is a pactum commissorium. This arrangement is not allowed under the law. A creditor cannot appropriate or consolidate ownership over a mortgaged property merely upon failure of the mortgagor to pay a debt obligation.

The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the debtor. This Court has repeatedly declared such arrangements as contrary to morals and public policy.

The only right of a mortgagee in case of non-payment of debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness.

The mortgagor’s default does not operate to automatically vest on the mortgagee the ownership of the encumbered property, for any such effect is against public policy, as earlier indicated. (Art. 2088, Civil Code; Spouses Solitarios vs. Sps. Jarque, G.R. No. 199852, November 12, 2014)

Ma. Soledad Deriquito-Mawis is currently the Dean. Lyceum of the Philippines University; president of Philippine Association of Law Schools; and Senior Partner at Gatchalian Castro & Mawis Law Office

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