ay is one of the co-owners of a parcel of land and a four-storey building. The said property had a market value of more than P40,000,000.
Jay, for himself and in representation of his co-owners, borrowed almost P4,000,000 from Vera, secured by a Real Estate Mortgage Contract over the subject property. The Mortgage Contract was annotated on the property’s title. After the execution of the Mortgage Contract, Vera asked Jay to execute an undated Deed of Absolute Sale with a stated consideration in the amount of P5,000,000, supposedly for the purpose of providing additional security for the loan. Jay and Vera verbally agreed that the mode of payment for the said loan would be Vera’s collection of rental payments from the tenants of the subject.
Years later, Jay was informed by a representative that the ownership of the subject property had been transferred to Vera; that a new title was issued in favor of Vera; and that BHLandholdings was demanding that Jay and his wife vacate the subject property.
Upon learning this, Tino, one of the co-owners of the property, caused the annotation of an adverse claim on the new title.
Thereafter, Vera executed a Deed of Absolute Sale in favor of BHLandholdings. Consequently, Vera’s title was cancelled and a new one was issued in favor of BHLandholdings.
Jay and his co-owners cried foul. They maintained that they are the rightful owners of the subject property since the Deed of Absolute Sale executed purportedly between Jay and Vera is null and void, and that, despite the execution of the Deed of Absolute Sale between Vera in favor of BHLandholdings, the latter has no right to own the property as it was not a buyer in good faith.
Vera, on the other hand, while admitting the existence of the Mortgage Contract to secure Jay’s loan, countered that the loan amount remained unpaid and that Jay, in fact, even obtained additional loans reaching more or less P10,500,000. Vera claimed that Jay sold to her the subject property by virtue of the undated Deed of Absolute Sale. She then claimed that the said deed was executed a year after, and not immediately after the execution of the Mortgage Contract. Vera also insisted that the undated Deed of Absolute Sale is, for all intents and purposes, a legitimate contract of sale, while Jay alleged that there was no real contract of sale between the parties and that the said Deed was merely intended to provide added security to the Mortgage Contract.
BHLandholdings, meanwhile, alleged that it is a buyer in good faith since the sale between it and Vera over the subject property was consummated 10 days prior to the annotation of the adverse claim. Since it was supposedly not aware of any infirmity involving the subject property, BHLandholdings alleged that it should be treated as a buyer in good faith.
Q: What is an equitable mortgage?
A: An equitable mortgage is defined as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. Its essential requisites are: (1) that the parties entered into a contract denominated as a contract of sale; and (2) that their intention was to secure an existing debt by way of a mortgage.
Q: When will an absolute sale be presumed to be an equitable mortgage?
A: Article 1602 of the Civil Code states that a contract shall be presumed to be an equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) 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;
(4) When the purchaser retains for himself a part of the purchase price;
(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) 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.
Article 1604 of the Civil Code, in turn, provides that the abovementioned badges of an equitable mortgage apply to a contract purporting to be an absolute sale.
Q: Must all the above-recited instances be present before sale be considered as equitable mortgage?
A: No. Jurisprudence even provides that the presence of even one of the circumstances enumerated in Article 1602 suffices to convert a purported contract of sale into an equitable mortgage. The existence of any of the circumstances defined in Article 1602 of the New Civil Code, not the concurrence nor an overwhelming number of such circumstances, is sufficient for a contract of sale to be presumed an equitable mortgage. When in doubt, courts are generally inclined to construe a transaction purporting to be a sale as an equitable mortgage, which involves a lesser transmission of rights and interests over the property in controversy.
Q: Was the purported deed of absolute sale executed by Jay and Vera be deemed as an equitable mortgage?
A: Yes. The presence of at least four badges of an equitable mortgage creates a very strong presumption that the purported contract of sale entered between Jay and Vera is an equitable mortgage.
First, it is not disputed by any party that the supposed vendor of the subject property, Jay, remained to be in possession of the subject property despite purportedly selling the latter to Vera. It is uncanny for a supposed buyer to desist from taking possession over property which he/she has already purchased.
Second, the purchase price of the purported sale indicated in the undated Deed of Absolute Sale is inadequate. According to the Rules of Court, Rule 129, Section 2, a court may take judicial notice of matters which are of public knowledge. In fact, the Court has previously held that trial courts can take judicial notice of the general increase in rentals of real estate especially of the business establishments.
Here, the court took judicial notice of the public knowledge that similar establishments located at the commercial center of the place where the property is located have a value of around P20,000,000. Thus, the P5,000,000 purchase price supposedly agreed upon by the parties is grossly inadequate.
The inadequacy of the purchase price is even confirmed by the acts of Vera herself. Vera was able to mortgage the subject property with a bank for an amount of P13,000,000. Vera also sold the subject property to BHLandholdings for the same amount of P13,000,000.
Third, Vera retained for herself the supposed purchase price. In fact, there is no proof that Vera actually parted with the sum of P5,000,000 in favor of Jay pursuant to the undated Deed of Absolute Sale.
Fourth, the real intention of the parties is for the purported contract of sale to merely secure the payment of their debt owing to Vera.
It must be stressed that the nomenclature given by the parties to the contract is not conclusive of the nature and legal effects thereof. Even if a document appears on its face to be a sale, the owner of the property may prove that the contract is really a loan with mortgage, and that the document does not express the true intent of the parties.
Q: Did the notarization of the undated Deed of Absolute Sale guarantee that the transaction is valid?
A: No, the notarization of a document does not guarantee its validity because it is not the function of the notary public to validate an instrument that was never intended by the parties to have any binding legal effect on them. Neither is the notarization of a document conclusive of the nature of the transaction conferred by the said document, nor is it conclusive of the true agreement of the parties thereto.
Q: Will the actual knowledge of the of the flaw in title by one’s transferor enough to constitute a buyer in good faith?
A: No, the actual knowledge of the flaw in title by one’s transferor is not enough to constitute a buyer in good faith where there are circumstances that should put a party on guard, such as the presence of occupants in the subject property. The fact that Jay has been in continuing possession of the subject property should have prompted BHLandholdings investigate further as to the contract of sale it entered with Vera. Further, BHLandholdings cannot seriously feign ignorance of any infirmity, considering that prior to its entering into the Deed of Absolute Sale, an adverse claim had already been annotated on Vera’s title.
(Source: Sps. Sy vs. De Vera-Navarro, G.R. No. 239088, April 3, 2019)
Ma. Soledad Deriquito-Mawis is Dean, Lyceum of the Philippines University; Mawis Law Office Trustee-at-Large; Philippine Association of Law Schools