Unmasked intention | Inquirer Business
Property rules

Unmasked intention

Spouses Jon and Myr borrowed money from Suzy payable within six months, with an interest thereon at 4.5 percent, compounded monthly from said date. The loan was hastily obtained as they wanted to pay their bank loan lest their property be foreclosed. For and in consideration of the said amount, they executed a “Deed of Sale under Pacto de Retro” over their conjugal house and lot in favor of Suzy.

The market value of the subject property is remarkably higher than the amount that was borrowed by the spouses. Suzy was allowed to keep the torrens title until the spouses have redeemed the property. Myr, who was by then abandoned by Jon, tried to redeem the property when she tendered the amount of P1.3 million.


Suzy refused the redemption price, as offered, as she insisted that the loan obligation has considerably increased. Having refused acceptance of the said checks covering the redemption price, Subsequently, Myr filed a complaint for the redemption of the property and moral damages plus attorney’s fees. She thereafter deposited with the RTC the two checks that Suzy refused to accept.

On the other hand, Suzy said that the spouses approached her and offered transaction involving a sale of property. She consulted her lawyer and on the same date a corresponding deed of sale under pacto de retro was executed and signed. Later on, she sent, through her lawyer, a letter to the spouses demanding the payment of their loan. Jon replied to said demand letter.


In his reply, Jon admitted that he no longer had the capacity to redeem the property and to pay the interest. In view of the said reply of Jon, Suzy filed a petition “for consolidation of ownership in pacto de retro sale”.

Q: What are the differences between a pacto de retro and equitable mortgage?

A: In pacto de retro the ownership of the property sold is immediately transferred to the vendee a retro, subject only to the repurchase by the vendor a retro within the stipulated period. The vendor a retro’s failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by operation of law, absolute title to the property. Such title is not impaired even if the vendee a retro fails to consolidate title under Article 1607 of the Civil Code.

Meanwhile, an equitable mortgage is a contract that—although lacking the formality, the form or words, or other requisites demanded by a statute—nevertheless reveals the intention of the parties to burden a piece or pieces of real property as security for a debt.

The essential requisites of such a contract are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage. The nonpayment of the debt when due gives the mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the satisfaction of the loan obligation.

Q: What instances would show that a contract is presumably an equitable mortgage:

A: Article 1602 states that the 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.

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.

Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage. Article 1602 specifically states that the equitable presumption applies to any of the cases therein enumerated.

Q: Did the parties in this case intend the contract to be a bona fide pacto de retro sale or an equitable mortgage?

A: It is deemed an equitable mortgage. The pacto de retro contract was executed merely as security for a loan. In fact, the spouses retained possession of the property allegedly sold. The spouses and their children continued to use it as their residence, even after Jon had abandoned them. The fact that the pacto de retro had been entered into on the very same day that the property was to be foreclosed by a commercial bank negates that it is a bona fide one.

Such circumstance proves that the spouses direly needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize some profit, they would not have retained possession of the house and continued to live there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan obligation, not to transfer ownership of the property.

Q: What is the remedy of Suzy given that the transaction is an equitable mortgage?

A: Inasmuch as the contract between the parties was an equitable mortgage, Respondent Suzy’s remedy was to recover the loan amount from petitioner by filing an action for the amount due or by foreclosing the property. (Source: Ramos vs. Sarao and Ramos, , G.R. No. 149756, February 11, 2005)

The author is Dean of College of Law at the Lyceum of the Philippines University; Chairperson of the Philippine Association of Law Schools; and founder of Mawis Law Office

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