Unmasking the mask

Edith filed a petition in court to consolidate in her name, the ownership of a parcel of land covered by a tax declaration. She alleged that she bought the land from Froi for P32,000, and executed a Deed of Sale Under Pacto de Retro with him.

The deed provides that Froi has the right to repurchase from her within a period of six months, from the date of the deed for the same price of P32,000, provided, however, that if Froi shall fail to exercise his right to repurchase within the period stipulated, then the conveyance shall become absolute and irrevocable, without the necessity of drawing up a new deed of absolute sale, subject to the requirement of the law regarding consolidation of ownership of real property.

Edith claimed that the six-month redemption period had expired without Froi buying back the land. Later, she was issued a tax declaration for the land under her name.

Froi countered that the deed did not express the true agreement between them. He claimed that their true agreement was a loan. He borrowed P20,000 from Edith at 10 percent interest rate per month for six months and put up the land as a security. He averred that his sister Hermie had introduced him to a respondent who was a known money lender in their municipality.

He claimed that as part of Edith’s requirements to lend him the money, he had to surrender the tax declaration over the land. She allegedly then compelled him to sign the deed. He referred to the value he had received for the land as being grossly disproportionate to the land’s then market value.

Froi continued to possess the land. He paid the realty taxes. He offered to pay the loan plus interest. Edith, however, refused his offer. He prayed that the contract be declared as an equitable mortgage, and that Edith be ordered to cease and desist from performing acts of ownership over the land.

Q: What is a sale with right to repurchase (pacto de retro)?

A: A sale with right to repurchase refers to a situation where the title and ownership of the property sold are immediately vested in the vendee, subject to the vendor’s exercise of his or her right of redemption within the stipulated period. In fine, the failure of the vendor a retro to repurchase the property vests upon the vendee a retro, by operation of law, absolute title and ownership over the property sold.

Q: What is the general policy of the law on such transaction?

A: The law does not look kindly on transactions that are claimed to be a sale with the right of repurchase. Art. 1603 of the Code provides that, in case of doubt, a contract purporting to be a sale with right to repurchase should be considered an equitable mortgage.

The policy of the law is to discourage pacto de retro sales and thereby prevent the circumvention of the prohibition against usury and pactum commissorium.

The Supreme Court has taken judicial notice of the fact that pacto de retro sales have been frequently used—to conceal contracts of loan secured by a mortgage. The provisions of the Civil Code, which consider certain types of sales as equitable mortgages, are intended for the protection of those who are unlettered and who are penurious vis-a-vis their creditors.

Q: When shall a sale with pacto de retro be presumed to be an equitable mortgage?

A: Article 1602 of the Civil Code provides 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.

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. 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 these circumstances is enough for the presumption to arise.

Q: What is the true nature of the contract that Edith and Froi executed?

A: The following circumstances bear the conclusive earmarks of an equitable mortgage: (1) Froi and Edith evidently intended to use the land merely as security for his loan of P32,000; (2) Froi remained in possession of the land even after the execution of the contract and continued to pay realty taxes thereon; and (3) The contract contained a pactum commissorium provision.

Q: What is pactum commissorium?

A: In pactum commissorium, the ownership of the security will pass to the creditor by the mere default in payment of the loan by the debtor.

The Court has invariably declared that this kind of arrangement is void for being contrary to morals and public policy. Article 2088 of the Civil Code provides that the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

Q: What are the elements of pactum commissorium?

A: The following are the elements: (1) There should be a property mortgaged by way of security for the payment of the principal obligation; and (2) There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.

Source: Dala vs Auticio, G.R. No. 205672. June 22, 2022

The author is Dean of Lyceum of the Philippines University; Chairperson of Philippine Association of Law Schools; and founder of Mawis Law Office The law does not look kindly on transactions that are claimed to be a sale with the right of repurchase