Buying a residential condominium unit on installment

According to statistics found online, the Philippines has 154,700 condominium units as of 2023. This number is expected to reach 200,000 units by the end of 2025.

Based on this estimate, we can expect 45,000 more condominium units to be built in the next two years.

The rise in the number of condominium units has a direct correlation with condo prices. From 2017 to 2023, prices of residential condominium units have increased yearly by an average of about 8.55 percent a year.  The exception was in 2021 when prices decreased by 1 percent.

The thousands of condominium units being built and yet to be built by property developers will mostly be funded by loans from the banking sector.

Last year, the Bangko Sentral ng Pilipinas released data indicating that in the first three months of 2023, the banking industry extended P3 trillion worth of investments and loans to the real estate sector, which was 5.3 percent higher than the P2.85 trillion in the same period for 2022.

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While some in the real estate sector have intimated that developers are scaling back residential developments in favor of commercial and office projects, the size of the residential condominium property sector will remain significant.

Considering that almost all property developers will finance their projects through loans and financing, it is but natural for a buyer, after having entered into a contract with the property developer for the purchase of a condominium unit, to worry that the developer may not comply with the promised specifications, or worse, might not even complete the project.

For those who can remember the financial crisis of 1997 and 2009, there were many unfinished structures that were promised to be beautiful high-rise residential condominium buildings.

Accordingly, it would be wise for potential buyers of condominium units, and those already paying for their units through regular installment payments, to be familiar with Presidential Decree No. 957 (“PD 957”).

Also known as the Subdivision and Condominium Buyers’ Protective Decree, its declared objective is “to provide a protective mantle over helpless citizens who may fall prey to the razzmatazz of what P.D. 957 termed ‘unscrupulous subdivision and condominium sellers…” (Francel Realty Corporation v. Sycip, G.R. No. 154684, 8 September 2005).

The practice of mortgaging the condominium project, defined by PD 957 as “the entire parcel of real property divided or to be divided primarily for residential purposes into condominium units, including all structures thereon”, to a bank, financial institution, or other creditors (“mortgage creditor”) is common practice.

While the availability of credit has helped the property sector to grow, there have been cases where fully paid buyers have had difficulty in consolidating the title to their condominium units or obtaining clean titles thereto.

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Some mortgage creditors have refused to release the mortgage they hold over the condominium units on the ground that the mortgage debt has not been paid by the property developer.

In that regard, Section 18 of PD 957 specifically regulates the right of a developer to mortgage and encumber the condominium project. The law provides that the Housing and Land Use Regulatory Board (“HLURB”), now the Department of Human Settlements and Urban Development and Human Settlements Adjudication Commission pursuant to Republic Act No. 11201, must approve in writing any such mortgage or encumbrance for the same to be valid.

Mortgage of condominium units

In addition, PD 957 provides that: (a) proceeds of the loan should be used for the development of the condominium project, (b) effective measures have been provided to ensure such utilization, (c) buyers of condominium units must be notified before release of the loan, (c) buyers must be given the opportunity to pay their purchase price directly to the mortgage creditor who, in turn, shall apply such payments to the corresponding mortgage indebtedness and, (d) when fully paid, buyers have the right to the title and insist on the release of the mortgage as to their unit.

Mortgages of condominium projects that have not been approved by the HLURB are void (Home Bankers Savings and Trust Co. v. Court of Appeals, et al., G.R. No. 128354, 26 April 2005).

In one case, the Supreme Court declared void the mortgage of a condominium unit by the developer to a bank for non-compliance with PD 957.

The bank failed to check whether the developer secured the HLURB’s prior written approval, which approval is required by PD 957, before it accepted the properties as collateral and whether any of the properties offered as collateral already had corresponding buyers at the time the Mortgage Agreement was executed.

Even if the mortgage agreement between the bank and property developer was executed before the contract to sell and deed of absolute sale with the buyer, since the buyer paid its reservation fee four months before the execution of the mortgage agreement the court found that the bank should have verified with the developer if the unit already had a buyer. (Prudential Bank (now Bank of the Philippine Islands) v. Rapanot, et al., GR 191636, January 16, 2017))

Moreover, buyers must also verify whether the developer has mortgaged the condominium project, not only the specific unit, as it is also not a defense that the subject of the mortgage loan was for the entire land or building and not the individual subdivided units of the condominium project.

In a case, the court declared that the unit was also mortgaged when the entire parcel of land or building, of which it was a part, was mortgaged (Far East Bank & Trust Co. v. Marquez, G.R. No. 155344, 20 January 2004).

If the project or unit was mortgaged by the developer, the buyer may demand that they be allowed to pay the purchase price directly to the mortgage creditor, who shall apply the payments to the corresponding mortgage indebtedness, so that when fully paid, they would have the right to insist on the release of the mortgage of their unit and transfer title to their names.

On the other hand, in the event the property developer has not developed the condominium project according to the approved plans, or has not completed the construction within the agreed time limit, the buyer may stop paying their installments by giving notice to the owner or developer, and demand reimbursement on amounts already paid (Section 23, PD 957).

The right to stop payment is immediately effective upon giving due notice to the owner or developer, or upon filing a complaint before the HLRUB against the erring developer (Francel Realty Corporation v. Sycip, G.R. No. 154684, 8 September 2005).

When all is said and done, buyers must make sure that they know their rights under PD 957, and choose financially stable, socially-responsible and trustworthy developers, with whom to invest their hard-earned cash.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)