9. Equitable Mortgage

J. Equitable Mortgage (Civil Code, arts. 1602-1605)

Civil Code, arts. 1602-1605

Article 1602. 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. (n)

Article 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. (n)

Article 1604. The provisions of article 1602 shall also apply to a contract purporting to be an absolute sale. (n)

Article 1605. In the cases referred to in articles 1602 and 1604, the apparent vendor may ask for the reformation of the instrument. (n)

EQUITABLE MORTGAGE

One which lacks the proper formalities, form or words or other requisites prescribed by law for a mortgage, but shows the intention of the parties to make the property subject of the contract as security for a debt and contains nothing impossible or contrary to law. (Cachola v. CA, G.R. No. 97822, May 7, 1992; NCC, Art. 1602)

Essential requisites of equitable mortgage

• For an apparent sale to be treated as an equitable mortgage, the parties’ real intention must be for the transaction to secure payment of a debt or performance of another obligation.

Presumption of an equitable mortgage

A sale with conventional redemption is deemed to be an equitable mortgage in any of the following cases. (NCC, Art. 1602)

• Price of the sale with right to repurchase is unusually Inadequate;
• Seller Remains in possession as lessee or otherwise;
• Upon or after the expiration of the right to repurchase, Another instrument extending the period of redemption or granting a new period is executed;
• Purchaser Retains for himself a part of the purchase price;
• Seller binds himself to pay the Taxes on the thing sold;
• In any other case where the real intention of the parties is that the transaction shall Secure the payment of a debt or the performance of any other obligation.

The Article 1602 grounds also apply when the contract purports to be an absolute sale. (Civil Code, Art. 1604)

NOTE: In case of doubt in determining whether it is equitable mortgage or sale a retro (with right of repurchase); it shall be construed as equitable mortgage. The remedy is reformation.

Updated: The presumption of an equitable mortgage may be rebutted by evidence of the parties’ actual transaction (Villarta v. Talavera, G.R. No. 208021, 3 February 2016).

Inadequacy of price and Equitable Mortgage

An unusually inadequate price in a sale with right to repurchase gives rise to a rebuttable presumption of an equitable mortgage under Article 1602(1) of the Civil Code. Ordinary inadequacy alone does not trigger that presumption.

The decisive factor in evaluating whether or not a deed of sale absolute in form is a mortgage

The intention of the parties, as manifested in the relative situation of the parties at that time, the attitude acts, conduct, declarations of the parties, the negotiations between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature of their design and understanding, is the decisive factor in evaluation if the deed is a mortgage. (Sps. Raymundo, et al. v. Sps. Bandong, G.R. No. 171250, July 4, 2007)

Effects when sale is adjudged as an equitable mortgage

• The apparent seller may ask for the reformation of the instrument (NCC, Art. 1605)
• Money, fruit or other benefit to be received by the buyer as rent or otherwise shall be considered as interest (NCC, Art. 1602);
• The court may decree that “vendor” pay his outstanding loan to the “vendee” (Banga v. Bello, G.R. No. 156705, September 30, 2005); and
• A remand of the case to the trial court where the latter did not pass upon the mortgagor’s claim that he had paid his mortgage obligation, only for the purpose of the determining whether said obligation has been paid, and if not, how much should still be paid. (Banga v. Bello, G.R. No. 156705, September 30, 2005)