4. Real Estate Mortgage

D. Real Estate Mortgage (Civil Code, arts. 2124-2126 and 2128-2131)

Civil Code, arts. 2124-2126 and 2128-2131

CHAPTER 3

Mortgage

Article 2124. Only the following property may be the object of a contract of mortgage:

(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage. (1874a)

Article 2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized. (1875a)

Article 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (1876)

Article 2128. The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (1878)

Article 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes. (1879)

Article 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void. (n)

Article 2131. The form, extent and consequences of a mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law. (1880a)

REAL ESTATE MORTGAGE

Real estate mortgage (REM) is a contract whereby the debtor secures to the creditor the fulfillment of the principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not fulfilled at the time stipulated.

Mortgages and Leases

GR: The mortgagor should be the absolute owner of the property to be mortgaged, otherwise, the mortgage is considered null and void.

XPN: Doctrine of mortgagee in good faith. All persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. This is the same rule that underlies the principle of innocent purchasers for value.

The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor to the property given as security and, in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is, nonetheless, entitled to protection. (Duque-Rosario v. Banco Filipino Savings and Mortgage Bank, G.R. No. 140528, 07 Dec. 2011)

NOTE: The subsequent nullification of the mortgagor’s title will not nullify the mortgage. (Gonzales v. IAC, G.R. No. L-69622, 29 Jan. 1988)

Q: Corona is the registered owner of a lot covered by TCT No. RT-122097 (126876). Her children are petitioners Danilo and Sonia, respondent Damian, and the Jimenez siblings (Vilma, Federico, and Chona Jimenez). Corona died on 16 Jan. 2002. During the settlement of the estate, Jimenez siblings discovered a Deed of Donation allegedly executed by Corona in favor of Damian on 31 Aug. 2000 over the 532 sq. m. property. By virtue of the Deed, TCT No. RT- 122097 was cancelled and TCT No. N-217728 was issued in the name of Damian on 07 Sept. 2000.

On 21 May 2001, Damian mortgaged the property to Calubad and Keh in consideration of a P7,000,000.00 - loan. On the same day, the mortgage was annotated on TCT No. N-217728. Jimenez siblings learned about the mortgage, but only Sonia registered her Affidavit of Adverse Claim, which was annotated at the back of TCT No. N-217728 on 12 July 2002. On 12 Oct. 2002, Sonia was informed that the property was scheduled for auction on 24 Oct. 2002. This prompted the Jimenez siblings to file a complaint for the annulment of the Deed of Donation and TCT No. N-217728, as well as the cancellation and annulment of the Deed of Real Estate Mortgage, with prayer for preliminary injunction before the RTC of Quezon City.

RTC denied the prayer for injunction, hence, the extrajudicial sale pushed through as scheduled. Calubad and Keh emerged as the highest bidders. Consequently, a Certificate of Sale dated 03 Nov. 2002 was issued. The title to the property was consolidated and TCT No. N-257432 was issued in favor of Calubad and Keh.

Danilo argues that while Calubad and Keh may be mortgagees in good faith, they are not purchasers in good faith as they were aware of Sonia's adverse claim when they purchased the property during the public auction on 24 Oct. 2002. As such, they have no right over the disputed property. Calubad and Keh contend that that any subsequent adverse claim will not prejudice the mortgagee's right as a purchaser in the foreclosure sale. Are Calubad and Keh's title as purchasers in the foreclosure sale are valid?

A: YES. There is a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. The doctrine applies when the following requisites concur, namely:

• the mortgagor is not the rightful owner of, or does not have valid title to, the property;
• the mortgagor succeeded in obtaining a Torrens title over the property;
• the mortgagor succeeded in mortgaging the property to another person;
• the mortgagee relied on what appears on the title and there exists no facts and circumstances that would compel a reasonably cautious man to inquire into the status of the property; and
• the mortgage contract was registered.

All these requisites were satisfied in this case, viz.: (a) Damian was found to have no valid title to the property as his title was derived from a forged Deed of Donation; (b) he was able to obtain TCT No. N- 217728; (c) he succeeded in mortgaging the property to Calubad and Keh; (d) Calubad and Keh found nothing on TCT No. N-217728 that would have notified them of Damian's invalid title. In fact, Calubad and Keh even went beyond the title and conducted an ocular inspection, whereby they confirmed that Damian was in possession and occupation of the property; and (e) the mortgage contract was registered. Thus, the courts a quo did not err in ruling that Calubad and Keh were mortgagees in good faith.

Jurisprudence dictates that a subsequent lien or encumbrance annotated at the back of a certificate of title of a foreclosed property will not affect the rights of a purchaser in a foreclosure sale because such sale retroacts to the date of the registration of the mortgage, making the sale prior in time to the lien or encumbrance. The foreclosure sale retroacts to the date of registration of the mortgage because it is incidental to the fulfilment of the mortgagor's obligation in the mortgage contract upon his default. In turn, the purchaser in a foreclosure sale essentially derives his right from the previously registered mortgage. To rule otherwise would be to render nugatory the purpose of the mortgage as security.

Furthermore, the nullity of the mortgagor's certificate of title does not automatically carry with it the nullity of a registered mortgage if the mortgagee acted in good faith. Once the mortgagor defaulted in the fulfillment of his obligation, the mortgagee in good faith can still cause the foreclosure of the mortgage. In such case, the purchaser in the foreclosure sale acquires the right of the mortgagee in good faith, making the sale prior i n time as against any subsequent lien or encumbrance. Accordingly, Sonia's adverse claim, which was annotated after the registered mortgage in favor of Calubad and Keh, cannot prevail over Calubad and Keh's rights as mortgagees in good faith and purchasers in the foreclosure sale. Being mortgagees in good faith, they have a superior lien over that of Sonia, and their right to foreclose is reserved. (Jimenez v. Jimenez, G.R. No. 228011, 10 Feb. 2021)

Laws that govern the contract of real mortgage

• NCC;
• Mortgage Law;
• Property Registration Decree (PD 1529);
• Sec. 194, as amended by Act No. 3344, Revised Administrative Code (Phil. Bank of Commerce v. De Vera, G.R. No. L- 18816, December 29, 1962); and
• R.A. 4882 – law governing aliens who become mortgagees.

Kinds of real mortgages

• Voluntary or Conventional mortgage – It is constituted voluntarily by the contracting parties or by the will of the owner of the property on which it was created;
• Legal mortgage – A mortgage whose execution and recording a person may demand when the law establishes a mortgage in that person's favor (NCC, Art. 2125, par. 2); and
• Equitable mortgage – Although lacking the formalities of a mortgage, shows the intention of the parties to make the property a security for the debt.

Real estate mortgage v. Contract of sale with right of repurchase

Right to possession

The mortgagee has no right or claim to the possession of the property. Such possession is only a security for the payment of the sum borrowed. The debtor merely subjects the property to a lien but the ownership thereof is not parted.

Registration of mortgage is a matter of right. By executing the mortgage, the mortgagor is understood to have given his consent to its registration, and he cannot be permitted to revoke it unilaterally. An unregistered mortgage binds the parties, but registration is required for its constitution as a mortgage effective against third persons under Article 2125 of the Civil Code. Registration does not cure an otherwise invalid mortgage.

Mortgage as a real and inseparable right

Mortgage is a real and inseparable right. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. (NCC, Art. 2126)

Extent of Mortgage

GR: Mortgage extends to the following:

• Natural accessions;
• Improvements;
• Growing fruits;
• Rents or income not yet received when the obligation becomes due; and
• Amount of indemnity granted or owing to the proprietor from:
• Insurance proceeds; or
• Expropriation price. (NCC, Art. 2127)

Reason: Ownership of such accessions and accessories and improvements subsequently introduced also belongs to the mortgagor who is the owner of the principal. (Castro, Jr. v. Court of Appeals, G.R. No. 97401, December 6, 1995)

Effects of Mortgage

• It creates a real right; and
• It creates merely an encumbrance.

Alienation or assignment of mortgage credit

The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (NCC, Art 2128)

NOTE: Even if the alienation is not registered, it would still be valid as between the parties. (Lopez v. Alvarez, GR No. L-3438, October 12, 1907) There is no need to obtain the consent of the debtor/mortgagor.

REDEMPTION OF MORTGAGE

Redemption is a transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien that the mortgage may have created.