February 9, 2016 (Part 1)

Take note of the different kinds of Mortgages:

1. Voluntary or Conventional Mortgage2. Legal Mortgage3. Equitable Mortgage (Article 1602)

Objects of Real Estate Mortgage:

1. Immovables2. Alienable Real Rights

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 2124 is clear. By the word “only”, it means that the list in the said article is exclusive.

Likewise, we have emphasized last time the importance determining whether your property is an immovable or not. The building in itself is an immovable and in fact can be subject of a real estate mortgage separate from the land on which it stands.

PLEDGE REAL ESTATE MORTGAGE

Involves personal property Involves real propertyReal Contract- there is a transfer or cession

It is not necessary that a mortgagee must be in possession of the property mortgaged for the validity of the said accessory contract

The pledgee has the right to receive the fruits

No such right exists unless otherwise stipulated

Extrajudicial in nature Judicial or ExtrajudicialMust be in a public instrument indicating the date of the mortgage and a description of the thing pledged in order to bind third persons (registration not needed)

Must be registered in the Registry of Property in order to bind third persons

It is not required that the mortgagee be in possession of the mortgaged property. Ones status as a mortgagee cannot be the basis of possession. As a basic rule, the mortgagor retains possession of the property mortgaged as a security for the payment of the sum borrowed from the

mortgagee-creditor because by the mortgage, the debtor merely subjects the property to a lien but ownership is not parted with.

It is not an essential requisite that the mortgaged property remains in the possession of the mortgagor. Therefore, it is possible by agreement between the parties that the possession of the property be transferred to the mortgagee without altering the nature of the contract. But again, such transfer of possession is not necessary for the perfection of the mortgage.

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 2085. The following requisites are essential to the contracts of pledge and mortgage:

(1) That they be constituted to secure the fulfillment of a principal obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)

Notice here that Article 2125 requires that the Deed of Real Estate Mortgage or document be registered in the Registry of Property.

What is the effect is the Real Estate Mortgage is not registered? What happened in Tan vs Valdehueza?

LUCIA TAN vs ARADOR VALDEHUEZA and REDICULO VALDEHUEZA

Facts: The parcel of land described in the first cause of action was the subject matter of the public auction sale held on May 6, 1955 wherein Tan was the highest bidder and as such a Certificate of Sale was executed in favor of

LUCIA TAN. Due to the failure of defendant Arador Valdehueza to redeem the said land within the period of one year as being provided by law, the Sheriff executed an ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA TAN.

ARADOR VALDEHUEZA and REDICULO VALDEHUEZA have executed two documents of DEED OF PACTO DE RETRO SALE in favor of LUCIA TAN of two portions of a parcel of land.

From the execution of the Deed of Sale with right to repurchase, Arador Valdehueza and Rediculo Valdehueza remained in the possession of the land and land taxes to the said land were paid by them.

The Deed of Pacto de Retro (dated August 5, 1955) was not registered in the Registry of Deeds, while the Deed of Pacto de Retro referred to as "Annex E" (dated March 15, 1955) was registered

ISSUE: Was there a valid mortgage? (YES)

HELD: The trial court treated the registered deed of pacto de retro as an equitable mortgage but considered the unregistered deed of pacto de retro "as a mere case of simple loan, secured by the property thus sold under pacto de retro," on the ground that no suit lies to foreclose an unregistered mortgage. It would appear that the trial judge had not updated himself on law and jurisprudence; he cited, in support of his ruling, article 1875 of the old Civil Code and decisions of this Court circa 1910 and 1912.

Under article 1875 of the Civil Code of 1889, registration was a necessary requisite for the validity of a mortgage even as between the parties, but under article 2125 of the new Civil Code (in effect since August 30,1950), this is no longer so. 4 If the instrument is not recorded, the mortgage is nonetheless binding between the parties. (Article 2125, 2nd sentence).

The Valdehuezas having remained in possession of the land and the realty taxes having been paid by them, the contracts which purported to be pacto de retro transactions are presumed to be equitable mortgages, 5 whether registered or not, there being no third parties involved.

Here, the parties executed two documents of pacto de retro sale. However, it appears that the defendants remained in possession of the land and the taxes were paid by them. The intention of these documents was to secure the obligation of Valdehuezas, having remained in possession of the land and the realty taxes having been paid by them. These transactions purported to be pacto de retro sale are presumed to be equitable mortgages, applying Article 1602 of the Civil Code. Regardless of its registration, again, we have an equitable mortgage here. We have a valid mortgage even if it is not registered, there being no third parties involved.

In the Old Civil Code, registration is necessary for the validity of the mortgage. However, it is already clear under Article 2125 that even if the instrument is not recorded, the mortgage is nonetheless binding between the parties. The fact that the mortgage is annotated or is registered is only to affect third persons. In the absence of such annotation or registration, third persons dealing with the property are not bound by the mortgage because under the Torrens System, third parties are only charged with the knowledge of those encumbrances placed on the title as well as their actual knowledge.

Again, mortgage here can be binding between the parties but in the absence of registration, it is not binding against third persons. Notice that it is one of the differences or distinctions between a real estate mortgage and a pledge. The requirement in pledge in order to bind third persons is that it must be in a public instrument indicating the date of the pledge and the description of the thing pledged. On the other hand, in a real estate mortgage, the requirement is that it must be duly registered with the Registry of Deeds to bind third persons.

With regard to the last paragraph of Article 2125, this applies to legal or equitable mortgages.

Article 2125. x x x

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)

Here, for example, in a pacto de retro sale which is actually an equitable mortgage, the mortgagor can seek the execution and the recording of the instrument to formalize the mortgage. Considering that the intention of the parties is to have the property mortgaged, the mortgagee cannot appropriate the thing subject of the mortgage. What he has is the right to have the execution and recording thereof. He can also file an action to have the mortgage registered.

With regard to the perfection of a real estate mortgage, you may notice that in the first part of the discussion of De Leon, the characteristics that was mentioned of a mortgage is that it is real, accessory and subsidiary. When you real it means that the contract is perfected by delivery. But in a contract of mortgage under Article 2125, delivery is not necessary for its perfection. So dalawa na lang, either consensual or formal/solemn contract. If you remember the case of Hechanova vs Adil, it was stated therein that no valid mortgage is constituted where the deed of mortgage is a mere private document and therefore, not registered. However, if you also look at the same case as well as the provision under Article 2125, even if that case held that the mortgage is void, there is a discussion that the mortgagee may demand the reduction of the mortgage in a public

instrument. So, if you say it is really void, diba if a contract is void, no rights can arise. Take a look again at Article 2125.

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.

x x x

So as long as there is an instrument, then you have a perfected contract of mortgage.

At the most, what we could say is that it is a FORMAL CONTRACT; that it must be, at the very least, in writing in order to bind the parties. However, again, if you try to take a look at the cases or at the discussion or the provisions under the Civil Code, there is no express provision or ruling that would really indicate that for a valid mortgage, it must be in writing or it must be perfected by consent or there must be delivery.

Trying to summarize everything that we have discussed, we could say that at the very least, it must be in an instrument, in writing to bind the mortgagor and the mortgagee.

Why is it that there was not much emphasis on this one? First, we have the right between the parties to demand execution and recording of the document. This is relevant because in the absence of the proper document or recording it or duly executing it before the notary public and recording it with the Registry of Deeds, hindi mo rin ma-foreclose. If it is made orally or verbally, you cannot foreclose it. You must have some document that would establish your right to demand execution and the proper recording of the document to formalize the mortgage.

Mortgage, again, is necessary in the sense that it is a security to the principal obligation. You need this mortgage so that in case there is default on the part of the debtor, you can foreclose it. Yun naman yung end dito, di ba? Foreclosing. You can foreclose it after the proper registration of the document.

Just take note of that as we go further with our discussions.

If the mortgage is not registered but it is in a public instrument, it is binding between the parties because again, registration only operates as a notice of the mortgage to others but it does not add any validity nor does it convert an invalid mortgage into a valid mortgage between the parties.

STATE INVESTMENT vs CA (1996)

FACTS: A contract to sell was executed by Spouses Oreta, and the Solid Homes, Inc. (SOLID), involving a parcel of land.

SOLID executed several real estate mortgage contracts in favor of State Investment over its subdivided parcels of land, one of which is the subject lot. For failure of SOLID to comply with its mortgage obligations contract, STATE extrajudicially foreclosed the mortgaged properties including the subject lot.

SOLID thru a MOA negotiated for the deferment of consolidation of ownership over the foreclosed properties by committing to redeem the properties from STATE. Thereafter, the spouses filed a complaint before the HLURB, against SOLID and STATE for failure on the part of SOLID to execute the necessary absolute deed of sale as well as to deliver the title to said property despite full payment of purchase price.

STATE averred that unless SOLID pays the redemption price of P 125,195.00, it has a “right to hold on and not release the foreclosed properties.”

ISSUE: Who between the Spouses Oreta and STATE have better right over the subject lot? (SPOUSES ORETA)

HELD: STATE's registered mortgage right over the property is inferior to that of respondents-spouses' unregistered right. The unrecorded sale between respondents-spouses and SOLID is preferred for the reason that if the original owner (SOLID) had parted with his ownership of the thing sold then he no longer had ownership and free disposal of that thing so as to be able to mortgage it again. Registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties.

In this case, petitioner was well aware that it was dealing with SOLID, a business entity engaged in the business of selling subdivision lots. We take judicial notice of the uniform practice of financing institutions to investigate, examine and assess the real property offered as security for any loan application especially where, as in this case, the subject property is a subdivision lot located at Quezon City, M.M. It is a settled rule that a purchaser or mortgagee cannot close its eyes to facts which should put a reasonable man upon his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. Petitioner's constructive knowledge of the defect in the title of the subject property, or lack of such knowledge due to its negligence, takes the place of registration of the rights of respondents-spouses.

Q1: Is the mortgage in favor of State Investment registered?

A1: Yes. However the Supreme Court held here that the registration of the mortgage is of no moment since it is understood to be without prejudice to the better right of third parties.

Q2: What do you mean by that?

A2: (?)

Q3: Was there a valid mortgage between Solid and State Investment?

A3: No.

Q4: Are all the requisites present for a valid real estate mortgage?

A4: No. There was no absolute ownership and free disposal of the thing mortgaged.

Q5: So what is the effect of the registration?

A5: The registration did not bind third persons.

Q6: Can State Investment be considered as a mortgagee in good faith considering that the sale in favor of Sps Oreta was not registered?

A6: No. Since they are involved in the business of investment, they must take necessary precautions to ascertain if there was any flaw in the title of the mortgage.

Notice here that State’s mortgage was registered. Nevertheless, the Supreme Court held that its registered mortgage is inferior to that of respondent spouses’ unregistered right. It was submitted here that if the original owner SOLID has parted with the ownership of the thing sold, then he no longer has ownership.

Take note, the contract executed between Spouses Orbeta and SOLID was a contract to sell. In a contract to sell, ownership is not yet transferred – it is subject to a condition which is the full payment of the purchase price. In fact, in this case, Solid was demanded by the spouses to execute the necessary absolute deed of sale. Looking at the facts, ownership was not yet transferred. Nevertheless, it is still not a valid mortgage because there is a failure to comply with the third requisite: FREE DISPOSAL.

Here, even if we assume that Solid remains the owner of the subject property, it had no free disposal of the thing so as to be able to mortgage it again. Registration of the mortgage is of no moment (no effect; it will not cure the

invalidity of the mortgage) since it is understood to be without prejudice to the better right of third parties.

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