When is a transaction, denominated as a sale agreement, an equitable mortgage? May the property subject of the apparent sale be reconveyed to the seller upon finding by the court that the transaction is one of equitable mortgage? These questions were answered in the fairly recent case of Arturo Dacquel v. Spouses Ernesto and Flora Dacquel-Sotelo, G.R. 203946, 4 August 2021.
Under the Civil Code of the Philippines, the contract shall be presumed to be an equitable mortgage, in any of the following cases:
- When the price of a sale with a right to repurchase is unusually inadequate;
- When the vendor remains in possession as lessee or otherwise;
- 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;
- When the purchaser retains for himself a part of the purchase price;
- 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.
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. (Article 1602)
When in doubt, courts are generally inclined to construe a transaction purporting to be a sale as an equitable mortgage, which involves a lesser transmission of rights and interests over the property.
In the cited case, the Court found two badges of fraud against the supposed buyer — gross inadequacy of price in the Deed of Sale and continued possession of the subject property by the purported sellers, as debtors of the buyer.
Even after the supposed execution of the Deed of Sale, the sellers persisted in exercising acts assertive of their ownership over the subject property. These actuations persuade that they were preserving their hold on the subject property and had no intent at all to relinquish their ownership over the same by sale.
As the transaction between the parties is one of equitable mortgage, the purported buyer did not become owner of the subject property but a mere mortgagee thereof. As such, he was bound by the prohibition against pactum commissorium. The mortgagee’s consolidation of ownership over the mortgaged property upon the mortgagor’s mere failure to pay the obligation is the essence of pactum commissorium. The mortgagor’s default does not operate to automatically vest on the mortgagee the ownership of the encumbered property.
Having proceeded to cause the cancellation of the title to the mortgaged property and its transfer to the name of the mortgagee without availing of the remedy of foreclosure, the latter can be concluded to have dabbled in the prohibited practice of pactum commissorium. The transaction is consequently rendered void, and title to the subject property should be reverted to the sellers, who, under the transaction, are mere mortgagors.
First published on The Daily Tribune.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
