Chapter 13. Extinguishment of Sale

SALES REVIEWER (2013-‐2014) ATTY. RAY PAOLO SANTIAGO

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED: MAY 21, 2014)

CHAPTER 13: EXTINGUISHMENT OF SALE

I. In General (Articles 1231 and 1600) Article 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a) Article 1600. Sales are extinguished by the same causes as all other obligations, by those stated in the preceding articles of this Title, and by conventional

or legal redemption. (1506)

• Same grounds by which obligations in general are extinguished also apply to extinguishment of obligations arising from sale

o PA-‐LO-‐RE-‐CO-‐CO-‐NO ! Payment

• Only extinguishes obligations to which they pertain in a contract of sale

• Not necessarily the contract itself ! Loss ! Remission ! Compensation ! Confusion ! Novation

o Annulment o Rescission o Resolutory Condition o Prescription o Conventional or Legal Redemption (Article 1600)

II. Conventional Redemption A. Definition (Article 1601) Article 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of article 1616 and other stipulations which may have been agreed upon. (1507)



1. Conventional Redemption Takes Place: • When the seller reserved for himself the right to repurchase the

thing sold, with obligation to: a. Return price of the sale b. Return expenses of the contract c. Any other legitimate payments made by reason of the

sale d. Necessary and useful expenses of the thing sold.

• Even when sale is one with right to repurchase, buyer is subrogated to the seller’s rights and actions even during the period where redemption can be made by the seller.

o In other words, right to redemption does not prevent full consummation.

• Who may exercise? a. Seller in whom right is recognized by contract b. Any person to whom such right may have been

transferred c. In the case of legal redemption, the person so entitled

by law. B. Proper Reservation Of Right To Repurchase

• Distinguishing right to redeem from option to purchase. o Article 1601: Right of repurchase must be reserved by

the vendor through stipulation to that effect in the contract of sale

! Not a right granted to the vendor by the vendee ! It is one of the stipulations in the contract

! Once instrument executed, vendor may no longer reserve

o Any right thereafter granted to the vendor, by the vendee cannot be considered a right to repurchase, but some other right, like an option to buy.

• Essence of pacto de retro " title and ownership is immediately vested in the vendee a retro, subject to a restrictive condition of repurchase by the vendor within the redemption period.

• Sales with rights of repurchase, as defined by the Civil Code, are not favored. We will not construe instruments to be sales with a right to repurchase, with the stringent and onerous effects which follow, unless the terms of the document and the surrounding circumstances require it. Whenever, under the terms of the writing, any other construction can fairly and reasonably be made, such construction will be adopted and the contract will be construed as a mere loan unless the court can see that, if enforced according to its terms, it is not an unconscionable one. Bautista v. Unangst, 557 SCRA 256 (2008). [citing Ramos v. Court of Appeals 180 SCRA 635 (1989), which in turn cites Padilla v. Linsangan, 19 Phil. 65 (1911) and Aquino v. Deala, 63 Phil. 582 (1936).

1. Valid Sale Required For There To Be A Valid Right To

Repurchase • Valid existence of a right to repurchase hinges upon fact that

the underlying contract of sale is valid, and that there has been performance.



o Right to repurchase must be constituted as part of a valid sale at perfection. xVillarica v. CA, 26 SCRA 189 (1968).1

• An agreement to repurchase becomes a promise to sell when made after the sale because when the sale is made without such agreement the purchases acquires the things sold absolutely; and, if he afterwards grants the vendor the right to repurchase, it is a new contract entered into by the purchases as absolute owner. Roberts v. Papio, 515 SCRA 346 (2007).2

Roberts v. Papio

Facts: Spouses Martin and Lucina Papio were owners of a residential lot located in Makati. They executed a real estate mortgage on said property to obtain a long from Amparo Investments. Upon Papio’s failure to pay the loan, the corporation filed a petition for extrajudicial foreclosure of mortgage. Since the couple needed money to prevent the foreclosure, they executed a Deed of Absolute Sale over the property in favor of Amelia Roberts. Of the P85,000 purchase price, P59,000 was paid to Amparo Investments while the P26,000 difference was retained by the spouses. The title to the property was delivered to Amelia Roberts. Thereafter, the parties executed a 2-‐year contract of lease over the property, with Roberts as lessor and Papio as lessee. At first, Papio paid his monthly rentals, but stopped paying after 1985. However, he and his

1 Claravall v. CA, 190 SCRA 439 (1990); Torres v. CA, 216 SCRA 287 (1992); Roberts v. Papio, 515 SCRA 346 (2007). 2 Ramos v. Icasiano, 51 Phil (1927).

family remained in possession of the property for almost 13 years. Despite repeated demand, Papio refused to pay and refused to leave the premises. Hence, Roberts filed a complaint for unlawful detainer. Paprio raised the defense that in the original contract of sale, Roberts gave him the right to redeem the property at any time for a reasonable amount. In fact, on 1985 he remitted to Roberts’ authorized representative, Perlita Ventura, the amount of P250,000 as repurchase price. Allegedly, Roberts only refused to execute a deed of absolute sale because Ventura misappropriated the amount of P39,000 from the supposed repurchase price Issue: Whether or not the contract of sale entered into by Papio and Roberts is actually an equitable mortgage. Held: NO. It is the contract of sale. One repurchases only what one has previously sold. The right to repurchase presupposes a valid contract of sale between same parties. By insisting that he had repurchased the property, Papio thereby admitted that the deed of absolute sale executed by him and Roberts was in fact and in law a deed of absolute sale and not an equitable mortgage; he had acquired ownership over the property based on said deed. Respondent, is thus estopped from asserting that the contract under the deed of absolute sale is an equitable mortgage unless there is an allegation and evidence of palpable mistake on the part of respondent, or a fraud on the part of Roberts. Doctrine:



• In sales denominated as pacto de retro, the price agreed upon should not generally be considered as the just value of the thing sold, absent other corroborative evidence—there is no requirement in sales that the price be equal to the exact value of the thing subject matter of the sale. xDorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008).

C. Right Of Repurchase Provable By Parol Evidence

• Right to repurchase: merely a feature in the contract of sale o Thus, it is governed by the Statute of Frauds o However, SC has held: when the contract of sale is in

writing, parol evidence may be adduced to prove the right to repurchase

! This is because the Deed of Sale and the verbal agreement allowing the right to repurchase are an integral whole.

! The deed of sale itself is the “note or memorandum” required to remove the contract from the Statute of Frauds.

o Also, if there is no objection to such parol evidence, it will be admissible in trial.

• SC: “Best Evidence” Rule not an obstacle to the adducement of such parol evidence.

o When parol agreement was the moving cause of the written contract.

o When written contract was executed on the faith/representation of the parol contract.

o Right to repurchase proved orally is consistent with terms of written contract.

D. Distinguished From Option To Purchase

Right to Redeem Option to Purchase Not a separate contract – merely part of a main contract of sale – cannot exist unless reserved at

time of perfection

Generally a principal contract, created independent of another

contract

Must be imbedded into the contract of sale upon its perfection

May exist before or after the perfection of the sale, or be imbedded in another contract

upon its perfection Does not need a separate

consideration to be valid and effective

Must have consideration separate and distinct from the purchase

price Redemption period cannot exceed

10 years Period for an option may exceed

10 years Exercise requires that notice be

accompanied by tender of payment – consignment when

tender cannot be made

Requires only a notice of exercise to be given to the optioner

Exercise extinguishes contract of sale

Results in perfection of a contract of sale

E. Redemption Period

• The period to repurchase is not suspended merely because there is a divergence of opinion between the parties as to the precise meaning of the phrase providing for the condition upon which the right to repurchase is triggered. The existence of



seller a retro’s right to repurchase the proper is not dependent upon the prior final interpretation by the court of the said phrase. Misterio v. Cebu State College of Science and Technology, 461 SCRA 122 (2005).

Misterio v. Cebu State College of Science and Technology

Facts: Asuncion sold to Sudlon Agricultural High School (SAHS) a parcel of land, reserving the right to repurchase the same in case (1) the school ceases to exist, or (2) the school transfers location. She had her right annotated. She died. By virtue of BP 412, SAHS was merged with the Cebu State College, effective June 1983. In 1990, the heirs of Asuncion sought to exercise their right to redeem, claiming that school has ceased to exist. Issue: Whether or not the heirs of Asuncion may still exercise their right to redeem the property Held: NO. Their right has already prescribed. Considering that no period for redemption was agreed upon, the law imposes a 4-‐year limitation. This means that from the time the school was merged to Cebu State College, they had 4 years, or until June 1987 to redeem the property. However, they failed to do so within the period. Failure to redeem automatically consolidates ownership in favor of the vendee. The fact that the right to redeem was annotated does not make it imprescriptible, it only serves to notify third persons. Doctrine:

1. When No Period Agreed Upon • General Rule: If it is stipulated that there is a right to redeem,

and in the absence of agreement as to period of exercise, it shall last 4 years from date of the contract.

• Misterio v. Cebu State College, 461 SCRA 122 (2005) o It was held that the four-‐year period began from

happening of condition contained in deed of sale (rather than date of contract).

o CLV: This is inexplicable! (To be discussed later)

2. When Period Agreed Upon • General Rule: If there is an agreement as to period, it cannot

exceed 10 years if it exceeds 10 years, the agreement is only valid for the first 10 years.

• Anchuel v. Intermediate Appellate Court, 147 SCRA 434 (1987) o Stipulation: Vendor cannot redeem within 19 years from

execution. o SC: Such is void for being violative of Article 1601, and

fixed the period of redemption at ten years. • Tayao v. Dulay, 13 SCRA 758 (1965)

o Stipulation: right of redemption cannot be exercised within 10 years

o SC: Stipulation was void. However, such nullity does not convert contract into a mere indebtedness nor an equitable mortgage.

! Article 1606 would apply " seller may exercise right to redemption within a period of 10 years form date of contract



o Although stipulation as to the period may be unclear or void, there is still a stipulation.

! Thus, we follow the 10-‐year period for redemption.

! We do not consider the right of redemption as being one without a stipulated period.

• Bandong v. Austria, 31 Phil. 479 (1915) o Stipulation: sellers could exercise in March of any year. o Such could be exercised for a period of 10 years from

date thereafter, but not after 10 years • Ochagabia v. Court of Appeals, 304 SCRA 867 (1999)

o Right to redeem had prescribes when exercised after 10 years.

3. Pendency of Action Tolls Redemption Period • Ong Chua v. Carr, 53 Phil. 957 (1929) " pendency of an action

brought in good faith and relating to the validity of a sale a retro tolls the running of the period of redemption.

o Note: The seller a retro had given notice of the exercise of the redemption right within the redemption period.

BUT • Misterio v. Cebu State College, 461 SCRA 122 (2005) "

Pendency of a litigation does not toll the period. o Such period is not suspended merely because there is a

divergence of opinion between the parties as to when the condition upon which the right to repurchase is triggered.

o Existence of right to repurchase is not dependent upon the interpretation by the court of said condition

o Note: The successors-‐in-‐interest of the seller a retro sought to exercise the redemption right after the expiration of the four-‐year redemption period.

• CLV: No contradiction between these two cases o Important consideration: “vesting” of the exercise of

the right by its proper exercise (requiring notice and tender)

o Thus, in essence, completion of redemption process (payment of amounts required in Article 1616) is tolled by the filing of a civil action relating to the issue of such redemption

! Provided that both exercise and filing would be done within redemption period

4. Non-‐payment of Price Does Not Affect Running of Redemption

Period • Catangcatang v. Legayada, 82 SCRA 51 (1978) " nonpayment

of purchase price does not serve to suspend the period of redemption.

o Sale was consummated upon execution of document, and delivery of land to the vendee.

o Nonpayment of the balance of the price does not suspend the efficacy of the provisions of the valid contract.

F. Situation Prior to Redemption

• In a sale a retro, buyer has a right to the immediate possession of the property sold, unless otherwise agreed upon, since title and ownership of the property sold are immediately vested in



the buyer a retro, subject only to the resolutory condition of repurchase by the seller a retro within the stipulated period. xVda. de Rigonan v. Derecho, 463 SCRA 627 (2005).1

• Pending repurchase, the buyer may alienate, mortgage, or encumber the property.

o But such alienation, mortgage or encumbrance is as revocable as his right.

o When right exercised, the buyer has to return the property free from all encumbrances imposed by him.

G. Who Can Redeem (Articles 1611 to 1614) Article 1611. In a sale with a right to repurchase, the vendee of a part of an undivided immovable who acquires the whole thereof in the case of article 498, may compel the vendor to redeem the whole property, if the latter wishes to make use of the right of redemption. (1513) Article 1612. If several persons, jointly and in the same contract, should sell an undivided immovable with a right of repurchase, none of them may exercise this right for more than his respective share. The same rule shall apply if the person who sold an immovable alone has left several heirs, in which case each of the latter may only redeem

1 Reyes v. Hamada, 14 SCRA 215 (1965); Solid Homes, Inc. v. CA, 275 SCRA 267 (1997); Misterio v. Cebu State College of Science and Technology, 461 SCRA 122 (2005); Cadungog v. Yap, 469 SCRA 561 (2005); Ramos v. Dizon, 498 SCRA 17 (2006); Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 51 (2007).

the part which he may have acquired. (1514) Article 1613. In the case of the preceding article, the vendee may demand of all the vendors or co-‐heirs that they come to an agreement upon the repurchase of the whole thing sold; and should they fail to do so, the vendee cannot be compelled to consent to a partial redemption. (1515) Article 1614. Each one of the co-‐owners of an undivided immovable who may have sold his share separately, may independently exercise the right of repurchase as regards his own share, and the vendee cannot compel him to redeem the whole property. (1516)

• Article 1611 " Seller wants to repurchase only his part: Buyer may compel him to repurchase the whole thing.

• Article 1614 " Creditors of the seller cannot make use of the right of redemption against the buyer, until after they have exhausted the property of the seller.

• De Guzman v. Court of Appeals, 148 SCRA 74 (1987) o If one of the co-‐owners/co-‐heirs alone redeem the

whole property, he will be a mere trustee with respect to the shares of the co-‐owners/co-‐ heirs.

o Thus, no prescription lies against the rights of these co-‐owners/co-‐heirs to demand from the redemptioner their share in the property

H. How Redemption Effected (Article 1616)



Article 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition: (1) The expenses of the contract, and any other legitimate payments made by reason of the sale; (2) The necessary and useful expenses made on the thing sold. (1518)

• Three things need to be returned (Article 1616) 1. Price of the sale. 2. Expenses of contract, and any other legitimate

payments made by reason of the sale. 3. Necessary and useful expenses made on the thing sold.

• Seller may bring his action against every possessor who derives right from the buyer.

o Even if there is no mention of the right to repurchase in the contract between buyer and subsequent buyer.

o Without prejudice to provisions of Property Registration Decree and the ��Mortgage Law, with respect to mortgagees/purchasers in good faith and for value.

• Failure to pay useful improvements entitles buyer a retro to retain possession of the land until actual reimbursement is done.

• Article 1616 is not exclusive o It should be construed with Article 1601 which states

that in order to redeem, Article 1616 must be complied with as well as “other stipulations agreed upon.”

• Well-‐settled is the rule that a formal offer to redeem must be accompanied by a valid tender of the redemption price and the filing of a judicial action, plus the consignation of the redemption price within the period of redemption, is equivalent to a formal offer to redeem. xVillegas v. Court of Appeals, 499 SCRA 276 (2006).

o In order to exercise the right to redeem, only tender of payment is sufficient xLegaspi v. CA, 142 SCRA 82 (1986); consignation is not required after tender is refused xMariano v. CA, 222 SCRA 736 (1993).

o The fact that the seller a retro deposited the amount of the repurchase money with the Clerk of Court was simply an additional security.

o Mere sending of letters expressing desire to repurchase, without tender, does not comply with the requirement of law.

• But when tender not possible, consignation should be made xCatangcatang v. Legayada, 84 SCRA 51 (1978).

• A formal offer to redeem, accompanied by a bona fide tender of redemption price, is not essential where the right to redeem is exercised through a judicial action within the redemption period and simultaneously depositing the redemption price. xLee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995).

o No prescribed form for an offer to redeem o Thus, we have two ways of redeeming

! Formal offer to pay accompanied by bona fide tender of payment.



• Only necessary to preserve right of redemption for further enforcement. (as opposed to exercised).

! Exercise through judicial action accompanied with simultaneous deposit of the redemption price.

• Filing of action is equivalent to formal offer.

o When is right of redemption deemed “vested” ! Formal offer to redeem, accompanied by bona

fide tender of payment, within redemption period.

! Thus, the right is “vested” – it may be enforced even beyond redemption period

I. Redemption Price (Article 1616)

• A stipulation in a sale a retro requiring as part of the redemption price interest for the cost of money, is not in contravention with Article 1616, since the provision is not restrictive nor exclusive, and does not bar additional amounts that the parties may agree upon, since the article itself provides “and other stipulations which may have been agreed upon.” xSolid Homes v. Court of Appeals, 275 SCRA 267 (1997).

J. Fruits (Article 1617) Article 1617. If at the time of the execution of the sale there should be on the land, visible or growing fruits, there shall be no reimbursement for or

prorating of those existing at the time of redemption, if no indemnity was paid by the purchaser when the sale was executed. Should there have been no fruits at the time of the sale and some exist at the time of redemption, they shall be prorated between the redemptioner and the vendee, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale. (1519a)

• Article 1617 on the disposition of fruits of property redeemed applies only when the parties failed to provide a sharing arrangement thereof; otherwise, the parties contractual stipulations prevail. xAlmeda v. Daluro, 79 SCRA 327 (1977).

• Article 448 of the Civil Code on the rights of a builder in good faith is inapplicable in cases involving contracts of sale with right of repurchase—it is inapplicable when the owner of the land is the builder, sower, or planter. Where the true owner himself is the builder of the works on his own land, the issue of good faith or bad faith is entirely irrelevant. The right to repurchase may be exercised only by the vendor in whom the right is recognized by contract or by any person to whom the right may have been transferred. In a sale with right of repurchase, the applicable provisions are Articles 1606 and 1616 of the Civil Code, and not Article 448. Narvaez v. Alciso, 594 SCRA 60 (2009).

K. Effect When No Redemption Made: Consolidation (Article 1607) Article 1607. In case of real property, the consolidation of ownership in the vendee



by virtue of the failure of the vendor to comply with the provisions of article 1616 shall not be recorded in the Registry of Property without a judicial order, after the vendor has been duly heard. (n)

• Before the New Civil Code: when no redemption made, buyer automatically acquired full ownership. Today, Article 1607.

o This proceeding for consolidation is an ordinary civil action, not a motion incident to another action.

o If such is denied because contract was actually an equitable mortgage, then another action may be filed to collect/foreclose

• Article 1607 abolished automatic consolidation of ownership in the vendee a retro upon expiration of the redemption period by requiring the vendee to institute an action for consolidation where the vendor a retro may be duly heard. If the vendee succeeds in proving that the transaction was indeed a pacto de retro, the vendor is still given a period of thirty days from the finality of the judgment within which to repurchase the property. xSolid Homes v. Court of Appeals, 275 SCRA 267 (1997).

• Once the vendor fails to redeem the property within the stipulated period, irrevocable title shall be vested in the vendee by operation of law. xVda. de Rigonan v. Derecho, 463 SCRA 627 (2005).

• Under a sale a retro, the failure of the buyer to consolidate his title under Article 1607 does not impair such title and ownership because the method prescribed thereunder is merely for the purpose of registering and consolidating titles to the property. In fact, the failure on the part of a seller a retro to

exercise the redemption right within the period agreed upon or provided for by law, vests upon the buyer a retro absolute title and ownership over the property sold by operation of law. Consequently, after the effect of consolidation, the mortgage or re-‐sale by the seller a retro of the same property would not transfer title and ownership to the mortgagee or buyer, as the case may be, under the Latin maxim NEMO DAT QUOD NON HABET. xCadungog v. Yap, 469 SCRA 561 (2005).

o Notwithstanding Article 1607, recording in the Registry of Deeds of the consolidation of ownership to the buyer is not a condition sine qua non to transfer of ownership

! Buyer would still be the owner. ! Essence of pacto de retro " title and ownership

are immediately vested in buyer, subject to resolutory condition of repurchase.

! Failure of seller to perform the said condition vests absolute title and ownership over the property sold.

! Failure to consolidate title under Article 1607 does not impair buyer’s ownership. The method prescribed is merely for purposes of registration.

L. Equitable Mortgage (Articles 1602-‐1604) 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)

1. Definition • An equitable mortgage is “one which although lacking in some

formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law.” Raymundo v. Bandong, 526 SCRA 514 (2007) 1

• Essential requisites of equitable mortgage: xMolina v. Court of Appeals, 398 SCRA 97 (2003).2

a. Parties entered into a contract denominated as a contract of sale; and

b. The intention was to secure an existing debt by way of a mortgage.

• San Pedro v. Lee, 430 SCRA 338 (2005) " when the two above conditions are not proven, the existence of any circumstance

1 Ceballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004); Alvaro v. Ternida, 479 SCRA 288 (2006); Cirelos v. Hernandez, 490 SCRA 624 (2006); Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 51 (2007); Olivares v. Sarmiento, 554 SCRA 384 (2008); Tio v. Abayata, 556 SCRA 175 (2008); Deheza-‐Inamarga v. Alano, 574 SCRA 651 (2008); Rockville Excel International Exim Corp. v. Culla, 602 SCRA 124 (2009); Kings Properties Corp. v. Galido, 606 SCRA 137 (2009). 2 Matanguihan v. CA, 275 SCRA 380 (1997); Martinez v. CA, 358 SCRA 38 (2001); Hilado v. Heirs of Rafael Medlla, 37 SCRA 257 (2002); Ceballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004); San Pedro v. Lee, 430 SCRA 338 (2005); Go v. Bacaron, 472 SCRA 229 (2005), citing VILLANUEVA, CESAR L. PHILIPPINE LAW ON SALES, (1998 ed.), p. 271; Romulo v. Layug, Jr., 501 SCRA262 (2006); Roberts v. Papio, 515 SCRA 346 (2007); Raymundo v. Bandong, 526 SCRA 514 (2007); Dorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008); Muñoz, Jr. V. Ramirez, 629 SCRA 38 (2010).



enumerated in Article 1602 cannot be the basis to treat the transaction as an equitable mortgage.

• General Rule: In other words, we look at the two requisites first before going to Article 1602.

• The decisive factor in evaluating whether an agreement is an equitable mortgage is the intention of the parties, as shown not necessarily by the terminology used in the contract but by all the surrounding circumstances, such as 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. Necessitous men are not always free, in that to answer a pressing emergency, they will submit to any term that the crafty may impose on them. Banga v. Bello, 471 SCRA 653 (2005) 1

• This kind of arrangement, where the ownership of the land is supposedly transferred to the buyer who provides for the funds to redeem the property from the bank but nonetheless allows the seller to later on buy back the properties, is in the nature of an equitable mortgage governed by Articles 1602 and 1604 of the Civil Code. Bacungan v. Court of Appeals, 574 SCRA 642 (2008).

• If the terms of the pacto de retro sale were unfavorable to the vendor, courts have no business extricating her from that bad bargain—courts are not guardians of persons who are legally

1 Austria v. Gonzales, Jr., 420 SCRA 414 (2004); Raymundo v. Bandong, 526 SCRA 514 (2007).

competent. Dorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008).

2. Rationale Behind Provisions On Equitable Mortgage • The provisions of the Civil Code governing equitable mortgage

disguised as sale contracts are primarily designed to curtail the evils brought about by contracts of sale with right to repurchase, particularly the circumvention of the usury law and pactum commissorium. Heirs of Jose Reyes, Jr. v. Reyes, 626 SCRA 758 (2010).

o They envision contracts of sale w/ right to repurchase where the real intention of the parties is that the repurchase price is money loaned, and the “pacto de retro sale” is a means of securing the loan.

o Since Article 1602 is remedial in nature, it was applied retroactively in cases prior to the effectivity of the New Civil Code.

3. When In Doubt, Construe As Equitable Mortgage And Not

Right To Repurchase • When in doubt, courts construe transactions as equitable

mortgages since it provides for lesser transmission of rights. o The law on equitable mortgage favors the least

transmission of rights and interest over a property in controversy, since the law seeks to prevent circumvention of the law on usury and the prohibition against pactum commissorium provisions. Additionally, it is aimed to end unjust or oppressive transactions or violations in connection with a sale or property. The



wisdom of these provisions cannot be doubted, considering many cases of unlettered persons or even those with average intelligence invariably finding themselves in no position whatsoever to bargain fairly with their creditors. xSpouses Miseña v. Rongavilla, 303 SCRA 749 (1999).1

• Lapat v. Rosario, 312 SCRA 539 (1999) " contract should be considered as a mortgage or as a loan instead of pacto de retro when its terms are ambiguous or the circumstances are inconsistent with a sale.

• Molina v. Court of Appeals, 398 SCRA 97 (2003) " intention of parties is showed by all surrounding circumstances, not by the terminology used in the contract.

• Equitable mortgage seeks to prevent situation where necessitous men, who are not always free in that to answer a pressing emergency, will submit to any term that the crafty may impose on them. Banga v. Bello, 471 SCRA 653 (2005)

o Besides, it is a fact that in time of grave financial distress which render persons hard-‐pressed to meet even their basic needs or answer an emergency, such persons would have no choice but to sign a deed of absolute sale of property or a sale thereof with pacto de retro if only to obtain a much-‐needed loan from unscrupulous money lenders. xMatanguihan v. Court of Appeals, 275 SCRA 380 (1997).2

4. When Presumed Equitable Mortgage (Article 1602)

1 Lao v. Court of Appeals, 275 SCRA 237 (1997). 2 Salonga v. Concepcion, 470 SCRA 291 (2005).

• General Rule: Existence of any one of these conditions suffices to give rise to the non-‐conclusive presumption that the contract is an equitable mortgage.

• Exception: Article 1602 is not conclusive and may be rebutted by competent and satisfactory proof to the contrary.

• Lim v. Calaguas (45 O.G. No. 8, p.3394) " in order for presumption to apply, the parties must have intended the contract to be a mortgage and not a pacto de retro.

• Lim enumerates the following circumstances to treat the contract as an equitable mortgage.

o Terms used in power-‐of-‐attorney indicate that conveyance was intended to be a loan secured by a mortgage

o Price paid in relation to value of property is grossly inadequate

! However, mere allegation of insufficiency of selling price does not create the presumption if there is no proof regarding the market values of the area and property in question

• Inadequacy of price: Consideration so far short of the real value as to startle the mind.

• Even with the assertion that the price in a pacto de retro is not the assessed price, does not justify the conclusion that the contract is one of equitable mortgage.

o Practice in pacto de retro sale is to fix a relatively reduced price



to afford the seller a retro every facility to redeem the property.

o Seller at time of alleged sale was in urgent need of money.

o Supposed seller invested money he obtained in making improvements on the property sold.

o Seller remained in possession. ! Although the seller only remained in possession

for a year, such stipulation did not detract from the fact that possession (an indicium of ownership) was retained by the vendor, and that the vendor retained part of the purchase price.

! This pointed to an equitable mortgage. ! Continued possession where sellers promised to

vacate, but did not. Tolerated possession is not enough to prove equitable mortgage.

o Seller paid land tax o Buyer accepted partial payments, such acceptance

being incompatible with idea of irrevocability of the title of ownership of the purchaser at the expiration of the term stipulated in the original contract for the exercise of the right to redemption

o Seller remained bound for the repayment of the money o Transaction had origin in a borrowing of money.

! When true intention was not to convey ownership, but to secure housing loan of “buyer” in which “seller” had a direct interest since proceeds were to be applied to their

outstanding mortgage obligations. – Equitable Mortgage

! Alleged loan disbursed on installments – no proof as to inadequacy of price – continued receipt of rentals by seller was found to be a gesture of generosity : considered sale on installments

o There was a previous debt between the parties that was not extinguished by the sale but remained subsisting.

• Delay in transferring title does not give rise to presumption.

5. Badges of Equitable Mortgage (Article 16021) • A contract of sale actually intended to secure the payment of an

obligation is presumed an equitable mortgage. xRomulo v. Layug, Jr., 501 SCRA 262 (2006).2

• The presence of only one circumstance defined in Article 1602 is sufficient for a contract of sale a retro to be presumed an equitable mortgage. xHilado v. Medalla 377 SCRA 257 (2002).3

• The presumption in Article 1602 jibes with the rule that the law favors the least transmission of property rights. xEnriquez, Sr. v.

1 Lim v. Calaguas, 45 O.G. No. 8, p. 3394 (1948); Balatero v. IAC, 154 SCRA 530 (1987); Mariano v. CA, 220 SCRA 716 (1993); Lobres v. CA, 351 SCRA 716 (2001). 2 Ayson, Jr. V. Paragas, 557 SCRA 50 (2008); Bautista v. Unangst, 557 SCRA 256 (2008). 3 Claravall v. CA, 190 SCRA 439, 448 (1990); Uy v. CA, 230 SCRA 664 (1994); Lobres v. CA, 351 SCRA 716 (2001); Alvaro v. Ternida, 479 SCRA 288 (2006); Diño v. Jardines, 481 SCRA 226 (2006); Raymundo v. Bandong, 526 SCRA 514 (2007); Aleligay v. Laserna, 537 SCRA 699 (2007); Dorado Vda. De Delfin v. Dellota, 542 SCRA 397 (2008); Bautista v. Unangst, 557 SCRA 256 (2008); Rockville Excell International Exim Corp. V. Culla, 602 SCRA 124 (2009); Heirs of Jose Reyes, Jr. v. Reyes, 626 SCRA 758 (2010).



Heirs of Spouses Nieves and Alfredo Baldonado, 498 SCRA 365 (2006); but it is not conclusive, for it may be rebutted by competent and satisfactory proof to the contrary. xSantiago v. Dizon, 543 SCRA 402 (2008).

• The provisions of Article 1602 on the presumption of equitable mortgage applies also to a contract purporting to be an absolute sale. xTuazon v. CA, 341 SCRA 707 (2000).1

• A contract purporting to be an absolute sale is presumed to be an equitable mortgage: (a) when the price of the sale is unusually inadequate; 2 (b) when the vendor remains in possession as lessee or otherwise;3 (c) when after the expiration of the right of repurchase, it is extended by the buyer. xHilado v. Heirs of Rafael Medalla, 37 SCRA 257 (2002);4 (d) when the purported seller continues to collect rentals from the lessees of the property sold. Ramos v. Dizon, 498 SCRA 17 (2006); (e) when the purported seller was in desperate financial situation when he executed the purported sale. Bautista v. Unangst, 557 SCRA 256 (2008); or under threat of being sued criminally. Ayson, Jr. V. Paragas, 557 SCRA 50 (2008).

• “Inadequacy of purchase price” is considered so far short of the real value of the property as to startle a correct mind. xSantiago v. Dizon, 543 SCRA 402 (2008); or that the mind revolts at it as such that a reasonable man would neither directly or indirectly be likely to consent to it. xVda de Alvarez v. CA, 231 SCRA 309

1 Zamora v.CA, 260 SCRA 10 (1996). 2 Romulo v. Layug, Jr., 501 SCRA262 (2006). 3 Romulo v. Layug, Jr., 501 SCRA262 (2006); Ayson, Jr. V. Paragas, 557 SCRA 50 (2008); Bautista v. Unangst, 557 SCRA 256 (2008); Rockville Excell International Exim Corp. v. Culla, 602 SCRA 124 (2009). 4 Cruz v. Court of Appeals, 412 SCRA 614 (2003).

(1994); it must be grossly inadequate or shocking to the conscience. Tio v. Abayata, 556 SCRA 175 (2008).

• To presume a contract is an equitable mortgaged based on gross inadequacy of price, it must be clearly shown from the evidence presented that the consideration was in fact grossly inadequate at the time the sale was executed. Mere inadequacy of price is not sufficient to create the presumption. xOlivares v. Sarmiento, 554 SCRA 384 (2008).5

• Mere tolerated possession is not enough to prove that the transaction was an equitable mortgage. xRedondo v. Jimenez, 536 SCRA 639 (2007).

• Payment of real estate taxes is a usual burden attached to ownership, and when such payment is coupled with continuous possession of the property, it constitutes evidence of great weight that a person under whose name the realty taxes were declared has a valid and right claim over the land. xGo v. Bacaron, 472 SCRA 229 (2005).6

• However mere allegations without proof to support inadequacy of price, or when continued possession by the seller is supported by a valid arrangement consistent with the sale, would not support the allegation of equitable mortgage. xCirelos v. Hernandez, 490 SCRA 624 (2006).7

• Although under the agreement the seller shall remain in possession of the property for only one year, such stipulation does not detract from the fact that possession of the property, an indicium of ownership, was retained by the alleged vendor to

5 Kings Properties Corp. v. Galido, 606 SCRA 137 (2009). 6 Lumayag v. Heirs of Jacinto Nemeño, 526 SCRA 51 (2007). 7 Austria v. Gonzales, Jr., 420 SCRA 414 (2004).



qualify the arrangement as an equitable mortgage, especially when it was shown that the vendor retained part of the purchase price. xLegaspi v. Ong, 459 SCRA 122 (2005).1

• Under Article 1602, delay in transferring title is not one of the instances enumerated by law—instances in which an equitable mortgage can be presumed. Nor does the fact that the original transaction on the land was to support a loan, which when it was not paid on due date was negotiated into a sale, without evidence that the subsequent deed of sale does not express the true intentions of the parties, give rise to a presumption of equitable mortgage. xCeballos v. Intestate Estate of the Late Emigdio Mercado, 430 SCRA 323 (2004).

• The fact that the price in a pacto de retro sale is not the true value of the property does not justify the conclusion that the contract is one of equitable mortgage; in fact a pacto de retro sale, the practice is to fix a relatively reduced price to afford the seller a retro every facility to redeem the property . xIgnacio v. CA, 246 SCRA 242 (1995).2

• Article 1602 being remedial in nature, may be applied retroactively in cases prior to the effectivity of the Civil Code. xOlea v. CA, 247 SCRA 274 (1995).

6. Applicability To Deeds Of Absolute Sale (Article 1604) • Two requisites for Article 1604 (in relation to Article 1602) to

apply

1 Oronce v. CA, 298 SCRA 133 (1998). 2 De Ocampo v. Lim, 38 Phil. 579 (1918); Feliciano v. Limjuco, 41 Phil.147 (1920); Belonio v. Movella, 105 Phil. 756 (1959).

a. Parties entered into contract denominated as a contract of sale.

b. Intention was to secure an existing debt by way of mortgage.

7. Proof By Parole Evidence; Best Evidence Rule • That is why parol evidence is competent and admissible in

support of the allegations that an instrument in writing, purporting on its face to transfer the absolute title to property, or to transfer the title with a right to repurchase under specified conditions reserved to the seller, was in truth and in fact given merely as security for the repayment of a loan. xMariano v. Court of Appeals, 220 SCRA 716 (1993).3

• Matanguihan v. Court of Appeals, 275 SCRA 380 (1997) o Parol evidence is competent to prove that the

instrument in question was given merely as a security. o Upon proof of the truth of such allegations, court will

enforce the agreement as they truly intended. • Austria v. Gonzales 420 SCRA 414 (2004) " non-‐application of

“best evidence rule” to equitable mortgage situations. o Decisive factor in evaluating intent in such agreements

is not always the document itself. o But all the surrounding circumstances. Thus, parole

evidence is acceptable. 3 Lim v. Calaguas, 45 O.G. No. 8, p. 3394 (1948); Cuyugan v. Santos, 34 Phil. 100 (1916); Matanguihan v. CA, 275 SCRA 380 (1997); Hilado v. Heirs of Rafael Medlla, 37 SCRA 257 (2002); Madrigal v. Court of Appeals, 456 SCRA 659 (2005); Legaspi v. Ong, 459 SCRA 122 (2005); Banga v. Bello, 471 SCRA 653 (2005); Diño v. Jardines, 481 SCRA 226 (2006); Ayson, Jr. V. Paragas, 557 SCRA 50 (2008).



8. Remedies Allowed For Equitable Mortgage (Articles 1454,

1602, 1605) Article 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. Article 1605. In the cases referred to in articles 1602 and 1604, the apparent vendor may ask for the reformation of the instrument. (n)

• When a contract is construed to be an equitable mortgage, the following may result:

o Any money, fruit or benefit to be received by the buyer as rent shall be considered as interest subject to usury laws;

o The apparent “Seller” may ask for reformation of the instrument;

o Court may decree that “buyer”-‐debtor must pay his outstanding loan to “seller”-‐creditor

o Where trial court did not pass upon the mortgagor’s claim that he paid the mortgage obligation, a remand of the case to trial court is in order

! To determine whether the mortgage had been settled.

! And if not, how much mortgagor should pay to settle the same.

• In the case of an equitable mortgage, although Article 1605 which allows for the remedy of reformation, nothing therein precludes an aggrieved party from pursuing other remedies to effectively protect his interest and recover his property, such as an action for declaration of nullity of the deed of sale and specific performance. xTolentino v. Court of Appeals, 386 SCRA 36 (2002).

o CLV: However, nullification proposed by Tolentino would be unfair – it would leave buyer without the necessary security contract, which remains valid. Reformation should be the proper remedy to enforce true intention. But, in the event property had been sold to a third party, nullification of that sale and reconveyance should be allowed provided security arrangement over the property is preserved.

• If a sale a retro is construed to be an equitable mortgage, execution of an affidavit of consolidation is of no consequence, and “constructive possession” would not ripen to ownership since such was not in concept of an owner. Balatero v. Intermediate Appellate Court, 154 SCRA 530 (1987)

• In an equitable mortgage situation, the consolidation of ownership in the person of the mortgagee in equity upon failure of the mortgagor in equity to pay the obligation, would amount to a pactum commissorium. The only proper remedy is to cause the foreclosure of the mortgage in equity. xBriones-‐Vasquez v.



Court of Appeals, 450 SCRA 644 (2005); or to determine if the principal obligation secured by the equitable mortgage has been paid or settled. xBanga v. Bello, 471 SCRA 653 (2005).

• Expiration of “period of redemption” in an equitable mortgage does not prevent the purported seller from extinguishing the main contract of loan, and thus also the equitable mortgage contract.

o As long as foreclosure has not been done.

9. Pactum Commissorium (Article 2088) Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

• A stipulation which is a pactum commisorium enables the mortgagee to acquire ownership of the mortgaged properties without need of any foreclosure proceedings—it is a nullity being contrary to the provisions of Article 2088 of the Civil Code. xLumayag v. Heirs of Jacinto Nemeño, 526 SCRA 315 (2007).1

• The elements of pactum commissorium, which enable the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, are: (1) there

1 Guerrero v. Yñigo, 96 Phil. 37 (1954); Montevirgin v. CA, 112 SCRA 641 (1982); Vda. de Zulueta v. Octaviano, 121 SCRA 314 (1983); Ong v. Roban Lending Corp., 557 SCRA 516 (2008); Heirs of Jose Reyes, Jr. V. Reyes, 626 SCRA 758 (2010).

should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-‐payment of the principal obligation within the stipulated period. Ong v. Roban Lending Corp., 557 SCRA 516 (2008).

• It does not apply when the security for a debt is also money in the form of time deposit. xConsing v. CA, 177 SCRA 14 (1989).

• Vda. de Zulueta v. Octaviano, 121 SCRA 314 (1983) o Stipulation: upon redemption by buyer from third party,

that instrument would be considered a deed of absolute sale from seller to buyer. Another instrument was executed entitled “option to repurchase.”

o This was not a sale a retro as the option to repurchase was in a separate document.

o Neither was it an equitable mortgage as it was not meant to secure a loan – no application of Article 1602.

o SC: It was not a pactum commissorium either ! Seller was not a debtor ! Nothing was offered as security.

o Public Policy on pactum commissorium applies only when the transaction is a mortgage or other security contract – no application to a true sale or transfer transaction.

• Guerrero v. Yñigo, 96 Phil. 37 (1954) " “mortgage with conditional sale”

o Stipulation: Mortgagor reserved for himself the right to redeem property by paying back the amount loaned. On



failure of mortgagor to exercise such right, title would pass and be vested in the mortgagee.

o SC: Such stipulation cannot be construed as giving mortgagee right to own the property upon failure of the mortgagor to pay. This is void for being pactum commissorium.

• Montevirgin v. Court of Appeals, 112 SCRA 641 (1982) o Equitable mortgage guised as a sale a retro cannot be

enforced as a sale o When a purported sale a retro is found to be an

equitable mortgage, the proper remedy in case the borrower does not pay the “price” is to foreclose on the mortgage.

! There can be no loss of the “seller’s” right to redeem for that would be pactum commissorium.

! Return of redemption price would be equaL to paying the principal loan, thus extinguishing the equitable mortgage.

• The provision in a MOA/Dacion en Pago with a Right to Repurchase that in the event the borrower fails to comply with the new terms of restructuring the loan, the agreement shall automatically operate to be an instrument of dacion en pago without need of executing any new document does not constitute pactum commissorium. Solid Homes, Inc. v. Court of Appeals, 275 SCRA 267 (1997); the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being

prohibited by law. Ong v. Roban Lending Corp., 557 SCRA 516 (2008).

Solid Homes v. Court of Appeals

Facts: Solid Homes executed in favor of State Financing Center a Real Estate Mortgage on its properties embraced in the TCT, in order to secure the payment of a loan of 10M which the former obtained from the latter. A year later, Solid Homes applied for and was granted an additional loan of 1, 511,270.03 by State Financing, and to secure its payment, Solid executed an amendment to real estate mortgage whereby the credits secured by the first mortgage on the abovementioned properties were increased from 10M to 11,511,270.03. Solid homes obtained additional credits and financing facilities from State Financing in the sum of 1,499,811.97 and to secure its payment, the former executed the amendment to real estate mortgage whereby the mortgage executed on its properties was again amended so that the loans or credits secured thereby were further increased from 11,511, 270.03 to 13,011,082.00. When the obligations became due and payable, State Financing made repeated demands upon Solid homes for the payment thereof, but the latter failed to do so. State Financing filed a petition for extrajudicial foreclosure of the mortgages who in pursuance of the petition, issued a notice of sheriff’s sale whereby the mortgaged properties of Solid homes and the



improvements existing thereon, including the V.V. Soliven Towers II Building were set for public auction sale in order to satisfy the full amount of Solid homes’ mortgage indebtedness, the interest thereon, and the fees and expenses incidental to the foreclosure proceedings. Before the scheduled public auction sale, the mortgagor Solid homes made representations and induced State Financing to forego with the foreclosure of the real estate mortgage. By reason thereof, State Financing agreed to suspend the foreclosure of mortgaged properties, subject to the terms and conditions they agreed upon, and in pursuance of the said agreement, they executed a document entitled MEMORANDUM OF AGREEMENT/DACION EN P AGO. Issue:

1. Whether or not the memorandum of agreement/dacion en pago executed by the parties is valid and binding " YES

2. Whether or not solid homes can claim damages arising from the non-‐annotation of its right of repurchase in the consolidated titles " NO

Held: The Memorandum of Agreement/Dacion En Pago was valid and binding, and that the registration of said instrument in the Register of Deeds was in accordance with law and the agreement of the parties. Solid homes utterly failed to prove that respondent corporation had maliciously and in bad faith caused the non-‐annotation of petitioner’s right of repurchase so as to prevent the latter from exercising such right. On the contrary, it is admitted by both parties that State Financing

informed Solid homes of the registration with the register of deeds of their memorandum of agreement/dacion en pago and the issuance of the new certificates of title in the name of State Financing. Clearly, petitioner was not prejudiced by the non-‐ annotation of such right in the certificates of title issued in the name of State Financing. Also, it was not the function of the corporation to cause said annotation. It was equally the responsibility of petitioner to protect its own rights by making sure that its right of repurchase was indeed annotated in the consolidated titles of State Financing. The only legal transgression of State was its failure to observe the proper procedure in effecting the consolidation of the titles in its name. But this does not automatically entitle the petitioner to damages absent convincing proof of malice and bad faith on the part of private respondent-‐corporation. Doctrine:

• BUT SEE: The stipulation in the promissory note providing that upon failure of the makers to pay interests, ownership of the property would automatically be transferred to the payee, and the covering deed of sale would be registered is in substance a pactum commissorium in violation of Article 2088, and consequently, the resultant sale is void and the registration and obtaining of new title in the name of the buyer would have be



declared void also. A. Francisco Realty v. Court of Appeals, 298 SCRA 349 (1998).1

A. Francisco Realty v. Court of Appeals

Facts: A. Francisco Realty and Development Corp. granted a loan worth P7.5M in favor of spouses Javillonar, to which the latter executed three documents: a) a promissory note containing the interest charge of 4% monthly, b) a deed of mortgage over the subject property, c) an undated deed of sale of the mortgaged property. Since the spouses allegedly failed to comply with the payments, petitioner registered the sale in its favor, getting a TCT issued in its name without knowledge by the spouses. Subsequently, the spouses obtained another loan worth P2.5M, signing another promissory note in favor of petitioner. Petitioner demanded the possession of the property, as well as the interest payments, to which the spouses refused to comply. Petitioner filed an action for possession in the RTC. RTC ruled in favor of petitioner, but CA reversed. Issue: Whether or not the sale was considered as an equitable mortgage Held: YES. The transfer was in the nature of pactum commissorium, since the sale was really considered as an equitable mortgage. It was really intended by the spouses to make such undated deed of sale a security. Also, when petitioners transferred the title in its name, the spouses was never informed of such action. Such transfer was therefore void, making the TCT held by petitioners null and void as well.

1 Legaspi v. Ong, 459 SCRA 122 (2005).

Doctrine:

10. Final Chance to Redeem in “Mistaken Equitable Mortgage” (Article 1606)

Article 1606. The right referred to in article 1601, in the absence of an express agreement, shall last four years from the date of the contract. Should there be an agreement, the period cannot exceed ten years. However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase. (1508a)

• Grant Of 30-‐Day Redemption Right In Case Of Litigation And Article 1606: Expiration of period ipso jure extinguishes right to redeem. However, when there was a previous suit concerning the nature of the contract, the seller may still exercise right to repurchase within 30-‐days from the time final judgment was rendered

o The 30-‐day period contemplates a case involving a controversy as to the nature of the contract. Court decides whether it is a pacto de retro or an equitable mortgage. Tapas v. Court of Appeals, 69 SCRA 393 (1976).



o The 30-‐day period under Article 1606 does not apply if the courts should find the sale to be absolute. Pangilinan v. Ramos, 181 SCRA 359 (1990).

• Rationale For 30-‐Day Period o Seller may have considered the sale to be an equitable

mortgage. Being such, the seller has every right to extinguish the equitable mortgage by paying-‐up the loan at any time before the buyer has foreclosed on the mortgage.

o Allowing the expiration of the redemption period is consistent with his claim that the sale was an equitable mortgage.

o Thus, upon finding of the court that it was indeed a pacto de retro, then the seller must be granted a final 30-‐day period within which to decide and if ever, exercise his right to redeem.

• However: if issue was whether the contract was an absolute sale or sale a retro

o Judgment of sale a retro does not give the seller the 30-‐day period.

o In such a case, seller is negligent for not exercising the right to redeem.

• Sellers in a sale judicially declared as pacto de retro may not exercise the right to repurchase within the 30-‐day period provided under Article 1606, although they have taken the position that the same was an equitable mortgage, if it is shown that there was no honest belief thereof since: (a) none of the circumstances under Article 1602 were shown to exist to warrant a conclusion that the transaction was an equitable

mortgage; and (b) that if they truly believed the sale to be an equitable mortgage, as a sign of good faith, they should have consigned with the trial court the amount representing their alleged loan, on or before the expiration of the right to repurchase. Abilla v. Gobonseng, 374 SCRA 51 (2002).1

Abilla v. Gobonseng

Facts: Spouses Abilla instituted against Spouses Gobonseng an action for specific performance, recovery of sum of money and damages, seeking the reimbursement of the expenses they incurred in the preparation and registration of 2 public instruments-‐-‐ Deed of Sale and Option to Buy. As a defense, Spouses Gobonseng contended that the transaction covered by these instruments was a mortgage. RTC ruled in favor of Spouses Abilla, stating that it was a sale giving Spouses Gobonseng until August 31, 1983 within which to buy back the 17 lots subject of the sale. CA affirmed and held that the transaction was a pacto de retro sale, and not an equitable mortgage. In 1999, Spouses Gobonseng filed with the RTC an urgent motion to repuchase the lots with tender of payment, which was denied. However, after the judge inhibited himself from the case, it was reraffled to a different branch, which granted the motion to repurchase. Issue: Whether or not Spouses Gobonseng may exercise the right to repurchase, as stipulated in Article 1606(3). Held: NO. Sellers in a sale judicially-‐declared as pacto de retro may NOT

1 Vda. de Macoy v. CA, 206 SCRA 244 (1992).



exercise the right to repurchase within the 30-‐day period provided under Article 1606, although they have taken the position that the same was an equitable mortgage, if it shown that there was no honest belief thereof since: (a) none of the circumstances under Article 1602 were shown to exist to warrant a conclusion that the transaction was an equitable mortgage; and (b) that if they truly believed the sale to be an equitable mortgage, as a sign of good faith, they should have consigned with the trial court the amount representing their alleged loan, on or before the expiration of the right to repurchase. Doctrine:

• An equitable mortgage is a voidable contract. It may be annulled within four (4) years from the time the cause of action accrues. Ayson, Jr. v. Paragas, 557 SCRA 50 (2008). [CLV: Thereafter, it may be enforced against the provision on pactum commissorium?]

11. Feigning Equitable Mortgage Situation to Avail of Article 1606 • What if seller feigns defense of equitable mortgage in order to

get the 30-‐day period? • Where evidence established no honest doubt as to parties’

intentions to make it a sale pacto de retro, seller would not be entitled to Article 1606’s benefits. Adorable v. Inacala, 103 SCRA 481 (1958)

• There must be honest belief on part of vendor that the agreement was in reality a mortgage, merely to give security for an obligation. Vda. De Macoy v. Court of Appeals, 206 SCRA 244 (1992) and Felicen v. Orias, 156 SCRA 586 (1987)

• When sale is judicially declared pacto de retro, and after vendors take the position that it was an equitable mortgage, having no honest belief to that effect – vendors may not avail of the additional 30-‐day period. Abilla v. Gobonseng, 374 SCRA 429 (2002)

o If they truly believed that the sale was an equitable mortgage, they should have consigned with the trial court the amount representing the alleged loan.

• However, this was reversed. Article 1606 only applies when the nature of the transaction was put in issue before the court.

o It applies in a situation where one party claims that it was a pacto de retro, and the other claimed that it was an equitable mortgage, and the courts decided that it was a pactto de retro sale.

o However, applicability still rests on the bona fire intent of the seller a retro, if he truly believed that the transaction was an equitable mortgage.

o It doesn’t matter what the buyer intended the transaction to be.

III. Legal Redemption A. Definition (Article 1619) Article 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title.



(1521a)

• Legal redemption is in the nature of a privilege created by law partly for reasons of public policy and partly for the benefit and convenience of the redemptioner, to afford him a way out of what might be a disagreeable or [an] inconvenient association into which he has been thrust. It is intended to minimize co-‐ownership. xFernandez v. Tarun, 391 SCRA 653 (2002).1

1. Rationale For Legal Redemption • Reasons of public policy • Benefit and convenience of redemptioner, to afford him a way

out of what might be an inconvenient association • Intended to minimize co-‐ownership

o Law grants a co-‐owner the exercise of said right of redemption when shares of other owners are sold to a third person

• Once property is subdivided and distributed among the co-‐owners, no more reason to sustain any right of legal redemption. Avila v. Barabat, 485 SCRA 8 (2006)

2. Salient Distinctions Between Conventional And Legal Right Of

Redemption

Conventional (“right a retro”) Legal (“subrogation”) Can only be constituted by express reservation in a contract of sale at

Does not have to be expressly reserved, covers other onerous

1 Basa v. Aguilar, 117 SCRA 128 (1982).

time of perfection transfers of title In favor of the seller �Given to a third-‐party to the sale.

Exercise extinguishes the underlying contract of sale, as though there was never any

contract at all

Constitutes a new sale in substitution of the original sale

B. Legal Redemption Rights Under The Civil Code

1. Among Co-‐Heirs (Article 1088) Article 1088. Should any of the heirs sell his hereditary rights to a stranger before the partition, any or all of the co-‐heirs may be subrogated to the rights of the purchaser by reimbursing him for the price of the sale, provided they do so within the period of one month from the time they were notified in writing of the sale by the vendor. (1067a)

• No right of legal redemption available to co-‐heirs when sale covers a particular property of the estate.

• Redemption right pertain to disposition of right to inherit, and not when there is a sale of a particular property of the estate. xPlan v. Intermediate Appellate Court, 135 SCRA 270 (1985).

• When the heirs have partitioned the estate among themselves and each have occupied and treated definite portions thereof as their own, co-‐ownership has ceased even though the property is still under one title, and the sale by one of the heirs of his definite portion cannot trigger the right of redemption in favor of the other heirs. xVda. De Ape v. Court of Appeals, 456 SCRA 193 (2005).



• The heirs who actually participated in the execution of the extrajudicial settlement, which included the sale to a third person of their pro indiviso shares in the property, are bound by the same; while the co-‐heirs who did not participate are given the right to redeem their shares pursuant to Article 1088. xCua v. Vargas, 506 SCRA 374 (2006).

2. Among Co-‐Owners (Article 1620)

Article 1620. A co-‐owner of a thing may exercise the right of redemption in case the shares of all the other co-‐owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. Should two or more co-‐owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common. (1522a)

• The right of redemption may be exercised by a co-‐owner only when part of the community property is sold to a stranger, now when sold to another co-‐owner because a new participant is not added to the co-‐ownership. xFernandez v. Tarun, 391 SCRA 653 (2002).

o Should two or more co-‐owners desire to exercise the right of redemption, they may do so only in proportion to the share they have in the co-‐owned thing.

o Right of redemption of co-‐owners excludes adjoining owners. Article 1623(2)

• When the seller a retro dies, the right to redeem cannot be exercised by a co-‐heir alone, since the right to redeem belonged in common to all the heirs. xDe Guzman v. Court of Appeals, 148 SCRA 75 (1987).

• Redemption by co-‐owner redounds to the benefit of all other co-‐owners. xMariano v. Court of Appeals, 222 SCRA 736 (1993); and the 30-‐day period for the commencement of the right to exercise the legal redemption right, even when such right has been recognized to exist in a final and executory court decision, does not begin from the entry of judgment, but from the written notice served by the seller to the party entitled to exercise such redemption right. Guillen v. Court of Appeals, 589 SCRA 399 (2009).

• The requisites for the exercise of legal redemption are as follows: (1) there must be co-‐ownership; (2) one of the co-‐owners sold his right to a stranger; (3) the sale was made before the partition of the co-‐owned property; (4) the right of redemption must be exercised by one or more co-‐owners within a period of thirty days to be counted from the time he or they were notified in writing by the co-‐owner vendor; and (5) the vendee must be reimbursed the price of the sale. Calma v. Santos, 590 SCRA 359 (2009).

3. Effect Of De Facto Partition Among Co-‐Heirs And Co-‐Owners • When the heirs have partitioned the estate among themselves

and each have occupied and treated definite portions thereof as their own, co-‐ownership has ceased even though the property is still under one title, and the sale by one of the heirs of his definite portion cannot trigger the right of redemption in favor



of the other heirs. Vda. De Ape v. Court of Appeals, 456 SCRA 193 (2005)

• For the right of redemption to be exercised, co-‐ownership must exist at the time of the conveyance is made by a co-‐owner and the redemption is demanded by the other co-‐owner or co-‐owners. xAvila v. Barabat, 485 SCRA 8 (2006).

4. Distinguishing Between Right Of Redemption Of Co-‐Heirs And

Co-‐Owners – • Article 1620 includes the doctrine that a redemption by a co-‐

owner of the property owned in common, even when he uses his own fund, within the period prescribed by law inures to the benefit of all the other co-‐owners. xAnnie Tan v. Court of Appeals, 172 SCRA 660 (1989).1

• Article 1088, the heir may redeem for himself the heredity rights sold by a co-‐heir.

• Mariano v. Court of Appeals, 220 SCRA 716 (1993) " co-‐heir exercised legal redemption over parcel of land belonging to estate of decedent. Thus, which redemption clause to apply?

o Distinction between 1088 and 1620 o When sake of particular property or interest in

property, Article 1620. o When sale of hereditary right itself, Article 1088.

5. Among Adjoining Owners Of Rural Lands (Articles 1621)

Article 1621.

1 De Guzman v. CA, 148 SCRA 75 (1987); Adille v. CA, 157 SCRA 455 (1988).

The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land. This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (1523a)

• Right of redemption covers only “resale” and does not cover exchanges or barter of properties. De Santos v. City of Manila, 45 SCRA 409 (1972).

• Requisite to show property previously bought on “speculation” dropped. xLegaspi v. CA, 69 SCRA 360 (1976).

• Right of redemption covers only “resale” and does not cover exchanges or barter of properties xDe Santos v. City of Manila, 45 SCRA 409 (1972); and cannot arise unless both adjacent lands are rural lands. xPrimary Structures Corp. v. Valencia, 409 SCRA 371 (2003).

• When there is no issue that when the adjoining lands involved are both rural lands, then the right of redemption can be exercised and the only exemption provided is when the buyer can show that he did not own any other rural land. But the burden of proof to provide for the exception lies with the buyer.



xPrimary Structures Corp. v. Valencia, 409 SCRA 371, 374 (2003).

6. Among Adjoining Owners of Urban Land (Article 1622)

Article 1622. Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-‐sold, the owner of any adjoining land has a right of pre-‐emption at a reasonable price. If the re-‐sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price. When two or more owners of adjoining lands wish to exercise the right of pre-‐emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (n)

• Ortega v. Orcine, 38 SCRA 276 (1971) " the purpose of this provision is to discourage speculation in real estate and the aggravation of the housing problems.

o “Urban” " refers to the character of the community or vicinity in which the land is found.

• Redemption of Urban land only applies when there is resale o No right of redemption when urban land is transferred

under “exchange” of properties.

• Legaspi v. Court of Appeals, 69 SCRA 360 (1976) " practically did away with requirement of having purchased land previously for speculation.

• Sen Po Ek Marketing v. Martinez, 325 SCRA 210 (2000) held that Article 1622 only deals with small urban lands bought for speculation.

o Right does not apply to a lessee trying to buy the land he is leasing.

7. Sale of Credit in Litigation (Article 1634) – 30 days from notice

of demand to pay. Article 1634. When a credit or other incorporeal right in litigation is sold, the debtor shall have a right to extinguish it by reimbursing the assignee for the price the latter paid therefor, the judicial costs incurred by him, and the interest on the price from the day on which the same was paid. A credit or other incorporeal right shall be considered in litigation from the time the complaint concerning the same is answered. The debtor may exercise his right within thirty days from the date the assignee demands payment from him. (1535) C. When Period of Legal Redemption Begins (Article 1623) Article 1623. The right of legal pre-‐emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall



not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners. The right of redemption of co-‐owners excludes that of adjoining owners. (1524a)

1. Kind Of Notice Contemplated By Law • Both the letter and the spirit of the law argue against any

attempt to widen the scope of the notice specified in the Civil Code to include any other kind of notice, such as verbal or by registration. Marinao v. Court of Appeals, 222 SCRA 736 (1993).1

o Neither the registration of the sale xCabrera v. Villanueva, 160 SCRA 627 (1988), nor the annotation of an adverse claim xVda. De Ape v. Court of Appeals, 456 SCRA 193 (2005), nor notice being given by the city treasurer xVerdad v. Court of Appeals, 256 SCRA 593 (1996), comply with the written notice required under Article 1623 to begin the tolling of the 30-‐day period of redemption.

• The written notice of sale is mandatory, notwithstanding actual knowledge of a co-‐owner, in order to remove all uncertainties about the sale, its terms and conditions, as well as its efficacy and status. xVerdad v. Court of Appeals, 256 SCRA 593 (1996).

• Notice to minors may validly be served upon parents even when the latter have not been judicially appointed as guardians since

1 Citing Hernaez v. Hernaez, 32 Phil. 214 (1915); Castillo v. Samonte, 106 Phil. 1024 (1960).

the same is beneficial to the children. xBadillo v. Ferrer, 152 SCRA 407 (1987).

• The notice required under Article 1623 is deemed to have been complied with when the other co-‐owner has signed the Deed of Extrajudicial Partition and Exchange of Shares which embodies the disposition of part of the property owned in common. xFernandez v. Tarun, 391 SCRA 653 (2002).

• The existence of a clause in the deed of sale to the effect that the vendor has complied with the provisions of Article 1623, cannot be taken to “being the written affirmation under oath, as well as the evidence, that the required written notice to petitioner under Article 1623 has been meet, for the person entitled to the right is not a party to the deed of sale. xPrimary Structures Corp. v. Valencia, 409 SCRA 371 (2003).

2. Counting Of The Period • The 30-‐day period for the commencement of the right to

exercise the legal redemption right, even when such right has been recognized to exist in a final and executory court decision, does not begin from the entry of judgment, but from the written notice served by the seller to the party entitled to exercise such redemption right. Guillen v. Court of Appeals, 589 SCRA 399 (2009).

• The interpretation of Article 1623 where there is a need for notice in writing, should always tilt in favor of the redemptioner and against the buyer, since the purpose is to reduce the number of participants until the community is terminated, being a hindrance to the development and better administration of the property. “It is a one-‐way street,” in favor of the



redemptioner since he can compel the buyer to sell to him but he cannot be compelled by the vendee to buy. xHermoso v. Court of Appeals, 300 SCRA 516 (1998).

3. Notice Must Cover Perfected Sale • The 30-‐day period does not begin to run in the absence of

written notification coming from the seller. xCua v. Vargas, 506 SCRA 374 (2006);1 and it must be a written notice of a perfected sale. xSpouses Doromal v. Court of Appeals, 66 SCRA 575 (1975).

• Notice must be with execution and delivery of the deed of sale. o Period should not be deemed to have commenced

unless notice is made after execution of formal deed of disposal.

• This doctrine cannot be applied to legal pre-‐emption.

4. Summation On Strict Rules On Article 1623 Concerning Notice • Francisco v. Boiser, 332 SCRA 305 (2000), summarized the case-‐

law on Article 1623, and with definitiveness declared: o For the 30-‐day redemption period to begin to run,

notice must be given by the seller; and that notice given by the buyer or even by the Register of Deeds is not sufficient. This expressly affirms the original ruling in Butte v. Manuel Uy and Sons, Inc., 4 SCRA 526 (1962), as affirmed in xSalatandol v. Retes, 162 SCRA 568 (1988). This expressly overruled the ruling in xEtcuban

1 Garcia v. Calaliman, 17 SCRA 201 (1989); Mariano v. Court of Appeals, 222 SCRA 736 (1993).

v. CA, 148 SCRA 507 (1987), which allowed the giving of notice by the buyer to be effective under Article 1623;

o When notice is given by the proper party (i.e., the seller), no particular form of written notice is prescribed under Article 1623, so that the furnishing of the copies of the deeds of sale to the co-‐owner would be sufficient, as held previously in xDistrito v. CA, 197 SCRA 606 (1991); Conejero v. CA, 16 SCRA 775 (1966); xBadillo v. Ferrer, 152 SCRA 407 (1987), but only on the form of giving notice but not on the ruling of who is the proper party to give notice;

o Affirmed ruling in xAlonzo v. Intermediate Appellate Court, 150 SCRA 259 (1987), that the filing of the suit for ejectment or collection of rentals against a co-‐owner actually dispenses with the need for a written notice, and must be construed as commencing the running of the period to exercise the right of redemption, since the filing of the suit amounted to actual knowledge of the sale from which the 30-‐day period of redemption commences to run.

Francisco v. Boiser

Facts: Petitioner Adalia Francisco and three of her sisters, Ester, Elizabeth, and Adeluisa, were co-‐owners of four parcels of registered land in Caloocan City. On August 1979, they sold 1/5 of their undivided share to their mother, Adela Blas, for PhP10,000, making her a co-‐owner of the real property to that extent.



7 years later, in 1986, however, Adela sold her 1/5 share for PhP10,000 to respondent Zenaida Boiser, another sister of petitioner. In 1992 or 6 years after the sale, Adalia received summons with a copy of a complaint by Zenaida demanding her share in the rentals being collected from the tenants of the Ten Commandments Building, which stands on the co-‐owned property. Adalia then informs Zenaida that she was exercising her right of redemption as co-‐owner of the subject property, depositing for that purpose PhP10,000 with the Clerk of Court The case was however dismissed after Zenaida was declared non-‐suited, and Adalia’s counterclaim was thus dismissed as well. 3 years after, Adalia institutes a complaint demanding the redemption of the property, contending that the 30-‐ day period for redemption under Art. 1623 had not begun to run against her or any of the other co-‐owners, since the vendor Adela did not inform them about the sale, which fact they only came to know of when Adalia received the summons in 1992. Zenaida on the other hand contends that Adalia already knew of the sale even before she received the summons since Zenaida had informed Adalia by letter of the sale with a demand for her share of the rentals three months before filing suit, attaching to it a copy of the deed of sale. Adalia’s receipt of the said letter is proven by the fact that within a week, she advised the tenants of the building to disregard Zenaida’s letter-‐demand. The trial court dismissed the complaint for legal redemption, holding that Art. 1623 does not prescribe any particular form of notifying co-‐owners on appeal, the CA affirmed. Issue: Whether or not the letter-‐demand by Zenaida to Adalia, to which the deed of sale was attached, can be considered as sufficient

compliance with the notice requirement of Article 1623 for the purpose of legal redemption. Held: The petitioner points out that the case does not concern the particular form in which such notice must be given, but rather the sufficiency of notice given by a vendee in lieu of the required notice to be given by the vendor or prospective vendor. The text of Article 1623 clearly and expressly prescribes that the 30 days for making the redemption shall be counted from notice in writing by the vendor it makes sense to require that notice be given by the vendor and nobody else, since the vendor of an undivided interest is in the best position to know who are his co-‐owners, who under the law must be notified of the sale. Notice by the co-‐owner likewise removes all doubt as to the fact of the sale, its perfection, and its validity by not immediately notifying, or not notifying at all, a co-‐ owner, the vendor can delay or even effectively prevent the meaningful exercise of the right of redemption. However, it would be unjust in the case at bar to require the vendor Adela to serve notice of the sale, when the fact has already been established in both lower courts Adalia has effectively exercised her right when she deposited the P10,000 redemption price 7 days after receiving the summons.

5. Rare Exceptions: • Alonzo v. Intermediate Appellate Court, 150 SCRA 259 (1987)

As An Exception To Article 1088



o Situation where co-‐heirs lived with purchaser in the same lot, but the action was brought only after 13 years of knowing about the same. The co-‐heirs are deemed to have received actual notice of the same (even if no written notice). Laches seems to be the main principal.

o When the buyers took possession of the property immediately after the execution of the deed of sale in their favor and lived in the midst of the other co-‐owners who never questioned the same. xPilapil v. CA, 250 SCRA 560 (1995).

• Exception To The Exception (i.e. Exception To The Alonzo Doctrine) When the sale to the buyer was effected through the co-‐owner who acted as the broker, and never indicated that he would exercise his right to redeem. xDistrito v. CA, 197 SCRA 606 (1991).

• Verdad v. Court of Appeals, 256 SCRA 593 (1996) – Alonzo and Distrito are special exceptions

o Co-‐owner learned of the sale through city treasurer o Her exercise of right of redemption was timely: no

written notice of sale was ever given to her, thus the 30-‐day period had not yet run.

Summation On Strict Rules On Notice A. Hermoso v. Court of Appeals, 300 SCRA 516 (1998). Notice in writing is needed in 3 other species of legal redemption

1. Case where share of co-‐owners are sold to a third person 2. Redemption of adjoining rural land 3. Redemption of adjoining urban land.

• Interpretation in these cases tilts in favor of the redemptioner. • The written notice of sale is mandatory, notwithstanding actual

knowledge of a co-‐owner, in order to remove all uncertainties about the sale, its terms and conditions, as well as its efficacy and status. Verdad v. Court of Appeals, 256 SCRA 593 (1996)

o Written notice required was enacted to remove all doubts about the alienation.

B. Francisco v. Boiser, 332 SCRA 305 (2000) – Requirements under Article 1623

1. Notice must be given by seller in order for 30-‐day redemption period to run.

2. No particular form is prescribed. 3. Filing of suit for ejectment or collection of rentals dispenses

with need for written notice – filing of the suit amounts to actual knowledge of the sale.

• Other co-‐owner signs deed of partition embodying disposition of property – proper notice. Fernandez v. Tarun, 391 SCRA 653 (2002)

D. Other Legal Redemption Rights

1. Redemption in Patents (Sec. 119, C.A. 141) COMMONWEALTH ACT NO. 141 Section 119. Every conveyance of land acquired under the free patent or homestead provisions, when proper, shall be subject to repurchase by the applicant, his widow, or legal heirs, within a period of five years from the date of the conveyance.



• Sale within 5 years void even when in favor of homesteader’s

own child. • Right to repurchase is granted by law and need not be provided

for in the deed of sale. xBerin v. Court of Appeals, 194 SCRA 508 (1991).

• General Rule: Under the free patent or homestead provisions of the Public Land Act a period of five (5) years from the date of conveyance is provided, to be reckoned from the date of the sale and not from the date of registration in the office of the Register of Deeds. xLee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995).1

o Exception: Where homestead was sold at extrajudicial foreclosure, 5 year period begins to run after expiration of one year period of repurchase allowed in extrajudicial foreclosure.

• Section 119 of Public Land act should be read with Article 1616 of New Civil Code – there should be a return of the price/tender of payment.

o Mere notice of intent to redeem is insufficient.

2. Redemption in Tax Sales (Sec. 215, NIRC of 1997) NATIONAL INTERNAL REVENUE CODE OF 1997 Section 215. Forfeiture to Government for Want of Bidder. In case there is no bidder for real property exposed for sale as herein above provided or if the highest bid is for an amount insufficient to

1 Mata v. Court of Appeals, 318 SCRA 416 (1999).

pay the taxes, penalties and costs, the Internal Revenue Officer conducting the sale shall declare the property forfeited to the Government in satisfaction of the claim in question and within two (2) days thereafter, shall make a return of his proceedings and the forfeiture which shall be spread upon the records of his office. It shall be the duty of the Register of Deeds concerned, upon registration with his office of any such declaration of forfeiture, to transfer the title of the property forfeited to the Government without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer, or any one for him may redeem said property by paying to the Commissioner or the latter's Revenue Collection Officer the full amount of the taxes and penalties, together with interest thereon and the costs of sale, but if the property be not thus redeemed, the forfeiture shall become absolute.

3. Redemption by Judgment Debtor (Secs. 27-‐28, Rule 39, Rules of Civil Procedure)

1997 RULES OF CIVIL PROCEDURE Section 27. Who may redeem real property so sold. Real property sold as provided in the last preceding section, or any part thereof sold separately, may be redeemed in the manner hereinafter provided, by the following persons: (a) The judgment obligor; or his successor in interest in the whole or any part of the property;



(b) A creditor having a lien by virtue of an attachment, judgment or mortgage on the property sold, or on some part thereof, subsequent to the lien under which the property was sold. Such redeeming creditor is termed a redemptioner. (29a) Section 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. The judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, with the per centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment under which such purchase was made, the amount of such other lien, with interest. Property so redeemed may again be redeemed within sixty (60) days after the last redemption upon payment of the sum paid on the last redemption, with two per centum thereon in addition and the amount of any assessments or taxes which the last redemptioner may have paid thereon after redemption by him, with interest on such last named amount, and in addition, the amount of any liens held by said last redemptioner prior to his own, with interest. The property may be again, and as often as a redemptioner is so disposed, redeemed from any previous redemptioner within sixty (60) days after the last redemption, on paying the sum paid on the last previous redemption, with two per centum thereon in addition, and the amounts of any

assessments or taxes which the last previous redemptioner paid after the redemption thereon, with interest thereon, and the amount of any liens held by the last redemptioner prior to his own, with interest. Written notice of any redemption must be given to the officer who made the sale and a duplicate filed with the registry of deeds of the place, and if any assessments or taxes are paid by the redemptioner or if he has or acquires any lien other than that upon which the redemption was made, notice thereof must in like manner be given to the officer and filed with the registry of deeds; if such notice be not filed, the property may be redeemed without paying such assessments, taxes, or liens. (30a)

• Under Section 28, Rule 39 of the 1997 Rules of Civil Procedure, the period of redemption shall be “at any time within one (1) year from the date of registration of the certificate of sale,” so that the period is now to be understood as composed of 365 days, unlike the 360 days under the old provisions of the Rules of Court. xYsmael v. CA, 318 SCRA 215 (1999).

• In execution sales, the sheriff does not warrant the title to the property sold by him and it is not incumbent on him to place the purchaser in possession of the property.

o The rule of caveat emptor applies to execution sales. • Written notice must be given to the judgment debtor before the

sale of the property on execution, to give him the opportunity to prevent the sale by paying the judgment debt sought to be enforced and the costs which have been incurred. xTorres v. Cabling, 275 SCRA 329 (1997).



• Where there is a third-‐party claim, sheriff should demand from the judgment creditor who becomes the highest bidder, payment in cash of his bid instead of merely crediting the amount to the partial satisfaction of the judgment debt. xTorres v. Cabling, 275 SCRA 329 (1997).

4. Redemption in Extrajudicial Foreclosure (Sec. 6, Act 3135)

ACT NO. 3135 Section 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-‐four to four hundred and sixty-‐six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.

• This is the General Rule • Before the expiration of the 1-‐year redemption period within

which the judgment-‐debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to the possession of the subject matter.

• The Court may allow the purchaser to receive the rentals of the purchased property, but the purchaser is accountable to the judgment-‐debtor for that amount, and may be credited against

the redemption price when the said judgment debtor or mortgagor effects the redemption.

• The redemption of extra-‐judicially foreclosed properties is exercised within one (1) year from the date of the auction sale as provided for in Act 3135. xLee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995).

• The execution of a dacion en pago by sellers effectively waives the redemption period normally given a mortgagor. xFirst Global Realty and Dev. Corp. v. San Agustin, 377 SCRA 341 (2002).

5. Redemption In Judicial Foreclosure Of Mortgage (Sec. 47, R.A. 8791)

REPUBLIC ACT NO. 8791 Section 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially or extra-‐judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-‐judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in



accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

• Section 47(1) refers to foreclosures by banking institutions. • Section 47(2) is the Exception to Act 3135. • A stipulation to render the right to redeem defeasible by an

option to buy on the part of the creditor. Soriano v. Bautista, 6 SCRA 946 (1962).

Soriano v. Bautista

Facts: Bautista spouses mortgaged their lot to Soriano, who took possession thereof and cultivated the same. Pursuant to Par. 5 of their agreement, Soriano decided to buy the lot. Bautista refused to sell claiming that being mortgagors, they cannot be deprived of their right to redeem the property.

Issue: Whether or not Soriano may buy the mortgaged property of Bautista Held: YES. True that the transaction is a mortgage, which carried with it a customary right of redemption. However, the mortgagor’s right to redeem was rendered defeasible at the election of the mortgagees by virtue of Par. 5, allowing them the option to purchase the said lot. There is nothing immoral or illegal about such stipulation. It was supported by the same consideration as the mortgage contract and constituted an irrevocable continuing offer within the time stipulated. That being the case, Bautista spouses must be compelled to honor the sale. Doctrine:

• No right to redeem from a judicial foreclosure sale, except those granted by banks or banking institutions. xGSIS v. CFI, 175 SCRA 19 (1989).

• The one-‐year redemption period in the case of foreclosure is not interrupted by the filing of an action assailing the validity of the mortgage, so that at the expiration thereof, the mortgagee who acquires the property at the foreclosure sale can proceed to have title consolidated in his name and a writ of possession issued in his favor. xUnion Bank v. CAs, 359 SCRA 480 (2001).1

• After bank has foreclosed the property as highest bidder in the auction sale, the accepted offer of spouses-‐borrowers to “repurchase” the property was actually a new option contract,

1 Vaca v. CA, 234 SCRA 146 (1994).



and the condition that the spouses-‐borrowers will pay monthly interest during the one-‐year option period is considered to be the separate consideration to hold the option contract valid. xDijamco v. Court of Appeals, 440 SCRA 190 (2004).

• No right to redeem is granted to the debtor-‐mortgagor when there has been a judicial foreclosure of a real estate mortgage, except when the mortgagee is a bank or a banking institution.

• “Equity of Redemption” " the right of the defendant-‐mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within 90 days after the judgment becomes final, or even after the foreclosure sale but before the confirmation of it by the Court.

6. Redemption in Foreclosure by Rural Banks (R.A. No. 720) • If the land is mortgaged to a rural bank, mortgagor may redeem

within two (2) years from the date of foreclosure or from the registration of the sheriff's certificate of sale at such foreclosure if the property is not covered or is covered, respectively, by Torrens title. If the mortgagor fails to exercise such right, he or his heirs may still repurchase within five (5) years from expiration of the two (2) year redemption period pursuant to Sec. 119 of the Public Land Act (C.A. 141). xRural Bank of Davao City v. CA, 217 SCRA 554 (1993).1

7. Legal Right to Redeem under Agrarian Reform Code

REPUBLIC ACT NO. 3844

1 Heirs of Felicidad Canque v. CA, 275 SCRA 741 (1997).

Section 12. Lessee's Right of Redemption In case the landholding is sold to a third person without the knowledge of the agricultural lessee, the latter shall have the right to redeem the same at a reasonable price and consideration: Provided, That the entire landholding sold must be redeemed: Provided, further, That where these are two or more agricultural lessees, each shall be entitled to said right of redemption only to the extent of the area actually cultivated by him. The right of redemption under this Section may be exercised within two years from the registration of the sale, and shall have priority over any other right of legal redemption.

• Under Section 12 of R.A. 3844, as amended, in the event that the landholding is sold to a third person without the knowledge of the agricultural lessee, the latter is granted by law the right to redeem it within 180 days from notice in writing and at a reasonable price and consideration. xQuiño v. CA, 291 SCRA 249 (1998).2

2 Springsun Management Systems Corp. v. Camerino, 449 SCRA 65 (2005).

Documents

Chapter 13. Extinguishment of Sale