MORTGAGEMr. De Guzman

MORTGAGE> Contract  whereby  the  debtor  secures  to  the  creditor  the fulfillment of a principal obligation, specially substituting to such  security  immovable  property  or  real  rights  over immovable property which obligation shall be satisfied with the proceeds of sale of said property or rights in case the said obligation is not complied with at the time stipulated.

Derived from two French words “mort” and “gage”. “Mort” means “dead” and “gage” means “pledge”. Thus, a mortgage is “dead” or “unproductive pledge”. OBJECTS OF REAL MORTGAGE

1. immovables2. alienable real rights in accordance with the laws, imposed upon immovables* future property cannot be object of mortgage (Article 2124)1

 CHARACTERISTICS OF A MORTGAGE

1. Real – It requires delivery for its perfection.

2. Accessory – It can only exist if there is a principal obligation, which it secures. If the principal obligation is void, the mortgage is also void.

3. Subsidiary – Once the obligation has been paid or satisfied, the property must be released from the encumbrance imposed. The mortgage is answerable only if the principal obligation is not paid.

4. Unilateral - After perfection, it creates obligation to be performed by the mortgagee.

5. Indivisible – Even though the debt is divided among the debtors or their successors in interest of the debtor, or the credit among the creditors or successors in interest, the mortgage remains an undivided one.

6. Inseparable - The mortgage attaches to the property, regardless of who will be its subsequent owner or possessor.

7. Comprehensive – It can secure all kinds of obligations which are not void.

A mortgage does not involve a transfer, cession or conveyance of property but only constitutes a lien thereon.

1 Art. 2124. Only the following property may be the object of a contract of mortgage;(1) Immovables;(2) Alienable real rights in acoordance with the laws, imposed upon immovable.

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

RIGHT TO POSSESSION

General rule: The mortgagee has no right or claim to the possession of the property. Such possession is only a security for the payment of the sum borrowed. Hence, one’s status as a mortgagee cannot be the basis of possession.

Exception: If there is a stipulation to the contrary.

Note: It is not an essential requisite of a contract of mortgage that the property mortgaged remains in the possession of the mortgagor.

KINDS OF MORTGAGE:

1. Voluntary – one which is agreed to between the parties or constituted by the will of the owner of the property on which it is created

2. Legal – one required by law to be executed in favour of certain persons.

3. Equitable – one which, although it lacks the proper formalities of a mortgage shows the intention of the parties to make the property as a security for a debt.

Venus

ESSENTIAL REQUISITES OF A CONTRACT OF MORTGAGE / PLEDGE 1.  That they be constituted to secure the fulfillment of a principal obligation;2.  That the pledgor or mortgagor  be  the  absolute  owner  of  thing pledged or mortgaged 3.  That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. (Article 2085)2

4. That when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (Article 2087)3

SPECIAL REQUISITES FOR MORTGAGE

1. It can cover only immovable property and alienable real rights imposed upon immovable. (Article 2124)4

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

(1) That they be constituted to secure the fulfillment of a principal obligation;(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose.Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857)

3 Art. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists

may be alienated for the payment to the creditor. (1858)

4 Art. 2124. Only the following property may be the object of a contract of mortgage;

Note: While a mortgage of land necessarily includes, in the absence of a stipulation, the improvements thereon, a building itself may be mortgaged apart from the land on which it is built.

2. It must appear in a public instrument.

Effect when mortgage is in a private document: No valid mortgage is constituted. The creditor may recover the loan and has the right to compel the debtor to execute a contract of mortgage in a public instrument.

3. It must be recorded in the Registry of Property. Registration in the registry of property is necessary to bind third persons, but not for the validity of the contract. (Article 2125)5

The persons in whose favor the law establishes a mortgage has the right to demand the execution and the recording of the document in which the mortgage is formalized.

Order of foreclosure cannot be refused on the ground that the mortgage was not registered provided no innocent third parties are involved.

REGISTRATION OF MORTGAGE

Once the mortgage has been signed in due form (i.e. in a public instrument), the mortgagee is entitled to its registration as a matter of right. (Article 1357)6

SUBSEQUENT REGISTRATION OF AN ADVERSE CLAIM

A prior registration of a lien creates a preference. Hence, the subsequent annotation of an adverse claim cannot defeat the rights of the mortgagee or the purchaser at the auction sale whose rights are derived from a prior mortgage validly registered.

EFFECT OF REGISTRATION AS TO THE BETTER RIGHT OF THIRD PARTIES

A registered mortgage right over property previously sold is inferior to the buyer’s unregistered right.

Case: Maria Bautista Vda. De Reyes vs. Martin De Leon 20 SCRA 369

Facts: A property was sold. The sale was not recorded. Therefore, the seller mortgaged the same property to a third person. The mortgage was recorded.

(3) Immovables;(4) Alienable real rights in acoordance with the laws, imposed upon immovable.

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

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

between the parties. 6 Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form once the contract has been perfected. This right may be exercised simultabeously with the action upon the contract.

Issue: Between the unrecorded sale of prior date and a recorded mortgage thereof at a later date, which will prevail?

Held: The unrecorded sale is preferred for the reason that if the original owner had parted with his ownership of the thing sold, he no longer had the ownership and free disposal of that thing so as to be able to mortgage it.

EFFECT OF AN INVALIDITY OF MORTGAGE

If the mortgage contract is void, the principal obligation which is guaranteed is not affected at all. What is merely impaired is the mortgagee’s right to foreclose which is a convenient way of satisfying the principal obligation of the debtor to the creditor.

Even then, the deed of real mortgage remains useful as evidence to prove the personal obligation of the debtor to the creditor in an ordinary action for collection.

Mr. Chioco

EFFECTS OF MORTGAGE

1. It creates a real right. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it is constituted. (Article 2126)

Until discharged upon payment of the obligation, it follows the property wherever it goes and subsists notwithstanding change of ownership.

2. It creates merely an encumbrance. A mortgage is merely a security for a debt and an encumbrance upon the property. It does not extinguish the title of the debtor. The debtor remains the owner, i.e. he has the right to dispose.

The only right of a mortgagee in case of non-payment of a debt secured by a mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy outstanding indebtedness.

DOCTRINE OF MORTGAGEE IN GOOD FAITH

The doctrine provides that a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the property given as a security, and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation.

The doctrine presupposes, however, that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining a Torrens Title over the property.

The doctrine does not apply to a situation where the title is still in the name of the rightful owner and the mortgagor is different from the person pretending to be the owner. The mortgagee shall not be considered an innocent mortgagee for value and the registered owner will not lose his title.

DILIGENCE REQUIRED OF A MORTGAGEE-BANK

If the mortgagee is a bank or a financing institution, the general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the Torrens Certificate of Title does not apply.

It is settled that banks, their business being impressed with public interest are expected to exercise more care and prudence than private individuals in their dealings, even those involving registered lands.

Respondent Bank should have diligently conducted an investigation of the land offered as collateral. Since the subject land was not mortgaged by the owner thereof and since the Bank is not a mortgagee in good faith, said bank is not entitled to protection under the law (Arguelles v. Malarayat Rural Bank, INC. G.R. No. 200468, March 19, 2014).

Ms. Laurente

EXTENT OF MORTGAGE

General Rule: Mortgage extends to the following:

1. Natural Accessions;

2. Growing fruits;

3. Rents or income not yet received when the obligation becomes due; and

4. Amount of indemnity granted or owing to the proprietor from:

a. The insurers of the property managed; or

b. Expropriation for public use7

Reason: The ownership of such accessions and accessories and improvements subsequently introduced also belongs to the mortgagor who is the owner of the principal.

Exception:

1. An express stipulation excluding them; and

2. There is evidence sufficiently overthrowing the presumption that the mortgagor owns the mortgaged property.

Article 2127 of the Civil Code is irrelevant and inapplicable to mortgages and their foreclosures if the mortgagor is later found or declared to be not the true owners of the property.

BLANKET OR DRAGNET CLAUSE

It is specifically phrased to subsume all debts of pastor future origins. Mortgages of this character enable the parties to provide continuous dealings, the nature of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction.

7 Art. 2127. The mortgage extends to the natural accessions, to  the  improvements,  growing  fruits,  and  the  rents 

or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the insurers of the property mortgaged, or in   virtue   of   expropriation   for   public   use,   with   the declarations,  amplifications  and  limitations  established  by law,  whether  the  estate  remains  in  the  possession  of  the mortgagor,  or  it  passes  into  the  hands  of  a  third  person. (1877) 

Status: Valid

A mortgage with a dragnet clause is an “offer” by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made.

Exception: It can be said that the “offer” was not accepted by the bank when a subsequent advance was made because of a new security. A mortgage containing a “dragnet clause” will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor. In this case, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to.

Purpose: It operates as a convenience and an accommodation to the borrowers as it makes available additional funds without the parties having to execute additional security documents.

Note: Provisions of this nature are carefully scrutinized and strictly construed particularly when the mortgage contracts one of adhesion.

Ms. Lumague

ALIENATION OF MORTGAGE CREDIT

The mortgage credit may be alienated or assigned to a third person, in whole or in part, with the formalities required by law. (Article 2128)8

In this case, the assignee may foreclose the mortgage in case of non-payment by the debtor.

Note: Even if the alienation is not registered, it would still be valid as between the parties.

STIPULATIONS ON MORTGAGE CONTRACTS

1. Including after-acquired properties

Future property cannot be an object of a contract of mortgage. However, a stipulation subjecting to the mortgage lien, properties and improvements (after-acquired properties) added to a property already mortgaged which the mortgagor may subsequently acquire, install, or use in connection with real property already mortgaged belonging to the mortgagor is valid.

Status: VALID

Purpose: To maintain, to the extent allowed by the circumstances, the original values of the property given as security.

Such stipulation is common where the properties given as collateral are perishable or subject to inevitable wear and tear.

2. Blanket Or Dragnet Clause - already discussed

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

3. Forbidding Alienation Of Mortgaged Property

Status: Any stipulation forbidding the owner from alienating is VOID.

In case of alienation, the transferee is bound to respect the encumbrance because being a real right, the property remains subject to the fulfillment of the obligation for whose guaranty it was constituted.

4. Stipulation requiring mortgagee’s consent before alienation

Status: VALID and binding only in the sense that the mortgagee cannot be compelled to recognize the sale while the loan is unpaid.

The sale of the property does not affect the right of the registered mortgagee to foreclose on the same even if ownership has been transferred to another.

Note: Such stipulation nonetheless contravenes public policy, being an undue impediment or interference on the transmission of property.

5. Grant of First Refusal

Status: VALID

The consideration for the loan –mortgage may be said to include the consideration for the right of first refusal.

Note: A sale made in violation of the mortgagee’s contractual right of first refusal is rescissible. The buyer is presumed to have been notified thereof by the registration of the mortgage deed containing such stipulation, which equates to notice to the whole world.

6. Acceleration Clause

A stipulation stating that on the occasion of the mortgagor’s default, the whole sum remaining unpaid automatically becomes due and payable.

Status: It is VALID.

7. Stipulation to Upset Price or “TIPO”

An Upset Price or TIPO is the minimum price at which the property shall be sold at a public auction.

Status: VOID

A stipulation in the mortgage of real property providing for a Upset Price, to become operative in the event of a foreclosure sale at public auction, is null and void because property must be sold to the highest bidder.

Parties cannot, by agreement, contravene the law and interfere with the lawful procedure of the courts.

SPECIAL RIGHTS

⇒ Rights of a Mortgagor

To alienate the mortgaged property but the mortgage shall remain attached to the property.

(Article 2130)9

⇒ Rights of a Mortgagee

To claim from a third person in possession of the mortgaged property the payment of the part of the credit secured by the property which said third person possesses. (Article 2129)10

Prior demand must have been made on the debtor and the latter failed to pay.

INSURANCE OF THE PROPERTY

The mortgagee and the mortgagor both have insurable interest in the property. They may insure the same.

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

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