Absolute contract of sale is an equitable mortgage

Persida Acosta

Persida Acosta

Dear PAO,
I purchased a property from a friend. Originally, he mortgaged the property to a bank and I merely assumed the obligation to pay for it. We executed a Deed of Absolute Sale with a right to repurchase the property wherein I allowed the vendor a year to pay the amount I shelled out to redeem his property from the bank. He failed to do so. I gave him an additional three months to comply, in writing, but he still failed to do so. I initiated to proceed with the consolidation of the property’s title in my name and he opposed it, saying that our transaction is considered an equitable mortgage. What does he mean?

Sincerely yours,

Dear Tino,
For your information, an equitable mortgage is defined “as 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, there being no impossibility nor anything contrary to law in this intent.”

A contract of sale is presumed to be an equitable mortgage when any of the following circumstances enumerated in Article 1602 of the New Civil Code is present:

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 the right to repurchase is usually 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 benefits to be received by the vendee as rent or otherwise shall be considered as interest, which shall be subject to the usury laws.

In Rockville Excel International Exim Corporation v. Spouses Oligario Culla and Bernardita Miranda (G.R. No. 155718, 2 October 2009), the Honorable Supreme Court was confronted with an issue on whether a Deed of Absolute Sale executed by the parties is indeed a document pertaining to an absolute sale of a property or one that reflects an equitable mortgage. The Honorable Supreme Court then reiterated the above-provision of law and further stated that the same also applies to a contract that purports to be an Absolute Deed of Sale.

Accordingly, they said that for the presumption of an equitable mortgage to arise under Article 1602, two requisites must concur, viz.:

(a) That the parties entered into a contract denominated as a contract of sale; and,

(b) That their intention was to secure an existing debt by way of a mortgage.

The Honorable Supreme Court even added that, any of the circumstances laid down under Article 1602, not the concurrence nor an overwhelming number of enumerated circumstances, is sufficient to support the conclusion that an absolute contract of sale is in fact an equitable mortgage. The principle of law stating that in case of doubt, the least transmission of rights is highly favored was clearly applied in the situation.

Again, we find it necessary to mention that this opinion is solely based on the facts you have narrated and our appreciation of the same. The opinion may vary when the facts are changed or elaborated.

We hope that we were able to enlighten you on the matter.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to dearpao@manilatimes.net


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