I had a friend who regularly borrows money from me. He went to see me again about two years ago to borrow a huge amount of cash. Because of the rising amount of his total debts, we agreed that he will mortgage to me his rest house in the province. We agreed that this will be the security of his loan and that I will become the owner of his property if he is unable to pay his loan on the date we agreed on.
Three months have passed from the due date of his loans and he is still unable to pay me back. I then prepared a document for him to sign that I am now the owner of his mortgaged property because of his failure to pay me on time. He now refuses to sign it and says that I cannot own the property he mortgaged to me.
I want to ask now if I can insist that he sign the document to acknowledge that I am the owner of his property considering that we already had an agreement that I will be the owner of his mortgaged rest house effective immediately after his delay in payment. I hope you can clarify this matter. Thank you.
You cannot legally oblige your debtor to transfer ownership to your name of his property that he mortgaged to you. The law expressly prohibits creditors from appropriating pieces of property that are subject of a mortgage, to wit:
“Article 2085: 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 ” (Civil Code of the Philippines).
The property provided by your debtor in your mortgage agreement is intended as a security for the fulfilment of his obligation to pay his debts. This mortgaged property is protected by law against automatic transfer of ownership to the creditor as seen from the above-cited law.
This prohibited act of automatic transfer to the creditor of the property given as security by the debtor is called pactum commisorium. According to the Supreme Court, pactum commisorium exists when there is an agreement giving the creditor the right to automatically claim the property given as security to the principal obligation in case the debtor fails to pay without undergoing foreclosure proceedings and public sale (Edralin v. PhilippineVeterans Bank, G.R. No. 168523, March 9, 2011).
Your agreement with your debtor that his mortgaged property will be transferred to you if he fails to fulfill his obligation has no legal effect since the law also specifically provides that agreements or stipulations allowing pactum commisorium are null and void (Art. 2085, Civil Code of the Philippines ). This kind of agreement in mortgage is prohibited by law as it prevents the debtor to have a fair opportunity to recover the property given as a security to the principal obligation.
Lastly, in case of a debtor’s failure to fulfill his obligation, the proper procedure involves undergoing a foreclosure proceeding wherein the mortgaged property will be foreclosed and sold at a public sale where the proceeds of the sale will be used to satisfy the principal obligation that is owed the lender.
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 email@example.com