I borrowed P100,000.00 from my friend with an interest of ten percent payable in 11 months for P10,000.00 each month. My friend also asked me to mortgage a lot to secure the loan. It was also stipulated in our agreement that if I fail to pay in any given month, the ownership of my lot will automatically transfer to my friend. On the seventh month, I failed to pay my loan because my son got sick, and I used the money to pay for the hospital bills. I tried to pay P20,000.00 the following month but my friend refused to receive the same. Instead, he told me that the property is already considered sold to him upon my failure to pay on the seventh month. Can I still recover my property? I am willing to pay the remaining balance of my loan as long as I can get my property back.
Yes. You can still get your property because the stipulation in your contract for the automatic appropriation of the property to your friend upon your failure to pay the loan is a pactum commissorium, which is null and void by law.
Article 2088 of the Civil Code of the Philippines prohibits pactum commissorium and provides that “[t]he 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.” The following are the elements of a pactum commissorium: “(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period” (Spouses Uy Tong vs. Court of Appeals; G. R. No. 77465, May 21, 1988; ponente, former Associate Justice Irene Cortes). “The essence of pactum commissorium is that ownership of the security will pass to the creditor by mere default of the debtor” (Sps. Solitarios vs. Sps. Jaque; G. R. No. 199852, November 12, 2014; ponente, Associate Justice Presbitero Velasco Jr.).
From the facts that you gave, it seems that all the elements of a pactum commissorium are present: (1) there is a creditor-debtor relationship between you and your friend; (2) a property was mortgaged as a security for the obligation; and (3) there is an automatic appropriation by your friend in case you defaulted in any of the monthly payments. Also, the Supreme Court has repeatedly held that “the only right of a mortgagee in case of non-payment of debt secured by mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. The mortgagor’s default does not operate to automatically vest on the mortgagee the ownership of the encumbered property, for any such effect is against public policy, as earlier indicated.” (Id.)
Simply put, your friend cannot automatically appropriate to himself the mortgaged property upon your failure to pay your obligation but he has the option to foreclose the mortgage and even purchase the same in a foreclosure sale. Nevertheless, since you are ready, willing and able to pay your outstanding debt, we find it unnecessary to foreclose the subject property.
We hope that we were able to answer your queries. Please be reminded that this advice is based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.
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.