We have a small lot back in our province in the name of my parents. When my mother became sick, my father entered into a contract with our neighbor wherein in exchange for an amount of money that we will borrow, my father agreed to entrust our land including the land title to our neighbor with an agreement that the land will be returned to us after the payment of our debt. However, since my mother’s hospital bills increased, we had a hard time getting money to pay our debt.
We were surprised one day when our neighbor claimed that the land is already his because of our failure to pay our debt as agreed upon in our contract. My father told me that he was unsure if there was anything written in the contract to that effect since he did not read everything. I want to know if it is true that our neighbor now owns our land. We would like to ask for your advice on our problem.
The claim of your neighbor that your parent’s property is automatically transferred to his name has no legal basis and is in fact in violation of the law. This is because the agreement between your father and your neighbor is one which is called a mortgage. And under this kind of agreement, the borrower provides to the lender or creditor a property, such as land, as a security for the fulfillment of the obligation to pay the amount borrowed. In turn, the property given as a security is protected by law through a prohibition against automatic transfer to creditor of the complete ownership over the property, 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)
It can be seen in the above-cited law that automatic transfer to his name of the property given as security to the principal obligation is prohibited even if there is a stipulation to the contrary.
This prohibited act of automatic transfer to the creditor of the property given as security by the debtor is what 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. Philippine Veterans Bank, G.R. No. 168523, March 9, 2011).
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. In case of the debtor’s failure to fulfil his obligation, the proper procedure involves undergoing a foreclosure proceeding wherein the subject property will be foreclosed and sold at a public sale where the proceeds of the sale will be used to satisfy the principal obligation.
Thus, to conclude, the insistence of your neighbor on automatically appropriating the property of your parents under mortgage without undergoing proper legal proceedings is void; thus, it carries no legal effect.
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