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February 9, 2016 (Part 1)

Take note of the different kinds of Mortgages:


1.
2.
3.

Voluntary or Conventional Mortgage


Legal Mortgage
Equitable Mortgage (Article 1602)

Objects of Real Estate Mortgage:


1.
2.

Immovables
Alienable Real Rights

Article 2124. Only the following property may be the object


of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws,
imposed upon immovables.
Nevertheless, movables may be the object of a chattel
mortgage. (1874a)

mortgagee-creditor because by the mortgage, the debtor


merely subjects the property to a lien but ownership is not
parted with.
It is not an essential requisite that the mortgaged property
remains in the possession of the mortgagor. Therefore, it is
possible by agreement between the parties that the
possession of the property be transferred to the mortgagee
without altering the nature of the contract. But again, such
transfer of possession is not necessary for the perfection of
the mortgage.
Article 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.
The persons in whose favor the law establishes a
mortgage have no other right than to demand the execution
and the recording of the document in which the mortgage is
formalized. (1875a)

Article 2124 is clear. By the word only, it means that the


list in the said article is exclusive.
Likewise, we have emphasized last time the importance
determining whether your property is an immovable or not.
The building in itself is an immovable and in fact can be
subject of a real estate mortgage separate from the land on
which it stands.
PLEDGE
Involves personal property
Real Contract- there is
transfer or cession

The pledgee has the right to


receive the fruits
Extrajudicial in nature
Must be in a public instrument
indicating the date of the mortgage
and a description of the thing
pledged in order to bind third
persons (registration not needed)

Article 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;

REAL ESTATE MORTGAGE (2) That the pledgor or mortgagor be the absolute owner of
Involves real property
the thing pledged or mortgaged;
It is not necessary that a
mortgagee must be in possession
(3) That the persons constituting the pledge or mortgage
of the property mortgaged for the
have the free disposal of their property, and in the absence
validity of the said accessory
thereof, that they be legally authorized for the purpose.
contract
No such right exists unless
Third persons who are not parties to the principal obligation
otherwise stipulated
may secure the latter by pledging or mortgaging their own
Judicial or Extrajudicial
Must be registered in the Registry
property. (1857)
of Property in order to bind third
persons
Notice here that Article 2125 requires that the Deed of Real

It is not required that the mortgagee be in possession of


the mortgaged property. Ones status as a mortgagee
cannot be the basis of possession. As a basic rule, the
mortgagor retains possession of the property mortgaged as
a security for the payment of the sum borrowed from the

Estate Mortgage or document be registered in the Registry


of Property.
What is the effect is the Real Estate Mortgage is not
registered? What happened in Tan vs Valdehueza?
LUCIA TAN vs ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA

Facts: The parcel of land described in the first cause of


action was the subject matter of the public auction sale
held on May 6, 1955 wherein Tan was the highest bidder
and as such a Certificate of Sale was executed in favor of
LUCIA TAN. Due to the failure of defendant Arador
Valdehueza to redeem the said land within the period of
one year as being provided by law, the Sheriff executed an
ABSOLUTE DEED OF SALE in favor of the plaintiff LUCIA
TAN.

The intention of these documents was to secure the


obligation of Valdehuezas, having remained in possession
of the land and the realty taxes having been paid by them.
These transactions purported to be pacto de retro sale are
presumed to be equitable mortgages, applying Article 1602
of the Civil Code. Regardless of its registration, again, we
have an equitable mortgage here. We have a valid
mortgage even if it is not registered, there being no third
parties involved.

ARADOR VALDEHUEZA and REDICULO VALDEHUEZA


have executed two documents of DEED OF PACTO DE
RETRO SALE in favor of LUCIA TAN of two portions of a
parcel of land.

In the Old Civil Code, registration is necessary for the


validity of the mortgage. However, it is already clear under
Article 2125 that even if the instrument is not recorded, the
mortgage is nonetheless binding between the parties. The
fact that the mortgage is annotated or is registered is only
to affect third persons. In the absence of such annotation
or registration, third persons dealing with the property are
not bound by the mortgage because under the Torrens
System, third parties are only charged with the knowledge
of those encumbrances placed on the title as well as their
actual knowledge.

From the execution of the Deed of Sale with right to


repurchase, Arador Valdehueza and Rediculo Valdehueza
remained in the possession of the land and land taxes to
the said land were paid by them.
The Deed of Pacto de Retro (dated August 5, 1955) was
not registered in the Registry of Deeds, while the Deed of
Pacto de Retro referred to as "Annex E" (dated March 15,
1955) was registered
ISSUE: Was there a valid mortgage? (YES)
HELD: The trial court treated the registered deed of pacto
de retro as an equitable mortgage but considered the
unregistered deed of pacto de retro "as a mere case of
simple loan, secured by the property thus sold under pacto
de retro," on the ground that no suit lies to foreclose an
unregistered mortgage. It would appear that the trial judge
had not updated himself on law and jurisprudence; he
cited, in support of his ruling, article 1875 of the old Civil
Code and decisions of this Court circa 1910 and 1912.
Under article 1875 of the Civil Code of 1889, registration
was a necessary requisite for the validity of a mortgage
even as between the parties, but under article 2125 of the
new Civil Code (in effect since August 30,1950), this is no
longer so. 4 If the instrument is not recorded, the mortgage
is nonetheless binding between the parties. (Article 2125,
2nd sentence).
The Valdehuezas having remained in possession of the
land and the realty taxes having been paid by them, the
contracts which purported to be pacto de retro transactions
are presumed to be equitable mortgages, 5 whether
registered or not, there being no third parties involved.
Here, the parties executed two documents of pacto de retro
sale. However, it appears that the defendants remained in
possession of the land and the taxes were paid by them.

Again, mortgage here can be binding between the parties


but in the absence of registration, it is not binding against
third persons. Notice that it is one of the differences or
distinctions between a real estate mortgage and a pledge.
The requirement in pledge in order to bind third persons is
that it must be in a public instrument indicating the date of
the pledge and the description of the thing pledged. On the
other hand, in a real estate mortgage, the requirement is
that it must be duly registered with the Registry of Deeds to
bind third persons.
With regard to the last paragraph of Article 2125, this
applies to legal or equitable mortgages.
Article 2125. x x x
The persons in whose favor the law establishes a
mortgage have no other right than to demand the execution
and the recording of the document in which the mortgage is
formalized. (1875a)
Here, for example, in a pacto de retro sale which is actually
an equitable mortgage, the mortgagor can seek the
execution and the recording of the instrument to formalize
the mortgage. Considering that the intention of the parties
is to have the property mortgaged, the mortgagee cannot
appropriate the thing subject of the mortgage. What he has
is the right to have the execution and recording thereof. He
can also file an action to have the mortgage registered.
With regard to the perfection of a real estate mortgage, you
may notice that in the first part of the discussion of De

Leon, the characteristics that was mentioned of a mortgage


is that it is real, accessory and subsidiary. When you real it
means that the contract is perfected by delivery. But in a
contract of mortgage under Article 2125, delivery is not
necessary for its perfection. So dalawa na lang, either
consensual or formal/solemn contract. If you remember the
case of Hechanova vs Adil, it was stated therein that no
valid mortgage is constituted where the deed of mortgage
is a mere private document and therefore, not registered.
However, if you also look at the same case as well as the
provision under Article 2125, even if that case held that the
mortgage is void, there is a discussion that the mortgagee
may demand the reduction of the mortgage in a public
instrument. So, if you say it is really void, diba if a contract
is void, no rights can arise. Take a look again at Article
2125.
Article 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.
xxx
So as long as there is an instrument, then you have a
perfected contract of mortgage.
At the most, what we could say is that it is a FORMAL
CONTRACT; that it must be, at the very least, in writing in
order to bind the parties. However, again, if you try to take
a look at the cases or at the discussion or the provisions
under the Civil Code, there is no express provision or ruling
that would really indicate that for a valid mortgage, it must
be in writing or it must be perfected by consent or there
must be delivery.
Trying to summarize everything that we have discussed,
we could say that at the very least, it must be in an
instrument, in writing to bind the mortgagor and the
mortgagee.
Why is it that there was not much emphasis on this one?
First, we have the right between the parties to demand
execution and recording of the document. This is relevant
because in the absence of the proper document or
recording it or duly executing it before the notary public and
recording it with the Registry of Deeds, hindi mo rin maforeclose. If it is made orally or verbally, you cannot
foreclose it. You must have some document that would

establish your right to demand execution and the proper


recording of the document to formalize the mortgage.
Mortgage, again, is necessary in the sense that it is a
security to the principal obligation. You need this mortgage
so that in case there is default on the part of the debtor,
you can foreclose it. Yun naman yung end dito, di ba?
Foreclosing. You can foreclose it after the proper
registration of the document.
Just take note of that as we go further with our discussions.
If the mortgage is not registered but it is in a public
instrument, it is binding between the parties because again,
registration only operates as a notice of the mortgage to
others but it does not add any validity nor does it convert
an invalid mortgage into a valid mortgage between the
parties.
STATE INVESTMENT vs CA (1996)
FACTS: A contract to sell was executed by Spouses Oreta,
and the Solid Homes, Inc. (SOLID), involving a parcel of
land.
SOLID executed several real estate mortgage contracts in
favor of State Investment over its subdivided parcels of
land, one of which is the subject lot. For failure of SOLID to
comply with its mortgage obligations contract, STATE
extrajudicially foreclosed the mortgaged properties
including the subject lot.
SOLID thru a MOA negotiated for the deferment of
consolidation of ownership over the foreclosed properties
by committing to redeem the properties from STATE.
Thereafter, the spouses filed a complaint before the
HLURB, against SOLID and STATE for failure on the part
of SOLID to execute the necessary absolute deed of sale
as well as to deliver the title to said property despite full
payment of purchase price.
STATE averred that unless SOLID pays the redemption
price of P 125,195.00, it has a right to hold on and not
release the foreclosed properties.
ISSUE: Who between the Spouses Oreta and STATE have
better right over the subject lot? (SPOUSES ORETA)
HELD: STATE's registered mortgage right over the
property is inferior to that of respondents-spouses'

unregistered right. The unrecorded sale between


respondents-spouses and SOLID is preferred for the
reason that if the original owner (SOLID) had parted with
his ownership of the thing sold then he no longer had
ownership and free disposal of that thing so as to be able
to mortgage it again. Registration of the mortgage is of no
moment since it is understood to be without prejudice to
the better right of third parties.

In this case, petitioner was well aware that it was dealing


with SOLID, a business entity engaged in the business of
selling subdivision lots. We take judicial notice of the
uniform practice of financing institutions to investigate,
examine and assess the real property offered as security
for any loan application especially where, as in this case,
the subject property is a subdivision lot located at Quezon
City, M.M. It is a settled rule that a purchaser or mortgagee
cannot close its eyes to facts which should put a
reasonable man upon his guard, and then claim that he
acted in good faith under the belief that there was no defect
in the title of the vendor or mortgagor. Petitioner's
constructive knowledge of the defect in the title of the
subject property, or lack of such knowledge due to its
negligence, takes the place of registration of the rights of
respondents-spouses.
Q1: Is the mortgage in favor of State Investment
registered?
A1: Yes. However the Supreme Court held here that the
registration of the mortgage is of no moment since it is
understood to be without prejudice to the better right of
third parties.
Q2: What do you mean by that?
A2: (?)
Q3: Was there a valid mortgage between Solid and State
Investment?
A3: No.
Q4: Are all the requisites present for a valid real estate
mortgage?

A4: No. There was no absolute ownership and free


disposal of the thing mortgaged.
Q5: So what is the effect of the registration?
A5: The registration did not bind third persons.
Q6: Can State Investment be considered as a mortgagee
in good faith considering that the sale in favor of Sps Oreta
was not registered?
A6: No. Since they are involved in the business of
investment, they must take necessary precautions to
ascertain if there was any flaw in the title of the mortgage.
Notice here that States mortgage was registered.
Nevertheless, the Supreme Court held that its registered
mortgage is inferior to that of respondent spouses
unregistered right. It was submitted here that if the original
owner SOLID has parted with the ownership of the thing
sold, then he no longer has ownership.
Take note, the contract executed between Spouses Orbeta
and SOLID was a contract to sell. In a contract to sell,
ownership is not yet transferred it is subject to a condition
which is the full payment of the purchase price. In fact, in
this case, Solid was demanded by the spouses to execute
the necessary absolute deed of sale. Looking at the facts,
ownership was not yet transferred. Nevertheless, it is still
not a valid mortgage because there is a failure to comply
with the third requisite: FREE DISPOSAL.
Here, even if we assume that Solid remains the owner of
the subject property, it had no free disposal of the thing so
as to be able to mortgage it again. Registration of the
mortgage is of no moment (no effect; it will not cure the
invalidity of the mortgage) since it is understood to be
without prejudice to the better right of third parties.
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