Real Estate Mortgage (REM)

Definition
A contract where the debtor secures to the creditor the fulfillment of a
principal obligation by subjecting to such security immovable property or
real rights in case the principal obligation is not complied with.

Essential characteristics
1. Accessory and subsidiary contract

2. Unilateral, as the only obligation is for the creditor to free the property
from encumbrance upon payment
3. Mortgagor retains possession of the property in general

N.B: pactum non alienando is void (prohibition for the mortgagor to

dispose the property)
4. Over immovable or alienable real rights over immovables

5. REM must appear in a public document recorded in the ROP

If not registered, just binding between the parties
6. REM is a real right that attaches to the property

Thus, the REM is both a real right and real property by itself

7. Mortgagor must be the absolute owner of the property; otherwise, it is

void

Distinguish a REM vs. a pacto de retro sale

Effects of a REM
o It subsists until after payment of obligation.

o The right of the mortgagee in case of non-payment is foreclosure of

the REM. Pactum commissorium is against public policy.

Extent of a REM

o General Rule: REM is not limited to the property itself, but also its:

1) accessions,

2) improvements,

3) growing fruits,

4) rents, income,
 5) proceeds of insurance in case it perishes, or

6) expropriation value if condemned.

o EXCEPT: contrary stipulation.

Assignability of a REM

o The REM can be alienated or assigned; and the mortgagees

assignee/transferee is entitled to foreclose the mortgage in case of non-
payment of the obligation.

Effect if mortgagor transfers the property

o 1. Transfer does not relieve mortgagor-debtor from his obligation to pay

the debt to the creditor, UNLESS there is novation.

o 2. REM follows the property. Hence, creditor-mortgagee must make

demand against the debtor. If the latter cannot pay, then the creditor
can demand payment from the possessor of the property (transferee),
and foreclose thereafter if there is non-payment.

REM Foreclosures

1. Judicial foreclosure under Rule 68 of the ROC.

o GR: No right of redemption

No right of redemption under judicial foreclosure, but there is

equity of redemption where the mortgagor is given the chance to
pay the debt within the 90 days period after the judgment
becomes final OR after the foreclosure sale but before
confirmation.
o EXCEPTION: There is redemption, however, if the mortgagee is a
banking institution (1 year for natural person mortgagors and 3
months/before registration whichever comes first for juridical person
mortgagors)

2. Extrajudicial foreclosure under Act 3135.

o Specific power required

EJ foreclosure only applies when the mortgagee is given

specific power or express authority to foreclose.
If there is none, there can be no EJ foreclosure.

o Venue of auction
 Province where the property is found
o Strict notice requirements

1. Posting of notice of sale in 3 public places in the province where the

property is found

2. Publication in a newspaper of general circulation 1x a week for 3

consecutive weeks

If the sale is postponed, republish.

Notice requirements not subject to waiver.

Personal notice to the mortgagor generally not required; unless

contract requires it.

o Period of redemption

General Rule: Within 1 year from date of sale. If the land is

registered property, then from registration of certificate of sale.

Exception: if the mortgagor is a juridical person and the mortgagee

is a bank, quasi-bank, or trust entity, then redemption is only
within 3 months from foreclosure or registration of certificate of
sale with the Registry of Deeds, whichever comes first.

o Requirements for valid redemption

1. Exercise within proper period

2. Payment of purchase price of property plus 1% interest per
month

Taxes with same 1% interest if paid by purchaser

3. Written notice of redemption served on officer who made the

sale, and duplicate filed with Registry of Deeds

Mortgagees right to recover deficiency post-foreclosure

o Mortgagee may recover deficiencies if the proceeds of the foreclosure sale
are insufficient. The action to recover the deficiency prescribes after 10
years.

Three mutually exclusive options of the mortgagee in case of

mortgagors death:

o 1. Waive mortgage and pursue claim against estate as an ordinary

claim
 o 2. Judicial foreclosure of the mortgage, and recover deficiency, if any as an
ordinary claim against the estate

o 3. Rely on the mortgage exclusively (e.g. EJ foreclosure), without right

to file claim for deficiency

Effect of a mortgagor filing a collection suit

o It bars foreclosure of mortgage. The creditor cannot avail both remedies

because it is in essence a splitting of his cause of action into two.
Splitting of a single cause of action is prohibited under the ROC.

Nature of a writ of possession before end of the redemption period

o The purchaser at a foreclosure sale may petition for a writ of possession

within the redemption period by filing an ex parte motion under oath.

o Purchaser must file a bond. Upon approval of the bond thereafter, the
court must issue a writ of possession. It is a matter of course and not a
matter of discretion.

o Since, its ex parte, any questions regarding the validity of the sale, the
mortgage, etc. must be tried in separate proceedings.

Nature of a writ of possession after end of the redemption period

o When ownership has been consolidated, at the end of the redemption

period, the purchaser at the foreclosure sale may file a writ of possession.

o Here, a bond is no longer necessary because he is the absolute owner

already.

Question: Can an ex-parte writ of possession be enforced against a third

party who is in actual possession of the foreclosed property but is not in
privity with the mortgagor?

o Answer: No, it cannot. Under Art. 433 of the NCC, one who claims to
be owner of a property possessed by another must bring appropriate
judicial action in this case, it must be an action for ejectment.

o To rule otherwise would unduly prejudice the third person who did not
have a chance to oppose the claim, since the proceedings to issue a writ
of possession are ex parte.

o Remedy of said third parties:

Two options:
 a) terceria where he serves upon the sherif an affidavit of his title and
a copy is given to the judgment creditors; in this case, the officer is not
bound to keep the property; or

b) independent separate action, to recover ownership and possession of

the contested property (Rule 39, Sec. 16, ROC).

Questions:

1) Can a REM cover future properties?

2) Can a REM cover future loans or advancements?

Concurrence and Preference of Credits

I. Properties exempt from liability for obligations

A) Survival necessities

1. Family Home, except for:

a) non-payment of taxes
b) debts prior to constitution of FH

c) debts secured by mortgage on premises of the FH

d) debts due to laborer, mechanics, architects, etc. for the construction of

the FH

2. Clothing and necessaries of the family

3. Furniture and household things not exceeding P1000.00

4. Provisions for family for 3 months

B) Money received for support
1. Right to receive support and things procured from such support
2. Earnings within the month to support the family

3. Proceeds of life insurance

4. Right to receive legal support from government or those procured from
such
C) Employment/trade necessities

1. Tools and implements for trade/employment

2. Two beasts of burden used in occupation
3. Professional libraries
4. One fishing boat and net for fishermen

D) Specially enumerated
1. Lettered gravestones
2. Copyrights and other properties exempted by law
3. Property in custodia legis, and of public dominion

II. Preferred credits as to specific movable property? (Article 2241)

1. Taxes on the movable

2. Malversation by public officials of such movables

 3. Vendors lien, provided debtor still possesses it; if resold, then lien is on the
proceeds of sale
4. Credits secured by pledge, chattel mortgage

5. Mechanics or repairmans lien, on the thing

6. Laborers wages, on the thing

7. Salvage, on the goods saved

8. Tenancy, on the share of fruits/harvest

9. Carriers lien, on the goods carries
10. Hotels lien on movables belonging to guests, but not for money loaned to
guests
11. Crop loan, over the fruits harvested

12. Rentals for one year, on the movables in the property leased
13. Claim of depositor, on goods wrongfully sold by the depositary

N.B.: If the movables on which the above liens exist have been wrongfully
taken then the lien-holder/creditor can demand return of movable from
any possessor, within 30 days from unlawful seizure

III. Preferred credits over specific immovable property (Article 2242)

1. Taxes, on the immovable

2. Vendors lien, for sale of real property

3. Contractors lien, over the property

4. Lien of material-men, when material was used for property

5. Mortgages recorded in ROP
6. Expenses of preservation, when the law authorizes reimbursement
7. Recorded attachments, by virtue of judicial order

8. Warranty in partition of co-heirs of property

9. Conditional donations, on the immovable donated as to pecuniary
charges and other conditions
10. Premiums for 2 years in favor of insurers, on the insured property

IV. Order of preference as to other properties/free property of a debtor

(Article 2244)
 1. Funeral expenses

2. Wages of employees for one year

3. Expenses of last illness
4. Workmens compensation
5. Support for one year
6. Support during insolvency

7. Fines in crimes
8. Legal expenses for administration of insolvents estate
9. Taxes other than those over specific property
a) National government first

b) Then to province

c) Then to city or municipality

10. Torts

11. Donations
12. Credits in public instrument or covered by final judgment have preference
among themselves in order of property of dates of instruments or
judgments

Question: What is the order of preference of credits?

1. Credits which enjoy preference as to specific movables exclude all others
to the extent of the value of the movable

2. If there are two or more credits as to the same movable, claims are pro rata
(meaning, the enumeration is not in order)

Except for payment of taxes due the State as this always enjoys first
priority

3. APPLY SAME RULES TO SPECIFIC IMMOVABLES

4. For enumeration in A2244, follow the order

5. For common credits, no preference; just apply property pro rata regardless
of dates

Question: What happens when there is a distressed corporation that asks for
rehabilitation and suspension of payments?

Preferred creditors cannot assert preference anymore, and they will all stand
in equal footing with other creditors. This allows the receiver to exercise
discretion free from legal interference that might hinder rescue of the
company.
Insolvency Law

Difference between suspension of payments and insolvency

a) In suspension, purpose is to delay payments; in insolvency, purpose is to
discharge debtor from debts

b) In suspension, amount of debt is not changed; in insolvency, creditors

receive less than their credits (or where there are preferences, some may
not receive at all)

Suspension of payments; Definition.

It applies to situations where a debtor has properties, but not enough to pay
debts as they fall due. He is still solvent, but not liquid.

Effect of suspension of payments

a) No disposition of property of debtor except in ordinary course of

business

b) No payment except in ordinary course of business

c) Upon request to court, all pending executions against debtor shall be

suspended
- Except those covered by mortgage

Creditors not affected by suspension of payments

a) Those with claims within 60 days immediately preceding filing of

petition:

1) claims for personal labor

2) claims for maintenance

3) expenses of last illness of debtor

4) Funeral of spouse or children of debtor

b) Those possessing legal or contractual mortgages

Procedure to petition for suspension of payments

1. File petition in RTC where debtor resides 6 months prior.

2. Along with the petition, file:

a) Verified list of creditors

b) Debts and liabilities

c) Statement of assets and liabilities

d) Proposed agreement/schedule

3. Court issues order calling all creditors to a meeting (2-8 weeks from order)

4. Publication and notice

5. Meeting of creditors

Quorum required: represent at least 60% of liabilities of the

debtor

6. Creditors approve the proposition

- Vote requirement: double majority vote necessary to approve:

A. 2/3 of creditors

B. 2/3 of 60% of the liabilities

7. Objections can be made within 10 days of meeting

a) Defects in call for meeting or the meeting itself

b) Fraudulent connivance between one or some creditors and the debtor

to vote in favor of the agreement

c) Fraudulent conveyance of claims to obtain a majority

8. Court issues order directing the agreement to be carried out

Procedure for voluntary insolvency

1. Debtor files petition that he is insolvent and cannot pay debts in full,
accompanied by:

a) verified schedule of liabilities

b) verified inventory of properties

 2. Court issues order of adjudication

- Publication and service of order to creditors

- N.B. NO hearing required.

3. Meeting of all creditors to elect assignee of debtors property

- Clerk of court conveys property to assignee, and the assignee

acquires legal title over the property
- What if someone has a mortgage over the property?

Remedy: File a motion to be excluded from the

insolvency proceedings because he will pursue the
mortgage lien

- What if there is an existing claim being filed in court?

The case will only determine how much is due the

creditor, but he has to join the other creditors in this
proceeding.

- What attachments and judgments shall be set aside?

Those levied or secured within 30 days before

insolvency proceeding (rationale: badge of fraud)

N.B. SAME RULE for dispositions within 30 days

before insolvency proceedings, unless there is value
received in GF for the property

4. Liquidation of assets and payment of debts

5. Composition

- Ofer of terms of composition is made after filing of schedule of

liabilities and creditors
- The ofer must be accepted in writing by the same double majority of
creditors

- It is made after depositing the consideration to be paid and the cost of

proceedings

- The court must approve the terms of composition

Procedure for involuntary insolvency

1. Three or more creditors file petition

 - When should they have been creditors?

More than 30 days prior to petition, to avoid fraudulent conveyance

The creditors must be residents of the Philippines

2. Court issues order requiring debtor to show cause why he must not be
declared insolvent

- Debtor files motion to dismiss or answer

3. Hearing of the case

- Issuance of order declaring debtor insolvent

- Then he will be required to submit schedule of assets and liabilities
- Publication and service of order
(N.B. procedure from this point is the same as voluntary insolvency)

4. Meeting of all creditors to elect assignee of debtors property

- Clerk of court conveys property to him

5. Liquidation of assets and payment of debts

6. Composition