EQUITABLE MORTGAGE

What is an equitable mortgage?

One which lacks the proper formalities, form or words or other requisites prescribed by law for a
mortgage, but shows the intention of the parties to make the property subject of the contract as security
for a debt and contains nothing impossible or contrary to law

What are the essential requisites of equitable mortgage?

1. Parties entered into a contract of sale

2. Their intention was to secure an existing debt by way of a mortgage.

What is the rule on the presumption of an equitable mortgage?

A sale with conventional redemption is deemed to be an equitable mortgage in any of the following
cases: (Art. 1602)

1. Price of the sale with right to repurchase is unusually Inadequate

2. Seller Remains in possession as lessee or otherwise

3. Upon or after the expiration of the right to repurchase Another instrument extending the period of
redemption or granting a new period is executed

4. Purchaser Retains for himself a part of the purchase price

5. Seller binds himself to pay the Taxes on the thing sold

6. In any other case where the real intention of the parties is that the transaction shall Secure the
payment of a debt or the performance of any other obligation.

7. Art. 1602 shall also apply to a contract purporting to be an Absolute sale. (Art. 1604)

Note: In case of doubt in determining whether it is equitable mortgage or sale a retro (with right of
repurchase); it shall be construed as equitable mortgage.

Sales with Right to Repurchase

In a conventional sale with a right to repurchase feature, the gross inadequacy of price raises a
presumption of equitable mortgage. The proper remedy of the alleged seller, who is actually an
equitable mortgagor, is not to rescind the contract of sale, but to have it reformed or declared a
mortgage contract, and to pay off the indebtedness which is secured. On the other hand, the remedy of
the alleged buyer would not be to appropriate the subject matter as a buyer for that would be pactum
commissorium, but to foreclose on the quitable mortgage.

Form in Equitable Mortgage Claims

In Cuyugan v. Santos, the Supreme Court held that the Statute of Frauds does not stand in the way of
treating an absolute deed as a mortgage, when such was the intention of the parties, although the
agreement for redemption or defeasance rests wholly in parol, or is proved by parol evidence: “The
courts will not be used as a shield for fraud, or as a means for perpetrating fraud.”

Lapat v. Rosario, held that a contract should be construed as a mortgage or a loan instead of a pacto de
retro sale when its terms are ambiguous or the circumstances surrounding its execution or its
performance are incompatible or inconsistent with a sale. Even when a document appears on its face to
be a sale with pacto de retro, the owner of the property may prove that the contract is really a loan with
mortgage by raising as an issue the fact that the document does not express the true intent and
agreement of the parties. In such case, parol evidence then becomes competent and admissible to prove
that the instrument was in truth given merely as a security for the repayment of a loan.

Rosales v. Suba, that an equitable mortgage is not different from a real estate mortgage, and the lien
created thereby ought not to be defeated by requiring compliance with the formalities necessary to the
validity of a voluntary real estate mortgage.