Real Estate Mortgage

I. What is a real estate mortgage?

Real estate mortgage is an accessory contract whereby the debtor secures to the creditor
the fulfilment of a principal obligation, specially subjecting to such security immovable property
or real rights over immovable property in case the principal obligation is not complied with at
the time stipulated.

II. What are the essential requisites of real estate mortgage? See A2085 1

1. Secures the fulfilment of a principal obligation;

2. Mortgagor, must be the absolute owner of the thing mortgaged; and
3. Mortgagor must have free disposal of their property, or be legally authorized for
such purpose.

Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. Meaning, mortgagor is not always the debtor

Other special requisites include the following:

1. It can cover only immovable property and alienable real rights imposed upon
immovables;
2. It must appear in a public instrument;
3. Registration in the registry of property is necessary to bind third persons, but not for
the validity of the contract

When the principal obligation becomes due, the things which was mortgaged may be
alienated for the payment to the creditor. This is supported by Art. 2087.

Art. 2087. It is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists may be alienated for the
payment to the creditor. (1858)

Mortgagor retains ownership of the thing given as a security.

III. What are the Kinds of real estate mortgage?

1. Voluntary- agreed to by the parties or constituted by the will of the owner of the
property on which it is created
2. Legal- one required by law

1 Art. 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;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for the purpose.
 3. Equitable- one which, although lacking the formalities of a mortgage, shows the
intention of the parties to make the property a security for a debt

IV. What is the rule for alien mortgagors?

1. An alien may accept mortgage but he is prohibited from taking possession of the
mortgaged property during the existence of the mortgage and even after default of the
mortgage except for the purpose of :

• Foreclosure of mortgage
• Receivership for a period of 5 years from the actual possession
• Participating in the bidding or taking part in any sale of the property
mortgaged in cases of foreclosure

V. The mortgagee has the right to rely on what appears on the face of the certificate and in
the absence of suspicion the mortgagee has no obligation to look beyond thereon. If the
title bears the name of the real owner and the mortgagee was constituted by an
impostor without consent of the owner then the mortgage is null and void.

VI. Prohibition against pactum commissorium?

The stipulation whereby the thing used as security shall automatically become the property
of the creditor or there is the automatic transfer of ownership in the event of non-payment
of the debt in due time.

As a general rule, Pactum Commissorium is forbidden by law and is declared null and void
except the pledgee may appropriate the thing pledged if after the first and second auctions,
the thing is not sold as required by this article;

Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed
before a Notary Public to the sale of the thing pledged. This sale shall be made at a public
auction, and with notification to the debtor and the owner of the thing pledged in a proper
case, stating the amount for which the public sale is to be held. If at the first auction the
thing is not sold, a second one with the same formalities shall be held; and if at the second
auction there is no sale either, the creditor may appropriate the thing pledged. In this case
he shall be obliged to give an acquittance for his entire claim. (1872a)

VII. What is pacta non aliendo?

Pacta non aliendo refers to a stipulation in a mortgage which prohibits the mortgagor from
alienating the mortgaged property subject to the mortgage within the mortgage period.

Art. 2088.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.

Prohibition Against pactum commissorium

(1) Stipulation null and void.

= stipulation whereby the thing pledged or mortgaged or under antichresis (Art.

2137) shall automatically become the property of the creditor in the event of non-payment
of the debt within the term fixed is known as pactum commissorium or pacto commisorio
which is forbidden by law and declared null and void. (Art. 2088).

=by such a stipulation, the creditor would be able to acquire ownership of the
property given as security without need of public sale or foreclosure as required by law.

= this forfeiture clause has traditionally been outlawed because it is contrary to good
morals and public policy.

= the reason for the prohibition is that the amount of the loan is ordinarily much less
than the real value of the thing pledged or mortgaged.

(2) Requisites of pactum commissorium

a.There should be a pledge, mortgage, or antichresis of property by way of security for the
payment of the principal obligation; and

b.There should be a stipulation for an automatic appropriation by the creditor of the

property on the event of non payment of the obligation within the stipulated period.

= it is immaterial that the questioned stipulation was voluntarily and freely entered into,
pactum commissorium being void for being prohibited by law.

(3) Stipulation presupposes existence of security contract. –= pactum commissorium

referred to in Arts. 2088 and 2137, presupposes the existence of mortgage or pledge or
antichresis.

Art. 2088.The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose them. Any stipulation to the contrary is null and void.

Art. 2137.The creditor does not acquire the ownership of the real estate for non-payment of
the debt within the period agreed upon. Every stipulation to the contrary shall be void. But
the creditor may petition the court for the payment of the debt or the sale of the real
property. In this case, the Rules of Court on the foreclosure of mortgages shall apply.

= thus it has been held that there was no pactum commissorium where pursuant to the
contract of sale, the sums already paid by the vendee were forfeited for his failure to pay the
stipulated installments in due time considering that the person to whom the property was
forfeited (vendor) was the real and equitable owner of the same because title would not
pass until payment of the last installment.

= there is also no pactum commissorium where the alienation of the subject property was by
way of security and not by way of satisfying or extinguishing the debt of the debtor.

(4) Effect on security contract. –= the vice or nullity which vitiates such stipulation doesn’t
affect substantially the principal contract of pledge, mortgage, or antichresis with regard
to its validity and efficacy for the reason that the contract, having been perfected, can
 subsist although the contracting parties have not agreed as to manner the creditor can
recover his credit inasmuch as the law has expressly established the procedure in order
that he may recover the same, in case the debtor does not comply with his obligation.=
in short, the security contract of pledge, mortgage or antichresis remains valid; only
the prohibited stipulation is void.
Permissible stipulations
(1) Subsequent modification of original contract. –= the stipulations that are prohibited by
Arts. 2088 and 2137 (antichresis) are those executed or made simultaneously with the
original contract, not those subsequently entered into.= the principle does not prohibit
modification of the contract by subsequent agreement such as the parties may see fit to
adopt.

(2) Subsequent voluntary cession of property. –= the prohibition does not include
subsequent voluntary act of the debtor making cession of the property mortgaged in
payment of the debt which amounts in its legal effect to a novation of the original
contract and to a voluntary sale of the said property for the amount of the debt

(3) Promise to assign or sell. –= neither is the prohibition applicable to a promise to assign
or sell said property in payment of the obligation if, upon its maturity, it is not paid
because the title thereto remains with the debtor.= the promise is merely a personal
obligation of the mortgagor and does not in any way bind the property.(a)The mortgagor
can validly sell the property to a third person and if there should be any action accruing
to the mortgagee, it would be a personal action for damages against the mortgagor.(b)If
the vendee contributed to the breach of the contract by the mortgagor, the former,
together with the latter, may also be held liable for damages; or= if the vendee was guilty
of fraud which would be aground for rescission of the sale in his favor, the mortgagor
and not the mortgagee would be the party entitled to bring the action of annulment.

Risk of loss of property pledged or mortgaged

As the pledgee or mortgagee does not become the owner of the property and the ownership
thereof remains with the debtor, therefore, under the maxim, res perit domino suo, the
debtor-owner bears the loss of the property.= The principal obligation is not extinguished by
the loss of the pledged or mortgaged property.

What is foreclosure?

Foreclosure is the remedy available to the mortgagee by which he subjects the mortgaged property
to the satisfaction of the obligation, to secure that for which the mortgage was given. It may mean
the usual methods including the sale of the goods at a public auction. The right to foreclose a
mortgage prescribes in ten (10) years.

What are the kids of foreclosure?

1. ORDINARY- an ordinary execution sale is governed by the pertinent provisions of Rule 39 of the
Rules of Court

2. JUDICIAL – ordinary action for foreclosure under Rule 68 of the Rules of Court.
3. EXTRAJUDICIAL- when mortgagee is given a special power of attorney to sell the mortgaged
property by public auction, under Act No. 3135

What is Act No. 3135 on Extrajudicial Foreclosure of Real Property all about?

The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale of
the property mortgaged. The authority to sell is not extinguished by the death of the
mortgagor/mortgagee as it is an essential and inseparable part of a bilateral agreement. No sale can
be legally made outside the province in which the property sold is situated; and in case the place
within said province in which the sale is to be made is the subject of stipulation, such sale shall be
made in the said place in the municipality building of the municipality in which the property or part
thereof is situated

What is the procedure for Extrajudicial Foreclosure of both real estate mortgage under Act No. 3135
and Chattel Mortgage under Act No. 1508?

1. Filing of application before the Executive Judge through the Clerk of Court;

2. Clerk of Court will examine whether the requirement of the law have been complied with. That is,
whether the notice of sale has been posted for not less than 20 days in at least three (3) public
places of the municipality or city where the property is situated, and where the same is more than
P400.00, that such notice has been published once a week for at least three (3) consecutive weeks in
a newspaper of general circulation in the city or municipality;

3. The certificate of sale must be approved by the Executive Judge;

4. In extrajudicial foreclosure of real mortgages in different locations covering one indebtedness, only
one filing fee corresponding to such debt shall be collected;

5. The Clerk of Court shall issue certificate of payment indicating the amount of indebtedness, the
filing fees collected, the mortgages sought to be foreclosed, the description of the real estates and
their respective locations;

6. The notice of sale shall be published in a newspaper of general circulation pursuant to Section 1,
PD No. 1079;

7. The application shall be raffled among all sheriffs;

8. After the redemption period has expired, the Clerk of Court shall archive the records;

9. No auction sale shall be held unless there are at least two (2) participating bidders, otherwise the
sale shall be postponed to another date. If on the new date there shall not be at least two (2)
bidders, the sale shall then proceed. The names of the bidders shall be reported to the Sheriff or the
Notary Public, who conducted the sale to the Clerk of Court before the issuance of the certificate of
sale

What is redemption?
Redemption is the transaction by which the mortgagor reacquired or buys back the property which
may have passed under the mortgage, or divests the property of the lien which the mortgage may
have created.

What are the kinds of redemption?

1. Equity of Redemption is theright of mortgagor to redeem the mortgaged property after his default
in the performance of the conditions of the mortgage within the 90-day period from the date of the
service of the order of foreclosure or even thereafter but before the confirmation of the sale. It
applies to judicial foreclosure of real mortgage and chattel mortgage foreclosure.

2. Right of Redemption is the right of mortgagor to redeem the mortgaged property within one year
from the date of registration of the certificate of sale. It applies only to extrajudicial foreclosure of
real mortgage. It is best supported by this article:

Art. 1606. The right referred to in Article 1601, in the absence of an express agreement, shall last
four years from the date of the contract.

Should there be an agreement, the period cannot exceed ten years.

However, the vendor may still exercise the right to repurchase within thirty days from the time final
judgment was rendered in a civil action on the basis that the contract was a true sale with right to
repurchase. (1508a)

What are the Periods of Redemption?

The following are the periods of redemption for the following:

a) Natural person has one year from registration of the certificate of sale with Registry of Deeds
b) Juridical person has thesame rule as natural person
c) Juridical person
(Mortgagee is a bank) is three months after foreclosure or before registration of certificate of
foreclosure whichever is earlier
d) Extrajudicial, the provisions of Act No. 3135 applies

What is the amount of the Redemption Price?

The following rules govern:

Mortgage is not a bank (Act No. 3135, in relation to Sec. 28, Rule 39 of Rules of Court)
a) Purchase price of the property
b) 1% interest per month on the purchase price
c) Taxes paid and amount of purchaser’s prior lien, if any, with the same rate of interest computed
from the date of registration of sale, up to the time of redemption

Mortgagee is a bank (General Banking Law 2000)

a) Amount due under the mortgage deed
b) Interest
c) Cost and expenses
What is the redemption period in mortgage for homestead or free patent?

1. Mortgagee is a rural bank under RA 720 as amended-2 years from registration of the sheriff’s
certificate of sale (titles or untitled); if the mortgagor fails to redeem he may still repurchase from
the expiration of 2 years pursuant to Sec 119 of Public Land Act within 5 years

2. If land is mortgaged to parties other than rural banks, the mortgagor may redeem the property
within 1 years and if he fails he or his heirs may repurchase from the expiration of 2 years from the
same law within 5 years.