Prudential Bank v.

Panis
[G.R. No. L-50008. August 31, 1987.]

Facts:

On 19 November 1971, Fernando A. Magcale and Teodula Baluyut Magcale secured a loan of P70,000.00
from Prudential Bank. To secure payment of this loan, the Magcales executed in favor of Prudential Bank a
deed of Real Estate Mortgage over a 2-storey, semi-concrete residential building with warehouse space
(total area of 263 sq.m.); and granting upon the mortgagee the right of occupancy on the lot where the
property is erected. A rider is also included in the deed that in the event the Sales Patent on the lot is issued
of Bureau of Lands, the Register of Deeds is authorized to hold the Registration until the mortgage is
cancelled or annotate the encumbrance on the title upon authority from the Secretary of Agriculture and
Natural Resources, which title with annotation release in favor of the mortgage. The Real Estate Mortgage
was registered under the Provisions of Act 3344 with the Registry of Deeds of Zambales on 23 November
1971. Subsequently, the Magcales secured an additional loan from Prudential Bank, secured by another
deed of Real Estate Mortgage registeed with the Registry of Deeds in Olongapo City, on 2 May 1973.

On 24 April 1973, the Secretary of Agriculture issued Miscellaneous Sales Patent 4776 over the parcel of
land, possessory rights over which were mortgaged to rudential Bank, in favor of the Magcales. On the
basis of the Patent, and upon its transcription in the Registration Book of the Province of Zambales, OCT P-
2554 was issued in the name of Fernando Magcale, by the Ex-Oficio Register of Deeds of Zambales, on 15
May 1972.

For failure of the Magcales to pay their obligation to the Bank after it became due, the deeds of Real Estate
Mortgage were extrajudicially foreclosed. Consequent to the foreclosure was the sale of the properties
mortgaged to the bank as the highest bidder in a public auction sale conducted by the City Sheriff on 12
April 1978. The auction sale was held despite written request from the Magcales through counsel, dated 29
March 1978, for the City Sheriff to desist from going with the scheduled public auction sale. The issue was
raised to the CF Zambales and Olongapo City which, on 3 November 1978, declared the deeds of Real Estate
Mortgage as null and void. The bank filed a motion for reconsideration on 14 December 1978, which the
court denied on 10 January 1979 for lack of merit. Hence, the petition.

The Supreme Court modified the decision of the CFI Zambales & Olongapo, declaring that the Deed of Real
Estate Mortgage for P70,000.00 is valid but ruling that the Deed of Real Estate Mortgage for an additional
loan of P20,000.00 is null and void, without prejudice to any appropriate action the Government may take
against private respondents.

Issue: Whether or not a valid real estate mortgage can be constituted on the building erected on the land
belonging to another.

Held:

Yes. The answer with regard to the issues is in the affirmative, given the following explanations:

1. Building separate and distinct from the land

In the enumeration of properties under Article 415 of the Civil Code of the Philippines, it is obvious that the
inclusion of 'building' separate and distinct from the land, in said provision of law can only mean that a
building is by itself an immovable property. (Lopez vs. Orosa, Jr., et al., L-10817-18, Feb. 28, 1958; Associated
Inc. and Surety Co., Inc. vs. Iya, et al., L-10837-38, May 30, 1958).

2. Building can be mortgaged apart from the land it is built; possessory rights may be validly
transferred in a deed of mortgage

While a mortgage of land necessarily includes, in the absence of stipulation of the improvements thereon,
buildings; still a building by itself may be mortgaged apart from the land on which it has been built. Such a
mortgage would be still a real estate mortgage for the building would still be considered immovable
property even if dealt with separately and apart from the land (Leung Yee vs. Strong Machinery Co., 37 Phil.
644). Possessory rights over said properties before title is vested on the grantee, may be validly transferred
or conveyed as in a deed of mortgage (Vda. de Bautista vs. Marcos, 3 SCRA 438 [1961]).

3. A valid real estate mortgage may be constituted on the building erected on the land belonging to
another

The original mortgage was executed (19 November 1971) before the issuance of the final patent (24 April
1972) and before the government was divested of its title to the land (15 May 1972), an event which takes
effect only on the issuance of the sales patent and its subsequent registration in the Office of the Register
of Deeds (Visayan Realty Inc. vs. Meer, 96 Phil. 515; Director of Lands vs. De Leon, 110 Phil. 28; Director of
Lands vs. Jurado, L-14702, May 23, 1961; Peña, "Law on Natural Resources", p. 49). In the case at bar, it is
evident that the mortgage executed by Magcale on his own building which was erected on the land
belonging to the government is to all intents and purposes a valid mortgage.