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Equitable Mortgage and Sales Print E-mail
Mortgages are normal incidents in business transactions. For instance, lending institutions usually require a mortgage to secure a loan obligation obtained by the Pinoy Entrepreneur. There's really no problem if the contract is designated as a mortgage, as the parties are presumed to have understood its terms and conditions. In case a contract is designated as "Deed of Sale," can it be considered as a mortgage? Let's discuss.
 
An equitable mortgage is one that - although lacking in some formality, forms and words, or other requisites demanded by a statute - nevertheless reveals the intention of the parties to charge a real property as security for a debt and contains nothing impossible or contrary to law. Before the legal provisions on equitable mortgage is applied, two conditions must be established:
1. the parties entered into a contract denominated as a contract of sale.
2. their intention was to secure an existing debt by way of an equitable mortgage.

On the other hand, the instances when a contract -- regardless of its nomenclature (even if designated as a "Deed of Sale") -- may be presumed to be an equitable mortgage are as follows:

(1) When the price of a sale with right to repurchase is unusually inadequate.

(2) When the vendor remains in possession as lessee or otherwise.

(3) When 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)   When the purchaser retains for himself a part of the purchase price.

(5) When the vendor binds himself to pay the taxes on the thing sold.

(6)  In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any ther obligation.

Let's discuss an actual case to illustrate. Eulalia was engaged in the business of buying and selling large cattle for which she employed “biyaheros” whose task involved the procuring of large cattle with the financial capital provided by Eulalia and delivering the procured cattle to her for further disposal. In order to secure the financial capital she advanced for the “biyaheros,” Eulalia required them to surrender the Transfer Certificates of Title of their properties and to execute the corresponding Deeds of Sale in her favor. Eulalia discovered that one of the "biyaheros," Domeng, incurred shortage in the amount of P70,000.00. Domeng then executed a deed of sale over a parcel of land in favor of Eulalia, who then disposed of the property based on that document. The controversy reached the Supreme Court, which ruled that the parties (Domeng and Eulalia) never intended the transfer of ownership of the subject property, but merely to create an encumbrance to secure the indebtedness incurred by Domeng. The transaction was deemed an equitable mortgage, merely altering the relationship of the parties from seller and buyer, to mortgagor and mortgagee. The subject property is not transferred, but subjected to a lien in favor of Eulallia. 

*Source: Spouses Raymundo et al. vs. Spouses Bandong (G.R. No. 171250, 4 July 2007)

Published in : Topics, Contracts

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