Commercial Law: Real Estate Mortgage

Commercial Law

TITLE XVI

Pledge, Mortgage and Antichresis

CHAPTER 3

Mortgage

Art. 2124. Only the following property may be the object of a contract of mortgage:

Immovables;
Alienable real rights in accordance with the laws, imposed upon immovables.

Nevertheless, movables may be the object of a chattel mortgage.

Art. 2126.
The mortgage directly and immediately
subjects the property upon which it is imposed,

whoever the possessor may be,

to the fulfillment of the obligation for whose security it was constituted.

1. Real Estate Mortgage.

Real Estate Mortgage is an accessory contract by virtue of which real property is conveyed by way of security and a lien is created over a specific real property or properties with the condition that if the obligation secured is not paid, the mortgage may be foreclosed and the property sold to answer for the mortgage credit.

Parties.

The parties are

the mortgagor and
the mortgagee.

The mortgagor is the person who conveys the real property by way of mortgage to secure an obligation.
The mortgagee is the creditor whose credit is secured by the mortgage.

Characteristics.

The characteristics of Real Estate Mortgage are as follows: RARUS

It creates a real right of security;
It is an accessory contract;
It is a real security contract;
It is unilateral in the sense that only the mortgagor's signature is necessary to constitute it, and only the mortgagor has the obligation to return it; and
It is subsidiary because the thing mortgaged will answer for the principal obligation only upon default of the principal debtor.

Alternative Remedy.

The enforcement of a mortgage through foreclosure is an alternative remedy.
The Supreme Court explained that the mortgagee-creditor may institute two alternative remedies against the mortgagor/debtor.

The mortgagee/creditor can either institute:

a personal action for the collection of the debt or
a real action to foreclose the mortgage

but not both.

Only one cause of action exists against the debtor, which is non-payment of the obligation.

Each alternative remedy is complete by itself.
If the mortgagee decides to foreclose the mortgage, the mortgagee waives the action for the collection of the debt and vice versa.

Caltex Philippines, Inc. v. Intermediate Appellate Court, G.R. No. 74730, August 26, 1989:

"When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt.

With this remedy, he has a prior lien on the property.
In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings.

On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien.

He will have no more priority over the mortgaged property.
If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution.
He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor."

Bachrach Motor Co., Inc. v. Icarangal, 68 Phil. 287 (1939):

The reason why the remedies are alternative is that:
A "rule that would authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action against the mortgaged property, would result not only in multiplicity of suits so offensive to justice and obnoxious to law and equity, but also in subjecting the defendant to the vexation of being sued in the place of his residence or of the residence of the plaintiff, and then again in the place where the property lies."

PROBLEM:

X, at Y's request, executed a Real Estate Mortgage (REM) on his (X's) land to secure Y's loan from Z. Z successfully foreclosed the REM when Y defaulted on the loan but half of Y's obligation remained unpaid. May Z sue X to enforce his right to the deficiency? (2011 Bar)

No, because X is not Z's debtor.
Mortgage is just an accessory obligation.
X is not liable for the deficiency because what he constituted is a real security and not a personal security.
X as a mortgagor is not a party to the principal obligation.

2. Subject Matter

Only immovable properties may be the subject of a real estate mortgage.

Real properties are those provided for under Article 415 of the New Civil Code.

Article 415. The following are immovable property:

Land, buildings, roads and constructions

of all kinds adhered to the soil;

Trees, plants, and growing fruits,

while they are attached to the land or form an integral part of an immovable;

Everything attached to an immovable

in a fixed manner,
in such a way that it cannot be separated therefrom
without breaking the material or deterioration of the object;

Statues, reliefs, paintings or other objects for use or ornamentation,

placed in buildings or on lands
by the owner of the immovable
in such a manner that it reveals the intention
to attach them permanently to the tenements;

Machinery, receptacles, instruments or implements

intended by the owner of the tenement
for an industry or works
which may be carried on in a building or on a piece of land,
and which tend directly to meet the needs
of the said industry or works;

Animal houses, pigeon-houses, beehives, fish ponds

or breeding places of similar nature,
in case their owner has placed them or preserves them
with the intention to have them permanently attached to the land,
and forming a permanent part of it;
the animals in these places are included;

Fertilizer actually used on a piece of land;
Mines, quarries, and slag dumps,

while the matter thereof forms part of the bed,
and waters either running or stagnant;

Docks and structures which,

though floating,
are intended by their nature and object
to remain at a fixed place on a river, lake, or coast;

Contracts for public works, and servitudes

and other real rights over immovable property.

Article 2125 provides that alienable real right over such immovable may also be mortgaged.

These real rights are in law also immovable or real properties under par. 10 of Article 415 of the New Civil Code.

Contracts for public works, and servitudes and other real rights over immovable property.

Buildings are separate immovable properties; hence, they can be mortgaged separately from the land on which they are constructed.

A building is real property whether it is built on a rented land or not and whether built by the owner or not

It is immovable or real property even if a usufructuary or a lessee constructed it.

2.01 Estoppel

There are instances when certain movables are treated as real properties by estoppel.
The parties may be estopped although innocent third parties are not affected.
The view expressed in People's Bank & Trust Company and Atlantic Gulf & Pacific Company v. Dahican Lumber G.R. No. L-17500, May 16, 1967, 20 SCRA 84 is that the parties are bound, through estoppel, if they treat a movable as immovable.

Nevertheless, only the parties are estopped from questioning the nature of the property.

PROBLEM (1999 Bar):

Debtor purchased a parcel of land from a realty company payable in five yearly installments. Under the contract of sale, title to the lot would be transferred upon full payment of the purchase price. But even before full payment, the debtor constructed a house on the lot.

Sometime thereafter, the debtor mortgaged the house to secure his obligation arising from the issuance of a bond needed in the conduct of his business. The mortgage was duly registered with the proper chattel mortgage registry.

Five years later after completing payment of the purchase price, the debtor obtained title to the lot. And even as the chattel mortgage on the house was still subsisting, the debtor mortgaged to a bank the lot and improvement thereon to secure a loan. This real estate mortgage was duly registered and annotated at the back of the title.

Due to business reverses, the debtor failed to pay his creditors. The chattel mortgage was foreclosed when the debtor failed to reimburse the surety company for payments made on the bond. In the foreclosure sale, the surety company was awarded the house as the highest bidder.
Only after the foreclosure sale did the surety company learn of the real estate mortgage in favor of the lending investor on the lot and the improvement thereon. Immediately, it filed a complaint praying for the exclusion of the house from the real estate mortgage. It was submitted that as the chattel mortgage was executed and registered ahead, it was superior to the real estate mortgage.

On the suggestion that a chattel mortgage on a house — a real property — was a nullity, the surety company countered that when the chattel mortgage was executed, the debtor was not yet the owner of the lot on which the house was built. Accordingly, the house was a personal property and a proper subject of a chattel mortgage.

Who has a better claim to the house, the surety company or the lending investor? Explain.

The lending investor has a better claim to the house.
It should be pointed out that the house that was mortgaged is real property whether or not it was constructed on the land belonging to the builder.
While the parties to the chattel mortgage may be considered estopped from claiming that the mortgaged property is real property, the rule on estoppel, however, does not cover third persons.
The chattel mortgage on real property is not binding on third persons. Hence, since the real estate mortgage in favor of the lending company was duly registered, it is binding not only on the parties thereto but also on third persons, including the parties to the chattel mortgage.

Would the position of the surety company be bolstered by the fact that it acquired title in a foreclosure sale conducted by the Provincial Sheriff? Explain.

No. The fact that the surety company was the buyer on the foreclosure sale is not material in determining who has a better right to the house.
As already stated, the house is a real property and the real estate mortgage constituted thereon in favor of the lending investor is binding on third persons, including the surety company.
On the other hand, the chattel mortgage over the house is not binding on third persons. Hence, the foreclosure of such chattel mortgage does not have the effect of giving the parties thereto additional or superior rights.

3. Nature

The mortgage constitutes an encumbrance on the real property.
The right of the mortgagee is a right in rem.
The registered mortgage follows the property even if there is a change of ownership.

Security Interest.

Only security interest is acquired, the right to possession and jus disponendi are not included unless otherwise stipulated.
Except in cases where the mortgagor is also the principal debtor, the mortgagor is not personally liable to pay the principal obligation.

The reason is that the right of the mortgagee is only limited to a lien on the mortgaged property

4. Obligation Secured.

A mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage.
Example:

If the mortgage is meant to secure interest, charges and penalties, the deed must expressly so provide.
If the security is only for the principal, interests and bank charges, the security does not cover penalty fees.
"Penalty fee" is entirely different from "bank charges."

The phrase ''bank charges" is normally understood to refer to compensation for services.
A "penalty fee" is likened to a compensation for damages in case of breach of the obligation.
Being penal in nature, such fee must be specific and fixed by the contracting parties.

4.01 After-Incurred or Future Obligations

After-incurred or future obligations may be covered by real estate mortgage if the same is expressly provided for in the contract.

The Deed of Real Estate Mortgage may expressly state that it may secure future advancements.

In the absence of stipulation, the general rule is that the amount secured by a mortgage is limited to the amount expressly mentioned in the mortgage.
BPI Family Savings Bank, Inc. v. Vda. de Coscolluela, G.R. No. 167724, June 27, 2004:

The Real Estate Mortgage secures future advancement if it states that the mortgage secures the payment of the amount stated therein "as well as those that the mortgagee may extend to the mortgagor, including interest and expenses."

The Supreme Court explained the nature of mortgage that secures future advancements in Lim Julian v. Luterio, 49 Phil. 703 (1926:

The rule, of course, is well settled that an action to foreclose a mortgage must be limited to the amount mentioned in the mortgage. The exact amount, however, for which the mortgage is given need not always be specifically named. The amount for which the mortgage is given may be stated in definite or general terms, as is frequently the case in mortgages to secure future advancements. The amount named in the mortgage does not limit the amount for which it may stand as security, if, from the four corners of the document, the intent to secure future indebtedness or future advancements is apparent. Where the plain terms, of the mortgage, evidence such an intent, they will control as against a contention of the mortgagor that it was the understanding of the parties that the mortgage was security only for the specific amount named.

In that case the amount mentioned in the mortgage was $7,000. The mortgage, however, contained a provision that "the mortgagors agree to pay said mortgagee what sum of money which they may now or hereafter owe said mortgagee." At the time the action of foreclosure was brought the mortgagors owed the mortgagee the sum of $21,522. The defendants contended that the amount to be recovered in an action for foreclosure should be limited to the mount named as consideration for the mortgage did not limit the amount for which the mortgage stood as security, if, from the whole instrument the intent to secure future indebtedness could be gathered. The court held that a mortgage to cover future advances is valid.

Literal accuracy in describing the amount due, secured by a mortgage, is not required, but the description of the debt must be correct and full enough to direct attention to the sources of correct information in regard to it, and be such as not to mislead or deceive as to the amount of it, by the language used. Reading the mortgage before us from its four corners, we find that the description of the debt is full enough to give information concerning the amount due. The mortgage recites that it is given to secure the sum of P12,000, interest, commissions, damages, and all other amounts which may be found to be due at maturity. The terms of the contract are sufficiently clear to put all parties who may have occasion to deal with the property mortgaged upon inquiry. The parties themselves from the very terms of the mortgage could not be in ignorance at any time of the amount of their obligation and the security held to guarantee the payment.
When a mortgage is given for future advancements and the money is paid to the mortgagor "little by little" and repayments are made from time to time, the advancements and the repayments must be considered together for the purpose of ascertaining the amount due upon the mortgage at maturity, courts of equity will not permit the consideration of the repayments only for the purpose of determining the balance due upon the mortgage.

The mere fact that in contract of advancements the repayments at any one time exceeds the specific amount mentioned in the mortgage, will not have the effect of discharging the mortgage when the advancements at that particular time are greatly in excess of the repayments; especially is this true when the contract of advancement or mortgage contains a specific provision that the mortgage shall cover all "such other amounts as may be then due." Such a provision is added to the contract of advancements or mortgage for the express purpose of covering advancements in excess of the amount mentioned in the mortgage.

The sum found to be owing by the debtor at the termination of the contract of advancements between him and the mortgagee, during continuing credit, is still secured by the mortgage on the debtor’s property, and the mortgagee is entitled to bring the proper action for the collection of the amounts still due and to request the sale of the property covered by the mortgage.
Under a mortgage to secure the payment of future advancements, the mere fact that the repayments on a particular day equal the amount of the mortgage will not discharge the mortgage before maturity so long as advancements may be demanded and are being received.

4.02 Blanket Mortgage or Dragnet Clause

A blanket mortgage clause also known as a dragnet clause is one that is specifically phrased to subsume all debts of past or future origin.

It is a continuing security.
A mortgage with a dragnet clause makes available future loans without the need of executing another set of security documents.

The Supreme Court in Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005 explained the rule and the background of the said clause as follows:

A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed." Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. A "dragnet clause" operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.
Under American jurisprudence, two schools of thought have emerged on this question.

One school advocates that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by another mortgage.
The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement.

The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or "dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first security is a corollary component of the "dragnet clause." But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the "dragnet clause," but rather, on the new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry whether the second loan was made in reliance on the original security containing a "dragnet clause." Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the "dragnet clause" in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the "offer" was not accepted by the bank when a subsequent advance was made because:

the second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage;
there was no reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance;
the mortgagor signed the real estate mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and
there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance.

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.

PROBLEMS:

1985 BAR: A constituted in 1980 a real estate mortgage on his lot and a chattel mortgage on his car to secure the payment of a debt of P200,000.00 which he then owed to B, as well as other loans he may receive from him in the future. A paid his debt of P200,000.00 but not the loan of P50,000.00 which he obtained in 1982. May B foreclose both mortgages to satisfy A's unpaid obligation to him? Reasons.

Yes, he can foreclose the real estate mortgage but no he cannot foreclose the chattel mortgage. The real estate mortgage can be foreclosed because the law allows a real estate mortgage to cover future loans.
A provision known as a dragnet clause may be provided for under which future loans are secured without need of executing another set of security documents.
The mortgage is indivisible; hence, the mere fact that the first loan was paid does not result in the release of the mortgage.
However, B cannot foreclose the chattel mortgage because chattel mortgage cannot cover future loans. A requirement of a chattel mortgage is an affidavit of good faith, which requires that it will cover only existing just and valid debt described therein. (Note: The answer is based on the law that applies during dates material to the problem; Note that the law on chattel mortgage was repealed by the PPSA)

2012 BAR: X obtained a P10 million loan from BBB Banking Corporation. The loan is secured by Real Estate Mortgage on his vacation house in Tagaytay City. The original Deed of Real Estate Mortgage for the P10 million was duly registered. The Deed of Real Estate Mortgage also provides that "The mortgagor also agrees that this mortgage will secure the payment of additional loans or credit accommodations that may be granted by the mortgagee ... " Subsequently, because he needed more funds, he obtained another P5 million loan. On due dates of both loans, X failed to pay the P5 million but fully paid the P10 million. BBB Banking Corporation instituted extrajudicial foreclosure proceedings. Will the extrajudicial foreclosure prosper considering that the additional P5 million was not covered by the registration?

Yes, because the real estate mortgage contains a valid provision that it covers future advancements.
The real estate mortgage in this case contains what is known as a "blanket mortgage clause."
A 'blanket mortgage clause,' also known as a 'dragnet clause' is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are 'carefully scrutinized and strictly construed.'
Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. (Prudential Bank v. Alviar, G.R. No. 150197, July 28, 2005)

5. Kinds of Mortgage

Real estate mortgage can be: VLE

voluntary
legal or
equitable.

Equitable mortgage

It is governed by Articles 1365, 1450, 1454, 1602, 1603, 1604 and 1607 of the New Civil Code.

Voluntary mortgage

It is one that is constituted by the agreement of the parties.

Legal mortgages

It include cases contemplated by the second paragraph of Article 2125 which provides that "the persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized."
These also include cases where the law requires the constitution of a mortgage or any other security.

5.01 Equitable Mortgage.

Equitable mortgage is a contract that:

appears to be a sale with a right of repurchase or
an absolute sale which in reality is a contract whereby no transfer of ownership is intended but the real intention is only to constitute a security.

The instances when the sale is presumed to be an equitable mortgage are provided for under Article 1602 of the New Civil Code.
An equitable mortgage is one which, although lacking in some formality, or form, or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law.
The essential requisites of an equitable mortgage are:

the parties enter into what appears to be a contract of sale
but their intention is to secure an existing debt by way of mortgage."

An equitable mortgage is defined as "one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law.
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.
The remedy is judicial foreclosure of the mortgage under Rule 68 of the 1997 Rules of Civil Procedure as amended.

Registration of this type of mortgage is not required.

6. Transfer of Title.

The obligation will be satisfied by the accessory mortgage contract through foreclosure sale.
The proceeds of the forced sale will be applied to the obligation that is being secured.
Cavite Development Bank v. Spouses Cyrus Lim, G.R. No. 131679, February 1, 2000:

A foreclosure sale, though essentially a 'forced sale,' is still a sale in accordance with Article 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent.
Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale.
This is the reason Article 2085 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan."

6.01. Mortgagee in Good Faith and in Bad Faith.

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy.

This is the doctrine of "the mortgagee in good faith" based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title.
The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title.
A mortgagee in good faith has the right to rely on the face of the Torrens title, whether Original or Transfer Certificate of Title.
A mortgagee without notice will not be affected by the claim of third persons.

It is a basic rule in Land Registration Law that a void title may be the root of a valid title.

Consistently, a void title may not prejudice the right of a mortgagee in good faith.
The subsequent declaration that the title is null and void is not a ground to nullify the mortgage rights of a mortgagee that acted in good faith.
However this does not apply if the mortgage relied upon is forged; "a transferee or the mortgagee, based on a forged instrument, is not even a purchaser or mortgagee for value protected by law."

Erena v. Querrer-Kauffman, G.R. No. 165853, June 22, 2006:

A transferee or the mortgagee, based on a forge instrument, is not even a purchaser or mortgagee for value protected by law.
The Supreme Court explained:

Indeed, a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor of the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of, or does not have a valid title to, the mortgaged property, the mortgagee in good faith is nonetheless entitled to protection This doctrine presupposes, however, that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining a Torrens title over the property in his name and that, after obtaining the said title, he succeeds in mortgaging the property to another who relies on what appears on the said title. The innocent purchaser (mortgagee in this case) for value protected by law is one who purchases a titled land by virtue of a deed executed by the registered owner himself, not by a forged deed, as the law expressly states. Such is not the situation of petitioner, who has been the victim of impostors pretending to be the registered owners but who are not said owners. The doctrine of mortgagee in good faith does not apply to a situation where the title is still in the name of the rightful owner and the mortgagor is a different person pretending to be the owner. In such a case, the mortgagee is not an innocent mortgagee for value and the registered owner will generally not lose his title. We thus agree with the following discussion of the CA:

The trial court wrongly applied in this case the doctrine of "mortgagee in good faith" which has been allowed in many instances but in a milieu dissimilar from this case. This doctrine is based on the rule that persons dealing with properties covered by a Torrens certificate of title are not required to go beyond what appears on the face of the title. But this is only in a situation where the mortgagor has a fraudulent or otherwise defective title, but not when the mortgagor is an impostor and a forger.

In a forged mortgage, as in this case, the doctrine of "mortgagee in good faith" cannot be applied and will not benefit a mortgagee no matter how large is his or her reservoir of good faith and diligence. Such mortgage is void and cannot prejudice the registered owner whose signature to the deed is falsified. When the instrument presented is forged, even if accompanied by the owner’s duplicate certificate of title, the registered owner does not lose his title, and neither does the assignee in the forged deed acquire any right or title to the property. An innocent purchaser for value is one who purchases a titled land by virtue of a deed executed by the registered owner himself not a forged deed.

6.02 Exception.

Banks cannot rely merely on the title.

By the nature of their functions, banks are required to go beyond the title because they are required to exercise the highest degree of diligence.
They are required to investigate the title and the property.

The nature of the business of banks demands due care in accepting properties as security for the obligations of its borrowers.

Mortgages in favor of banks will be annulled if there are circumstances that would indicate the bank's bad faith or negligence.

Negligence may take the form of failure to conduct an exhaustive investigation on the history of the mortgagor's title.
Negligence may also consist of not checking if there is a present possessor or in not making further inquiries or investigation knowing that there is a possessor of the property to be mortgaged other than the mortgagor.

The Supreme Court had consistently taken judicial notice of standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who are the real owners thereof.

If a bank fails to follow this standard procedure, it cannot be considered a mortgagee in good faith.

Osmundo S. Canlas v. Court of Appeals, et al., G.R. No. 112160, February 28, 2000 121 SCAD 752, 326 SCRA 415:

Consistently, the mortgagee bank cannot be considered a mortgagee in good faith if it accepted a mortgage that was executed by impostors.
In one case, the mortgage was executed by a couple who introduced themselves as the spouses who are the registered owners of the property to be mortgaged.
The Supreme Court observed that the bank did not observe the requisite diligence in ascertaining or verifying the real identity of the couple.

Romy Agag v. Alpha Financing Corporation G.R. No. 154826, July 31, 2003:

As a general rule, where there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title indicates on its face, in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto. This rule, however, applies only to innocent purchasers for value and in good faith. An innocent purchaser for value or any equivalent phrase shall be deemed, under Section 39 of Act 496 (Land Registration Act), to include an innocent lessee, mortgagee or any other encumbrancer for value. It excludes a purchaser or mortgagee who has knowledge of a defect or lack of title in the vendor, or of facts sufficient to induce a reasonably prudent man to inquire into the status of the property.
In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, we ruled that when the purchaser or mortgagee is a financing institution, the general rule that a purchaser or mortgagee of land is not required to look further than what appears on the face of the title does not apply. Thus –

Nevertheless, we have to deviate from the general rule because of the failure of petitioner in this case to take the necessary precautions to ascertain if there was any flaw in the title of the Nolascos and to examine the condition of the property they sought to mortgage. The petitioner is an investment and financing corporation. We presume it is experienced in its business. Ascertainment of the status and condition of properties offered to it as security for the loans it extends must be a standard and indispensable part of its operations. Surely it cannot simply rely on an examination of a Torrens certificate to determine what the subject property looks like as its condition is not apparent in the document. The land might be in a depressed area. There might be squatters on it. It might be easily inundated. It might be an interior lot without convenient access. These and other similar factors determine the value of the property and so should be of practical concern to the petitioner.

So also, in Cruz v. Bancom Finance Corporation, a case for reconveyance of property against a purchaser in a foreclosure sale, it was stressed that the due diligence required of banks extended even to persons regularly engaged in the business of lending money secured by real estate mortgages. Their expertise or experience in dealing with encumbrances on lands, not to mention the public interest affecting their business, require them to exercise more care and prudence in dealing even with registered lands.
Respondent, being a financial institution, cannot claim good faith considering that neither it nor the alleged mortgagee bank was in possession of the lots prior and after the foreclosure sale. Had respondent conducted an ocular inspection of the premises, this being the standard practice in the real estate industry, it would have discovered that the land is occupied by petitioner. The failure of respondent to take such precautionary steps is considered negligence on its part and would thereby preclude the defense of good faith.

6.03. Remedy.

The remedy of the person whose right is defeated by the mortgagee in good faith is to proceed against the perpetrator of the fraud.

Hence, recourse may be against the mortgagor.

Philippine National Bank v. Court of Appeals, G.R. No. L-43972, July 24, 1990:

The right or lien of an innocent mortgagee for value upon the land mortgaged must be respected and protected, even if the mortgagor obtained his title through fraud.
The remedy of the persons prejudiced is to bring an action for damages against those who caused the fraud, and if the latter are insolvent, an action against the Treasurer of the Philippines may be filed for recovery of damages against the Assurance Fund.

Assurance Fund.

Part of fee paid to Registry of Deeds.

Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the parties.

The persons in whose favor the law establishes a mortgage have no other right than to demand the execution and the recording of the document in which the mortgage is formalized.

1. Registration.

A real estate mortgage must be registered with the Register of Deeds where the subject property is located in order to affect third persons.
Justice J.B.L. Reyes explained that a mortgage, whether registered or not, is binding between the parties, registration being necessary only to make the same valid against third persons.

In other words, registration only operates as a notice of the mortgage to others, but neither adds to its validity nor convert an invalid mortgage into a valid one between the parties.

a. Preference of Mortgage

However, preference of mortgage credits is determined by the priority of registration of the mortgages following the maxim "Prior tempore potior jure" (He who is first in time is preferred in right).

Applicable only to properties covered by Torrens Certificate of Title.

In the same manner, a recorded mortgage is superior to the right of an attaching judgment creditor.
Limpin, Jr. v. Intermediate Appellate Court, G.R. No. L-70987, June 30, 1987:

The superiority of the mortgagee's lien over that of a subsequent judgment creditor is now expressly provided in Rule 39, Section 16 of the Revised Rules of Court, which states with regard to the effect of levy on execution that it shall create a lien in favor of a judgment creditor over the right, title and interest of the judgment debtor in such property at the time of the levy, subject to the liens or encumbrances then existing.
It is well settled that a recorded mortgage is a right in rem, a lien on the property whoever its owner may be. The recordation of the mortgage in this case puts the whole world, petitioners included, on constructive notice of its existence and warned everyone who thereafter dealt with the property on which it was constituted that he would have to reckon with that encumbrance.

b. Ministerial Act

Registration is a mere ministerial act by which:

a deed, contract or instrument is sought to be inscribed in the records of the Office of the Register of Deeds and
annotated at the back of the certificate of title covering the land subject of the deed, contract or instrument.

The registration of a mortgage, or the entry of a memorial of a mortgage on the register, is not a declaration by the State that such an instrument is a valid and subsisting interest in land; it is merely a declaration that the record of the title appears to be burdened with the lease or mortgage described, according to the priority set forth in the certificate.
The mere fact that a mortgage was registered does not stop any party to it from setting up that it has no force or effect.

c. Registration

Registration can be made even if the mortgagor is questioning the mortgage for lack of consideration so long as there is no final judgment annulling the mortgage.
The mortgagor has the right to show that the mortgage in question is invalid for lack of consideration in an ordinary action and there ask for the avoidance of the deed and the cancellation of its registration. But until such action is filed and decided, it would be too dangerous to the rights of the mortgagee to deny registration of the mortgage, because a transfer or conveyance of the mortgaged property to an innocent third person can so easily defeat the mortgagee's rights.
If the purpose of registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after, not before, registration.
It must follow as a necessary consequence that registration must first be allowed and validity or effect litigated afterwards.

2. Unregistered Mortgage.

An unregistered mortgage is binding between the parties only.

Hence, the mortgage may be defeated by a third party who has a better right.
This includes cases when the mortgage cannot be registered because the mortgage is in a private instrument.

Similarly, an unrecorded prior mortgage is inferior to a recorded mortgage except if the second recorded second mortgage was executed when the mortgagor was no longer the owner of the property.

a. Remedies

The remedies of the mortgagee in such case are:

to compel the mortgagee to execute a public instrument and to register the mortgage; and/or
to file a Petition for Judicial foreclosure of mortgage under Rule 68 of the Revised Rules of Court in case there is default in the obligation secured by the mortgage.

As between the parties, non-compliance with the registration requirement cannot be a bar to foreclosure.

b. Registration

Once a mortgage has been signed in due form, the mortgagee is entitled to its registration as a matter of right.
By executing the mortgage, the mortgagor is understood to have given his consent to its registration, and he cannot be permitted to revoke it unilaterally.

c. Court Order

The mortgagee can likewise ask the court to register the mortgage. Courts can validly order the Register of Deeds to annotate a final Certificate of Sale in the Original Certificate of Title and to register such sale, even if the registered owner-mortgagor refuses to surrender the owner's duplicate Certificate of Title.
San Juan v. Court of Appeals, G.R. No. 110055, August 20, 2001:

Going now to the meat of the controversy, we hold that under the circumstances obtaining, the annotation of private respondent's final Certificate of Sale in the Original Certificate of Title, even without the presentation of petitioner's duplicate, was valid. To rule otherwise would result in a situation in which a purchaser in a foreclosure sale can never consolidate his or her title to the property even after the lapse of the redemption period, because of the sheer refusal or failure of the former owner to submit the latter's duplicate certificate of title. The mortgagee purchaser would then be at the mercy of the mortgagor, if the latter without any just cause withholds such duplicate. Apt is the following pronouncement of the Court in Toledo-Banaga v. Court of Appeals:.

Petitioners[1 other contention that the execution of the final and executory decision - which is to issue titles in the name of private respondent :--cannot be compelled by mandamus because of the 'formality' that the registered owner first surrenders her duplicate Certificates of Title f or cancellation per Section 80 of Presidential Decree 1529 cited by the Register of Deeds, bears no merit. In effect, they argue that the winning party must [a]wait execution until the losing party has complied with the formality of surrender of the duplicate title. Such preposterous contention borders on the absurd and has no place in our legal system xx x. Otherwise, if execution cannot be had just because the losing party will not surrender her titles, the entire proceeding in the courts, not to say the efforts, expenses and time of the parties, would be rendered nugatory. It is revolting to conscience to allow petitioners to further avert the satisfaction of their obligation because of sheer literal adherence to technicality, or formality of surrender of the duplicate titles.

3. Junior Mortgage

The existence of a mortgage does not deprive the owner of his or her right to constitute another mortgage.
Under our laws, a mortgagor is allowed to take a second or subsequent mortgage on a property already mortgaged, subject to the prior rights of the previous mortgages.
The right is expressly recognized in Section 4 of Rule 68 of the Revised Rules of Court because the balance after disposition of the proceeds of the sale can be given to junior encumbrancers in the order of priority.

a. Registration

The junior mortgages can also be registered.
However, the first registered mortgagee has superior right over junior mortgagees or attaching creditors or persons with adverse claims

The practice however is to stipulate that the loan shall not be released unless that mortgage is registered.

It is also usual to stipulate that the mortgagee shall retain the title and it is the obligation of the borrower to secure the consent of the mortgagor before any future mortgage can be extended.

b. Equity of Redemption

The rule is well settled that a second mortgagee merely takes what is called an equity of redemption and thus a second mortgagee has to wait until after the debtor's obligation to the first mortgagee has been fully settled.
The rights of a second mortgagee are strictly subordinate to the superior lien of the first mortgagee.
Ramirez v. Court of Appeals, G.R. No. 98147, March 6, 1993:

In the case at bar, the proper foreclosure of the first mortgage gave, not only the first mortgagor, but also subsequent lien holders like Marmeto, the right to redeem the property within the statutory period."

c. Mortgage Credit over a Property in an Auction Sale

Under ordinary circumstances, if a person has a mortgage credit over a property which was sold in an auction sale, the only right left to him was to collect its mortgage credit from the purchaser thereof during the sale conducted.
This is so because a mortgage directly and immediately subjects the property on which it is constituted, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created.

Art. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the rents or income not yet received when the obligation becomes due, and to the amount of the indemnity granted or owing to the proprietor from the Insurers of the property mortgaged, or in virtue of expropriation for public use, with the declarations, amplifications and limitations established by law, whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third person.

1. Accessions, Improvements and Fruits.

The mortgage extends to the following although they are not yet received when the obligation becomes due:

Natural accessions;
Improvements;
Growing fruits; and
Rents or income.

a. Rent

Rent, which is an accessory, follows the principal.
Rent is a civil fruit that belongs to the owner of the property producing it by right of accession.
The rightful recipient of the rent is the owner of the subject lot at the time the rent accrued.

Philippine National Bank v. Sps. Maranon, G.R. No. 189316, July 1, 2013:

However, when the principal property is mortgaged, the mortgage shall include all the rents because the mortgage covers civil fruits when the secured obligation becomes due as provided in Article 2127 of the Civil Code.

Cu Unjieng e Hijos v. Mabalacat Sugar Co. 58 Phil. 439 (1933):

A mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery, and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof.

Sps. Paderes v. Court of Appeals, 502 Phil. 76 (2005):

The Court declared that the improvements constructed by the mortgagor on the subject lot are covered by the real estate mortgage contract with the mortgagee bank and thus included in the foreclosure proceedings instituted by the latter.

2. When Not Applicable

The Court explained that Article 2127 is predicated on the presumption that the ownership of accessions and accessories also belongs to the mortgagor as the owner of the principal.
After all, it is an indispensable requisite of a valid real estate mortgage that the mortgagor be the absolute owner of the encumbered property, thus:

"All improvements subsequently introduced or owned by the mortgagor on the encumbered property are deemed to form part of the mortgage. That the improvements are t o be considered so incorporated only if so owned by the mortgagor is a rule that can hardly be debated since a contract of security, whether, real or personal, needs as an indispensable element thereof the ownership by the pledgor or mortgagor of the property pledged or mortgaged."

Corollarily, any evidence sufficiently overthrowing the presumption that the mortgagor owns the mortgaged property precludes the application of Article 2127.

Otherwise stated, the provision is irrelevant and inapplicable to mortgages and their resultant foreclosures if the mortgagor is later on found or declared to be not the true owner of the property.

3. After-Acquired Property

One of the basic requirements of mortgage is that the mortgagor must be the owner of the thing mortgaged.

Thus, a mortgage of property not owned by the mortgagor is without any effect.

Nevertheless, Article 2092 sanctions a promise to mortgage in the future.

Hence, one may promise to mortgage property that he or she does not yet own subject t o his acquisition of the property before constituting the mortgage thereon.

In addition, Article 2127 contemplates after-acquired properties like fruits and income.

Accessions and improvements are not separate properties but are part of the properties originally mortgaged.

After-acquired properties may also be included by stipulation; the parties may stipulate that after-acquired properties are automatically included in the mortgage.

It should be noted that the stipulation usually involves contracts where there is a main object of the contract, like land owned by the mortgagor which will be first mortgaged and the properties that are subject to stipulation are properties other than the property originally mortgaged.
Thus, the parties may stipulate that all buildings, machineries and equipment attached to the mortgaged property shall be subject to the mortgage.

Art. 2128. The mortgage credit may be alienated or assigned to a third person, In whole or In part, with the formalities required by law.

Art. 2129. The creditor may claim from a third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law establishes.

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

1. Mortgage Credit.

The mortgagee acquires real right when property is mortgaged. As noted earlier, this mortgage right is real property in itself under par. 10 of Article 415 of the New Civil Code because it is an encumbrance over an immovable.
Hence, the mortgagee is an owner of an intangible property that is the mortgage credit. As an owner, he has the right to dispose of the mortgage credit. a. Transfer of mortgage credit is an assignment of a right contemplated under Article 1625 of the New Civil Code. Hence, the assignment must be registered in order to affect third persons. However, registration is not enough because it is also required that the debtor is notified. ''The transfer of the mortgage credit does not affect the debtor unless he is notified of it."69

2. Payment by Third Person.

Normally, a third person cannot be made to pay the obligation of another person.
However Article 2129 allows recovery from a third person who is in possession of the mortgaged property up to the extent of the value of the property.

Article 2129 is a reproduction of Article 1879 of the old Civil Code.

In a case decided under the old Civil Code, E.C. McCullough & Co. v. Veloso and Serna, G.R. No. L-21455 April 6 1924:

" ... The effects of transfer of a mortgaged property to a third person are well determined by the Civil Code. According to article 1879 of this Code, the creditor may demand of the third person in possession of the property mortgaged payment of such part of the debt, as is secured by the property in his possession, in the manner and form established by law. The Mortgage Law in force at the promulgation of the Civil Code and referred to in the latter, exacted, among other conditions, also the circumstance that after judicial or notarial demand, the original debtor had failed to make payment of the debt at maturity. (Article 136 of the Mortgage Law of the Philippines of 1889)
According to this, the obligation of the new possessor to pay the debt originated from the right of the creditor to demand payment of him, it being necessary that a demand for payment should have previously been made upon the debtor and the latter should have failed to pay. And even if these requirements were complied with, still the third possessor might a b a n d on the property mortgaged, and in that case it is considered to be in t h e possession of the debtor. (Article 136 of the same law) This clearly shows t hat the spirit of the Civil Code is to let the obligation of the debtor to pay the debt stand although the property mortgaged to secure payment of said debt may have been transferred to a third person...

a. Third Person Buyer

However, if the third person buys the mortgaged property with notice that it is mortgaged, the buyer only undertakes either to pay or else allow the land to be sold if the mortgage creditor could not or does not obtain payment from the principal debtor when the debt matures.
The obligation to discharge the mortgage indebtedness remains on the shoulders of the original debtors.
The encumbrance would make the purchaser, eventually liable to discharge the mortgage by paying or settling with the mortgage creditor, should the original mortgagors fail to satisfy the debt.

3. Void Prohibition to Sell

The mortgagor remains to be the owner of the property despite the mortgage.

Hence, the mortgagor has the right to dispose of the property.

The mortgage contract cannot stipulate that the mortgagor is prohibited from transferring ownership of the mortgaged property.
It cannot also be stipulated that prior consent of the mortgagee is necessary for the sale of the mortgaged property.

Such a prohibition would b e contrary to the public good, inasmuch as the transmission of property should not be unduly impeded.

However, a stipulation prohibiting the mortgagor from entering a second or subsequent mortgage is valid.

a. Consent of Mortgagee not Necessary

It cannot also be stipulated that prior consent of the mortgagee is necessary for the sale of the mortgaged property.
Later, however, in Spouses Vega v. Social Security System, G.R. No. 181672, September 20, 2010:

The Supreme Court explained that if such provision appears in the mortgage contract, it cannot be interpreted as absolutely forbidding the owner from selling the same while her loan is pending.

Art. 2131. The form, extent and consequences of a mortgage, both as to Its constitution, modification and extinguishment, and as to other matters not Included in this Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law.

1. Rights of the Mortgagee.

The mortgagee can transfer his right.

A mortgage credit may be alienated or assigned to a third person, wholly or partially, with the formalities required by laws.
The assignment must be in a public instrument and must be registered to affect third persons.

The mortgagee-creditor may likewise wait for the maturity date and demand payment of the obligation.
If the debtor fails to pay, the mortgagee-creditor may either resort to specific performance or foreclosure of the mortgage.

a. Judicial Foreclosure Only

The Supreme Court explained that if only judicial foreclosure is available, the mortgagee's three remedies that can be alternatively pursued in case the mortgagor dies under Section 7 of Rule 86 of the Rules of Court are as follows:

to waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim;
to foreclose the mortgage judicially and prove any deficiency as an ordinary claim; and
to rely on the mortgage exclusively, foreclosing the same at any time before it is barred by prescription, without right to file a claim for any deficiency.

The third remedy is not available if extrajudicial foreclosure is provided for.

b. Right in Rem

The right of the mortgagee is inseparable from the mortgaged property.

It is a right in rem, a lien on the property.

Hence, courts cannot compel the substitution of the mortgage with a surety bond because to order such substitution will convert such lien from a right in rem, to a right in personam.

This will violate the non-impairment of contract clause under the Constitution.

c. Prescription.

A mortgage action prescribes after 10 years.
This is provided for under Article 1142 of the New Civil Code.

1.01. Foreign Mortgage

Section 9 of Republic Act No. 7721 as amended by Republic Act No. 10641 allows foreign banks to participate in foreclosure proceedings.
Under Section 9, foreign banks which are authorized to do banking business in the Philippines through any of the modes of entry under the law shall be allowed to bid and take part in foreclosure sales of real property mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged property, for a period not exceeding five years from actual possession.
Title to the property shall not be transferred to such foreign bank.

In case said bank is the winning bidder, it shall, during the said five-year period, transfer its rights to a qualified Philippine national, without prejudice to a borrower's rights under applicable laws.
Should the bank fail to transfer such property within the five-year period, it shall be penalized 1/2 of 1 % per annum of the price at which the property was foreclosed until it is able to transfer the property to a qualified Philippine national.

2. Foreclosure of Mortgage.

Mortgage may be foreclosed judicially or extrajudicially.
The rules on judicial foreclosure are embodied in Rule 68 of the Revised Rules of Court.

b. Alternative Remedies

A secured creditor may institute against the mortgage debtor either:

a personal action for the collection of the debt,
a real action to judicially foreclose the real estate mortgage, or
an extrajudicial foreclosure of the mortgage.

The remedies, however, are alternative, not cumulative, and the election or use of one remedy operates as a waiver of the others.
If the mortgagee-creditor waives such personal action and pursues his remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the right to sue for a deficiency judgment, in which case, all the properties of the defendant, other than the mortgaged property, are again open to him for the satisfaction of the deficiency.
In either case, his remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of one or the other remedy are purely accidental and are all under his right of election.

c. Default

Foreclosure is available only if there is default.
Hence, the foreclosure of a mortgage prior to the mortgagor's default on the principal obligation is premature, and should be undone for being void and ineffectual.
The mortgagee who has been meanwhile given possession of the mortgaged property by virtue of a writ of possession issued to it as the purchaser at the foreclosure sale may be required to restore the possession of the property to the mortgagor and to pay reasonable rent for the use of the property during the intervening period.

3. Judicial Foreclosure.

The highlights of the rules and jurisprudence on judicial foreclosure of real estate mortgage under Rule 68 are stated hereunder.

a. Quasi In Rem.

A proceeding for judicial foreclosure of mortgage is an action quasi in rem.

It is based on a personal claim sought to be enforced against a specific property of a person named party defendant.
And, its purpose is to have the property seized and sold by court order to the end that the proceeds thereof be applied to the payment of plaintiffs claim.

Necessarily, notice should be given to the mortgagor because he or she is supposed to be impleaded as a defendant in the case.
Summons must be served upon the defendant not for the purpose of vesting the court with jurisdiction but merely for satisfying the due process requirement.

b. Equity of Redemption.

There is no right of redemption in judicial foreclosure.

What is available to the mortgagor is Equity of Redemption that is exercised before the foreclosure sale.

Equity of redemption is simply "the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the foreclosure sale but prior to its confirmation."
Section 2 of Rule 68 provides that the Court shall render judgment for the sum found due and order that the same be paid to the court or to the judgment obligee within a period of not less than 90 days nor more than 120 days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment.
Confirmation by the Court is indispensable.

Foreclosure is not complete until it is confirmed by the Court.
Prior to confirmation, the Court may grant the judgment debtor or mortgagor the opportunity to pay the proceeds of the sale and thus refrain from confirming it.

c. No Right of Redemption.

The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.
The right of redemption in relation to a mortgage understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale — exists only in the case of the extrajudicial foreclosure of the mortgage.
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists.
The law declares that a judicial foreclosure sale 'when confirmed by an order of the court . . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.

Such rights are exceptionally 'allowed by law' (i.e., even after confirmation by an order of the court)

d. Possession.

The mortgagor is still entitled to possession before the finality of the Court's Order of confirmation or before the expiration of the redemption period (for banks).
The purchaser shall be entitled to such possession after the finality of the order of confirmation.

e. Deficiency Judgment.

If there is a balance due to the plaintiff-mortgagee upon the sale of any real property, after applying the proceeds of the sale, the court, upon motion, shall render judgment against the defendant for any such balance for which, by the record of the case, he may be personally liable to the plaintiff, upon which execution may issue immediately if the balance is all due at the time of the rendition of the judgment; otherwise, the plaintiff shall be entitled to execution at such time as the balance remaining becomes due under the terms of the original contract, which time shall be stated in the judgment.

f. Excess.

Section 4 of Rule 68 provides that the balance or residue after satisfying the obligation and costs shall be given to the mortgagor or the latter's representative.
Thus, in the absence of any evidence showing that the mortgage also covers the other obligations of the mortgagor, the proceeds from the sale should not be applied to the other obligations.

g. Registration.

The registration of the sale is required only in extrajudicial foreclosure sale because the date of the registration is the reckoning point for the exercise of the right of redemption.
In contrast, the registration of the sale is superfluous in judicial foreclosure because only the equity of redemption is granted to the mortgagor, except in mortgages with banking institutions.

4. Special Law on Extrajudicial Foreclosure.

The law on extrajudicial foreclosure of mortgage is Act No. 3135 entitled "An Act to Regulate the Sale of Property under Special Powers Inserted or Annexed."
This law is further implemented in Supreme Court Circular No. A.M. No. 99-10-05-0.
The full text of Act No. 3135 is as follows:

Section 1. When a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation, the provisions of the following election shall govern as to the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power.
Sec. 2. Said sale cannot be made legally outside of 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 subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated.
Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city.
Sec. 4. The sale shall be made at public auction, between the hours or nine in the morning and four in the afternoon; and shall be under the direction of the sheriff of the province, the justice or auxiliary justice of the peace of the municipality in which such sale has to be made, or a notary public of said municipality, who shall be entitled to collect a fee of five pesos each day of actual work performed, in addition to his expenses.
Sec. 5. At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.
Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions of sections four hundred and sixty-four to four hundred and sixty-six, inclusive, of the Code of Civil Procedure, in so far as these are not inconsistent with the provisions of this Act.
Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and filed in form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one hundred and fourteen of Act Numbered Four hundred and ninety-six, as amended by Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.
Sec. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal.
Sec. 9. When the property is redeemed after the purchaser has been given possession, the redeemer shall be entitled to deduct from the price of redemption any rentals that said purchaser may have collected in case the property or any part thereof was rented; if the purchaser occupied the property as his own dwelling, it being town property, or used it gainfully, it being rural property, the redeemer may deduct from the price the interest of one per centum per month provided for in section four hundred and sixty-five of the Code of Civil Procedure.
Sec. 10. This Act shall take effect on its approval.

5. Requisites of Extrajudicial Foreclosure.

The requisites that must be established before a creditor can proceed t o an extrajudicial foreclosure are as follows:

There must have been the failure to pay the obligation to the mortgagee-creditor;
The loan obligation must be secured by a real estate mortgage; and
The mortgagee-creditor has the right to foreclose the real estate mortgage either judicially or extrajudicially.

a. Special Power.

In connection with the requirement that the mortgagee must have the right to foreclose, it is well settled that extrajudicial foreclosure under Act 3135 is available only if there is an express provision in the real estate mortgage authorizing such extrajudicial sale.
Section 1 of Act No. 3135 states that the provisions on extrajudicial foreclosure shall apply "when a sale is made under a special power inserted in or attached to any real-estate mortgage hereafter made as security for the payment of money or the fulfillment of any other obligation."

b. Power to Mortgage.

It should be recalled that Article 1879 of the New Civil Code provides that a special power to sell excludes the power to mortgage; and a special power to mortgage does not include the power to sell.
The same provision is inapplicable in the case of the special power contemplated in Article 1879:

The sale proscribed by a special power to mortgage under Article 1879 is a voluntary and independent contract, and not an auction sale resulting from extrajudicial foreclosure, which is precipitated by the default of a mortgagor. Absent that default, no foreclosure results.

Perez v. Philippine National Bank, G.R. No. L-21813, July 30, 1966, 17 SCRA 833, 839:

The stipulation granting an authority to extrajudicially foreclose a mortgage is an ancillary stipulation supported by the same cause or consideration for the mortgage and forms an essential or inseparable part of that bilateral agreement.
The power to foreclose is not an ordinary agency that contemplates exclusively the representation of the principal by the agent but is primarily an authority conferred upon the mortgagee for the latter's own protection. That power survives the death of the mortgagor.

Bicol Savings and Loan Association v. Court of Appeals, G.R. No. 85302. March 31, 1989:

In fact, the right of the mortgagee bank to extrajudicially foreclose the mortgage after the death of the mortgagor Juan de Jesus, acting through his attorney-in-fact, Jose de Jesus, did not depend on the authorization in the deed of mortgage executed by the latter ...

5.01. Petition.

The extrajudicial foreclosure of the real estate mortgage is initiated by filing a Petition with the Executive Judge through the Clerk of Court who is also Ex-Officio Sheriff of the City or Province where the property is located.
There is only one filing fee regardless of the number of properties to be foreclosed.

a. Venue

The venue of the extrajudicial foreclosure proceedings is the place where each of the mortgaged property is located.

5.02. Notice and Publication

Act No. 3136 requires compliance with formal requirements of posting and publication; otherwise, the sale is rendered null and void.

The notice and publication requirements and the procedure for the extrajudicial foreclosure constitute conditions sine qua non for the validity of foreclosure.
Specifically, there must be compliance with the formal requirements prescribed under Sections 2, 3, and 4 of Act 3136.

To repeat the following are indispensable for the validity of the foreclosure:

The posting of notices of sale in three public places; and
The publication of the notice of sale in a newspaper of general circulation.

a. Estoppel

However, the mortgagor may be barred by estoppel or laches from claiming that the required posting in three public places has not been complied with.

b. Posting in the Mortgaged Property

Posting must be in three public places but it is not necessary that notice is posted in the mortgaged property.

c. Transfer of date

If the original date of the sale stated in the notice of sale is transferred to another date, there must be another posting and publication of the notice of sale for the new date, otherwise, the sale will be considered invalid.

d. Personal Notice to Mortgagor

Personal notice to the mortgagor-debtor is not necessary for the validity of the extrajudicial foreclosure proceedings.

It was explained that "the principal object of a notice of sale in a foreclosure of mortgage is not so much to notify the mortgagor as to inform the public generally of the nature and condition of the property to be sold, and of the time, place, and terms of the sale.
Notices are given to secure bidders and prevent a sacrifice of the property.
Clearly, the statutory requirements of posting and publication are mandated, not for the mortgagor's benefit, but for the public or third persons.

Unless the parties stipulate, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary because Section 3 of Act No. 3135 only requires the posting of the notice of sale in three public places and the publication of that notice in a newspaper of general circulation.

However, if requirement of notice is stipulated in the mortgage contract, the extrajudicial foreclosure sale is invalid without such notice.

e. Certificate of Posting

While posting is necessary, a Certificate of Posting is not indispensable.

The Certificate is just an evidence of the fact that there was posting, in case such posting is an issue or in question.

f. Appraisal Value

Act No. 3135 has no requirement for the determination of the mortgaged properties' appraisal value.

Nothing in the law likewise indicates that the mortgagee creditor's appraisal value shall be the basis for the bid price.
Neither is there any rule nor any guideline prescribing the minimum amount of bid or that the bid should be at least equal to the properties' current appraised value.

What the law only provides are the requirements, procedure, venue and the mortgagor's right to redeem the property.
When the law does not provide for the determination of the property's valuation, neither should the courts so require, for the Court's duty is limited to the interpretation of the law, not its augmentation.

5.03 Price.

The fact that the mortgaged property is sold at an amount less than its actual market value is not a ground to invalidate the foreclosure sale so long as the price is not shocking to the conscience.

In other words, mere inadequacy of price per se will not invalidate a judicial sale of real property.

Valmonte v. Court of Appeals, G.R. No. 41621, February 18, 1999:

It is well settled that when ther e is a right to redeem, inadequacy of price is of no moment for the reason that the judgment debtor has always the chance to redeem and reacquire the property. In fact, the property may be sold for less than its fair market value precisely because the lesser the price the easier f or the owner to effect a redemption.

It is only when the inadequacy of the price is grossly shocking to the conscience or revolting to the mind, such that a reasonable man would neither directly nor indirectly be likely to consent to it, that the sale shall be declared null and void.
Inadequacy of the price will not adversely affect the extrajudicial foreclosure sale where the right of redemption is available.

The inadequacy of the price becomes immaterial because the judgment debtor may still re-acquire the property or even sell his right to redeem and thus recover the loss he might have suffered if by reason of the "inadequate price" obtained at the execution sale.

A clause that fixes the "tipo" or "upset price" that becomes operative upon foreclosure is invalid.

An upset price is the minimum price for the property that is being offered in a public sale.
The sale must take place and the property must be awarded to the highest bidder. Parties, cannot, by agreement contravene the statutes and interfere with the lawful procedure of the courts

5.04 Deficiency and Excess.

If the mortgage was extrajudicially foreclosed and there is deficiency, the mortgagee has the right to recover the deficiency resulting from the difference between the amount obtained in the sale at public auction, and the outstanding obligation at the time of the foreclosure proceedings.

a. Deficiency

In general, a deficiency judgment is in the nature of an ordinary money judgment, may constitute a cause of action, and is barred by the statute of limitations applicable to ordinary judgment.
The 10-year period provided in Articles 1142 and 1144 of the New Civil Code applies to a suit for deficiency judgment.

Article 1142 provides that a mortgage action prescribes after 10 years.
Article 1144 of the Civil Code provides that actions must be brought within 10 years from the time the right of action accrues upon an obligation created by law and upon a written contract.

A suit for the recovery of the deficiency after the foreclosure of a mortgage is in the nature of a mortgage action because its purpose is precisely to enforce the mortgage contract; it is upon a written contract and upon an obligation of debtor to pay the deficiency which is created by law.

b. Excess

If the proceeds of the sale is more than the obligation, the f act that the mortgagee retains the excess does not invalidate the foreclosure but will simply give the mortgagor a cause of action to recover the surplus.
The right of the mortgagor to the surplus is a substantial right that must prevail over technicalities.
If there is a junior mortgagee then the excess shall be applied to the debt owed to the junior mortgagee.

5.05 Bidders

The bidder in the foreclosure sale may be the mortgagee or a third person. Section 5 of Act 3135 provides that At any sale, the creditor, trustee, or other persons authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale is made.
Foreigners? Yes.

5.06 Possession Before Foreclosure

Delivery of the mortgaged real property is not necessary for the perfection of the contract.

Hence, the mortgagor retains possession of the property even if a mortgage is constituted.

The mortgage contract cannot be the basis of the claim for possession by the mortgagee.
The mortgagee cannot even eject the occupants of the mortgaged property before foreclosure.

5.07 Possession After Foreclosure

The mortgagor shall remain in possession of the real property even after foreclosure.

He remains to be the owner of the property.
The right of the purchaser in the public auction is merely inchoate in nature.

However, the winning bidder or purchaser may file a petition in court for a writ of possession to obtain possession of the property even before the expiration of the period redemption period.

The Supreme Court has "consistently held that the purchaser can demand possession of the property even during the redemption period for as long as he files an ex parte motion under oath and post a bond in accordance with Section 7 of Act No. 3135, as amended.

Upon filing of the motion and the approval of the bond, the law also directs the court in express terms to issue the order for a writ of possession.
However, possession may not be awarded if a third party is actually holding the property adversely to the judgment debtor.

5.08 Possession After the Redemption Period

When the redemption period has expired and title over the property has been consolidated in the purchaser's name, a writ of possession can be demanded as a matter of right.

The writ of possession shall be issued as a matter of course even without the filing and approval of a bond after consolidation of ownership and the issuance of a new TCT in the name of the purchaser.

It has been consistently held that the issuance of a writ of possession is a ministerial function.

The order for a writ of possession issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond.
The trial court neither exercises its official discretion nor judgment.
If only to stress the writ's ministerial character, the Supreme Court, in previous cases, even disallowed injunction to prohibit its issuance, just as it held that issuance of the writ may not be stayed by a pending action for annulment of mortgage or the foreclosure itself.

For petitioner to be issued a writ of possession, it must first clearly show that it has consolidated ownership of the subject properties in its name.

It is only at this point that issuance of the writ becomes a ministerial function of the courts.
In such a case, the bond required in Section 7 of Act No. 3135 is no longer necessary.
Possession of the land then becomes an absolute right of the purchaser as confirmed owner.
The basis of this right to possession is the purchaser's ownership of the property.

The proceeding in a petition and/or motion for issuance of a writ of possession, after the lapse of the statutory period for redemption, is summary in nature.

The trial court is mandated to issue a writ of possession upon a finding of the lapse of the one-year statutory period for redemption without the redemptioner having redeemed the property.

The judge to whom an application for writ of possession is filed need not look into the validity of the mortgage or the manner of its foreclosure. In the issuance of a writ of possession, no discretion is left to the trial court.

Any question regarding the cancellation of the writ or in respect of the validity and regularity of the public sale should be determined in a subsequent proceeding as outlined in Section 8 of Act No. 313.

680 Home Appliances, Inc. u. The Honorable Court of Appeals, G.R. No. 206599, September 29, 2014:

The provisions of Act No. 3135 applies until the period of redemption; once redemption lapses and consolidation of the purchaser’s title ensues, Act No. 3135 finds no application.
In a number of cases, the Court declared that Section 8 of Act No. 3135 is the available remedy to set aside a writ of possession, without considering whether the writ involved in each of these cases was issued during or after the lapse of the redemption period. Upon reevaluation, we find it necessary to make a distinction and clarify when the remedy under Section 8 of Act No. 3135 may be availed of.
In extrajudicial foreclosures, a writ of possession may be issued either

within the redemption period or
after the lapse of the redemption period.

The first instance is based on a privilege provided under Section 7 of Act No. 3135; the second is based on the purchaser’s right of ownership.
The basis of the purchaser’s right to possess the property affects the nature of the right.

Act No. 3135 governs only the manner of the sale and redemption of the mortgaged real property in an extrajudicial foreclosure; proceedings beyond these, i.e., upon the lapse of the redemption period and the consolidation of the purchaser’s title, are no longer within its scope. This is apparent from Section 1 of Act No. 3135, which states:
x x x
In fact, the nine (9) sections of Act No. 3135 pertain to proceedings governing extrajudicial foreclosures, from the conduct of the foreclosure sale up to the exercise of the right of redemption. Our reading of Act No. 3135, therefore, should be consistent with the law’s limited coverage.
During the redemption period, the purchaser’s title is merely inchoate. The "mere purchase and [issuance of a] certificate of sale alone do not confer any right to the possession or beneficial use of the premises [in favor of the purchaser]." Nonetheless, the purchaser may acquire possession of the property during the redemption period by exercising the privilege granted to him under Section 7 of Act No. 3135:
x x x
The debtor, on the other hand, is provided opportunity to contest the transfer of possession during the redemption period under Section 8 of Act No. 3135, as he remains tobe the owner of the foreclosed property. The provision states:
x x x
The writ of possession that the debtor may petition to set aside under Section 8 of Act No. 3135 undoubtedly refers to one issued pursuant to Section 7 of the same law "during the redemption period." The reference to the Section 7 proceeding underscores the position that the remedy provided in Section 8 is available only against a writ of possession during the redemption period.
Further showing Section 7 and 8’s close relation is the bond required to be filed by the purchaser in Section 7 that the debtor may proceed against in Section 8. Section 7 states that the petition for the issuance of a writ of possession should be accompanied by a bond which, under Section 8, shall "indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of [Act No. 3135]."
The requirement and purpose of the bond in Act No. 3135 support the position that Section 8 thereof isa remedy available only during the redemption period. A bond is no longer required to be filed in support of a petition for writ of possession filed after the redemption period has expiredwithout the mortgagor exercising his right of redemption. At this point, the purchaser’s right over the property is consolidated and his right to obtain possession of the property stems from his right of ownership. In Philippine National Bank v. Sanao Marketing Corporation, the Court ruled that —

A writ of possession may also be issued after consolidation of ownership of the property in the name of the purchaser. It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of sale. As such, he is entitled to the possession of the property and can demand it any time following the consolidation of ownership in his name and the issuance of a new transfer certificate of title. In such a case, the bond required in Section 7 of Act No. 3135 is no longer necessary. Possession of the land then becomes an absolute right of the purchaser as confirmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court.

If a bond is no longer required to support a writ of possession issued after the consolidation of the purchaser’s ownership, then no relief can be extended to the debtor under Section 8 of Act No. 3135.
As pointed out, the remedy provided under Section 8 of Act No. 3135 to the debtor becomes available only after the purchaser acquires actual possession of the property.

This is required because until then the debtor, as the owner of the property, does not lose his right to possess.
However, upon the lapse of the redemption period without the debtor exercising his right of redemption and the purchaser consolidates his title, it becomes unnecessary to require the purchaser to assume actual possession thereof before the debtor may contest it.
Possession of the land becomes an absolute right of the purchaser, as this is merely an incident of his ownership.
In fact, the issuance of the writ of possession at this point becomes ministerial for the court.

The debtor contesting the purchaser’s possession may no longer avail of the remedy under Section 8 of Act No. 3135, but should pursue a separate action e.g., action for recovery of ownership, for annulment of mortgage and/or annulment of foreclosure.

5.09 Injunction Against the Writ.

The implementation of a writ of possession issued pursuant to Act No. 3135 at the instance of the purchaser at the foreclosure sale of the mortgaged property in whose name the title has been meanwhile consolidated cannot be prevented by the injunctive writ.

Under Section 8 of Act No. 3135, "the debtor may, in the proceedings in which possession was requested, but not later than thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure."
Section 8 further provides that "if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession."

Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

a. Exception.

The ministerial issuance of a writ of possession in favor of the purchaser in an extrajudicial foreclosure sale, however, admits of an exception.

Section 33, Rule 39 of the Rules of Court (Rules) pertinently provides that the possession of the mortgaged property may be awarded to a purchaser in an extrajudicial foreclosure unless a third party is actually holding the property by adverse title or right.

In Rural Bank of Sta. Barbara(Iloilo), Inc. v. Centeno, G.R. No. 200667, March 11, 2013:

The Court explained that "the phrase 'a third party who is actually holding the property adversely to the judgment obligor' contemplates a situation in which a third party holds the property by adverse title or right, such as that of a co- owner, tenant or usufructuary.
The co-owner, agricultural tenant, and usufructuary possess the property in their own right, and they are not merely the successor or transferee of the right of possession of another co-owner or the owner of the property.
Notably, the property should not only be possessed by a third party, but also held by the third party adversely to the judgment obligor.

As mentioned in Villanueva v. Cherdan Lending Investors Corporation, G.R. No. 177881, October 13, 2010:

The third person must therefore claim a right superior to that of the original mortgagor.

5.10. Redemption.

The rules on the right of the mortgagor to redeem the mortgaged property are as follows:

The debtor-mortgagor can redeem the property within one year from the date the certificate of sale is registered with the Register of Deeds.
If the mortgagee is a bank there is also a one-year redemption period for natural persons.
If the mortgagee is a bank and the mortgagor is a juridical person, the mortgagor can redeem the property within three months from foreclosure but not later than the registration of the certificate of sale.

a. Redemption Period for Natural Persons.

The mortgagor or debtor, who is a natural person, whose real property has been sold for the full or partial payment of his obligation to the mortgagee bank shall have the right within one year after the sale of the real estate, to redeem the property.
Subsection X311.5 of the Manual of Regulations for Bank as amended by BSP Circular No. 337, Series of 2002 provides that the one-year redemption period should be counted from the date of the registration of the certificate of sale with the Register of Deeds.
This is also consistent with Section 1(3) of Supreme Court Circular AM. No. 99-10-05 (as further amended on August 7, 2001) which imposes the following duty on the Clerk of Court:

e) after the certificate of sale has been issued to the highest bidder, keep complete records, while awaiting any redemption within a period of one (1) year from date of registration of the certificate of sale with the Register of Deeds concerned, after which, the records shall be archived. Notwithstanding the foregoing provision, juridical persons whose property is sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure, whichever is earlier, as provided in Section 47 of Republic Act No. 8791 (as amended. Res. of August 7, 2001).

b. Effect of Estoppel and/or Agreement.

It has been held, however, that a bank may be bound by an agreement providing for a longer redemption period.

The statutory period of redemption can be extended by agreement of the parties.
Thus, an agreement to provide for a two-year redemption converts the legal redemption into conventional redemption.

Even if there is no agreement, a mortgagee may also be bound by estoppel if the same mortgagee unilaterally granted an extension of the redemption period.

Thus, acceptance of the redemption price after the statutory period for redemption is considered a waiver of the period.

In Ibaan Rural Bank, Inc. v. Court of Appeals, G.R. No. 123817, December 17, 1999:

The sheriff who conducted the foreclosure sale unilaterally and arbitrarily extended the redemption period in the Certificate of Sale. However, the bank did not do anything during the same period and was therefore considered estopped from asserting that the period for redemption was only for one year and that the period had already lapsed.
The bank involved could not have claimed ignorance. Petitioner bank is a banking institution on whom the public expects diligence, meticulousness and mastery of its transactions. Had it diligently reviewed the Certificate of Sale, it could have easily discovered that the period was extended one year beyond the usual redemption period.

c. Effect of Restraining Order.

One of the usual recourse of mortgagors, who are desperately trying to hold on to their properties or are trying to buy time, is to file an action to annul the mortgage and to ask for a temporary restraining order or writ of preliminary injunction to prevent the bank from consolidating its title.
However, this move might eventually backfire if there is no sufficient ground to annul the mortgage because the issuance of a restraining order or a writ of preliminary injunction in a baseless action will not toll the running of the redemption period.
Thus, the Supreme Court ruled in People's Financing Corporation, et al. v. Court of Appeals, et al. G.R. No. 80791, December 4, 1990, 192 SCRA 34, 41:

The record shows, however, that the certificate of sale was duly registered by the petitioners in the Office of the Register of Deeds of Mandaue City on March 5, 1979. The one-year redemption period began to run from that date and expired on March 5, 1980, without any redemption having been effected by the private respondents. The consequence is that ownership was legally consolidated in PFC, which had a right to the issuance of a new certificate of title in its name.
It is not correct to say that the restraining order issued on February 11, 1980, by the trial court (which ultimately dismissed the complaint four years later) had the effect of suspending the running of the redemption period. As we held through Chief Justice Concepcion in Sumerariz v. Development Bank of the Philippines, "there is no statute or decision which supports plaintiffs contention that the period of one year to redeem land sold at the sheriff's sale was suspended by the institution of an action to annul the foreclosure sale."
On the third issue, we find for the private respondents. It has not been sufficiently established that the complaint they filed was intended merely to harass and place petitioner Arcenas in disrepute as they apparently were pursuing a cause of action they sincerely believed was meritorious. The fact that they have failed does not necessarily mean that they were acting in bad faith. The mere filing of a complaint against a person, while it may cause him some anxiety, is not per se evidence of ill will on which a claim for damages may be based. A contrary role would discourage peaceful recourse to the courts of justice and induce resort to methods less than legal, and perhaps even violent.

d. Taxes.

Consistent with the rule that the issuance of a temporary restraining order cannot stop the running of the redemption period, the Bureau of Internal Revenue opined that the capital gains tax and documentary stamp taxes should also be paid after the lapse of a period of one year from the date of registration despite the issuance of a temporary restraining order.

5.11. Redemption Price.

The redemption price under Act 3135 is the purchase price during the auction sale plus interest of 1 % per month and taxes.

There must be tender of the whole redemption price plus interest in order to validly exercise the right of redemption.
Redemption requires payment and not merely intent to redeem.
However, deposit of the redemption price with the Sheriff is sufficient to effect payment of the redemption price; consignation in court need not be resorted to.

a. Exception

By way of exception, the redemption price is the whole obligation secured by the mortgage if the mortgagee is a bank.

Section 47 of the General Banking Law provides that redemption may be exercised by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom.
Hence, the redemption price comprises not only the total amount due under the mortgage deed, but also with interest at the rate specified in the mortgage, and all the foreclosure expenses incurred by the mortgagee bank.

b. Amount under Act 3135

The amount to be paid upon redemption under Section 6 of Section Act 3135 is that which is provided for under the Rules of Court which is "the amount of his purchase, with one per cent um per month interest thereon in addition, up to the time of redemption together with the amount of any assessments or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same rate."

c. Amount under GBL

The amount to be paid under the GBL therefore is different from the amount to be paid under Act 3135.

Thus, even if Act 3135 will be applied to extrajudicial foreclosure of mortgage in favor of a bank, the price specified in Section 47 of the GBL is the applicable amount with respect to the redemption of the property foreclosed by a bank.

In case of conflict between Act 3135 and the GBL, the conflict should be resolved in favor of the GBL, being a special and subsequent legislation.

d. Actual and Simultaneous Tender

In this connection, it is important to note the general rule in redemption that it is not sufficient that a person offering t o redeem manifests his desire to do so.

The statement of intention must be accompanied by an actual and simultaneous tender of payment.
This is similar to the exercise of the right to repurchase.

In several cases decided by the Supreme Court where the right to repurchase was held to have been properly exercised, there was an unequivocal tender of payment for the full amount of the repurchase price. Otherwise, the offer to redeem is ineffectual.

Bona fide redemption necessarily implies a reasonable and valid tender of the entire repurchase price, otherwise the rule on the redemption period fixed by law can easily be circumvented.

5.12. Expiration of Redemption Period.

The right to redeem becomes functus officio on the date of its expiry.
Hence, the redemptioner has no right to redeem after the expiration of the redemption period.

a. Repurchase

The mortgagee, who is also the winning bidder, may allow the redemptioner to "redeem" after the expiration of the said period.

However, its exercise after the redemption period is not really one of redemption but a repurchase.

Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption.
Repurchase, however, of a foreclosed property, after redemption period, imposes no such obligation.
After expiry of the redemption period, the purchaser may or may not re sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner.

b. Liberal Construction

Moreover, there have been cases where the Supreme Court made liberal construction of redemption laws in favor of the redemptioner.
Doronila v. Vasquez 72 Phil. 572 (1941):

Allowed redemption even after the lapse of the one-year period in order to promote justice and avoid injustice.

Tolentino v. Court of Appeals G.R. Nos. L-50405-06, August 5, 1981, 106 SCRA 513:

The policy of the law to aid rather than defeat the right of redemption was expressed, stressing that where no injury would ensue, liberal construction of redemption laws is pursued and the exercise of the right to redemption is permitted to better serve the ends of justice.

Delos Reyes v. Intermediate Appellate Court, G.R. No. 74768, August 11, 1989, 176 SCRA 394:

The rule was liberally interpreted in favor of the original owner of the property to give him another opportunity, should his fortunes improve, to recover his property.
It should be noted however that in this case, the original owners made a valid tender within the redemption period.

Union Bank of the Philippines v. Court of Appeals, 370 Phil. 837, 846-847 (1999):

The Court ruled that, after the purchaser's consolidation of title over foreclosed property, the issuance of a certificate of title in his favor is ministerial upon the Register of Deeds, thus:

In real estate mortgage, when the principal obligation is not paid when due, the mortgage has the right to foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the payment of the principal obligation. Foreclosure may be effected either judicially or extrajudicially.
In a public bidding during extra-judicial foreclosure, the creditor — mortgagee, trustee, or other person authorized to act for the creditor may participate and purchase the mortgaged property as any other bidder. Thereafter the mortgagor has one year within which to redeem the property from and after registration of sale with the Register of Deeds.

In case of non-redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed or mortgage, or his sworn statement attesting to the fact of non-redemption; whereupon, the Register of Deeds Shall issue a new certificate of title in favor of the purchaser after the owner's duplicate of the certificate has been previously delivered and canceled.

Thus, upon failure to redeem foreclosed realty, consolidation of title becomes a matter of right on the part of the auction buyer, and the issuance of a certificate of title in favor of the purchaser becomes ministerial upon the Register of Deeds.

6. Foreclosure Under the GBL.

The special rules of foreclosure under the General Banking Law if the bank is the mortgagee are provided for in Section 47 which provides:

Section 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.

a. Injunction to Stop Foreclosure.

Section 47 of the GBL expressly recognizes a remedy against the foreclosure.
It provides that the foreclosure itself can be restrained upon the filing of a proper petition.
Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding."

b. Possession After Foreclosure.

Section 47 of the GBL likewise provides that the purchaser at the auction sale can take possession after foreclosure.
Section 47 provides that "the purchaser at the auction sale concerned whether in a judicial or extra judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law."

c. Redemption Period.

As noted earlier, Section 47 likewise provides for the rules on redemption that makes a distinction between a natural and a juridical person.

d. Constitutionality of Redemption Period for Juridical Persons.

In Golden Merchandising Corporation v. Equitable PCI Bank G.R. No. 195540, March 13, 2013: ⭐

The parties provided in their real estate mortgage contract executed in 1985 that upon petitioner's default and the latter's entire loan obligation becoming due, respondent may immediately foreclose the mortgage judicially in accordance with the Rules of Court, or extrajudicially in accordance with Act No. 3135, as amended.
As already pointed out, under Act No. 3135, the redemption period is one year from registration of the certificate of sale. With the passage of Section 47 of the GBL, an exception is thus made in the case of juridical persons which are allowed to exercise the right of redemption only "until, but not after, the registration of the certificate of foreclosure sale" and in no case more than three months after foreclosure, whichever comes first.
Petitioner in the afore-cited case contended that Section 47 of Republic Act No. 8791 violates the constitutional proscription against impairment of the obligation of contracts. The Supreme Court rejected the argument with the following explanation:

The purpose of the non-impairment clause of the Constitution is to safeguard the integrity of contracts against unwarranted interference by the State. As a rule, contracts should not be tampered with by subsequent laws that would change or modify the rights and obligations of the parties. Impairment is anything that diminishes the efficacy of the contract.
There is a impairment if a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the parties.
Section 47 did not divest juridical persons of the right to redeem their foreclosed properties but only modified the time for the exercise of such right by reducing the one-year period originally provided in Act No. 3135.
The new redemption period commences from the date of foreclosure sale, and expires upon registration of the certificate of sale or three months after foreclosure, whichever is earlier. There is likewise no retroactive application of the new redemption period because Section 47 exempts from its operation those properties foreclosed prior to its effectivity and whose owners shall retain their redemption rights under Act No. 3135.
Petitioner’s claim that Section 47 infringes the equal protection clause as it discriminates mortgagors/property owners who are juridical persons is equally bereft of merit.
The equal protection clause is directed principally against undue favor and individual or class privilege. It is not intended to prohibit legislation which is limited to the object to which it is directed or by the territory in which it is to operate. It does not require absolute equality, but merely that all persons be treated alike under like conditions both as to privileges conferred and liabilities imposed. Equal protection permits of reasonable classification. We have ruled that one class may be treated differently from another where the groupings are based on reasonable and real distinctions. If classification is germane to the purpose of the law, concerns all members of the class, and applies equally to present and future conditions, the classification does not violate the equal protection guarantee.
We agree with the CA that the legislature clearly intended to shorten the period of redemption for juridical persons whose properties were foreclosed and sold in accordance with the provisions of Act No. 3135.
The difference in the treatment of juridical persons and natural persons was based on the nature of the properties foreclosed – whether these are used as residence, for which the more liberal one-year redemption period is retained, or used for industrial or commercial purposes, in which case a shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner of these acquired assets. It must be underscored that the General Banking Law of 2000, crafted in the aftermath of the 1997 Southeast Asian financial crisis, sought to reform the General Banking Act of 1949 by fashioning a legal framework for maintaining a safe and sound banking system. In this context, the amendment introduced by Section 47 embodied one of such safe and sound practices aimed at ensuring the solvency and liquidity of our banks. It cannot therefore be disputed that the said provision amending the redemption period in Act 3135 was based on a reasonable classification and germane to the purpose of the law.
This legitimate public interest pursued by the legislature further enfeebles petitioner’s impairment of contract theory.
The right of redemption being statutory, it must be exercised in the manner prescribed by the statute, and within the prescribed time limit, to make it effective. Furthermore, as with other individual rights to contract and to property, it has to give way to police power exercised for public welfare. The concept of police power is well-established in this jurisdiction. It has been defined as the "state authority to enact legislation that may interfere with personal liberty or property in order to promote the general welfare." Its scope, ever-expanding to meet the exigencies of the times, even to anticipate the future where it could be done, provides enough room for an efficient and flexible response to conditions and circumstances thus assuming the greatest benefits.
The freedom to contract is not absolute; all contracts and all rights are subject to the police power of the State and not only may regulations which affect them be established by the State, but all such regulations must be subject to change from time to time, as the general well-being of the community may require, or as the circumstances may change, or as experience may demonstrate the necessity. Settled is the rule that the non-impairment clause of the Constitution must yield to the loftier purposes targeted by the Government. The right granted by this provision must submit to the demands and necessities of the State’s power of regulation. Such authority to regulate businesses extends to the banking industry which, as this Court has time and again emphasized, is undeniably imbued with public interest.

PROBLEMS:

X obtained a loan for P50 million from SSS Bank. The collateral is his vacation house in Baguio City under a real estate mortgage. X needed more funds for his business so he again borrowed another P10 million, this time from BBB Bank, another bank, using the same collateral. The loan secured from SSS Bank fell due and X defaulted.

If SSS Bank forecloses the real estate mortgage, what rights, if any, are left with BBB Bank as mortgagee also?

BBB Bank can redeem the foreclosed property. BBB Bank is what is known as a junior mortgagee. Under our laws, a mortgagor is allowed to take a second or subsequent mortgage on a property already mortgaged, subject to the prior rights of the previous mortgagee. Thus, the foreclosure of the first mortgage left BBB Bank with no other right than to redeem the property.

If the value of the Baguio property is less than the amount of loan, what would be the recourse of SSS Bank? BBB Bank?

SSS Bank can collect the deficiency by filing a case in court. There is nothing in the law that prohibits the recovery of deficiency after foreclosure.
As noted earlier, BBB Bank can redeem the property. In addition, BBB Bank can also recover any deficiency from X.

If the value of the property is more that the amount of the loan, who will benefit from the excess value of the property?

BBB Bank and X wilJ benefit from the excess. If the claim of SSS Bank is fully satisfied upon foreclosure, any excess amount will go to the junior mortgagee (BBB Bank) and if there is still a remaining balance, the amount will be given to the mortgagor-debtor.

If X defaulted with its loan in favor of BBB Bank but fully paid his loan with SSS Bank, can BBB Bank foreclose the real mortgage executed in its favor?

Yes, BBB Bank can foreclose the junior mortgage. Full payment of the loan from SSS Bank extinguished the accessory contract of mortgage in favor of SSS Bank. Hence, the only remaining lien is the junior mortgage of BBB Bank.

Does X have any legal remedy after the foreclosure in the event that later on he has the money to pay for the loan?

Yes, the remedy of X is to exercise his right of redemption. Act 3135 and the General Banking Act provides that the individual mortgagor can redeem the property within one year from the date of registration of the sheriffs certificate of foreclosure sale.

If SSS Bank and BBB Bank abandon their rights under the real estate mortgage, is there any legal recourse available to them?

Yes, the abandonment of the mortgages only affects the accessory contracts. The principal obligation remains. Hence, SSS Bank and BBB Bank could each file an action for specific performance, that is, to compel X to pay the loan.

Primetime Corporation (the Borrower) obtained a P10 million, five year term loan from Universal Bank (the Bank) in 1996. As security for the loan and as required by the Bank, the Borrower gave the following collateral security in favor of the Bank: 1) a real estate mortgage over the land and building owned by the Borrower and located in Quezon City; 2) the joint and several promissory note of Mr. Primo Timbol, the President of the Borrower; and 3) a real estate mortgage over the residential house and lot owned by Mr. Timbol, also located in Quezon City. Because of business reverses, neither the Borrower nor Mr. Timbol was able to pay the loan. In June 2001, the Bank extrajudicially foreclosed the two real estate mortgages, with the Bank as the only bidder in the foreclosure sale. On September 16, 2001, the certificates of sale of the two properties in favor of the Bank were registered with the Register of Deeds of Quezon City. IO months later, both the Borrower and Mr. Timbol were able to raise sufficient funds to redeem their respective properties from the Bank, but the Bank refused to permit redemption on the ground that the period for redemption had already expired, so that the Bank now has absolute ownership of both properties. The Borrower and Mr. Timbol came to you, on September 15, 2002, to find out if the position of the Bank is correct. What would be your answer? State your reasons.

The Bank is correct with respect to Primetown Corporation. Section 47 of the General Banking Law provides that a juridical person whose property has been sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property "until, but not after, the registration of the certificate of foreclosure sale" with the Register of Deeds and in no case more than three months after foreclosure, whichever comes first. The same period already expired in the present case.
However, the Bank is not correct with respect to the real estate mortgage over the residential house and lot owned by Mr. Timbol. Under Section 47 of the General Banking Law, the mortgagor or debtor, who is a natural person, whose real property has been sold for the full or partial payment of his (or another's) obligation shall have the right within one year after the sale of the real estate, to redeem the property. The one-year period is counted from the date of registration of the certificate of sale and the same period has not yet expired in this case.

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