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REAL ESTATE MORTGAGE

Definition

A contract whereby the debtor secures to the

creditor the fulfillment of a principal obligation, speciallysubjecting to such security immovable property or real

rights over immovable property in case the principal

obligation is not complied with at the time stipulated.

Characteristics of the contract:

Real

Accessory

Subsidiary

Unilateral it creates only an obligation on the partof the creditor who must free the property from the

encumbrance once the obligation is fulfilled.

CASE

Dilag vs. Heirs of Resurrecion, 76 Phil. 650

A deed of sale or mortgage is usually a unilateral

contract in the sense that only the vendor or mortgagor

signs it. Likewise a promissory note is a unilateral contract

in the sense that only the promisor or maker signs it. Butthese do not mean that the signer is the only party to that

contract and the only one entitled to sue thereon. The

obligee is as much a part to the contract as the obligor, for

there can be no obligor without an obligee; and as a matter

of course it is the obligee who has the right to sue on and

enforce the obligation.

What is the consideration of mortgage?

As mortgage is an accessory contract, its

consideration is the same as of the principal contract fromwhich it receives its life, and without which it cannot exist

as an independent contract, although the obligation

thereby secured is incurred by a third person and,

therefore, it will be valid if the principal obligation is valid,

and cannot be avoided on the ground of lack of

consideration.

What are the kinds of mortgage?1. Voluntary agreed to by the parties or constituted

by the will of the owner of the property on which it

is created

2. Legal one required by law to be executed in favour

of certain persons

a. The persons in whose favour the law

establishes a mortgage have no other right

than to demand the execution and the

recording of the document in which themortgage is formalized (Art 2125 par 2)

3. Equitable one which, although lacking the

formalities of a mortgage, shows the intention of

the parties to make the property a security for a

debt


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What is the object of mortgage?

Only the following property may be the object of a

contract of mortgage:

(1) Immovables;(2) Alienable real rights in accordance with the

laws, imposed upon immovables.

Note:

Future property cannot be the object of mortgage

because the mortgagor could not legally mortgage

any property he did not yet own.

A mortgage does not involve a transfer, cession orconveyance of property but only constitutes a lien

thereon. Until discharged, it follows the property

wherever it goes and subsists notwithstanding

changes of ownership.

A mortgage gives the mortgagee no right or claim to

the possession of the property, and therefore, a

mere mortgagee has no right to eject an occupant

of the property mortgaged unless the mortgage

should contain some provision to that effect. The only right of a mortgagee in case of non-

payment of a debt secured by mortgage would be to

foreclose the mortgage and have the encumbered

property sold to satisfy the outstanding

indebtedness.

If the possession is transferred to the mortgagee,

it must not expressly be for purpose of applying the

fruits to the interest then to the principal of the

credit, for then it would be an antichresis.

What are the requisites to the contract of mortgage?

The following requisites are essential to the contracts

of pledge and mortgage

1. That they be constituted to secure the fulfillment

of a principal obligation;

2. That the mortgagor be the absolute owner of the

thing mortgaged;

3. That the persons constituting the mortgage have

the free disposal of their property, and in theabsence thereof, that they be legally authorized for

the purpose.

4. It can cover only immovable property and alienable

real rights imposed upon immovables (Art 2124);

5. It must appear in a public instrument (Art. 2125);

and

6. Registration in the registry of property is necessary

to bind third persons, but not for the validity of the

contract between the parties (Art 2125).a. An order for foreclosure cannot be refused

on the ground that the mortgage had not

been registered provided no innocent third

parties are involved.


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Where the mortgage is in a private document, no

valid mortgage is constituted in which case the

creditor may recover the loan.

What is the doctrine of mortgagee in good faith?It is the reliance in good faith on certificate of

title of mortgagor.

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 isnonetheless entitled to protection.

Basis: All persons dealing

with the 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.

Exception: Duty of mortgagee to look beyond

certificate of title.

1. Where the purchaser or mortgagee has knowledgeof a defect or lack of title in the vendor, or

2. the mortgagee does not directly deal with the

registered owner of real property.

3. he was aware of sufficient facts to induce a

reasonably prudent man to inquire into the status of

a property in litigation.

4. When the purchaser or mortgagee is a bank or

financing institution

a. The due diligence required of banks extends

even to persons regularly engaged in the

business of lending money secured by realestate mortgages.

Effect of invalidity of Mortgage on Principal Obligation

1. Where a mortgage is not valid or false, the principal

obligation which it guarantees is not rendered null

and void. It remains valid.

a. What is lost only is the right to foreclose

the mortgage as a special remedy forsatisfying or settling the indebtedness which

is the principal obligation.

2. The mortgage deed remains as evidence or proof of

a personal obligation of the debtor and the amount

due to the creditor may be enforced in an ordinary

personal action.

Distinguish Mortgage from Pledge

PLEDGE REAL MORTGAGE

1. Constituted on movables 1. Constituted on immovables

2. Property is delivered topledgee or by common consent

2. Delivery is not necessary


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to a third person

3. Not valid against third personsunless a description of the thingpledged and date of pledgeappear in a public instrument

3. Not valid against third persons unlessregistered

Art. 2126.

Effect of mortgage.

1. Creates real right.

2. Create merely an encumbrance

a. By mortgaging his property, a debtor merely

subject it to a lien but ownership thereof isnot parted with.

b. The only right of a mortgagee in case of non-

payment of a debt secured by mortgage

would be to foreclose the mortgage and have

the encumbered property sold to satisfy the

outstanding indebtedness.

Art. 2127

Extent of Mortgage.

A real estate mortgage constituted on immovable

property is not limited to the property itself but also

extends to all its

a. accessions,

b. improvements,

c. growing fruits and

d. rents or income (see Art. 2102.) as well as

e. to the proceeds of insurance should the

property be destroyed, or

f. the expropriation value of the property

should it be expropriated.

To exclude them, it is necessary that there be an expressstipulation to that effect.

Mortgage with dragnet clauses to secure future

advancements.

It is a mortgage given to secure future

advancements.

General Rule: an action to foreclose a mortgage must be

limited to the amount mentioned in the mortgage.

Exception: Dragnet Clauses

But the amounts named as consideration in a contract of

mortgage do not limit the amount for which the mortgaged

may stand as security, if from the four corners of the

instrument the intent to secure future loans or

advancements and other indebtedness can be gathered.

Such stipulation is valid and binding between the parties.

Usefulness of mortgage with dragnet clause

1. It enables the parties to provide continuous

dealings, the nature or extent of which may not be

known or anticipated at the time, and

2. they avoid the expense and inconvenience of

executing a new security on each new transaction


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3. 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 extralegal services, recording fees, et cetera.

Notes:

Such dragnet clauses are carefully scrutinized and

strictly construed particularly where the mortgage

contract is one of adhesion, that is, it was prepared

solely by the mortgagee and the only participation

of the mortgagor was the affi xing of his signature

or adhesion thereto, in order to shield the wary orweaker party from deceptive schemes contained in

ready-made convenants.

When shall mortgage become a continuing security?

A mortgage (or pledge) given to secure future

advancements is a continuing security and is not

discharged by the repayment of the amount named in

the mortgage, until the full amount of theadvancements are paid.

Art. 2128

Such real right may be alienated or assigned to

third person, in whole or in part, by the mortgagee who

is the owner of said right and the assignee may

foreclose the mortgage in case of nonpayment of the

mortgage indebtedness. (Santiago vs. Pioneer Saving

and Loan Bank, 157 SCRA 100 [1988].)

The alienation or assignment is valid even if it is not

registered. Registration is necessary only to affect

third persons

Art. 2129 Right of Creditor against Transferee of

Mortgaged Property

The mortgage on the property may still be

foreclosed despite the fact that the mortgagor hastransferred the mortgaged property to a third person.

Art. 2130. Stipulation forbidding the owner from

alienating the mortgaged property shall be void.

Such a prohibition would be contrary to the public

good inasmuch as the transmission of property should not

be unduly impeded.

The mortgagee can simply withhold his consent andthereby prevent the mortgagor from selling the property.

The transferee is bound to respect the

encumbrance because being a real right, the property

remains subject to the fulfillment of the obligation for

whose guaranty it was constituted. (Art. 2126.)

Stipulation granting right of first refusal.


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There is nothing wrong in a stipulation granting the

mortgagee the right of first refusal over the mortgaged

property in the event the mortgagor decides to sell the

same.

Special Rights:

1. Mortgagor - To alienate the mortgaged property

but the mortgage shall remain attached to the

property.

NOTE: A stipulation forbidding the owner from alienating

the immovable mortgage shall be void (Art 2130) beingcontrary to public policy inasmuch as the transmission of

property should not be unduly impeded.

2. Mortgagee - To claim from a 3rd person in

possession of the mortgaged property the payment

of the part of the credit secured by the which said

third person possesses (Art 2129)

NOTE: It is necessary that prior demand for payment must

have been made on the debtor and the latter failed to pay(BPI vs Concepcion & Hijos, Inc., 53 Phil 906)

Art. 2131.

Foreclosure:

It is the remedy available to the mortgagee by

which he subjects the mortgaged property to the

satisfaction of the obligation to secure which the

mortgage was given.

Foreclosure is but a necessary consequence of non-payment of a mortgage indebtedness. As a rule, the

mortgage can be foreclosed only when the debt

remains unpaid at the time it is due.

In a real estate mortgage, when the principal

obligation is not paid when due, the mortgagee 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.

(Commodity Financing Co., Inc. vs. Jimenez, 91 SCRA57 [1979].)

Kinds of Foreclosure:

1. Judicial ordinary action for foreclosure under Rule

68 of the Rules of Court

2. Extrajudicial when mortgagee is given a special

power of attorney to sell the mortgaged propertyby public auction, under Act No. 3135

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