CONTRACTS TO SELL OR OF SALE versus REAL ESTATE MORTGAGE

LET’S DO IT LEGALLY RIGHT

By: E.T. Reyes III

With the upsurge in real estate dealings involving land development for mixed-use purposes in the Philippines that had started and eventually saturated the Metropolis, and now had spread its tentacles to the countryside, sales and mortgages of vast tracts of land had become banal.

Assuredly, bigger acquisitions of lands are in the horizon hence it is necessary to be mindful of the implications of transactions involving lands in order to avoid legal pitfalls.

In the normal run of things, a single piece of land could become the subject of a contract to sell or of a contract of sale on one hand; and likewise of a mortgage, one after the other, either in that order or otherwise. Should theis string of transactions take place, what would be the legal repercussions?

To answer the question, here are some hypotheticals:

1)     Land owner X, with a titled property enters into a CONTRACT TO SELL with A, who does not register it with the register of deeds. Then, X, subsequently loans money from B and mortgages the same land as security. The mortgage is registered with the register of deeds.

2)      Land owner X, with a titled property, enters into a CONTRACT OF SALE with A, who does not register it with the register of deeds. Then, X, subsequently loans money from B and mortgages the same land as security. The mortgage is registered with the register of deeds.

3)     Land owner X, with a titled property, loans money from B and mortgages the same land as security. The mortgage is registered with the register of deeds. Then, X subsequently enters into either a CONTRACT TO SELL or a CONTRACT OF SALE in favor of A.     

Apparently, X is the seller/ mortgagor while A is the buyer and B is the mortgagee. In this clash of rights, which between the sale and the mortgage will prevail?

The Supreme Court in a January 2016 ruling in the case of Fabio Cahayag and Conrado Rivera v. Commercial Credit Corporation etc. and Dulos Realty and Development Corporation etc. v. Commercial Credit Corp., G.R. Nos. 168078 & 168357, January 13, 2016, by re-affirming long standing doctrines in Civil law, un-tangled seemingly convoluted facts, as follows:

·        Pursuant to Article 2085 (2) of the New Civil Code, the mortgagor must be the absolute owner of the thing mortgaged. Necessarily, if he had previously sold the land, he could not validly mortgage it anymore.

·        This is based on the Nemo dat quod non habet principle which means – a person cannot give what he does not have. But this Latin precept has been jurisprudentially held to apply to a contract of sale at its consummation stage and not at the perfection stage. 

·        A contract to sell on one hand should therefore be distinguished from a contract of sale. The former does not carry with it the obligation to deliver or transfer the ownership of the thing sold, because of the existence of a positive suspensive condition which is usually the full payment of the price. Thus the seller remains as owner pending delivery. In a contract of sale, the obligation to deliver and transfer ownership is a necessary consequence of the sale.

·        Thus, in hypothetical No. 1 above, the prior Contract to Sell entered by X in favor of A, would not affect in any way the subsequent mortgage to B. The mortgage in favor of B prevails because X was still the owner of the land at the time when he mortgaged the same to B. And there was no delivery or transfer of ownership yet from X to A because the positive suspensive condition of full payment of the price in the contract to sell had not yet been fulfilled hence it is as if there is no previous sale transaction at all, at the time when the mortgage was constituted in favor of B.

·        In hypothetical No. 2 above, since what X entered into was a Contract of Sale in favor of A, then as a rule, he could not validly mortgage it anymore to B. There is one exception: that is if B, the mortgagee, qualifies as an innocent mortgagee for value as when he claims that he relied on a clean title because the previous sale to A was not registered. The exception however, only applies when the mortgagee is NOT a banking or financing institution. Notably, in the case of De la Merced v. GSIS, G.R. No. 167140, September 11, 2001, the Supreme Court applied more stringent requirements on banking and financing institutions whose business are extending loans upon mortgaging of lands on a daily basis hence presumed to be experienced in background checking lands before approving a mortgage. They cannot therefore just rely on a clean title but they must investigate whether the land was subject of a previous sale. Failure to do so, the previous sale albeit un-registered, would prevail over the registered mortgage. 

·         In hypothetical No. 3, given that the registered mortgage was ahead of either the contract to sell or the contract of sale, then the legal maxim, “first in time, priority in right” applies. This is because registration of the mortgage with the register of deeds constitutes as a constructive notice to the whole world that a previous mortgage was constituted over the land. If, notwithstanding, buyer A still buys the land despite the previous mortgage to B, then here, the mortgage prevails over the sale. This is true even if A buys the land without knowing about the previous mortgage. 

The moral here is that before engaging in the cumbersome process of land sales or mortgages, always check the title and make a background investigation. Or better yet, consult an attorney to guide you in the maze of legal nuances and niceties lest your stable equilibrium be upended by importunings of court litigation you would get ensnared in because of ignorantia legis – ignorance of the law or due to an incomplete understanding thereof.