SALES - Conventional Redemption

Section 1 - Conventional Redemption (Sales with Pacto de Retro)

Arts. 1601-1618 I. Concept A. Defined (1601) one which takes place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon B. Nature: Conventional redemption is a. An accidental element (must be stipulated); b. An express condition; c. A potestative resolutory condition; d. A real right which may be sold or assigned and enforced against a third person claiming under the purchaser II. Conventional redemption includes transactions presumed to be equitable mortgages. A. Equitable mortgage defined - One in which although it lacks some formality, form of words or other requisites, prescribed by a statute, show the intention of the parties to charge a real property as security for a debt and contains nothing impossible or contrary to law. B. The following are presumed to be equitable mortgages a. Contracts of sale with right to repurchase in the following cases (1602) 1) When the price of a sale with right to repurchase is unusually inadequate 2) When the vendor remains in possession as lessee or otherwise; 3) When the period of redemption is extended; 4) When the vendee retains part of the price; 5) When the vendor binds himself to pay taxes; 6) Other cases where it may be inferred that the intention of the parties is that the transaction is to secure the payment of a debt or the performance of any other obligation Cases: CABALLERO et al. vs. ONG TIAO BOK Quoted hereunder, for your information, is a resolution of this Court dated JUL 2 2001. G.R. No. 147206(Danilo H. Caballero, et al. vs. Ong Tiao Bok.) Petitioners are the children and heirs of Sergio Caballero and Elisea Hechanova. In their lifetime, the couple owned two parcels of land located in Calatrava, Negros Occidental. The lots (Lot Nos. 3 and 1451), with a total area of 110,010 square meters, were covered by Transfer Certificate of Title Nos. 24402 and 24403, respectively. On March 17, 1972, Sergio Caballero, with the marital consent of his wife, Elisea Hechanova, sold the two lots to respondent Ong Tiao Bok for P60,000.00 under a contract denominated as "Deed of Sale with Right to Repurchase." The contract provided that of the amount of P60,000.00, P23,000.00 should be paid to the Philippine National Bank, P30,000.00 to a certain Rogelio Cruz, while the remaining amount of P7,000.00 should be paid to Caballero; that the vendor may repurchase the property within a period of five years from the date of the execution of the contract with a grace period of three years from the expiration of the original period of five years; and that an area of 400 square meters in Lot No. 3, a beach resort with coconut and nipa palm trees, would be reserved for the exclusive use of the vendor until the expiration of the period of redemption, although it appears that respondent took possession of the lots. The deed of sale was duly registered. On January 29, 1996, after Sergio Caballero and Elisea Hechanova had died and 16 years after the expiration of the stipulated period of redemption, petitioners filed an action in the Regional Trial Court, Branch 58, San Carlos City, Negros Occidental, for the cancellation of the annotations of the sale on the titles to the lots. They contended that the contract between their predecessor-in-interest and respondent was in fact a contract of equitable mortgage and, since the ten (10) year prescriptive period for the foreclosure of the mortgage had lapsed, the annotation on the titles to the lots constituted a cloud thereon which should be removed.

The trial court dismissed petitioners' complaint on the ground that the Contract in question is a valid contract of sale with right of repurchase, and not an equitable mortgage, and that in any case laches has set in to bar petitioners' action. For this reason, it ordered the Registrar of Deeds of Negros Occidental to cancel TCT Nos. 24402 and 24403 and to issue a new one in the name of respondent since, with the vendor's failure to redeem the properties, title thereto became consolidated in favor of respondent. On appeal to the Court of Appeals, the ruling was affirmed. Petitioners' motion for reconsideration was also denied. Hence this petition. Petitioners reiterate their contention in the Court of Appeals that the purchase price of the property in question, compared to its assessed value at the time of the sale, and the fact that the vendors were granted exclusive use to a portion of the lots sufficiently indicated that the contract was not a contract of sale but rather of loan with the lots mortgaged as security. The petition has no merit. First. In order to determine whether a contract is one of sale or mortgage, the intention of the parties must be ascertained. In this case, the parties stipulated that "for and in consideration of the sum of P60,000.00, which the Party of the Second Part [respondent] shall pay the Party of the First Part [Caballero], the latter hereby sells, cedes, and conveys unto the Party of the Second Part all his rights, interest and participation in the abovementioned lots" and that "after the expiration of five (5) years from the signing of th[e] contract the Party of the First Part has the right to repurchase the two lots for the same consideration as stated in the Deed of Sale with pacto de [r]etro and that the said Party of the First Part shall have a grace period of three (3) years from the expiration of the five years." These stipulations clearly express the intention of the parties to enter into a contract of sale with a right of repurchase. Their contract needs no interpretation and should be enforced as written. With regard to petitioners' claim that the purchase price is inadequate, Art. 1602(1) of the Civil Code provides that a contract shall be presumed to be an equitable mortgage when the price of a sale with right to repurchase is unusually inadequate. The inadequacy of the price paid must be so gross and unconscionable that the mind revolts at it and is such as a reasonable man would neither directly nor indirectly be likely to consent to (Aguilar v. Rubiato, 40 Phil. 570 (1919); 5 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 157-158 (2nd ed., 1992)). In the case at bar, while the purchase price of the land was P60,000.00 when its assessed value is P65,610.00, the difference cannot be considered unconscionable and revolting. The Caballeros utilized a large part of the purchase price in order to settle their obligation to their creditors (PNB and Cruz). This obviously was a major factor in their decision to sell the properties at a price slightly lower than its assessed value. Petitioners claim that "it is public knowledge that that assessed value of properties is far below their fair market value ... thus a selling price equal or a little below that of the assessed value . . . is certainly and definitely inadequate." In the absence, however, of any evidence on the actual extent of the inadequacy of the price proving the same to be grossly inadequate, such allegation cannot be given much weight. Indeed, the vendor in cases of pacto de retro sale usually fixes a price less than the real value to make it easier for him to return the price received (Feliciano v. Limjuco, 41 Phil. 147 (1920)) not to mention that in cases of sale with right of repurchase, the price obtained is ordinarily less than that paid in cases of absolute sale. Second. Neither is there merit in petitioners' contention that by virtue of the stipulation allowing the Caballeros exclusive use of a portion of the sold properties, they have remained in possession thereof and that, as provided in Art. 1602(2) of the Civil Code, this is an indication that the contract is one of equitable mortgage. The trial court found that the Caballeros did not really remain in possession of the lots and that it was respondent who has been in possession thereof since the execution of the contract in question. Moreover, the reservation of the portion of the area in question hardly amounts to the possession contemplated by law. Considering the nature of the property reserved (beach resort) and the area it covers (400 square meters) in relation to the size of the entire property (more than 11 hectares), it is evident that the arrangement was more a form of accommodation to the

SALES - Conventional Redemption

former lot owners than a recognition of their right to remain on the land. The applied purpose appears to be merely to give them access to the beach resort. Indeed, the contract provided that upon the expiration of the period of redemption, the Caballeros would no longer be allowed access to any part of the purchased property. Third. Even assuming that the contract in question was one of equitable mortgage, petitioners are barred by laches from claiming any rights under the contract. They brought this action more than 23 years after the execution of the contract, during which period respondent was in possession of the land. Petitioners have slept on their claimed right. For the foregoing reasons, the Court RESOLVED to deny the petition for lack of showing that the Court of Appeals committed a reversible error. Ramos vs. Sarao Facts: On February 21, 1991, Spouses Jonas and Myrna Ramos executed a contract over their conjugal house and lot in favor of Sarao for and in consideration of P1,310,430. Entitled "DEED OF SALE UNDER PACTO DE RETRO," the contract, inter alia, granted the Ramos spouses the option to repurchase the property within six months from February 21, 1991, for P1,310,430 plus an interest of 4.5 percent a month. It was further agreed that should the spouses fail to pay the monthly interest or to exercise the right to repurchase within the stipulated period, the conveyance would be deemed an absolute sale. On July 30, 1991, Myrna Ramos tendered to Sarao the amount of P1,633,034.20 in the form of two manager's checks, which the latter refused to accept for being allegedly insufficient. On August 8, 1991, Myrna filed a Complaint for the redemption of the property and moral damages plus attorney's fees before the RTC. On August 13, 1991, she deposited with the RTC two checks that Sarao refused to accept. On December 21, 1991, Sarao filed against the Ramos spouses a Petition "for consolidation of ownership in pacto de retro sale" During the trial, Myrna Ramos testified among others that although the market value of the subject property as of February 1991 was calculated to be more or less P10 million, it was offered for only P1,310,430.00 for the reason that they intended nothing but to redeem the same. Sarao, on the other hand, testified that Jonas Ramos admitted that he no longer had the capacity to redeem the property and to pay the interest. So, she filed for consolidation proceedings. After trial, the RTC dismissed the Complaint and granted the prayer of Sarao to consolidate the title of the property in her favor. CA sustained it and ruled that the disputed contract was a bona fide pacto de retro sale, not a mortgage to secure a loan. Issues: Whether the parties intended the contract to be a bona fide pacto de retro sale or an equitable mortgage. Ruling: Equitable mortgage. In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro, subject only to the repurchase by the vendor a retro within the stipulated period. The vendor a retro's failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by operation of law, absolute title to the property. Such title is not impaired even if the vendee a retro fails to consolidate title under Article 1607 of the Civil Code. On the other hand, an equitable mortgage is a contract that although lacking the formality, the form or words, or other requisites demanded by a statute nevertheless reveals the intention of the parties to burden a piece or pieces of real property as security for a debt. The essential requisites of such a contract are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage. The nonpayment of the debt when due gives the mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the satisfaction of the loan obligation.

The nomenclature used by the contracting parties to describe a contract does not determine its nature. The decisive factor is their intention as shown by their conduct, words, actions and deeds prior to, during, and after executing the agreement. Article 1371: In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Even if a contract is denominated as a pacto de retro, the owner of the property may still disprove it by means of parol evidence, provided that the nature of the agreement is placed in issue by the pleadings filed with the trial court. There is no single conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage. However, the law enumerates several instances that show when a contract is presumed to be an equitable mortgage in Art. 1602 (the presence of even just one of the following circumstances suffices to convert a contract to an equitable mortgage.): (1)When the price of a sale with right to repurchase is unusually inadequate; (2)When the vendor remains in possession as lessee or otherwise; (3)When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4)When the purchaser retains for himself a part of the purchase price; (5)When the vendor binds himself to pay the taxes on the thing sold; (6)In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage when the terms of the document and the surrounding circumstances so require. The law discourages the use of a pacto de retro, because this scheme is frequently used to circumvent a contract known as a pactum commissorium. The Court has frequently noted that a pacto de retro is used to conceal a contract of loan secured by a mortgage. Such construction is consistent with the doctrine that the law favors the least transmission of rights. In the present factual milieu, the vendor retained possession of the property allegedly sold. Petitioner and her children continued to use it as their residence, even after Jonas Ramos had abandoned them. In fact, it remained as her address for the service of court orders and copies of Respondent Sarao's pleadings. The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to rebut it. Corollary to this principle, the favored party need not introduce proof to establish such presumption; the party challenging it must overthrow it, lest it persist. To overturn that prima facie fact that operated against her, Sarao needed to adduce substantial and credible evidence to prove that the contract was a bona fide pacto de retro. This evidentiary burden she miserably failed to discharge. Contrary to Sarao's bare assertions, a meticulous review of the evidence reveals that the alleged contract was executed merely as security for a loan. The July 23, 1991 letter of Respondent Sarao's lawyer had required petitioner to pay a computed amount under the heading "House and Lot Loan" to enable the latter to repurchase the property. In effect, respondent would resell the property to petitioner, once the latter's loan obligation would have been paid. This explicit requirement was a clear indication that the property was to be used as security for a loan. Respondent herself stressed that the pacto de retro had been entered into on the very same day that the property was to be foreclosed by a commercial bank. Such circumstance proves that the spouses direly needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize some profit, as Sarao suggests, they would not have retained possession of the house and continued to live there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan obligation, not to transfer ownership of the property.

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Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the contract was a pacto de retro. That letter, however, cannot override the finding that the pacto de retro was executed merely as security for a loan obligation. Moreover, on May 17, 1991, prior to the transmittal of the letter, petitioner had already sent a letter to Sarao's lawyer expressing the former's desire to settle the mortgage on the property. Considering that she had already denominated the transaction with Sarao as a mortgage, petitioner cannot be prejudiced by her husband's alleged admission, especially at a time when they were already estranged. Inasmuch as the contract between the parties was an equitable mortgage, Respondent Sarao's remedy was to recover the loan amount from petitioner by filing an action for the amount due or by foreclosing the property.

DIO, vs. JARDINES, Facts: On December 14, 1992, Leonides C. Dio (petitioner) filed a Petition for Consolidation of Ownership he alleged that: on January 31, 1987, Lina Jardines (respondent) executed in her favor a Deed of Sale with Pacto de Retro over a parcel of land with improvements thereon covered by Tax Declaration No. 44250, the consideration for which amounted to P165,000.00; it was stipulated in the deed that the period for redemption would expire in six months or on July 29, 1987; such period expired but neither respondent nor any of her legal representatives were able to redeem or repurchase the subject property; as a consequence, absolute ownership over the property has been consolidated in favor of petitioner. Respondent countered in her Answer that: the Deed of Sale with Pacto de Retro did not embody the real intention of the parties; the transaction actually entered into by the parties was one of simple loan and the Deed of Sale with Pacto de Retro was executed just as a security for the loan; the amount borrowed by respondent during the first week of January 1987 was only P50,000.00 with monthly interest of 9% to be paid within a period of six months, but since said amount was insufficient to buy construction materials for the house she was then building, she again borrowed an additional amount of P30,000.00; it was never the intention of respondent to sell her property to petitioner; the value of respondent's residential house alone is over a million pesos and if the value of the lot is added, it would be around one and a half million pesos; it is unthinkable that respondent would sell her property worth one and a half million pesos for only P165,000.00; respondent has even paid a total of P55,000.00 out of the amount borrowed and she is willing to settle the unpaid amount, but petitioner insisted on appropriating the property of respondent which she put up as collateral for the loan; respondent has been the one paying for the realty taxes on the subject property; and due to the malicious suit filed by petitioner, respondent suffered moral damages. The CA held that the true nature of the contract between herein parties is one of equitable mortgage, as shown by the fact that (a) respondent is still in actual physical possession of the property; (b) respondent is the one paying the real property taxes on the property; and (c) the amount of the supposed sale price, P165,000.00, earns monthly interest. Issue: whether the true nature of the contract is a sale or a mortgage? Whether the legal interest to be paid by the respondent is the interest contemplated in the contract or the interest declared by the bank? Ruling:A close examination of the records of this case reveals that the findings of fact of the CA are all based on documentary evidence and on admissions and stipulation of facts made by the parties. The CA's finding that there was no gross inadequacy of the price of respondent's residential house as stated in the contract, was based on respondent's own evidence, Tax Declaration No. 44250, which stated that the actual market value of subject residential house in 1986 was only P93,080.00. The fact that respondent has remained in actual physical possession of the property in question, and that respondent has been the one paying the real property taxes on the subject property was established by the admission made by petitioner during the pre-trial conference and embodied in the PreTrial Order 6 dated May 25, 1994. The finding that the purchase price in the amount of P165,000.00 earns monthly interest was based on petitioner's own testimony and admission in her appellee's brief that

the amount of P165,000.00, if not paid on July 29, 1987, shall bear an interest of 10% per month. The Court sees no reversible error with the foregoing findings of fact made by the CA. The CA correctly ruled that the true nature of the contract entered into by herein parties was one of equitable mortgage. Article 1602 of the Civil Code enumerates the instances when a purported pacto de retro sale may be considered an equitable mortgage, to wit: Art. 1602.The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1)When the price of a sale with right to repurchase is unusually inadequate; (2)When the vendor remains in possession as lessee or otherwise; (3)When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4)When the purchaser retains for himself a part of the purchase price; (5)When the vendor binds himself to pay the taxes on the thing sold; (6)In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. SHCaDA In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (Emphasis supplied) The presence of even one of the above-mentioned circumstances as enumerated in Article 1602 is sufficient basis to declare a contract of sale with right to repurchase as one of equitable mortgage. The appellate court was also correct in ordering respondent to pay "legal interest" on the amount of P165,000.00. this Court has invalidated similar stipulations on interest rates for being excessive, iniquitous, unconscionable and exorbitant. it is apparent that the stipulated interest in the subject loan is excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle embodied in Article 1306 of the Civil Code, contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal provision may be invoked to annul the excessive stipulated interest. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. WHEREFORE, the petition is hereby DENIED. The Decision of the Court of Appeals dated June 9, 2000 is AFFIRMED with the MODIFICATION that the legal interest rate to be paid by respondent on the principal amount of P165,000.00 is twelve (12%) percent per annum from March 29, 1989 until fully paid. SO ORDERED

b. Contracts of absolute sale in the cases mentioned in Art. 1602 (1604). Cases: GO, vs. BACARON Facts: "As evidenced by the Transfer of Rights dated October 1, 1993, Eliodoro Bacaron conveyed a 15.3955-hectare parcel of land located in Langub, Talomo, Davao City, in favor of Benny Go for P20,000.00. "About a year thereafter, Bacaron, seeking to recover his property, went to Go to pay his alleged P20,000.00 'loan' but the latter refused to receive the same and to return his property saying that the transaction between the two of them was a sale and not a mortgage as claimed by Bacaron. 2006 "Consequently, on March 5, 1997, Eliodoro Bacaron, as plaintiff [herein respondent], filed a Complaint for Reformation of Instrument with Damages and prayer for the issuance of a writ of preliminary injunction, with the Regional Trial Court of Davao City, Branch 12, against the [petitioner] Benny Go. He however averred that prior to extending said loan to him, the [petitioner] required him to execute a document purporting to be a Transfer of Rights but was told that the same would only be a

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formality as he could redeem the unregistered land the moment he pays the loan. Admitting that he signed the instrument despite knowing that the same did not express the true intention of the parties' agreement, i.e., that the transaction was a mere equitable mortgage, the [respondent] explained that he did so only because he was in a very tight financial situation and because he was assured by the [petitioner] that he could redeem his property. To support this claim, [respondent] stressed the fact that the consideration in the instrument was merely P20,000.00, which is grossly inadequate as the selling price of a 15-hectare land considering that, at that time, the market value of land in Davao City amounts to P100,000.00 per hectare. [Respondent] narrated that a year thereafter, or in a middle part of 1994, he was able to raise the P20,000.00 and went to the [petitioner] to pay his loan but the latter refused to accept his payment, insisting that the transaction entered into by the parties was not an equitable mortgage, as the [respondent] insists, but a real transfer of right over the property. Because of said refusal, [respondent] continued, he was compelled to refer the matter to his lawyer in order to request the [petitioner] to accept his payment otherwise he would file the necessary action in court. Despite said formal demand by the [respondent], however, [petitioner] allegedly continued to refuse to recognize the 'equitable mortgage', prompting [respondent] to consign the P20,000.00 with the Clerk of Court of the RTC of Davao City, Branch 12. He thus insisted that it is [petitioner] who is 'dead wrong' in not recognizing the equitable mortgage since, aside from the fact that the consideration was unusually inadequate, [respondent] allegedly remained in possession of the property. [Petitioner] filed his Answer on May 5, 1997, denying [respondent's] claim that the transaction was only an equitable mortgage and not an actual transfer of right. He asserted that the truth of the matter was that when [respondent] suffered business reverses, his accounts with the [petitioner], as evidenced by postdated checks, cash vouchers and promissory notes, remained unpaid and his total indebtedness, exclusive of interests, amounted to P985,423.70. [Petitioner] further averred that, in order to avoid the filing of cases against him, [respondent] offered to pay his indebtedness through dacion en pago, giving the land in question as full payment thereof. In addition, he stressed that considering that the property is still untitled and the [respondent] bought the same from one Meliton Bacarro for only P50,000.00, it is most unreasonable for him to agree to accept said land in exchange for over a million pesos of indebtedness. He claimed though that he was only forced to do so when [respondent] told him that if he did not accept the offer, other creditors would grab the same. Ruling of the RTC: Trial ensued and thereafter the trial court rendered its Decision dated February 24, 2000 dismissing the complaint while finding the [petitioner's] counterclaim meritorious. In making said ruling, the lower court, citing Article 1350 (should be 1359) of the New Civil Code, found that [respondent] failed to establish the existence of all the requisites for an action for reformation by clear, convincing and competent evidence. The trial court likewise observed that, contrary to [respondent's] claim that the transaction was a mere mortgage of the property, the terms of the instrument are clear and unequivocable that the property subject of the document was 'sold, transferred, ceded and conveyed' to the [petitioner] 'by way of absolute sale,' and hence, no extrinsic aids are necessary to ascertain the intention of the parties as the same is determinable from the document itself. Moreover, said court emphasized that considering the fact that [respondent] is an educated person, having studied in an exclusive school like Ateneo de Davao, and an experienced businessman, he is presumed to have acted with due care and to have signed the instrument with full knowledge of its contents and import. Ruling of the Court of Appeals Granting respondent's appeal, the appellate court ruled that the Contract entered into by the parties should be deemed an equitable mortgage, because the consideration for the sale was grossly inadequate. By continuing to harvest the crops and supervise his workers, respondent remained in control of the property. True, upon the institution of this case, petitioner paid the required real estate taxes that were still in arrears. Respondent, however paid the taxes for 1995, 1996 and 1997 the years between the dates when the alleged absolute sale was entered into on October 1, 1993, and when this case was instituted on March 5, 1997.

Issues (1) Whether the agreement entered into by the parties was one for equitable mortgage or for absolute sale; and (2) Whether the grant of the relief of contract reformation was proper. Ruling: The Petition has no merit. First Issue:Equitable Mortgage An equitable mortgage has been 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." The instances in which a contract of sale is presumed to be an equitable mortgage are enumerated in Article 1602 of the Civil Code as follows: "Art. 1602.The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1)When the price of a sale with right to repurchase is unusually inadequate; (2)When the vendor remains in possession as lessee or otherwise; (3)When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4)When the purchaser retains for himself a part of the purchase price; (5)When the vendor binds himself to pay the taxes on the thing sold; (6)In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws." Furthermore, Article 1604 of the Civil Code provides that "[t]he provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale." In the present case, three of the instances enumerated in Article 1602 grossly inadequate consideration, possession of the property, and payment of realty taxes attended the assailed transaction and thus showed that it was indeed an equitable mortgage. Inadequate Consideration The parties' respective arguments show that the sum of P20,000, by itself, is inadequate to justify the purported absolute Transfer of Rights. 22 Petitioner's claim that there was a dacion en pago is not reflected on the instrument executed by the parties. That claim, however, confirms the inadequacy of the P20,000 paid in consideration of the Transfer of Rights; hence, the Contract does not reflect the true intention of the parties. As to what their true intention was whether dacion en pago or equitable mortgage will have to be determined by some other means. Possession According to Article 1602(2) of the New Civil Code, one of the instances showing that a purported contract of sale is presumed to be an equitable mortgage is when the supposed vendor remains in possession of the property even after the conclusion of the transaction. In general terms, possession is the holding of a thing or the enjoyment of a right, whether by material occupation or by the fact that the right or, as in this case, the property is subjected to the will of the claimant. In Director of Lands v. Heirs of Abaldonado, the gathering of the products of and the act of planting on the land were held to constitute occupation, possession and cultivation. In the present case, the witnesses of respondent swore that they had seen him gather fruits and coconuts on the property. Based on the cited case, the witnesses' testimonies sufficiently establish that even after the execution of the assailed Contract, respondent has remained in possession of the property. The testimonies proffered by petitioner's witnesses merely indicated that they were tenants of the property. Petitioner only informed them that he was the new owner of the property. This attempt at a factual presentation hardly signifies that he exercised possession over the property. As held by the appellate court, petitioner's other witness (Redoa) was unconvincing, because he could not even say whether he resided within the premises. Payment of Realty Taxes That the parties intended to enter into an equitable mortgage is bolstered by respondent's continued payment of the real property taxes subsequent to the alleged sale. Payment of those taxes is a usual burden attached to ownership. Coupled with continuous

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possession of the property, it constitutes evidence of great weight that a person under whose name the realty taxes were declared has a valid and rightful claim over the land. That the parties intended to enter into an equitable mortgage is also shown by the fact that the "seller" was driven to obtain the loan at a time when he was in urgent need of money; and that he signed the Deed of Sale, despite knowing that it did not express the real intention of the parties. Second Issue:Reformation of Instrument We rule for respondent. Ultimately, it is the intention of the parties that determines whether a contract is one of sale or of mortgage. In the present case, one of the parties to the contract raises as an issue the fact that their true intention or agreement is not reflected in the instrument. Under this circumstance, parol evidence becomes admissible and competent evidence to prove the true nature of the instrument. Hence, unavailing is the assertion of petitioner that the interpretation of the terms of the Contract is unnecessary, and that the parties clearly agreed to execute an absolute deed of sale. His assertion does not hold, especially in the light of the provisions of Article 1604 of the Civil Code, under which even contracts purporting to be absolute sales are subject to the provisions of Article 1602. Moreover, under Article 1605 of the New Civil Code, the supposed vendor may ask for the reformation of the instrument, should the case be among those mentioned in Articles 1602 and 1604. Because respondent has more than sufficiently established that the assailed Contract is in fact an equitable mortgage rather than an absolute sale, he is allowed to avail himself of the remedy of reformation of contracts. WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution AFFIRMED.

receiving P50,000 a month, that is P600,000 a year. Thats 60% interest, right? Now if you are the vendor a retro, or if you are the mortgagor because the contract is really an equitable mortgage and not a pacto de retro sale and the law says that fruits should be applied as payment for interest subject to usury law. Since the effects of usury law are suspended so our question is if you are the vendor, can you still recover the excess amount over the legal interest? If you want to can you? Yes, by claiming that the interest is not usurious but unconscionable. Of course the law says that the vendor may ask for a reformation of the instrument. And this is what Bacaron did in Go v. Bacaron.

Bacungan vs. CA Facts: Respondents Velo, registered owners of 18 parcels of land situated in Rosales, Pangasinan, instituted an action for reconveyance with damages against petitioners Bacungan before the RTC. Respondents had earlier executed several real estate mortgages over the properties to secure the payment of the total amount of P350,000.00. Respondents defaulted on the payments, prompting the bank to foreclose the properties. However, as illustrated in the testimony of respondent Victoria Velo, respondents and petitioners devised a plan in which they agreed that in exchange for the apparent transfer of ownership of the parcels of land to petitioners, the latter would provide for the funds for the redemption of the properties from the bank in addition to the loan that petitioners would obtain from the bank. Thus, respondents were able to redeem the properties for the amount of P369,000.00 that was advanced by way of mortgage to them by petitioners. The amount approximates the total loans in the amount of P350,000.00 secured by the properties subject of the real estate mortgages executed by respondents. Thereafter, respondents executed several deeds of sale purporting to transfer the 18 parcels of lands for a total consideration of P232,000.00. The parties further agreed that upon the transfer of the properties in the name of petitioners, the latter would obtain another loan from the bank using the properties as collateral. Petitioners were supposed to remit the loan proceeds to respondents after deducting the amount of P369,000.00 lent by petitioners to respondents and, thereafter, allow respondents to buy back the properties. However, because petitioners had failed to secure a loan from the bank after the transfer of the titles in their names, respondents instituted the present action to nullify the deeds of sale on the ground that the sale was simulated.

Romulo v. Layug After the deed of sale was signed the vendee continued to extend loans to the vendor. Now, the vendee testified that part of the consideration in the deed of sale was the extinguishment of a prior loan in addition to the P200,000 which was indicated as the purchase price. Although the Court said that although did not include that in their contract because the capital gains tax would increase. So they only stated that the consideration was only P200,000 where actually, according to the vendee, the intention was only to cancel a previous loan. Now if that is the intention, dacion en pago, why did the vendee continue to extend loans to the vendor? So the conclusion reached by the Court is that the real intention of the parties was to subject the property as a security for the payment for the loan and not a sale. If it is finally determined that the contract really is a mortgage and not a sale what would be the proper thing to do? Would the contract be rescinded? Would the contract be annulled? Whats going to be done according to the Court in the case of Bacungan v. CA is to enforce the contract actually. The contract is a mortgage and not a sale. You have a contract which is not reflected in the document, thats why you reform the document in order to reflect the true intention of the parties. If there is doubt whether the contract is a pacto de retro sale or an equitable mortgage or even an absolute sale or an equitable mortgage, the doubt would be resolved in favor of equitable mortgage. Why? It is that interpretation which would result in the least transmission of rights. What is the effect if the contract is now determined to be equitable mortgage, what about the fruits received by the vendee, who is actually the mortgagee? The fruits or income will be considered as payment for interest subject to usury law. But we do not apply the usury law now. And since the effects of the usury law are now suspended, if the vendee is receiving income from the property which is more than the legal rate of interest, do you think the vendor would be able to recover that amount in excess of the legal interest if he questions that? Considering that as you learned in oblicon we do not have any usury law. Do you think he can still recover the excess? Like if the value of the property is 1 million. He is receiving maybe P50,000 a month as income from the property. Its a lot and building. And its generating income because there are tenants in the property and the vendee is

RTC dismissed the complaint for lack of merit. CA reversed RTCs judgment and held that by their contemporaneous and subsequent acts, the deeds of sale were simulated as the parties did not intend to be bound by them at all. CA based its decision on the gross inadequacy of prices, respondents' failure to receive any part of the purchase price stated in the deeds of sale, the offer by petitioners to return some of the certificates of title and petitioner Alexander Bacungan's admission that the sale was simulated. Issue: Whether the deeds of sale embody the real agreement of the parties Ruling: No. The deeds of absolute sale do not embody the real intention of the parties. This kind of arrangement, where the ownership of the land is supposedly transferred to the buyer who provides for the funds to redeem the property from the bank but nonetheless allows the seller to later on buy back the properties, is in the nature of an equitable mortgage governed by Articles 1602 and 1604 of the Civil Code. For a presumption of an equitable mortgage to arise, two requisites must be satisfied, namely: that the parties entered into a contract denominated as a contract of sale and that their intention was to secure an existing debt by way of mortgage. Under Art. 1604 of the Civil Code, a contract purporting to be an absolute sale shall be presumed to be an equitable mortgage should any of the conditions in Art. 1602 be present. The existence of any of the circumstances therein, not a concurrence or an overwhelming number of such

SALES - Conventional Redemption

circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage. Three telling circumstances indicating that an equitable mortgage exists are present. First, as established by the CA, the price of each of the properties was grossly inadequate. Second, petitioners retained part of the "purchase price" when they failed to turn over to the respondents the loan that they were supposed to secure from the bank. Third, petitioners insisted that part of the consideration of the sale consisted of amounts previously borrowed by respondents from them, indicating that petitioners were using the properties as "security" for the payment of respondents' other loans from them. The CA concluded that the sale was simulated because of the gross inadequacy of the prices and the failure by respondents to receive the purchase price. That respondents did not receive the purchase price is not entirely correct. As already discussed above, the consideration for the transaction was to secure the payment of respondents' loan to petitioners. All told, while the deeds of sale do not reflect the true intention of the parties, their real agreement must nonetheless be recognized and enforced. While neither party claimed that the real agreement was an equitable mortgage, the factual circumstances of the case nudge the Court to declare the real agreement as such and enforce the rights and liabilities of the parties accordingly. This being the case, the proper remedy availed by either party was to institute an action for the reformation of the deeds of sale in order to reflect the true intention of the parties. However, instead of dismissing the complaint altogether, the just and expeditious manner is to settle once and for all the rights and obligations of the parties under the equitable mortgage. It has been established that petitioners advanced the sum of P369,000.00 to respondents that prompted the latter to transfer the properties to petitioners. Thus, before the respondents can recover the said amount, respondents must first return the amount of P369,000.00 to petitioners.

Case: No right to repurchase after an alleged equitable mortgage was declared a pacto de retro sale Abilla v. Gobonseng This was a pacto de retro sale. Deed of sale and option to purchase where Gobonseng was given until, we dont know when the contract was executed, but until August 31, 1983 to repurchase the property. But the fact of repurchase or the nature of the contract was not really the cause of action when Abilla filed the case. Because when the case was filed it was to recover from Gobonseng the expenses for the execution of the contract. And because Gobonseng did not want to pay the defense he raised was that the contract was an equitable mortgage and not a pacto de retro sale. The trial court said this is a pacto de retro sale because you cannot find any of the circumstances under Art. 1602. Gobonseng went to the Court of Appeals, CA said this is a pacto de retro sale. Gobonseng went to the Supreme Court, on a technicality his petition for review was denied. So he quickly went to the trial court where the first case was filed by Abilla and said that since it was ruled that it was a pacto de retro sale then allow us to redeem because we still have 30 days from the finality within which to redeem. The Court did not allow it. Why? Because it has been the consistent ruling of the trial court and the CA that this was really a pacto de retro sale and Gobonseng was consistent in claiming that it was an equitable mortgage. After several years Gobonseng now wants to benefit from the ruling of the courts that it was a pacto de retro sale by trying to exercise right of redemption. The Court said no, because your claim that this is an equitable mortgage must be based on a bona fide belief that the contract really is an equitable mortgage, that the property subject of the purported sale was merely security for the payment of an obligation. And there is no claim here that it was a loan extended by Abilla. What was clearly established was that this really was a pacto de retro sale. In fact he was given time to redeem which was until August 31, 1993 and the case was filed in 1990, or shortly before that. If we say that the maximum period of redemption cannot exceed 10 years, can the parties agree that there shall be no redemption, for example, prior to within 5 years. If it is hereby agreed that the vendor can redeem the property at any time but not earlier than 5 years? So when you say at any time, is there a period agreed? Yes, which is ten years. But not earlier than 5 years. So how long can he redeem the property? Ten years after five years or just only ten years including the 5 years? In can never exceed ten years. The only exception is if there is a case, which he must exercise within 30 days from finality of the judgment declaring the contract to be a pacto de retro and not an equitable mortgage. If there is a restriction, like there shall be no redemption earlier than 9 years, so you only have one year to redeem. D. The period during which vendor can not redeem when added to the period of permitted redemption must not total more than 10 years E. Rulings on the period within which to make a repurchase a. The legal period of 4 years may be extended by stipulation, provided that the new period stipulated does not exceed 10 years b. A stipulation that the vendor cannot redeem the property until after 3 years should be construed to allow redemption within 4 years, after the lapse of the 3 years, counted from such lapse c. An agreement granting the vendor the right to repurchase when he as established a certain business is not a period. In such a case the vendor may redeem within 4 years. d. Where there is an agreed period, the period in excess of 10 years is void e. A stipulation granting the vendors the right to redeem at any time the vendors have the money should be construed to allow redemption within 10 years f. The stipulated period of redemption is suspended by the filing of an action brought in good faith relating to the validity of a sale with pacto-de-retro (it being claimed to be an equitable mortgage) and again commences to run only after decision declaring it to be a sale has become final g. Where the courts are functioning regularly, the redemption term is not suspended or extended by war IV. Who may redeem or exercise the right of redemption A. The vendor in whose favor the right is reserved. The following are included:

c. When a transaction purporting to be a contract of sale with right to repurchase is of doubtful interpretation (1603). 1) A stipulation that in case of failure of the vendor-a-retro as lessee to pay rentals, the lease shall automatically terminate and the right of ownership of the vendee shall become absolute is valid, not contrary to law nor oppressive. It is a clause common to pacto de retro and has received court sanction. 2) Although pactum commissorium (a stipulation for automatic vesting of title over the security in the creditor in case of debtors default) is void, such a clause in a contract is conclusive proof that it is a mortgage and not a sale with pacto de retro. C. Effect when the transaction is deemed an equitable mortgage. Refer to Go vs. Bacaron for reformation of instrument a. Fruits, money or other benefit received as rents by the vendee are considered as interest which shall be subject to the usury laws. (1602, last par.) b. The apparent vendor may ask for the reformation of the instrument (1605) III. Period of Repurchase or Redemption A. When no period is agreed upon a. Four years from the date of the contract (1606, par. 1) B. When a period is agreed upon (which includes a stipulation of redemption at any time) a. Within the period stipulated, which cannot exceed 10 years (1606, par. 2) C. The period may be extended to 30 days after final judgment was rendered in a civil case claiming that the contract was a true sale with right to repurchase (1606, par. 3) a. Pendency of litigation suspends the period of redemption b. The thirty day extension is applicable even should the case be filed after the expiration of the redemption period, if the parties dispute its nature as a pacto-de-retro sale with the allegation that it does not express their true agreement

SALES - Conventional Redemption

a. When vendors are co-owners selling jointly and in the same contract an undivided immovable. 1)Right of each co-owner. i)To redeem only his share (1612, par. 1) 2)Right of the vendee i)He may compel all the co-owners to redeem the whole (1613). Also when the whole property is adjudicated to the vendee in partition (1611).

VII. Obligations of the vendee-a-retro A. To return the thing sold free from all charges and mortgages constituted by the vendee (1618) 1) Exception: i) Lease contracts in good faith and according to custom, which must be respected

b. When a co-owner sells his share of an undivided immovable separately (1614). 1)Right of the vendor co-owner i)He may only redeem his share (1614). ii)He can not be compelled to redeem the whole (1614)

VIII. Rights of the vendee-a-retro A. To compel the vendor of a part of an undivided immovable to redeem the whole property upon the vendee acquiring the entire immovable (1611) in partition proceedings. B. To be subrogated to the vendors rights and actions (1609)

B. Heirs of the vendor (1612, par. 2) a. Right of each heir. 1) Each can redeem only the part which he may have acquired. b. Right of the vendee 1) He may compel all the heirs to redeem the whole (1613) Note: The rule of the Code is one sale, one redemption; except in case of death of the buyer a retro.

IX. Rules on pro-rating of fruits existing at the time of redemption A. If there are visible fruits at the time of the execution of the sale a. No reimbursement or pro-rating (1617, par. 1) is required 1) Exception: i) If indemnity for fruits was paid by the vendee when the sale was executed (1617, par. 1) B. If no visible fruits at the time of the sale existed a. Fruits must be pro-rated (1617, par. 2) 1) Share of the vendee: i) That portion corresponding to the time he possessed the land in the last year counted from the anniversary of the date of the sale. (Cf. Art. 545)

C. Creditors of the vendor (1610) a. Requisite 1) The creditors must have already exhausted the properties of the vendor (1610).

V. From whom or against whom may redemption be made A. The vendee B. The heir or heirs of the vendee a. If there is more than one heir (1615): 1) Against each of the heirs for his respective share i) Exception: aa) When the thing sold is awarded to only one heir C. Every possessor whose right is derived from the vendee (1608) a. Without prejudice to the provisions of the Mortgage Law and Act No. 496 (Land Registration Act) VI. Obligations of the vendor-a-retro A. The vendors obligations are (1616): a. To return the price of the sale b. To return the expenses of the contract and any other legitimate payments made by reason of the sale; c. To reimburse the necessary and useful expenses made on the thing sold, after their amount is determined B. Effect of the vendors failure to comply with his obligation a. General rule: 1) Ownership is consolidated in the vendee b. Exception: 1) When the subject matter consists of real property (1608) i) Requisites aa) Consolidation of ownership must be by virtue of a judicial order, after hearing the vendor (1607) In equitable mortgage: Vasquez vs. CA, G.R. 144882, February 4, 2005 Applying the principle of pactum commissorium specifically to equitable mortgages, in Montevergin v. CA, the Court enunciated that the consolidation of ownership in the person of the mortgagee in equity, merely upon failure of the mortgagor in equity to pay the obligation, would amount to a pactum commissorium. The Court further articulated that an action for consolidation of ownership is an inappropriate remedy on the part of the mortgagee in equity. The only proper remedy is to cause the foreclosure of the mortgage in equity. And if the mortgagee in equity desires to obtain title to the mortgaged property, the mortgagee in equity may buy it at the foreclosure sale.