EQUITABLE MORTGAGE

DIZON CASE
RULING:
The presumption of equitable mortgage created in Article 1602 of the Civil Code is not
conclusive. It may be rebutted by competent and satisfactory proof of the contrary.
this Court, in determining whether the price of a property is inadequate, has often referred
to its assessed value.[23] In the case at bar, as of 1988, the market value of the land was
P85,550 while that of its improvements was P27,880.[24] And the assessed value of the
land and its improvements for the same year was P29,850.[25] Clearly, the P550,000
purchase price at which petitioners bought the property in 1987 is not inadequate.
In declaring the contract in Bundalian to be an equitable mortgage, this Court, noting the
following considerations:
One of the terms and conditions was that the repurchase price would escalate month after
month, depending on when repurchase would be effected. The price would be
P532,480.66 computed at P160.00 per square meter after the first month; P565,760.00
computed at P170.00 per square meter after the second month; P599,040.00 computed at
P180.00 per square meter after the third month; and P632,320.00 computed at P190.00
per square meter after the fourth month, from and after the date of the instrument. It was
also stipulated in the same contract that the vendor shall have the right to possess, use,
and build on, the property during the period pending redemption. (Emphasis and
underscoring supplied),[28]
held that:
The stipulation in the contract sharply escalating the repurchase price every month
enhances the presumption that the transaction is an equitable mortgage. Its purpose is to
secure the return of the money invested with substantial profit or interest, a common
characteristic of loans.[29]
Unlike in Bundalian, however, there was, in the present case, no escalation of purchase
price to depend on when repurchase by respondent would be effected, for a fixed price
and fixed date of repurchase were agreed upon by respondent and petitioners. Also unlike
in Bundalian, respondent-vendor did not have the right to, among other things, build on
the property during the period pending redemption.
In fine, respondent failed to prove that the transaction was one of equitable mortgage.
Reformation of the deed of sale of the property to petitioners does not thus lie.

OLIVARES CASE
RULING:
An equitable mortgage is defined as one that, although lacking some formality or form,
nevertheless reveals the intention of the parties to charge a real property as security for a
debt.[22] A contract of sale is considered an equitable mortgage when the real intention of
the parties was to secure an existing debt by way of mortgage.[23] In this case, the land
which was the subject of the Deed of Absolute Sale was already mortgaged not to the
buyer but to another entity who was not a party to the contract. The land was already
mortgaged to DBP by the sellers (respondent and her husband Manuel), who were unable
to pay their loan. The records show that the property was about to be foreclosed so
respondent and Manuel decided to sell the property to Boteros. Under the terms of the
Deed of Definite Sale dated May 1979, the consideration for the sale was P2,000 plus the
assumption of Boteros of the sellers loan from the DBP, including all interests. Prior to
their sale transaction, there is no evidence that respondent had an existing debt with
Boteros. There is likewise no substantial evidence on the records that the parties to the
contract agreed upon a different transaction other than the sale of real property.
Article 1602 of the Civil Code enumerates the instances where a contract is presumed to
be an equitable mortgage. Article 1602 reads:
Article 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.
The foregoing provisions also apply to a contract purporting to be an absolute sale.[24]
In this case, the appellate court held that the contract should be presumed an equitable
mortgage because the sale price of the property was unusually inadequate and the vendor
remained in possession of the property.
The records of the case are bereft of any evidence which could lead to the conclusion that
the sale price was unusually inadequate. No evidence was presented on the market value
of real estate in the area where the property was located at the time of the sale. Neither
was there testimony of any alleged disparity on the price and the market value of the
property. There was no testimony nor evidence presented on the inadequacy of the sale
price. Besides, the property which respondent sold to Boteros for P25,000 in 1979 was

subsequently sold by Boteros to petitioners in 1984 for P27,000. If the price indicated on
the Deed of Absolute Sale dated 2 July 1979 was indeed grossly inadequate, then Boteros
could have sold the property five years later at a much higher price than P27,000. To
presume that a contract is an equitable mortgage based on gross inadequacy of price, it
must be clearly shown from the evidence presented that the consideration was in fact
grossly inadequate at the time the sale was executed. In fact, mere inadequacy of price is
not sufficient.[25]
Respondents continuous possession of the property even after the property was sold to
Boteros does not automatically mean that the transaction was an equitable mortgage and
not an absolute sale. In this case, Boteros merely tolerated respondents continued
possession of the property until Boteros sold the property and the new buyers, petitioners
herein, demanded respondent to vacate the property.
Based on the records of the case, we hold that the transaction between Boteros and
respondent and Manuel was a contract of absolute sale of real property and not merely an
equitable mortgage. Boteros can therefore validly sell the property to petitioners. In view
of the conclusion we have reached, it is unnecessary to pass upon the last two issues
raised by petitioners.
BAUTISTA CASE
RULING:
We cannot agree.
Respondent is correct in alleging that the deed of sale with right to repurchase qualifies as
an equitable mortgage under Article 1602. She merely secured the payment of the unpaid
car rentals and the amount advanced by petitioner to Jojo Lee.
The transaction between the parties is one of equitable mortgage and not a sale with right
to purchase as maintained by petitioners. Article 1602 of the New Civil Code provides
that the contract is 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.[53] (Emphasis ours)
The conclusion that the deed of sale with right to repurchase is an equitable mortgage is
buttressed by the following:
First, before executing the deed, respondent and Salak were under police custody due to
the complaint lodged against them by petitioner. They were sorely pressed for money, as
they would not be released from custody unless they paid petitioner. It was at this point
that respondent was constrained to execute a deed of sale with right to repurchase.
Respondent was in no position whatsoever to bargain with their creditor, petitioner. Nel
consensui tam contrarium est quam vis atqui metus. There can be no consent when under
force or duress. Bale wala ang pagsang-ayon kung itoy nakuha sa pamimilit o paraang di
malaya.
It is established that respondent signed the deed only because of the urgent necessity of
obtaining funds. When the vendor is in urgent need of money when he executes the sale,
the alleged sale with pacto de retro will be construed as an equitable mortgage.[54]
Necessitous men are not, truly speaking, free men; but to answer a present emergency
will submit to any terms that the crafty may impose upon them.[55]
Second, petitioner allowed respondent and Salak to retain the possession of the property
despite the execution of the deed. In fact, respondent and Salak were not bound to deliver
the possession of the property to petitioner if they would pay him the amount he
demanded.[56]
Where in a contract of sale with pacto de retro, the vendor remains in possession, as a
lessee or otherwise, the contract shall be presumed to be an equitable mortgage.[57] The
reason for the presumption lies in the fact that in a contract of sale with pacto de retro, the
legal title to the property is immediately transferred to the vendee, subject to the vendors
right to redeem. Retention, therefore, by the vendor of the possession of the property is
inconsistent with the vendees acquisition of the right of ownership under a true sale.[58]
It discloses, in the alleged vendee, a lack of interest in the property that belies the
truthfulness of the sale a retro.[59]
Third, it is likewise undisputed that the deed was executed by reason of: (1) the alleged
indebtedness of Salak to petitioner, that is, car rental payments; and (2) respondents own
obligation to petitioner, that is, reimbursement of what petitioner paid to the mortgagee,
Jojo Lee. Fact is, the purchase price stated in the deed was the amount of the
indebtedness of both respondent and Salak to petitioner.[60]

Apparently, the deed purports to be a sale with right to purchase. However, since it was
executed in consideration of the aforesaid loans and/or indebtedness, said contract is
indubitably an equitable mortgage. The rule is firmly settled that whenever it is clearly
shown that a deed of sale with pacto de retro, regular on its face, is given as security for a
loan, it must be regarded as an equitable mortgage.[61]
The above-mentioned circumstances preclude the Court from declaring that the parties
intended the transfer of the property from one to the other by way of sale. They are more
than sufficient to show that the true intention of the parties is to secure the payment of
said debts. Verily, an equitable mortgage under paragraphs 2 and 6 of Article 1602 exists
here. Settled is the rule that to create the presumption enunciated by Article 1602, the
existence of one circumstance is enough.[62]
Moreover, under Article 1603 of the Civil Code it is provided that: (i)n case of doubt, a
contract purporting to be a sale with right to repurchase shall be construed as an equitable
mortgage. In this case, We have no doubt that the transaction between the parties is that
of a loan secured by said property by way of mortgage.
In Lorbes v. Court of Appeals,[63] the Court held that:
The decisive factor in evaluating such agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract but by all the surrounding
circumstances, such as the relative situation of the parties at that time, the attitude, acts,
conduct, declarations of the parties, the negotiations between them leading to the deed,
and generally, all pertinent facts having a tendency to fix and determine the real nature of
their design and understanding. As such, documentary and parol evidence may be
submitted and admitted to prove the intention of the parties.
Sales with rights to repurchase, as defined by the Civil Code, are not favored. We will not
construe instruments to be sales with a right to repurchase, with the stringent and onerous
effects which follow, unless the terms of the document and the surrounding circumstances
require it. Whenever, under the terms of the writing, any other construction can fairly and
reasonably be made, such construction will be adopted and the contract will be construed
as a mere loan unless the court can see that, if enforced according to its terms, it is not an
unconscionable one.[64]
GO CASE
RULING:
Petitioner claims that the CA erred in granting the remedy of reformation of contracts. He
avers that the failure of the instrument to express the parties true agreement was not due
to his mistake; or to fraud, inequitable conduct, or accident.[36]
We rule for respondent.

Ultimately, it is the intention of the parties that determines whether a contract is one of
sale or of mortgage.[37] 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.[38] 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.
CADUNGOG CASE
RULING:
We agree with the CA that the petitioner, as vendor a retro, failed to repurchase the
property within the 10-year period fixed by the parties in the Deed of Sale with Right of
Repurchase. Consequently, Franklin Ong, the vendee a retro, had acquired absolute title
and ownership over the six parcels of land after August 17, 1979 when the petitioner, as
vendor a retro, failed to repurchase the same within the stipulated period.
A sale with pacto de retro transfers the legal title to the vendee a retro.[46] The essence of
a pacto de retro sale is that the title and ownership of the property sold are immediately
vested in the vendee a retro, subject to the resolutory condition of repurchase by a vendor
a retro within the stipulated period.[47] Failure on the part of a vendor a retro to
repurchase the property within the period agreed upon by them, or, in the absence thereof,
as provided for by law, vests upon the vendee a retro absolute title and ownership over
the property sold by operation of law.[48] The failure of the vendee a retro to consolidate
his title under Art. 1607 of the New Civil Code does not impair such title and ownership
because the method prescribed thereunder is merely for the purpose of registering and
consolidating titles to the property.[49] Franklin Ong, and not the petitioner, was the
lawful owner of the six parcels of land. The petitioner, thus, had no right to mortgage or
sell the same to the respondent on September 30, 1991 under the deed of absolute sale. As
the Latin adage goes: NEMO DAT QUOD NON HABET.[50] Hence, the ruling of the
CA that the respondent acquired ownership over the three parcels of land from the
petitioner under the Deed of Absolute Sale dated September 30, 1991 is erroneous. Not
being the owner of the parcels of land, the petitioner could not have lawfully sold the
same to the respondent.