Article 1602 of the Civil Code: Equitable mortgage
Status: In force
What does Article 1602 say?
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.
What does it mean in plain language?
Article 1602 of the Civil Code protects people who "sell" their land with a right to buy it back when the deal is really a loan. If any of six signs is present, such as a very low price, or the seller staying on the land and paying its taxes, the law presumes the contract is an equitable mortgage: a loan secured by the property. The seller then remains the owner, and the lender must collect the debt or foreclose.
A sale with right to repurchase (also called pacto de retro, or conventional redemption) is a sale where the seller keeps the right to buy the property back (Article 1601). The Supreme Court has said these sales have often been used to hide a loan secured by a mortgage (Saclolo v. Marquito, 2019).
How does it work in real life?
Tonya's lot
Tonya needs money. She signs a deed "selling" her lot to Cesar with the right to buy it back in two years. She keeps living in the house and keeps paying the real property tax. Two signs of Article 1602 are present (items 2 and 5), so the law presumes a loan secured by the lot.
"Absolute if not repurchased"
The same deed says the sale becomes absolute if Tonya does not repurchase on time. Following Dala and Saclolo, Cesar cannot simply keep the lot. He may collect what Tonya owes, with interest, and foreclose if she does not pay.
A true sale
In another case, the court finds that Lando really sold his lot with a right to repurchase, and there was no loan. Under Article 1606, Lando may still repurchase within thirty days from the final judgment.
These are made-up examples to show how the rule works. They are not advice for any real case.
What does this mean in practice?
- Whether a deal is a sale or an equitable mortgage is decided by a court from the documents and the conduct of the parties.
- Interest awarded in these cases follows the rulings on legal interest. See the legal interest rate and is 5% monthly interest legal?
- On a loan, Article 1956 says no interest is due unless it has been expressly stipulated in writing. In Dala and in Repuela, the Court ordered interest of 12% a year and then 6% a year for set periods; those rates were fixed for those cases.
- For time limits on collecting a debt, see how many years to collect a debt.
- For free or low-cost legal help, see where to find legal help.
- For a question-and-answer guide, see sale with right to repurchase: is it a loan? The term is explained in equitable mortgage.
What does Article 1602 say?
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 last paragraph treats the buyer's earnings as interest:
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.
Does it also apply to an "absolute sale"?
Yes. Article 1604 says the same presumption applies to a contract that looks like an absolute sale. And in case of doubt, Article 1603 says a contract that looks like a sale with right to repurchase is read as an equitable mortgage. The apparent seller may ask the court to reform the document so that it shows the true agreement (Article 1605).
How do courts apply the presumption?
- One sign is enough. In Repuela v. Estate of the Spouses Larawan (2016), the Court said the presence of any of the circumstances in Article 1602 is enough; no concurrence or large number is needed.
- Two requisites. In Heirs of Soliva v. Soliva (2015), the Court said the presumption needs a contract called a sale and an intention to secure an existing debt. It applies only when there is real doubt about the nature of the agreement.
- No automatic ownership. In Dala v. Auticio (2022), a clause making the sale "absolute and irrevocable" if the seller failed to repurchase was treated as pactum commissorium, an arrangement that lets the creditor take the property without foreclosure. The Court held the transfer of the land through it void and allowed the borrower to redeem by paying the debt with interest.
- Which deadline applies. In Saclolo v. Marquito (2019), the Court said that once the deal is found to be an equitable mortgage, there is no "repurchase", so the periods of Article 1606 do not apply. The ten-year period of Article 1144 applies instead, counted from when the cause of action accrued.
What if it is a true sale with right to repurchase?
If the court finds a true sale with right to repurchase, Article 1606 sets the period:
The right referred to in article 1601, in the absence of an express agreement, shall last four years from the date of the contract.
Should there be an agreement, the period cannot exceed ten years.
However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase.
For land, Article 1607 adds that the buyer's consolidation of ownership cannot be recorded in the Registry of Property without a court order, after the seller has been heard.
Frequently asked questions
What is an equitable mortgage?
It is a contract that looks like a sale, often a sale with right to repurchase, but whose real purpose is to secure a loan or another obligation. Article 1602 lists the cases where the law presumes this.
What are the signs of an equitable mortgage?
Article 1602 lists six: an unusually low price; the seller stays in possession; a new document extends the repurchase period; the buyer keeps part of the price; the seller pays the taxes on the property; or any other case where the real intention is to secure a debt.
Do all six signs have to be present?
No. In Repuela v. Estate of the Spouses Larawan (2016), the Supreme Court said the presence of any one of the circumstances in Article 1602 is enough.
Can the lender keep the land if the loan is not paid?
Not automatically. In Saclolo v. Marquito (2019) and Dala v. Auticio (2022), the Court said the creditor must collect the loan or foreclose. Taking the land without foreclosure would be pactum commissorium, which the Court treated as void.
What happens to the rent the buyer received?
Article 1602 says any money, fruits or other benefit the buyer receives as rent or otherwise is treated as interest, subject to the usury laws.
How long is the period to repurchase in a true sale with right to repurchase?
Article 1606 says four years from the contract if there is no express agreement, and not more than ten years if there is one.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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