Equitable Mortgage: Meaning
Quick answer
An equitable mortgage is a contract that is written as a sale but is really meant to secure a loan or another obligation. The Civil Code presumes one in the cases listed in Article 1602, for example when the seller stays in the property or keeps paying its taxes. If the contract is an equitable mortgage, the lender cannot simply keep the property when the loan is not paid; he must collect the debt or foreclose.
Also called: Pacto de retro sale treated as a loan
What does Article 1602 say?
The first part of the article:
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;
The other cases are: a new instrument extending the period of redemption or granting a new period; the buyer keeping part of the price; the seller binding himself to pay the taxes on the thing sold; and any other case where it may be fairly inferred that the real intention was to secure a debt. See Article 1602 for the full explanation.
Article 1603 adds that, in case of doubt, a contract purporting to be a sale with right to repurchase is construed as an equitable mortgage. Article 1604 extends Article 1602 to contracts that look like an absolute sale. Under Article 1605, the apparent seller may ask the court to reform the document.
What must be shown?
In Heirs of Soliva v. Soliva (2015), the Supreme Court said two requisites must concur: the parties entered into a contract called a sale, and their intention was to secure an existing debt by way of mortgage. The presumption applies only when there is real doubt about the nature of the agreement. In Repuela v. Estate of the Spouses Larawan (2016), the Court added that the presence of any one of the circumstances in Article 1602 is enough; no "overwhelming number" is needed.
Why does the law presume a mortgage?
In Dala v. Auticio (2022), the Supreme Court said that "the policy of the law is to discourage pacto de retro sales and thereby prevent the circumvention of the prohibition against usury and pactum commissorium." Pactum commissorium is an agreement letting a creditor take the property used as security without foreclosure. In Dala, a clause making the sale "absolute and irrevocable" if the seller failed to repurchase was held to be such an arrangement, and the transfer of the land was void. In Saclolo v. Marquito (2019), the Court said the creditors could collect the loan with interest and foreclose if it was not paid, but could not appropriate the lot without foreclosure.
Saclolo also held that since there is no real "repurchase" in an equitable mortgage, the repurchase periods of Article 1606 do not apply.
Example
Made-up illustration: Tonya "sells" 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 cases of Article 1602 are present, so the law presumes that the deal is a loan with a mortgage. Even if the deed says the sale becomes absolute if she does not pay, Cesar cannot simply keep the land; he must collect what is owed or foreclose. Whether the presumption holds is decided by the court on the evidence.
For more, see Sale with right to repurchase and Legal interest rate in the Philippines.
Which provisions use this term?
Frequently asked questions
What is an equitable mortgage in simple words?
It is a deal written as a sale, often a sale with right to repurchase, that is really a loan secured by the property. The law treats it as a mortgage, so the lender cannot simply keep the property.
When does the law presume an equitable mortgage?
Article 1602 lists six cases, including an unusually inadequate price, the seller staying in possession, the buyer keeping part of the price, and the seller paying the taxes on the property. In Repuela v. Estate of the Spouses Larawan (2016), the Supreme Court said any one of them is enough.
Does it apply to a deed of absolute sale?
Yes. Article 1604 says the rules of Article 1602 also apply to a contract purporting to be an absolute sale.
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 Supreme Court held that the creditor must collect the debt or foreclose; letting him take the land without foreclosure would be pactum commissorium, which is void.
What happens to the rent or fruits the buyer received?
Under the last paragraph of Article 1602, any money, fruits or other benefit the buyer receives as rent or otherwise is considered interest, subject to the usury laws.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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