Pactum Commissorium: Meaning
Quick answer
Pactum commissorium is an agreement that lets a creditor keep the property given as security, such as mortgaged land or a pledged item, automatically when the debtor fails to pay. Philippine law forbids it. Under Article 2088 of the Civil Code, such a clause is null and void. When the debt is not paid, the creditor's remedy is to foreclose and have the property sold, not to take it.
Also called: Automatic appropriation of collateral, Forfeiture clause in a mortgage
What does the Civil Code say?
It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
So the property may be sold to pay the debt, but the creditor may not simply keep it.
What are the elements?
In Spouses Ong v. Roban Lending (2008), the Supreme Court said the elements are: "(1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period."
The Court added that consent does not save the clause: the contracts being "freely and voluntarily executed" was "of no moment, pactum commissorium being void for being prohibited by law."
Does it need an express clause?
Not always. In Eupena v. Bobier (2020), a lender had the borrower's land titled in her own name and then leased it back to the borrower. The Court held that the lease was "the result of a pactum commissorium" and invalid under Article 2088.
In Singson v. Spouses Carpio (2023), a transfer of title to the lenders without foreclosure was held to be the prohibited practice. The Court said: "The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the debtor."
When is a transfer to the creditor allowed?
The prohibition has a limit. In Ruby Shelter Builders v. Tan (2024), the Court said: "The prohibition does not extend to a mutual agreement between the debtor and the creditor that the property subject of the mortgage is sold to the latter to extinguish the obligation." There, the debtor company itself had offered its properties in payment, and the transfer was upheld.
How does it connect to equitable mortgage?
A deal written as a sale with right to repurchase may really be a loan secured by the property. The law then presumes an equitable mortgage under Article 1602. In Dala v. Auticio (2022), the Court said "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." See Sale with right to repurchase.
What about movable collateral?
Republic Act No. 11057, the Personal Property Security Act (2018), applies to transactions that secure an obligation with movable collateral. Its Section 66(b) lists Articles 2085 to 2123 of the Civil Code among the provisions "repealed, amended, or modified accordingly" insofar as they are inconsistent with the Act. Section 54 sets its own procedure for a secured creditor who wants to take the collateral after default: a proposal to the debtor and others, who may object in writing. The cases above involved land and applied Article 2088 without discussing this law.
Example
Made-up illustration: Carla borrows money and mortgages her lot. The contract says the lot becomes the lender's if she does not pay within one year. She cannot pay, and the lender has the title moved to his name without foreclosure. Under Article 2088 and the rulings in Ong and Singson, the clause and the transfer are void; the lender may collect the loan or foreclose. See Can a lender keep your collateral?.
Which provisions use this term?
Frequently asked questions
What is pactum commissorium?
It is an agreement that lets a creditor become the owner of the property given as security, without foreclosure, if the debtor fails to pay. Article 2088 of the Civil Code says the creditor cannot appropriate the things pledged or mortgaged, and any stipulation to the contrary is null and void.
What are its elements?
In Spouses Ong v. Roban Lending (2008), the Supreme Court listed two: a property mortgaged as security for a principal obligation, and a stipulation for automatic appropriation by the creditor of the property if the obligation is not paid within the agreed period.
Is it valid if the borrower agreed to it?
No. In Ong, the Court said it does not matter that the contracts were freely and voluntarily signed, because pactum commissorium is void for being prohibited by law.
Can the debtor give the property to the creditor to pay the debt?
In Ruby Shelter Builders v. Tan (2024), the Court said the prohibition does not extend to a mutual agreement between debtor and creditor that the mortgaged property is sold to the creditor to extinguish the obligation.
What can the creditor do if the debt is not paid?
In Singson v. Spouses Carpio (2023), the Court said the only right of a mortgagee on nonpayment is to foreclose the mortgage and have the property sold to satisfy the debt.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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