Sale With Right to Repurchase (Pacto de Retro): Is It a Loan?

Article 1601 calls it conventional redemption: the seller "reserves the right to repurchase the thing sold". To repurchase, the seller must return the price and, under Article 1616, also the expenses of the contract and other legitimate payments made because of the sale, and the necessary and useful expenses made on the property.

The period is fixed by Article 1606. If the contract says nothing, the right lasts four years from the date of the contract. If the parties agree on a period, it "cannot exceed ten years." Even after a court rules that the contract was a true sale with right to repurchase, the seller may still repurchase within thirty days from final judgment.

Article 1602 lists the cases:

The same presumption applies to a contract written as an absolute sale (Article 1604). And "In case of doubt", a contract that looks like a sale with right to repurchase is construed as an equitable mortgage (Article 1603).

One sign is enough. In Repuela v. Estate of the Spouses Larawan (2016), the Supreme Court said "the presence of any of the circumstances set forth therein suffices for a contract to be deemed an equitable mortgage. No concurrence or an overwhelming number is needed."

But the presumption has limits. In Heirs of Soliva v. Soliva (2015), the Court said two things must concur: the parties made a contract called a sale, and their intention was to secure an existing debt. The presumption applies "only when doubt, in fact, exists" about the nature of the agreement. In that case, the Court found the deed was not an equitable mortgage and was a valid sale, but only of the part the seller owned.

The courts have seen these deals used to hide loans. In Saclolo v. Marquito (2019), the Court noted that sales with right to repurchase "have been frequently resorted to in order to conceal the true nature of a contract, that is, a loan secured by a mortgage." In Dala v. Auticio (2022), it said the policy of the law is to discourage pacto de retro sales and prevent the circumvention of the laws against usury and pactum commissorium.

Pactum commissorium is an agreement that lets the lender automatically become owner of the property if the debt is not paid, without foreclosure. In Dala, the deed said the sale would become "absolute and irrevocable" if the seller did not repurchase. The Court held this was a pactum commissorium, so the transfer of the land to the lender was void. The borrower could redeem the land by paying the loan with interest.

• The lender must collect or foreclose. In Saclolo, the Court said the lenders may collect the loan with interest and foreclose if it is not paid, and that letting them take the land without foreclosure would have the same effect as a pactum commissorium.
• The repurchase periods do not apply. Since there is no real sale, Saclolo held that the periods of Article 1606 do not apply. The Court applied instead the ten-year period of Article 1144, counted from the time the cause of action accrued.
• Rent counts as interest. Under the last paragraph of Article 1602, money, fruits or other benefits the buyer receives "as rent or otherwise" are considered interest, subject to the usury laws.
• The deed can be corrected. The apparent seller may ask the court to reform the document (Article 1605).

In Dala and Repuela, the Court applied 12% interest a year until June 30, 2013 and 6% after that, in line with the legal interest rules. See What is the legal interest rate in the Philippines?

The term is also explained in equitable mortgage.

Not by himself. For real property, Article 1607 says the buyer's consolidation of ownership, when the seller fails to repurchase, cannot be recorded in the Registry of Property "without a judicial order, after the vendor has been duly heard."

These are made-up examples to show how the rules work. They are not advice for any real case.

Tonya needs money. She signs a deed "selling" her lot to Cesar for ₱100,000, with the right to buy it back in two years. She stays in her house on the lot and keeps paying the real property tax. Under Article 1602(2) and (5), the law presumes the deal is a loan secured by the lot.

The deed also says the sale becomes absolute if Tonya does not repurchase on time. If a court finds an equitable mortgage, Cesar cannot simply keep the lot, as in Dala. He must collect the loan or foreclose.

If instead a court finds that it was a true sale with right to repurchase, Tonya still has thirty days from final judgment to repurchase (Article 1606).

Talk to a lawyer before you sign a deed of sale with right to repurchase, if a lender tells you a property is now his because you did not pay on time, or if you want a court to declare a deed an equitable mortgage. Whether a deal is a real sale or a loan depends on the documents and the evidence.

If you cannot afford a lawyer, see Free legal help in the Philippines. For more on loans and collection, see Debt and collection and the Article 1602 page.