Understanding the Difference Between Sale and Mortgage: Lessons from a Landmark Case

Arturo A. Dacquel v. Spouses Ernesto Sotelo and Flora Dacquel-Sotelo, G.R. No. 203946, August 04, 2021

Imagine you’ve lent money to a family member to help them build their dream home, and in return, they’ve handed over the title to their property. It seems straightforward, but what if years later, they claim the transfer was just to secure the loan, not to sell the property? This scenario, while seemingly clear-cut, can lead to complex legal battles over whether a transaction was a sale or merely a mortgage. In the case of Arturo A. Dacquel versus Spouses Ernesto Sotelo and Flora Dacquel-Sotelo, the Supreme Court of the Philippines had to untangle such a web of transactions to determine the true nature of a deed of sale.

The heart of the dispute revolved around a parcel of land in Malabon City, initially owned by the Sotelos, who borrowed P140,000 from Dacquel to finance their apartment construction. A deed of sale was executed, transferring the property to Dacquel, but the Sotelos later claimed it was only meant as security for the loan. The central legal question was whether the deed of sale was, in fact, an equitable mortgage.

Legal Context: Equitable Mortgage vs. Absolute Sale

In the realm of property law, distinguishing between an equitable mortgage and an absolute sale is crucial. An equitable mortgage arises when a property is transferred as security for a debt, but the intention is not to permanently transfer ownership. On the other hand, an absolute sale involves the full transfer of ownership from the seller to the buyer.

The Civil Code of the Philippines provides specific guidelines under Articles 1602 and 1604 to determine if a transaction should be treated as an equitable mortgage. These articles list several indicators or ‘badges of fraud’ that suggest a transaction might be a mortgage rather than a sale. For instance, if the price is unusually low or if the seller remains in possession of the property, these are signs that the transaction may be a mortgage.

Here’s how Article 1602 of the Civil Code reads: “The contract shall be presumed to be an equitable mortgage, in any of the following cases: (1) When the price of a sale with a 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.”

These principles are not just legal jargon; they have real-world implications. For example, if a homeowner borrows money to renovate their house and transfers the title to the lender as security, they might still be considered the true owner if the transaction is deemed an equitable mortgage.

Case Breakdown: The Journey from Loan to Legal Battle

The story began in 1994 when the Sotelos, facing financial constraints, borrowed P140,000 from Dacquel, Flora’s brother, to complete their apartment project. To secure the loan, they executed a deed of sale, transferring the title to Dacquel. However, the Sotelos claimed that the agreement was to repay the loan with interest from rental income, and upon full payment, Dacquel would return the property.

Disputes arose when the Sotelos demanded the property back after Dacquel had collected P280,000 from the apartment’s rental income. Dacquel refused, leading to a legal battle that saw the case travel through the Regional Trial Court (RTC) and the Court of Appeals (CA) before reaching the Supreme Court.

The RTC initially ruled in favor of Dacquel, dismissing the Sotelos’ claim for lack of evidence. However, the CA reversed this decision, applying Articles 1602 and 1604 to declare the deed of sale as an equitable mortgage. The CA found two key badges of fraud: the gross inadequacy of the price and the continued possession of the property by the Sotelos.

The Supreme Court upheld the CA’s decision, emphasizing the importance of the parties’ intent over the document’s wording. Justice Hernando wrote, “Decisive for the proper determination of the true nature of the transaction between the parties is their intent, shown not merely by the contract’s terminology but by the totality of the surrounding circumstances.”

The Court also addressed Dacquel’s claim of dacion en pago (a form of payment where the debtor transfers ownership of a property to the creditor as payment for a debt), dismissing it due to lack of evidence and mutual consent.

Furthermore, the Supreme Court highlighted the prohibition against pactum commissorium, where a creditor automatically becomes the owner of a mortgaged property upon default. Article 2088 of the Civil Code states, “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.”

Practical Implications: Navigating Property Transactions

This ruling underscores the importance of clarity and documentation in property transactions. For property owners and lenders, it’s crucial to ensure that the terms of any agreement are clear and reflect the true intent of the parties involved. If a transaction is meant to secure a loan, it should be explicitly stated as such to avoid future disputes.

For individuals or businesses involved in similar transactions, here are key lessons to take away:

• Document Intent Clearly: Ensure that any property transfer intended as security for a loan is documented as an equitable mortgage, not a sale.
• Understand Legal Presumptions: Be aware of the legal indicators that can classify a transaction as an equitable mortgage, such as price inadequacy and continued possession by the seller.
• Avoid Pactum Commissorium: Never agree to a condition where the lender automatically becomes the owner of the property upon default, as this is illegal.

Frequently Asked Questions

What is an equitable mortgage? An equitable mortgage is a transaction where property is transferred as security for a debt, but the transferor remains the true owner until the debt is paid.

How can I tell if a transaction is an equitable mortgage or a sale? Look for indicators such as a low sale price, continued possession by the seller, or any agreement that suggests the property is being used as loan security.

What is pactum commissorium? Pactum commissorium is an illegal practice where a creditor automatically becomes the owner of a mortgaged property upon the debtor’s default.

Can a deed of sale be challenged in court? Yes, if there is evidence that the transaction was intended as an equitable mortgage, the deed of sale can be challenged and potentially annulled.

What should I do if I suspect a deed of sale is actually a mortgage? Consult with a legal professional who can review the transaction details and advise on the best course of action.

ASG Law specializes in property law and equitable mortgage disputes. Contact us or email hello@asglawpartners.com to schedule a consultation.