The Supreme Court has ruled that a mortgage on a subdivision lot or condominium unit by a property developer is void if it lacks the prior written approval of the Housing and Land Use Regulatory Board (HLURB), as mandated by Presidential Decree (PD) 957. This protection extends to individual lots within a larger mortgaged property, ensuring buyers are shielded from developers’ non-compliance.

Mortgaged Land and Broken Promises: Can a Bank Foreclose on a Protected Subdivision Lot?

The case of Far East Bank & Trust Co. v. Arturo L. Marquez stemmed from a contract to sell a townhouse unit within a subdivision project. Arturo Marquez entered into an agreement with Transamerican Sales and Exposition (TSE) to purchase a 52.5 sq. m. lot with a townhouse unit for P800,000. Marquez made substantial payments, but the project stalled. Unknown to Marquez, TSE had obtained a loan from Far East Bank & Trust Co. (FEBTC) and mortgaged the entire property, including Marquez’s lot. When TSE defaulted, FEBTC foreclosed the mortgage. Marquez then sought to invalidate the mortgage on his property due to the lack of HLURB approval, as required under PD 957. This case highlights the tension between the rights of banks and the protections afforded to individual property buyers under the law. The core legal question is whether a mortgage, constituted over an entire property, is valid on a subdivided lot without HLURB approval. Building on this principle, it becomes vital to dissect and explain the implications of PD 957 regarding the mortgage of properties that are subject to a contract of sale.

PD 957, also known as the Subdivision and Condominium Buyers’ Protective Decree, aims to shield innocent purchasers from unscrupulous developers. Section 18 of PD 957 specifically addresses mortgages, stating:

“SEC. 18. Mortgages.-No mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the Authority. Such approval shall not be granted unless it is shown that the proceeds of the mortgage loan shall be used for the development of the condominium or subdivision project and effective measures have been provided to ensure such utilization. The loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his option, pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage indebtedness secured by the particular lot or unit being paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full payment thereof.”

The Supreme Court emphasized that this provision is mandatory, intended to protect lot buyers from hidden mortgages. The absence of HLURB approval renders the mortgage void, at least with respect to the affected buyer. In this case, FEBTC argued that the mortgage covered the entire unsubdivided parcel, not individual lots, and therefore did not require HLURB approval. However, the Court rejected this argument, reasoning that the lot was technically described and subject to a contract to sell prior to the mortgage; the lack of a separate title for the specific lot does not remove the need for protection under PD 957. Considering these key issues, the Court looked at its legislative intention.

Furthermore, the Court dismissed FEBTC’s claim as an innocent mortgagee. The Court emphasized that banks should exercise due diligence when dealing with property developers. The existence of a townhouse project should have alerted FEBTC to the possibility of existing contracts with buyers. Therefore, the bank should not have relied solely on the developer’s representations but should have independently verified the necessary permits and the status of the property. Due diligence, after all, serves as an indispensable instrument when dealing with financial undertakings that may amount to complexities in legal implications if not done properly. Thus, failure to exercise prudence equates to negligence and bars the bank from claiming good faith.

As a consequence of the bank’s negligence and the violation of Section 18 of PD 957, the Supreme Court upheld the HLURB’s decision, declaring the mortgage unenforceable against Marquez. Marquez was entitled to complete his payments directly to the bank, securing his right to the property upon full payment. While the HLURB decision encompassed orders beyond Marquez’s specific lot, the Supreme Court clarified that the ruling only applies to Marquez’s specific property. However, the Court stressed that the bank’s rights as a mortgagee cannot be sustained in violation of laws meant to protect innocent purchasers of property.

FAQs

What is the main purpose of PD 957?	PD 957 aims to protect subdivision and condominium buyers from fraudulent practices by developers.
What does Section 18 of PD 957 require?	It requires developers to obtain prior written approval from the HLURB before mortgaging any subdivision lot or condominium unit.
What happens if a developer mortgages a property without HLURB approval?	The mortgage is considered void, especially concerning buyers who were not informed of the mortgage.
Does the lack of a separate title for a lot exempt it from PD 957 protection?	No, the law protects buyers with contracts to sell, even if the lot does not yet have a separate title.
What responsibilities do banks have when financing subdivision projects?	Banks must exercise due diligence, verifying permits and licenses and investigating potential buyers’ rights.
Can a bank claim to be an innocent mortgagee if the developer fails to comply with PD 957?	No, if the bank was negligent in its investigation, it cannot claim to be an innocent mortgagee.
What remedy does a buyer have if their property is mortgaged without their knowledge and HLURB approval?	The buyer can seek to have the mortgage declared unenforceable against them and continue payments to secure their property rights.
Does this ruling apply to the entire mortgaged property, or just the specific lot in question?	The ruling primarily applies to the specific lot subject to the contract to sell, not the entire mortgaged property.

This landmark decision reinforces the protective mantle that PD 957 casts over vulnerable property buyers. It underscores the critical importance of HLURB approval in mortgage agreements and emphasizes the duty of financial institutions to exercise prudence when dealing with real estate developers, securing a more equitable landscape for both buyers and lenders.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Far East Bank & Trust Co. v. Arturo L. Marquez, G.R. No. 147964, January 20, 2004