Is Your Deed of Sale Actually a Loan? Understanding Equitable Mortgage in the Philippines

Confused about whether your property transaction is a true sale or just a loan in disguise? Philippine law recognizes ‘equitable mortgages’ – agreements that look like sales but function as loans secured by property. This case highlights how Philippine courts protect property owners from losing their land due to deceptive contracts, ensuring fairness and upholding the true intent behind transactions. Learn how to identify and protect yourself from equitable mortgages.

[ G.R. NO. 166183, January 20, 2006 ] SPS. TITO ALVARO AND MARIA VALELO, PETITIONERS, VS. SPS. OSMUNDO TERNIDA AND JULITA RETURBAN, COURT OF APPEALS, RESPONDENTS.

INTRODUCTION

Imagine a family needing funds and using their land as collateral, believing they are taking out a loan. However, the lender presents them with a document that looks like a sale, not a mortgage. This scenario is more common than you might think, and it’s precisely what Philippine law seeks to address through the concept of equitable mortgage. In the case of Sps. Alvaro v. Sps. Ternida, the Supreme Court clarified the nuances between an absolute sale and an equitable mortgage, emphasizing the importance of discerning the true intent of parties in property transactions. At the heart of this case lies a crucial question: When does a deed of sale, seemingly transferring property ownership, actually function as a loan agreement secured by the same property?

LEGAL CONTEXT: EQUITABLE MORTGAGE IN PHILIPPINE LAW

Philippine law, particularly Article 1602 of the Civil Code, anticipates situations where contracts are disguised to circumvent legal protections, especially for vulnerable property owners. This article specifically addresses ‘contracts of sale with right to repurchase’ (pacto de retro sales) but its principles extend to absolute sales intended as loan security. An equitable mortgage arises when a contract, regardless of its form, essentially secures a debt with real property. This legal concept is crucial because it prevents lenders from exploiting borrowers by masking loan agreements as outright sales, thus avoiding foreclosure proceedings and potentially seizing property unfairly.

Article 1602 of the Civil Code clearly lays out the instances when a sale is presumed to be an equitable mortgage:

Article 1602. 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;

(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.

Crucially, the presence of even just one of these conditions can lead a court to interpret a contract as an equitable mortgage rather than an absolute sale. This legal presumption shifts the burden of proof, requiring the party claiming an absolute sale to convincingly demonstrate that it was indeed the true intention of the parties.

CASE BREAKDOWN: SPS. ALVARO VS. SPS. TERNIDA

The story begins with Respondent Julita Returban, needing money, mortgaging her family’s riceland to the De Vera spouses for P28,000. Unbeknownst to Julita, the document presented was a ‘Deed of Pacto de Retro Sale,’ which she signed believing it was a mortgage. A year later, the De Veras transferred this ‘mortgage’ to the Calpito spouses. Julita, needing more funds, approached the Calpitos and signed another document, a ‘Deed of Sale with Right to Repurchase,’ after receiving an additional P3,000.

The situation became more complicated when the Calpitos, in turn, transferred the ‘mortgage’ to Petitioners, the Alvaro spouses. When Julita sought a further P1,000, the Alvaros provided it, but this time, they presented a ‘Deed of Absolute Sale.’ Julita, still under the impression she was signing mortgage-related papers, signed this document as well. When Julita attempted to redeem her land, the Alvaros refused, claiming they had purchased it outright and possessed a tax declaration in their name. This led the Ternida spouses (Julita and her husband) to file a case to annul the Deed of Absolute Sale, arguing it was merely an equitable mortgage.

The case journeyed through the courts:

1. Regional Trial Court (RTC): Initially, the RTC dismissed the Ternidas’ complaint, ruling in favor of the Alvaros.
2. Court of Appeals (CA): The Ternidas appealed, and the CA reversed the RTC decision. The CA declared the Deed of Absolute Sale to be an equitable mortgage, allowing the Ternidas to redeem their property.
3. Supreme Court: The Alvaros then elevated the case to the Supreme Court, arguing that the CA erred in interpreting the transaction as an equitable mortgage.

The Supreme Court sided with the Court of Appeals and the Ternida spouses. Justice Ynares-Santiago, writing for the Court, emphasized that “the nomenclature used by the contracting parties to describe a contract does not determine its nature. The decisive factor is the intention of the parties…”. The Court highlighted several crucial points:

“When plaintiff-appellant Julita Returban first mortgaged the land in favor of spouses Salvador de Vera and Juanita Orinion for the amount of P28,000.00, she was made to sign a Deed of Pacto de Retro Sale. Salvador de Vera himself was aware that the subject property was merely mortgaged, not sold, because he himself subsequently executed a Deed of Transfer Mortgage in favor of spouses Jose Calpito and Zoraida Valelo….”

The Court also noted the inconsistencies in the amounts involved and Julita’s continued attempts to ‘redeem’ the property, actions inconsistent with an absolute sale. Another key quote from the decision underscores the spirit of Article 1602:

“In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.”

Ultimately, the Supreme Court upheld the CA’s decision, affirming that the Deed of Absolute Sale was indeed an equitable mortgage. The Ternida spouses were granted the right to redeem their property by paying their outstanding debt to the Alvaros.

PRACTICAL IMPLICATIONS: PROTECTING YOUR PROPERTY FROM DISGUISED LOANS

This case serves as a powerful reminder of the protective mantle of Philippine law for property owners. It highlights the courts’ willingness to look beyond the literal wording of contracts to uncover the true intentions of the parties. For individuals and businesses, this ruling offers several important lessons:

• Substance over Form: Courts prioritize the substance of an agreement over its form. Simply labeling a contract as a ‘Deed of Absolute Sale’ does not automatically make it one if the underlying intent and circumstances point to a loan.
• Presumption of Equitable Mortgage: The conditions listed in Article 1602 are not mere suggestions; they create a legal presumption. If any of these conditions are present, the burden shifts to prove the transaction was genuinely a sale.
• Parol Evidence is Admissible: Even if a contract appears clear on its face, parol evidence (oral testimony, circumstantial evidence) is admissible to prove that the true agreement was an equitable mortgage. Julita’s testimony about her belief and understanding was crucial in this case.

Key Lessons from Sps. Alvaro v. Sps. Ternida:

• Read and Understand Contracts: Always thoroughly read and understand any document before signing, especially those involving property. Seek legal advice if needed.
• Document Everything: Keep records of all communications, payments, and related documents. This evidence can be vital in proving your case.
• Question Inconsistencies: Be wary of transactions where the stated ‘purchase price’ is significantly lower than the property’s market value, or where you remain in possession after a ‘sale.’
• Seek Legal Help Early: If you suspect a contract is not what it seems, consult a lawyer immediately to protect your rights.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q: What is an equitable mortgage?

A: An equitable mortgage is a transaction that looks like a sale (often a deed of sale or pacto de retro sale) but is actually intended to secure a loan. Philippine law recognizes these to protect borrowers from losing property unfairly.

Q: How do courts determine if a sale is actually an equitable mortgage?

A: Courts look at the circumstances surrounding the transaction and consider the conditions listed in Article 1602 of the Civil Code. Key factors include inadequate price, the seller remaining in possession, and evidence suggesting the intent was loan security.

Q: What is Article 1602 of the Civil Code?

A: This article lists situations where a contract of sale with right to repurchase is presumed to be an equitable mortgage. These presumptions are also applied to absolute sales when determining the true nature of the agreement.

Q: What should I do if I think I signed an equitable mortgage disguised as a sale?

A: Seek legal advice immediately. A lawyer can assess your situation, gather evidence, and help you file a case in court to have the contract declared an equitable mortgage, allowing you to redeem your property.

Q: Can I get my property back if it was declared an equitable mortgage?

A: Yes. If a court declares a sale to be an equitable mortgage, you have the right to redeem your property by paying the principal loan amount plus legal interest.

Q: Is it always bad to sign a Deed of Absolute Sale?

A: No. Deeds of Absolute Sale are standard for genuine property sales. However, you must be certain it reflects your true intention. If you intend to borrow money and use your property as security, ensure the document is clearly a mortgage agreement, not a sale.

Q: What is ‘pacto de retro sale’?

A: A ‘pacto de retro sale’ is a sale with the right to repurchase. While seemingly a sale, it can also be considered an equitable mortgage if intended as loan security.

Q: How can I avoid accidentally creating an equitable mortgage when I intend to sell my property?

A: Ensure the price reflects fair market value, completely relinquish possession after the sale, and clearly document the transaction as an absolute sale with no repurchase options unless genuinely intended as a pacto de retro sale.

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