Key Takeaway: Accurate Redemption Price Calculation is Crucial in Extrajudicial Foreclosures Involving Banks

BPI v. LCL Capital, Inc., G.R. Nos. 243396 & 243409, September 14, 2021

Imagine losing your home over a misunderstood calculation. For many Filipinos, the dream of homeownership can quickly turn into a nightmare when facing the complexities of property foreclosure. In the case of Bank of the Philippine Islands (BPI) versus LCL Capital, Inc., the Supreme Court of the Philippines tackled a crucial issue that could affect countless property owners: how to correctly compute the redemption price following an extrajudicial foreclosure when the mortgagee is a bank. This case highlights the importance of understanding legal nuances that can significantly impact one’s ability to reclaim their property.

The dispute arose when LCL Capital, Inc. failed to repay a loan secured by a mortgage on two condominium units. After BPI, the mortgagee, foreclosed on the property, a disagreement ensued over the redemption price LCL had to pay to regain ownership. The core question was whether the redemption price should be based on the mortgage deed’s terms or the bid price at the auction, and what expenses should be included.

Legal Context: Understanding Redemption Rights and Extrajudicial Foreclosures

In the Philippines, the right to redeem a foreclosed property is a critical protection for borrowers. Under the General Banking Act (Republic Act No. 337), when a bank is the mortgagee, the redemption price is governed by specific rules. Section 78 of this Act stipulates that the redemption price includes the amount due under the mortgage deed, interest at the rate specified in the mortgage, and all costs and expenses incurred by the bank due to the foreclosure and custody of the property.

This contrasts with the general rule under Act No. 3135, which governs extrajudicial foreclosures but does not specifically address situations involving banks. The Supreme Court has ruled that RA No. 337, being a special and subsequent law, takes precedence over Act No. 3135 in cases involving banks.

Key terms to understand include:

• Extrajudicial Foreclosure: A process where a property is sold without court intervention to satisfy a debt.
• Redemption Price: The amount a borrower must pay to reclaim their property after foreclosure.
• Redemption Period: The time frame within which a borrower can redeem the foreclosed property, typically one year.

For instance, if a homeowner defaults on a mortgage with a bank, they must be aware that the redemption price will be calculated based on the mortgage deed’s terms, including any specified interest rate, rather than just the auction bid price.

Case Breakdown: The Journey from Loan Default to Supreme Court Decision

LCL Capital, Inc. took out a P3,000,000 loan from Far East Bank & Trust Co. (FEBTC) in 1997, secured by a mortgage on two condominium units. When LCL defaulted, BPI, which had merged with FEBTC, foreclosed on the property and won the auction with a bid of P2,380,287.07. However, BPI prematurely consolidated ownership before the redemption period expired, prompting LCL to file a lawsuit.

The Regional Trial Court (RTC) initially ruled in favor of LCL, declaring the consolidation void and setting the redemption price at P2,513,583.15, based on the bid price and a 6% interest rate. BPI appealed, arguing for a higher redemption price based on the mortgage deed and a 17% interest rate as stipulated in the loan agreement.

The Court of Appeals (CA) partially granted BPI’s appeal, affirming the exclusion of real estate taxes from the redemption price but remanding the case for recomputation using the 17% interest rate. Both parties sought further review from the Supreme Court.

The Supreme Court emphasized the importance of adhering to the General Banking Act’s provisions:

“In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution concerned by reason of the execution and sale and as a result of the custody of said property less the income received from the property.”

The Court found that both the RTC and CA erred in their calculations. The redemption price should be based on the mortgage deed’s principal obligation of P3,000,000, not the bid price. Additionally, real estate taxes paid by BPI should be included, as LCL retained possession of the property. The Court affirmed the 17% interest rate as stipulated in the mortgage contract.

Practical Implications: Navigating Redemption Prices in Future Cases

This ruling sets a clear precedent for how redemption prices should be calculated in extrajudicial foreclosures involving banks. Property owners and borrowers must understand that the redemption price will be based on the mortgage deed’s terms, including the principal obligation, stipulated interest rate, and all foreclosure and custody expenses, including real estate taxes.

For businesses and individuals, it’s crucial to:

• Ensure that loan agreements clearly specify the terms of the mortgage, including the interest rate.
• Be aware of the one-year redemption period and the factors that will determine the redemption price.
• Consult with legal professionals to understand their rights and obligations in case of default.

Key Lessons:

• Always review and understand the terms of your mortgage agreement, especially the interest rate and redemption provisions.
• Be prepared to pay real estate taxes as part of the redemption price if you retain possession of the property.
• Seek legal advice early to navigate the complexities of foreclosure and redemption processes.

Frequently Asked Questions

What is the redemption period for a foreclosed property in the Philippines?

The redemption period is typically one year from the date of the foreclosure sale.

How is the redemption price calculated when a bank is the mortgagee?

The redemption price includes the principal obligation under the mortgage deed, interest at the rate specified in the mortgage, and all costs and expenses incurred by the bank due to the foreclosure and custody of the property.

Can real estate taxes be excluded from the redemption price?

No, real estate taxes paid by the bank must be included in the redemption price if the borrower retains possession of the property.

What happens if the bank consolidates ownership before the redemption period expires?

Such consolidation is considered premature and void, but it does not affect the calculation of the redemption price.

Is the bid price at the foreclosure auction the basis for the redemption price?

No, when the mortgagee is a bank, the redemption price is based on the mortgage deed’s terms, not the bid price.

What should borrowers do to protect their rights in case of foreclosure?

Borrowers should consult with legal professionals to understand their rights and obligations, review their mortgage agreements, and be prepared to redeem the property within the one-year period.

ASG Law specializes in property and banking law. Contact us or email hello@asglawpartners.com to schedule a consultation and ensure your rights are protected.