When is a Sale Not a Sale? Understanding Equitable Mortgages

G.R. No. 107259, June 09, 1997

Imagine losing your home because a loan agreement was disguised as a sale. This happens more often than you might think, especially when financial desperation leads people to accept unfavorable terms. The Supreme Court case of Raymundo M. Dapiton vs. Court of Appeals and Meljohn Dela Peña sheds light on this crucial issue, helping us understand when a contract of sale can be considered an equitable mortgage, protecting vulnerable property owners from unfair transactions.

Distinguishing Between Sales and Equitable Mortgages: The Legal Framework

Philippine law distinguishes between an absolute sale, where ownership transfers completely, and an equitable mortgage, where a property is used as security for a debt. The Civil Code provides specific instances where a contract, though appearing as a sale, is presumed to be an equitable mortgage.

Article 1602 of the New Civil Code outlines these instances:

“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 usually 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.
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 the interest which shall be subject to the usury law.”

For example, suppose Mr. Cruz, needing urgent funds, “sells” his land to a lender for a price significantly below market value, but continues to cultivate the land. Despite the appearance of a sale, the law presumes an equitable mortgage, protecting Mr. Cruz’s right to redeem his property by paying the debt.

The Dapiton Case: A Story of Financial Hardship and Legal Maneuvering

The Dapiton case revolves around a transaction between Raymundo Dapiton and Meljohn dela Peña. Dapiton, needing money, approached Dela Peña for a loan, offering his house and lot as security. A document was signed, purporting to be a deed of sale for P400.00, but with annotations allowing Dapiton to repurchase the property within a year.

Here’s a breakdown of the key events:

• 1967: Dapiton obtains a P400 loan from Dela Peña, secured by his property, with a signed document appearing as a deed of sale.
• Annotations: Dela Peña adds handwritten notes to the document, granting Dapiton a one-year option to repurchase.
• 1968: Dapiton attempts to repurchase the property, but Dela Peña refuses, claiming the sale was absolute.
• Legal Battle: Dapiton files a complaint for annulment of the deed of sale, arguing it was actually a loan agreement.

The lower court dismissed Dapiton’s complaint, but the Court of Appeals initially reversed this decision, then later sided with Dela Peña, declaring the transaction an absolute sale. The case then reached the Supreme Court.

The Supreme Court highlighted several critical points:

“Firstly, it is without dispute that private respondent Dela Peña made two (2) annotations on the deed of sale, one at the left hand margin and another at the back of the page. These annotations grant Raymundo Dapiton the right to repurchase his property within one year. This right of repurchase is a clear contravention of private respondent’s claim that the deed of sale was meant to be absolute.”

“Secondly, it has been established that the deceased Dapiton habitually borrowed money from numerous acquaintances, using the said property as security for the loan. The amount borrowed, amounting to Four Hundred Pesos (P400.00), invariably remained the same. Although these loans were constantly denoted as “sale with right of repurchase,” the deceased Dapiton continously remained in possession of the property despite a succession of such loan transactions. Evidently, all these transactions were equitable mortgages.”

The Court ultimately ruled in favor of Dapiton’s heirs, recognizing the transaction as an equitable mortgage.

Practical Implications: Protecting Yourself from Predatory Lending

The Dapiton case reinforces the importance of understanding the true nature of contracts, especially when dealing with loans secured by property. It serves as a warning against predatory lending practices that exploit vulnerable individuals.

Key Lessons:

• Inadequate Price: If the selling price is significantly lower than the property’s market value, it raises a red flag.
• Continued Possession: If the seller remains in possession of the property, it suggests a mortgage rather than a sale.
• Right to Repurchase: The presence of a repurchase agreement strengthens the argument for an equitable mortgage.
• Legal Advice: Always seek legal advice before signing any document involving the transfer of property, especially when taking out a loan.

For instance, if a homeowner facing foreclosure is offered a “sale with leaseback” agreement, they should carefully examine the terms and seek legal counsel to ensure it’s not an equitable mortgage designed to circumvent foreclosure laws.

Frequently Asked Questions

Q: What is an equitable mortgage?

A: An equitable mortgage is a transaction that appears to be a sale but is actually intended as security for a debt. The borrower retains the right to redeem the property by paying off the debt.

Q: How does an equitable mortgage differ from an absolute sale?

A: In an absolute sale, ownership of the property transfers completely to the buyer. In an equitable mortgage, the seller retains the right to recover the property.

Q: What are the signs of an equitable mortgage?

A: Signs include an inadequate selling price, the seller remaining in possession, and the presence of a repurchase agreement.

Q: What should I do if I suspect a transaction is an equitable mortgage?

A: Seek legal advice immediately. An attorney can help you determine the true nature of the transaction and protect your rights.

Q: Can I still redeem my property if it was subject to an equitable mortgage?

A: Yes, you have the right to redeem the property by paying off the debt, even if the transaction was disguised as a sale.

Q: What happens if the buyer refuses to allow me to redeem the property?

A: You can file a lawsuit to compel the buyer to allow redemption and to have the transaction declared an equitable mortgage.

ASG Law specializes in Real Estate Law and Property Rights. Contact us or email hello@asglawpartners.com to schedule a consultation.