Unmasking Simulated Sales: Why Your Deed of Sale Might Be Void

TLDR: In the Philippines, a Deed of Sale that doesn’t reflect the true intention of the parties, especially when used as a disguised loan agreement, can be declared void by the courts. This case highlights how Philippine jurisprudence protects property owners from losing their land based on simulated contracts, ensuring that the real agreement prevails over формальность.

G.R. No. 136857, November 22, 2000

INTRODUCTION

Imagine needing urgent funds and turning to a lender who asks for your land title as collateral. Instead of a straightforward loan agreement, you’re presented with a Deed of Sale. You’re assured it’s just a formality, a way to secure the loan, and your property will be returned once you repay. But what if the lender later claims the sale was genuine, and your land is now theirs? This is the precarious situation many Filipinos face, and it’s precisely the scenario addressed in the Supreme Court case of Spouses Bartimeo and Caridad Velasquez and Spouses John and Grace Velasquez-Balingit vs. Court of Appeals and Filomena Tejero. This case delves into the crucial legal concept of simulated contracts, specifically Deeds of Sale that are not what they seem. At its heart, the question is: when is a sale not really a sale under Philippine law?

LEGAL CONTEXT: THE DOCTRINE OF SIMULATED CONTRACTS

Philippine law, specifically the Civil Code, recognizes that not all contracts are created equal, or in good faith. Article 1345 of the Civil Code directly addresses simulated contracts, defining them as those where parties do not truly intend to be bound by the terms they ostensibly agree upon. The law further distinguishes between two types of simulation:

• Absolute Simulation: This occurs when parties have no intention to be bound at all. The contract is a complete sham, a mere facade. Article 1346 of the Civil Code explicitly states, “An absolutely simulated contract is void.”
• Relative Simulation: Here, parties conceal their true agreement behind a false contract. While they intend to be bound by some agreement, it’s not the one reflected in the simulated contract. The latter part of Article 1346 clarifies, “A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement.”

The implications are significant. If a contract is deemed absolutely simulated, it is void from the beginning, as if it never existed. Philippine courts, in numerous decisions, have consistently upheld the principle that the true intent of the parties, not just the формальность of the document, dictates the nature and validity of a contract. As the Supreme Court has reiterated in cases like Cruz vs. Court of Appeals, Sicad vs. Court of Appeals, and People’s Aircargo and Warehouse Co. Inc., vs. Court of Appeals, the real nature of a contract is determined by the express terms of the agreement and the contemporaneous and subsequent actions of the parties.

CASE BREAKDOWN: TEJERO VS. VELASQUEZ – UNRAVELING THE SIMULATION

The case of Filomena Tejero against the Velasquez spouses is a classic example of alleged absolute simulation. Let’s break down the narrative:

1. Financial Need and Initial Loan: Filomena Tejero, residing on a Quezon City lot since 1953 and seeking to finalize its purchase from PHHC, needed money. In 1967, she borrowed P5,000 from Spouses Bartimeo and Caridad Velasquez, securing it with a mortgage on the property.
2. Subsequent Loan and Increasing Debt: Tejero took another loan of P2,000 from the Velasquez spouses. By this time, her total debt was P7,000, and she signed another mortgage. Crucially, she admits struggling to fully repay the loans despite making partial payments.
3. The Deed of Sale – A Disguised Collateral?: Here’s where the simulation is alleged. According to Tejero, the Velasquez spouses, both lawyers, suggested a scheme: she would sign a Deed of Sale for the property so they could use it to secure a larger bank loan. The promise was that after obtaining the bank loan, they would reconvey the property back to Tejero, who would then assume the bank loan. Tejero claims she received no payment for this supposed sale.
4. Simultaneous Documents: On January 17, 1970, three documents were signed:
   • Cancellation of the August 1967 Mortgage: This stated Tejero had fully paid the P7,000 loan, which Tejero disputes.
   • Deed of Absolute Sale: Transferring the property to the Velasquez spouses for a stated price of P19,000.
   • “Agreement”: Granting Tejero one year to repurchase the property for P19,000, or else vacate.
5. Bank Loan Fails, Property Stays with Velasquez: The anticipated bank loan never materialized. However, the Velasquez spouses registered the property in their name and later sold it to their daughter, Grace Velasquez-Balingit.
6. Legal Battle Ensues: Tejero sued to annul the Deed of Sale and subsequent transfers, arguing it was a simulated contract.

The Regional Trial Court (RTC) ruled in favor of Tejero, declaring the Deed of Sale void. The Court of Appeals (CA) affirmed this decision. The case reached the Supreme Court (SC). The Supreme Court meticulously examined the evidence and the sequence of events. Justice Gonzaga-Reyes, writing for the Third Division, highlighted the following key points:

“We are convinced that the execution of the three documents bearing the same date validates Tejero’s claim that she did not sell her land to the Velasquez spouses but that to be able to pay her loan from them she agreed to transfer title over the lot on the condition that the spouses will secure a bank loan… and for the latter to subsequently reconvey the lot to Tejero… The arrangement was intended to benefit both parties…”

The Court found the simultaneous execution of the cancellation of mortgage, Deed of Sale, and repurchase agreement highly indicative of a simulated sale, designed not as a real transfer of ownership, but as a security arrangement for the loan. The SC emphasized the lack of credible evidence that Tejero received the supposed purchase price of P19,000. The Court also noted the Velasquez spouses’ inaction for nine years after the repurchase period expired, further undermining their claim of a genuine sale. As the Supreme Court concluded:

“From the foregoing observations, it is clear that the parties have had no intention to be bound by the contract of sale and its accompanying documents and that the said documents were executed pursuant to a scheme conceived by the spouses Velasques who now wish to renege therefrom.”

Ultimately, the Supreme Court upheld the lower courts’ decisions, declaring the Deed of Sale absolutely simulated and void, thereby protecting Filomena Tejero’s property rights.

PRACTICAL IMPLICATIONS: PROTECTING YOUR PROPERTY FROM SIMULATED SALES

The Velasquez vs. Tejero case serves as a potent reminder of the importance of clearly understanding the nature of contracts, especially when dealing with property as collateral. This ruling has significant implications for property owners and those extending loans:

• Substance Over Form: Philippine courts prioritize the true intent of the parties over the формальность of a contract. A document labeled “Deed of Sale” will not automatically be treated as such if evidence suggests it was intended as something else, like a security for a loan.
• Burden of Proof: The party alleging simulation bears the burden of proving it. In Tejero’s case, the totality of evidence, including the simultaneous documents and the parties’ actions, successfully demonstrated the simulation.
• Protection Against Predatory Lending: This case provides a legal shield against unscrupulous lenders who might exploit borrowers’ financial vulnerabilities by disguising loan agreements as sales to seize their properties.
• Due Diligence for Buyers: Prospective buyers of property must exercise due diligence, especially when transactions seem unusual or involve circumstances suggesting a potential prior loan arrangement. Grace Velasquez-Balingit, as the daughter of the Velasquez spouses, was not considered an innocent purchaser for value due to the circumstances of the transfer.

Key Lessons:

• Document Everything Clearly: When entering loan agreements involving property as collateral, ensure the documents accurately reflect the transaction as a loan with a mortgage or security agreement, not a sale.
• Seek Legal Counsel: Before signing any document related to property transfer or loans, consult with a lawyer to understand the implications and ensure your interests are protected.
• Keep Evidence: Preserve all communication, payment records, and other documents related to the transaction, as these can be crucial in proving your case if disputes arise.
• Be Wary of ” формальность” Sales: If someone tells you a Deed of Sale is just a “формальность” for a loan, be extremely cautious. This is a red flag for potential simulation.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q: What is a simulated contract in Philippine law?

A: A simulated contract is one where the parties do not truly intend to be bound by the terms of the agreement. It’s a false or deceptive contract, either entirely (absolute simulation) or partially (relative simulation).

Q: How do Philippine courts determine if a Deed of Sale is simulated?

A: Courts look beyond the document itself and examine the totality of evidence, including the parties’ actions before, during, and after the signing, the presence of consideration, and the surrounding circumstances.

Q: What is the difference between absolute and relative simulation?

A: Absolute simulation means the parties don’t intend to be bound at all, making the contract void. Relative simulation means they conceal their true agreement behind a false contract, and the real agreement, if lawful, may be enforced.

Q: If a Deed of Sale is declared absolutely simulated, what happens?

A: The Deed of Sale is considered void from the beginning. Ownership of the property does not transfer, and the original owner retains their rights. Any titles issued based on the void Deed of Sale are also invalid.

Q: Can a Deed of Sale be considered simulated even if it’s notarized?

A: Yes. Notarization only attests to the signatures and execution of the document, not the genuineness of the parties’ intent or the underlying transaction. A notarized Deed of Sale can still be proven to be simulated.

Q: What should I do if I believe my Deed of Sale was simulated?

A: Immediately consult with a lawyer specializing in property law and litigation. They can assess your case, gather evidence, and initiate legal action to annul the simulated contract and recover your property.

Q: How can I avoid entering into a simulated Deed of Sale?

A: Be cautious of deals that seem too good to be true or deviate from standard practices. Always insist on clear, written loan agreements when borrowing money using property as collateral. Never sign a Deed of Sale if your intention is not to genuinely sell your property.

Q: Is it illegal to enter into a simulated contract?

A: While the simulated contract itself (if absolutely simulated) is void and not necessarily illegal in itself, using it to defraud or deceive someone can have legal consequences, including civil liability and potentially criminal charges depending on the intent and actions involved.

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