The Supreme Court affirmed the Housing and Land Use Regulatory Board’s (HLURB) authority to declare mortgages unenforceable against homebuyers when developers mortgage properties without the required HLURB approval and without informing the buyers. This ruling protects homebuyers who have contracts to sell, ensuring their rights are prioritized over the mortgagee’s claim, especially when the mortgage violates the provisions of Presidential Decree No. 957, also known as “The Subdivision and Condominium Buyer’s Protective Decree.” The decision reinforces the HLURB’s role in regulating real estate practices to safeguard the interests of vulnerable homebuyers.

Developer’s Debt vs. Homebuyer’s Dream: Who Prevails?

This case, Home Bankers Savings & Trust Co. vs. The Honorable Court of Appeals, et al., G.R. No. 128354, April 26, 2005, revolves around a common yet distressing scenario: a real estate developer mortgages properties already subject to contracts to sell, without the knowledge or consent of the homebuyers and without securing the necessary approvals from the HLURB. When the developer defaults on the loan, the bank forecloses the mortgage, leaving the homebuyers in a precarious position. The central legal question is whether the bank’s right as a mortgagee prevails over the homebuyers’ rights under their contracts to sell, particularly when the mortgage was constituted in violation of P.D. No. 957.

The facts of the case reveal that several individuals entered into separate contracts to sell with TransAmerican Sales and Exposition (TransAmerican), managed by Engr. Jesus Garcia, for townhouse units located in Quezon City. These contracts stipulated that upon full payment, the titles would be transferred to the buyers free from all liens and encumbrances. However, Garcia later obtained a loan from Home Bankers Savings and Trust Company, mortgaging the properties without the knowledge or consent of the homebuyers and without HLURB approval. When Garcia defaulted on the loan, the bank foreclosed the properties, prompting the homebuyers to file a complaint with the HLURB, seeking to annul the mortgage and protect their rights.

The HLURB ruled in favor of the homebuyers, declaring the mortgage unenforceable against them and ordering the bank to deliver the titles free from any liens. This decision was subsequently affirmed by the Office of the President and the Court of Appeals. The appellate court anchored its ruling on the case of Union Bank of the Philippines vs. HLURB, which established HLURB’s jurisdiction over such disputes. Home Bankers Savings and Trust Company then elevated the case to the Supreme Court, questioning HLURB’s jurisdiction and arguing that it was a mortgagee in good faith.

The Supreme Court, however, found no merit in the bank’s petition. The Court emphasized HLURB’s exclusive jurisdiction to regulate the real estate trade and protect homebuyers, citing P.D. No. 1344, which expanded HLURB’s powers to include cases involving unsound real estate business practices and claims filed by subdivision lot or condominium unit buyers against developers. The Court reiterated that the act of mortgaging the subdivision without the knowledge and consent of the unit buyer and without the approval of the HLURB is a violation of Section 18 of P.D. No. 957.

Section 18 of P.D. No. 957 explicitly states:

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 Court underscored that this provision is a prohibitory law, meaning that any acts committed contrary to it are considered void. The Supreme Court rejected the bank’s argument that it was unaware of any buyers at the time the mortgage was constituted, noting that the contracts to sell were executed as early as 1988, prior to the mortgage. The Court also dismissed the bank’s claim of being a mortgagee in good faith, stating that the bank was negligent in failing to inquire into the status of the lots and verify whether Garcia had secured the necessary authority from HLURB to mortgage the properties. The Court has stated that, “Judicial notice can be taken of the uniform practice of banks to investigate, examine and assess the real estate offered as security for the application of a loan.” The Court reiterated that financial institutions have a responsibility to exercise due diligence in protecting their loan activities and cannot simply rely on clean titles without further investigation.

Moreover, the Court held that the bank’s negligence took the place of registration, thus it is presumed to know the rights of respondents over the lot. The conversion of the status of petitioner from mortgagee to buyer-owner will not lessen the importance of such knowledge. Neither will the conversion set aside the consequence of its negligence as a mortgagee. In the case of Far East Bank and Trust Co. vs. Marquez, the Supreme Court elaborated on the responsibility of mortgagees in similar circumstances:

Petitioner bank should have considered that it was dealing with a [townhouse] project that was already in progress. A reasonable person should have been aware that, to finance the project, sources of funds could have been used other than the loan, which was intended to serve the purpose only partially. Hence, there was need to verify whether any part of the property was already the subject of any other contract involving buyers or potential buyers. In granting the loan, petitioner bank should not have been content merely with a clean title, considering the presence of circumstances indicating the need for a thorough investigation of the existence of buyers like respondent. Having been wanting in care and prudence, the latter cannot be deemed to be an innocent mortgagee.

The Court also addressed the bank’s contention that the homebuyers were negligent in failing to register their contracts to sell. The Court clarified that the responsibility to register the contracts lies with the seller, not the buyer, according to Section 17 of P.D. No. 957. As a result, the bank could not claim to be an innocent purchaser for value and in good faith and was therefore bound by the contracts to sell.

Furthermore, the Court emphasized the option provided in the last paragraph of Section 18 of P.D. No. 957, which allows homebuyers who have not yet fully paid to directly pay their installments to the mortgagee, who is then required to apply such payments to the mortgage indebtedness. This provision aims to enable buyers to obtain title over their properties promptly after full payment.

Finally, the Court addressed the fact that the case against the developer, Garcia/TransAmerican, was archived due to the inability to serve summons. The Court clarified that Garcia/TransAmerican was not an indispensable party in determining the validity of the mortgage, and therefore, the absence of Garcia/TransAmerican did not prevent the HLURB from resolving the dispute between the homebuyers and the bank.

FAQs

What was the key issue in this case?	The key issue was whether a mortgage constituted by a real estate developer without the knowledge and consent of homebuyers and without HLURB approval is enforceable against those homebuyers.
What is HLURB’s role in this type of dispute?	HLURB has the exclusive jurisdiction to regulate real estate trade and protect homebuyers, including the power to declare mortgages unenforceable when they violate P.D. No. 957.
What is P.D. No. 957?	P.D. No. 957, also known as “The Subdivision and Condominium Buyer’s Protective Decree,” is a law designed to protect innocent homebuyers from unscrupulous real estate developers.
What does Section 18 of P.D. No. 957 say about mortgages?	Section 18 prohibits developers from mortgaging any unit or lot without prior written approval from HLURB, ensuring that the proceeds of the loan are used for the development of the project.
Who is responsible for registering the contracts to sell?	The seller (developer) is responsible for registering the contracts to sell with the Register of Deeds, according to Section 17 of P.D. No. 957.
What happens if the developer fails to notify HLURB about the mortgage?	If the developer fails to notify HLURB and get written approval, the mortgage can be declared invalid and unenforceable against homebuyers.
Can homebuyers pay their installments directly to the bank?	Yes, homebuyers who haven’t fully paid have the option to pay their installments directly to the mortgagee, who must apply such payments to the mortgage indebtedness.
What is the duty of banks when dealing with real estate developers?	Banks have a duty to exercise due diligence in investigating the status of the properties being mortgaged, including verifying whether the developer has secured HLURB approval and inquiring about existing contracts to sell.
Is the developer an indispensable party in resolving mortgage disputes?	No, the developer is not always an indispensable party, and HLURB can resolve disputes between homebuyers and the mortgagee even in the developer’s absence.

In conclusion, this case underscores the importance of protecting homebuyers’ rights and enforcing the provisions of P.D. No. 957. The Supreme Court’s decision reaffirms HLURB’s authority to regulate the real estate industry and ensure that financial institutions exercise due diligence when dealing with real estate developers. It serves as a reminder to banks that they cannot simply rely on clean titles without further investigation, especially when dealing with ongoing development projects.

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: HOME BANKERS SAVINGS & TRUST CO. VS. COURT OF APPEALS, G.R. NO. 128354, April 26, 2005