Deed of Sale vs. Equitable Mortgage

Under the Civil Code, an agreement that, on its face, looks like a sale may be considered an equitable mortgage. Article 1602 of the Civil Code provides:

Art. 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.

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.

In Rockville Excel International Exim Corporation vs. Spouses Oligario Culla and Bernardita Miranda, G.R. No. 155716, October 2, 2009,  the Supreme Court faced the issue of whether a Deed of Absolute Sale is really an absolute sale of real property or an equitable mortgage. The Supreme Court explained the concept of an equitable mortgage as follows:

An equitable mortgage has been defined “as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, there being no impossibility nor anything contrary to law in this intent.”

A contract of sale is presumed to be an equitable mortgage when any of the following circumstances, enumerated in Article 1602 of the Civil Code, is present. . .

The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale.

For the presumption of an equitable mortgage to arise under Article 1602, two (2) requisites must concur: (a) that the parties entered into a contract denominated as a contract of sale; and, (b) that their intention was to secure an existing debt by way of a mortgage. Any of the circumstances laid out in Article 1602, not the concurrence nor an overwhelming number of the enumerated circumstances, is sufficient to support the conclusion that a contract of sale is in fact an equitable mortgage. In several cases, we have not hesitated to declare a purported contract of sale to be an equitable mortgage based solely on one of the enumerated circumstances under Article 1602. This approach follows the rule that when doubt exists on the nature of the parties’ transaction, the law favors the least transmission of property rights.

In Rockville, the Supreme Court ruled that the contract between the parties was an equitable mortgage. According to the Supreme Court:

In the present case, three attendant circumstances indicate that the purported sale was in fact an equitable mortgage. First, the Sps. Culla retained possession of the property. Second, Rockville kept a part of the purchase price. Third, as previously discussed, Rockville continued to give the Sps. Culla extensions on the period to repay their loan even after the parties allegedly agreed to a dacion en pago. These circumstances, coupled with the clear and unequivocal testimonies of Oligario and Bernardita that the purpose of the Deed of Absolute Sale was merely to guarantee their loan, clearly reveal the parties’ true intention to execute an equitable mortgage and not a contract of sale.

That a contract where the vendor remains in physical possession of the land, as lessee or otherwise, is an equitable mortgage is well-settled. The reason for this rule lies in the legal reality that in a contract of sale, the legal title to the property is immediately transferred to the vendee; retention by the vendor of the possession of the property is inconsistent with the vendee’s acquisition of ownership under a true sale. It discloses, in the alleged vendee, a lack of interest in the property that belies the truthfulness of the sale.

According to Rockville, it took possession of the property, albeit constructively and not through actual occupation. Rockville contends, too, that its possession of the title to the property and its subsequent attempt to register the property in its name are clear indicators of its intent to enforce the contract of sale.

We cannot agree with these positions. In the first place, the Sps. Culla retained actual possession of the property and this was never disputed. Rockville itself admits this in its petition, but claims in justification that since the property is contiguous to the site of the Sps. Culla’s family home, it would have been impossible forRockville to obtain actual possession of the property. Regardless of where the property is located, however, if the transaction had really been a sale as Rockvilleclaimed, it should have asserted its rights for the immediate delivery and possession of the lot instead of allowing the Sps. Culla to freely stay in the premises. Its failure to do so suggests that Rockville did not truly intend to enforce the contract of sale.

Moreover, we observe that while Rockville did take steps to register the property in its name, it did so more than two years after the Deed of Absolute Sale was executed, and only after Oligario’s continued failure to pay the P2,000,000.00 loan.

In addition, Rockville admitted that it never paid the P1,500,000.00 balance to the Sps. Culla. As found by the RTC, while Rockville claims that it deposited this amount with May Bank of Malaysia and notified Oligario of the deposit, no evidence was presented to support this claim. Besides, even if this contention had been true, the deposit in a foreign bank was neither a valid tender of payment nor an effective consignation.

Lastly, the numerous extensions granted by Rockville to Oligario to pay his debt after the execution of the Deed of Sale convince us that the parties never intended to enter into a contract of sale; instead, the intent was merely to secure the payment of Oligario’s loan.

All told, we see no reason to depart from the findings and conclusions of both the trial court and the Court of Appeals.