CIVIL LAW > VIII. CREDIT TRANSACTIONS > D. REAL ESTATE MORTGAGE

A Real Estate Mortgage (REM) is a contractual arrangement where the owner of real property (the mortgagor) grants a security interest over the property in favor of a creditor (the mortgagee) to secure the performance of a principal obligation. This is governed by Articles 2085 to 2123 of the Civil Code of the Philippines and pertinent jurisprudence.

I. ESSENTIAL REQUISITES OF A REAL ESTATE MORTGAGE

Under Article 2085, the following requisites must be present for a mortgage to be valid:

Existence of a Principal Obligation
The mortgage is merely an accessory contract, meaning it cannot exist without a valid principal obligation (e.g., loan or debt).
- If the principal obligation is void, the mortgage is also void.
- However, the nullity of the mortgage does not necessarily affect the validity of the principal obligation.
Ownership of the Mortgaged Property
The mortgagor must own the property or have the authority to encumber it.
- Third-party mortgages are allowed where the mortgagor is not the debtor but consents to encumber their property as security for another’s obligation.
Compliance with Formal Requirements
- Form: Under Article 1358, a contract creating a mortgage must appear in a public instrument.
- Registration: The mortgage must be registered in the Register of Deeds to bind third parties under the Property Registration Decree (P.D. 1529). Without registration, the mortgage is valid only between the contracting parties.
Specification of Obligation Secured
The obligation secured by the mortgage must be clearly stated. Ambiguities in the amount or scope of the obligation may render the mortgage unenforceable.

II. RIGHTS AND OBLIGATIONS OF PARTIES

A. Mortgagor (Owner of the Property)

Right to Possess the Property
The mortgagor retains possession of the mortgaged property unless there is a contrary stipulation (Article 2128).
Obligation to Pay the Principal Obligation
The mortgagor must ensure compliance with the obligation secured by the mortgage.
Prohibition Against Alienation Without Consent
The mortgagor cannot validly sell or encumber the mortgaged property without the mortgagee’s consent, if stipulated.

B. Mortgagee (Creditor)

Right to Foreclosure
If the principal obligation is breached, the mortgagee has the right to foreclose the mortgage, either judicially or extrajudicially.
Obligation to Return the Title
Upon full payment of the obligation, the mortgagee must cancel the mortgage and return the certificate of title to the mortgagor.

III. REGISTRATION OF MORTGAGE

Purpose of Registration
- To bind third parties and provide notice of the encumbrance on the property.
- Registration must be done in the Registry of Deeds where the property is located.
Effect of Non-Registration
- The mortgage remains valid between the parties but does not prejudice third parties who acquire rights in good faith and for value.

IV. FORECLOSURE OF REAL ESTATE MORTGAGE

Foreclosure is the legal process by which the mortgagee seeks to recover the debt by selling the mortgaged property. This can be done either judicially or extrajudicially.

A. Judicial Foreclosure

Governing Law: Rule 68 of the Rules of Court.
Procedure:
- Filing a verified complaint for foreclosure.
- Issuance of a judgment ordering the debtor to pay or, in default, selling the property at a public auction.
- Sale proceeds are applied to the debt, with any surplus returned to the mortgagor.
Right of Redemption:
- The mortgagor has a right to redeem the property within one year from the registration of the sale.

B. Extrajudicial Foreclosure

Governing Law: Act No. 3135 (as amended by Act No. 4118).
Procedure:
- A special power of attorney authorizing foreclosure must be embodied in the mortgage deed.
- Filing of the foreclosure application with the Office of the Sheriff.
- Auction of the property without court intervention.
Equity of Redemption:
- In extrajudicial foreclosure, the mortgagor has the right to redeem only before the foreclosure sale is finalized.
Publication Requirement:
- Notice of sale must be published in a newspaper of general circulation for three consecutive weeks.

V. OTHER IMPORTANT DOCTRINES

Pactum Commissorium (Article 2088)
- A stipulation that ownership of the mortgaged property shall automatically pass to the mortgagee upon default is void. The remedy is foreclosure, not automatic ownership transfer.
Indivisibility of Mortgage (Article 2089)
- A mortgage remains indivisible even if the debt is divided among heirs or successors. Payment of part of the debt does not extinguish the mortgage.
Extent of the Mortgage
- A mortgage includes all accessions, improvements, and fruits of the property unless otherwise stipulated.

VI. REMEDIES IN CASE OF BREACH

Action to Foreclose: Judicial or extrajudicial foreclosure depending on the stipulations in the mortgage contract.
Action for Deficiency: After foreclosure, if the proceeds of the sale are insufficient to satisfy the debt, the creditor may file a separate action for the deficiency.

VII. JURISPRUDENTIAL PRINCIPLES

Registration as Constructive Notice
- Rizal Commercial Banking Corporation v. CA (1993): Registration of the mortgage in the Registry of Deeds constitutes constructive notice to third parties.
Nullity of Pactum Commissorium
- Spouses Belisario v. IAC (1988): A stipulation that the property automatically becomes the creditor’s upon default is contrary to public policy.
Applicability of Redemption Rights
- Paderes v. CA (1992): The right of redemption or equity of redemption must be exercised strictly within the period provided by law.

VIII. REAL ESTATE MORTGAGE VS. OTHER CREDIT TRANSACTIONS

REM vs. Pledge:
- Pledge involves movable property; REM involves real property.
- Possession of pledged property is transferred to the creditor.
REM vs. Antichresis:
- In antichresis, the creditor may use the fruits of the property to apply against the debt.
- In REM, fruits remain with the mortgagor unless stipulated.
REM vs. Chattel Mortgage:
- Chattel mortgage involves movable property; REM pertains to immovable property.
- Registration processes differ under the Property Registration Decree and Chattel Mortgage Law.

IX. CONCLUSION

A Real Estate Mortgage is a critical instrument in credit transactions, balancing the creditor's right to secure repayment with the debtor's right to retain ownership and possession until default. Proper understanding of its requisites, effects, and remedies ensures protection of parties' rights while adhering to the law's requirements.