Characteristics of a Real Estate Mortgage under Civil Law

A Real Estate Mortgage (REM) is a contract whereby the debtor secures an obligation by subjecting immovable property (real estate) to the fulfillment of such obligation, without transferring ownership. Below are the detailed characteristics of an REM as governed by Philippine Civil Law:

1. Accessory Contract

A real estate mortgage is an accessory contract, meaning it cannot exist independently but depends on the principal obligation it secures.
If the principal obligation is extinguished, the mortgage is likewise extinguished (Article 1231, Civil Code).

2. Real Right

Once registered, a real estate mortgage creates a real right over the immovable property.
This real right follows the property, regardless of who possesses it (principle of lex rei sitae).

3. Formal Contract

The real estate mortgage must comply with the formal requirements of law to be valid:
- It must be in writing (Article 2125, Civil Code).
- If it involves properties required by law to be registered, it must also be registered with the Register of Deeds to bind third parties.
- Lack of registration makes the mortgage valid only between the contracting parties but not against third persons (Article 2125).

4. Non-Transfer of Ownership

Ownership of the mortgaged property remains with the mortgagor.
The creditor (mortgagee) only has the right to foreclose and sell the property in case of default.

5. Indivisibility

The mortgage is indivisible, meaning:
- It subsists as a whole over the entire property even if the debt is partially paid (Article 2089, Civil Code).
- Partial satisfaction of the debt does not correspondingly extinguish the mortgage over any specific portion of the property.
This principle ensures that the mortgagee’s security is not compromised until full payment.

6. Right to Foreclose

In case of default, the creditor may foreclose the mortgage to satisfy the obligation.
Foreclosure may be judicial (through court proceedings) or extrajudicial (pursuant to Act No. 3135, as amended by Act No. 4118).

7. Limitation to Obligation Secured

A mortgage is merely a security for an obligation; it does not create or give rise to a debt.
The debt or principal obligation must exist independently of the mortgage.

8. Special Rule on Future Obligations

A mortgage may secure future advancements or obligations stipulated in the agreement, provided the advancements or obligations are clearly contemplated in the contract (Article 2126).

9. Right of Redemption

In cases of extrajudicial foreclosure, the mortgagor retains a right of redemption under Act No. 3135.
- Redemption must be exercised within one year from the date of registration of the certificate of sale.
In judicial foreclosures, the period of redemption is determined by the rules of court and typically exists until the court's confirmation of the sale.

10. Coverage of Immovables

Only immovable property (e.g., land, buildings) and their accessories may be subject to a real estate mortgage.
The accessories include natural fruits, industrial fruits, and civil fruits if stipulated (Article 2127).

11. Stipulations Not Contrary to Law

Parties may freely stipulate terms in the contract, provided these are not contrary to law, morals, good customs, public order, or public policy (Article 1306, Civil Code).
Pactum commissorium (automatic appropriation of the mortgaged property by the creditor in case of default) is prohibited and void (Article 2088).

12. Requirement of Default

The mortgagee’s right to foreclose only arises upon the debtor’s default in fulfilling the obligation.

13. No Deficiency Judgment in Extrajudicial Foreclosure

In extrajudicial foreclosures, if the proceeds of the sale are insufficient to cover the debt, the mortgagee is prohibited from recovering the deficiency through personal action against the debtor unless the mortgagor is a juridical person (Act No. 3135).

14. Priority of Claims

The mortgagee has a preferential right over the proceeds of the foreclosure sale.
If multiple mortgages exist, the priority is determined by the order of registration in the Register of Deeds.

15. Extinguishment of Mortgage

A real estate mortgage is extinguished upon:

Full payment or performance of the obligation.
Abandonment or cancellation of the mortgage contract.
Foreclosure and exhaustion of the mortgaged property.

16. Applicability of General Provisions on Obligations and Contracts

General principles on obligations and contracts apply, including rules on:
- Consent, object, and cause (essential requisites of a contract).
- Nullity of contracts that lack essential elements or violate prohibitory laws.

By understanding these characteristics, parties can properly structure a real estate mortgage contract while ensuring compliance with Philippine Civil Law.