CIVIL LAW

VIII. CREDIT TRANSACTIONS

D. Real Estate Mortgage

1. Requisites

A real estate mortgage is a contract whereby the debtor or a third person secures the performance of an obligation by subjecting immovable property or real rights over immovable property to the fulfillment of the obligation, with the condition that if the obligation is not fulfilled, the creditor may cause the property to be sold in a public auction and apply the proceeds to the satisfaction of the debt. The governing provisions can be found under the Civil Code of the Philippines, specifically Articles 2085 to 2123.

Requisites of a Real Estate Mortgage

A. Essential Requisites

Principal Obligation Must Be Valid
- The mortgage is an accessory contract, meaning there must be a valid principal obligation (e.g., a loan, debt, or any obligation secured by the mortgage).
- If the principal obligation is void, the mortgage is also void. However, if the principal obligation is merely voidable or unenforceable, the mortgage may still be enforced until annulled or declared void.
The Mortgagor Must Have Free Disposal of the Property or Legal Authority to Constitute the Mortgage
- The mortgagor must own the property being mortgaged or be authorized to mortgage it, as ownership or legal authority is necessary to create a valid lien.
- A co-owner may only mortgage their undivided share unless consent from other co-owners is obtained.
Subject Matter Must Be Determinate Immovable Property or Real Rights Over Immovables
- The property must be identifiable and must consist of:
  - Immovable property (e.g., land, buildings); or
  - Real rights over immovables (e.g., usufruct, easement).
- The property must also be alienable, meaning it cannot be subject to prohibitions against alienation or encumbrance (e.g., public lands or properties subject to a prohibition under special laws).
Formal Requirements (Article 2125, Civil Code)
- The mortgage must be constituted in a public instrument.
- It must be registered with the Registry of Property to bind third parties.
- Absence of registration does not render the mortgage void but merely makes it ineffective against third parties.

B. Special Requisites

Stipulation on Redemption
- There can be no pactum commissorium (automatic appropriation of the mortgaged property by the creditor in case of default), as this is expressly prohibited by law (Article 2088, Civil Code).
- Redemption periods for mortgages are governed by special laws, such as the General Banking Law or Maceda Law, depending on the nature of the loan and debtor.
Obligations Secured Must Be Future, Past, or Contingent
- A mortgage may secure obligations already existing, future obligations (e.g., credit lines), or contingent obligations.
- Future obligations must be specified or determinable, and the contract must clearly indicate this intent.
Indivisibility of the Mortgage
- The mortgage is indivisible (Article 2089, Civil Code). This means that even if the debt is partially paid, the mortgage subsists until the entire obligation is satisfied unless expressly stipulated otherwise.
- This rule does not apply to divisible obligations when the property mortgaged is physically divisible and there is express agreement allowing division.

C. Effects of Non-Compliance with Requisites

As to Non-Registration
- If the mortgage is not registered, it is valid and binding between the parties but not against third parties.
- Unregistered mortgages cannot prejudice subsequent purchasers or encumbrancers in good faith.
As to Lack of Public Instrument
- If the mortgage is not in a public instrument, it is void.
As to Lack of Ownership or Legal Authority
- If the mortgagor is not the owner or lacks authority, the mortgage is void, but it may give rise to an action for damages if there was bad faith or fraud.
As to Invalidity of the Principal Obligation
- A void principal obligation renders the mortgage void. However, a voidable or unenforceable obligation does not automatically void the mortgage.

Legal Effects of Real Estate Mortgage

Rights of the Mortgagee (Creditor)

Right to Foreclose
- In case of default by the mortgagor, the mortgagee may file for foreclosure to sell the property in a public auction.
Right to Apply Proceeds to the Debt
- The mortgagee has a preference to apply the proceeds of the sale to the satisfaction of the debt.
Right to Retain Lien Until Obligation Is Fully Satisfied
- The mortgage subsists until the obligation is fully paid, regardless of partial payments.

Rights and Obligations of the Mortgagor (Debtor)

Right to Possession
- The mortgagor retains possession of the property unless otherwise stipulated.
Right of Redemption
- Redemption rights are governed by the terms of the mortgage or by law (e.g., one-year redemption period under the Rules of Court for judicial foreclosures).
Obligation to Pay the Principal Debt
- The mortgagor must fulfill the principal obligation to extinguish the mortgage.

Foreclosure of Mortgage

Judicial Foreclosure
- Initiated by filing a court case; governed by Rule 68 of the Rules of Court.
- The mortgagor has a one-year redemption period from the date of registration of the certificate of sale.
Extrajudicial Foreclosure
- Allowed if there is a special power of attorney in the mortgage contract.
- Governed by Act No. 3135 (as amended by Act No. 4118).
- Redemption period depends on whether the mortgage involves a natural person or a juridical entity.
Deficiency Judgment
- If the proceeds of the foreclosure sale are insufficient to satisfy the debt, the creditor may file an action for the deficiency unless otherwise stipulated.

This comprehensive framework ensures that all legal requisites and effects surrounding real estate mortgages in the Philippines are meticulously applied and adhered to, safeguarding the interests of both creditors and debtors.