Extrajudicial foreclosure (Act 3135) | Foreclosure of Real Estate Mortgage (RULE 68) | SPECIAL CIVIL ACTIONS

DISCLAIMER: The following discussion is for informational and educational purposes only and does not constitute legal advice nor create an attorney-client relationship. If you have specific questions about your rights or obligations under Philippine law, please consult a qualified attorney.

EXtrajudicial Foreclosure Under Act No. 3135 (as amended by Act No. 4118)

1. Overview

Extrajudicial foreclosure of real estate mortgages in the Philippines is primarily governed by Act No. 3135, as amended by Act No. 4118. This statute provides a summary and non-litigious procedure for enforcing a mortgagee’s right to foreclose and sell mortgaged real property in the event of a mortgagor’s default.

Key Distinction: Unlike judicial foreclosure under Rule 68 of the Rules of Court (where the foreclosure is conducted through the courts and concluded by court order), extrajudicial foreclosure allows the mortgagee to effect the sale outside of court proceedings, subject to compliance with statutory and regulatory requirements ensuring notice, fairness, and due process.

2. Authority to Foreclose Extrajudicially

  • Special Power of Attorney (SPA) or an equivalent stipulation authorizing extrajudicial foreclosure must be expressed in the mortgage contract.
  • In the absence of such authority, the mortgagee generally may not resort to extrajudicial foreclosure and must instead proceed with judicial foreclosure.

3. Scope of Act No. 3135

  • Governs the extrajudicial foreclosure of real estate mortgages when a mortgagor is in default.
  • Applies to real properties (land and/or improvements) and not chattels (movable properties), which are typically covered by the Chattel Mortgage Law (Act No. 1508).
  • Allows for a streamlined, out-of-court remedy for the mortgagee but strict compliance with statutory requirements is crucial, given that it deprives the mortgagor of property without full judicial proceedings.

4. Procedural Requirements

A. Filing of Petition or Request for Foreclosure Sale

  1. Initiation by Mortgagee:

    • The mortgagee (or trustee, in appropriate cases) files a petition or written request for sale under Act 3135 with the Office of the Sheriff or a bonded Notary Public in the province or city where the property is located.
    • The mortgage contract itself must contain the special power of attorney or language giving the mortgagee the authority to foreclose extrajudicially.

  2. Designation of Officer Conducting the Sale:

    • Under Act 3135, the extrajudicial sale may be conducted either by the Sheriff or by a bonded Notary Public.
    • In practice, it is more common for the foreclosure sale to be conducted through the sheriff’s office, but the law expressly permits a notary public to handle the auction (provided they meet statutory bond requirements, if any).

B. Notice of Sale

  1. Posting Requirements (Section 3, Act 3135):

    • The sheriff or notary public must post notices of the sale in at least three (3) conspicuous places in the municipality or city where the property is located.
    • The posting must be done for at least 20 days prior to the date of the sale.

  2. Publication Requirements (as amended by Act 4118):

    • If the assessed value of the real property exceeds Four Hundred Pesos (₱400) (an outdated threshold under the law, but functionally this means essentially all real properties of significant value), the notice of sale must also be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city where the property is located.
    • If no newspaper of general circulation exists in the locality, publication must be done in a newspaper of general circulation in the province or region.

  3. Content of Notice:

    • The notice must accurately describe the time, date, and place of the sale, the name of the mortgagor(s) and mortgagee(s), the property description, and the cause of default or the amount due.
    • Strict compliance with the posting and publication requirements is essential; defects in the notice or its publication are grounds to question the validity of the foreclosure sale.

C. Conduct of the Auction Sale

  1. Public Auction:

    • On the appointed date, the sheriff or notary public conducts a public auction at the place stated in the notice (often at the main entrance of the provincial capitol or city/municipal hall).
    • The property is sold to the highest bidder for cash or certified check (depending on the local practice/requirements).
    • The sheriff/notary must ensure that the auction is open to the public and that all interested bidders are allowed to participate.

  2. Determination of Winning Bidder:

    • The highest bid that meets or exceeds the mortgagee’s claim (plus costs and expenses) is typically declared the winning bid.
    • If the mortgagee is the sole bidder and nobody else bids an amount higher than or equal to the mortgagee’s claim, the mortgagee is deemed the winning bidder.

  3. Certificate of Sale:

    • After the sale, the officer conducting the sale issues a Certificate of Sale to the highest bidder.
    • The Certificate of Sale must be registered with the Register of Deeds of the province or city where the property is located within a reasonable period.
    • Registration is critical because it initiates the computation of the redemption period (if one exists) and also informs third persons of the completed foreclosure sale.

5. Redemption and Its Period

A. Right of Redemption (Section 6, Act 3135, as amended by Act 4118)

  1. General Rule:

    • The mortgagor, his successors-in-interest, or any judicial creditor with a subsequent lien on the property has the right to redeem the property within the statutory redemption period.

  2. Redemption Period:

    • Under Act 3135, as amended, the redemption period is one (1) year from the date of registration of the Certificate of Sale in the Register of Deeds.
    • There are, however, special laws (e.g., the General Banking Law for foreclosures by banks, GFIs, etc.) that may modify the redemption period for certain categories of mortgagees and mortgagors. For instance, the redemption period can be shorter (e.g., three (3) months from foreclosure or until the registration of the certificate of sale, whichever is earlier) in specific situations involving banking institutions.

  3. Amount Required for Redemption:

    • The redeeming party must pay the purchase price (the highest bid) plus interest and other lawful expenses or costs incurred from the time of the sale up to the redemption.
    • If there was a deficiency (where the bid price was lower than the mortgage obligation), that deficiency does not necessarily form part of the redemption price; what must be tendered is the price at which the property was sold plus interest and expenses.

  4. Effect of Failure to Redeem:

    • Upon expiration of the redemption period, title to the property consolidates in the purchaser.
    • The purchaser is then entitled to a Final Deed of Sale or a Deed of Conveyance, which is annotated on the title, and the mortgagor (and all persons holding under him) generally loses all legal interests in the property.

6. Possession During Redemption Period

  • Generally, the possession of the foreclosed property remains with the mortgagor during the redemption period, unless there is a legal stipulation or a specific ground for the mortgagee or purchaser to take earlier possession (e.g., upon bond, consent, or other specific stipulations).
  • After the expiration of the redemption period (and upon consolidation of ownership), the purchaser may move for a writ of possession to secure actual possession of the property.

7. Post-Foreclosure Issues: Deficiency Claims

  1. Deficiency:

    • After an extrajudicial foreclosure sale, if the winning bid is less than the outstanding mortgage debt plus costs and expenses, a deficiency arises.
    • The mortgagee may typically file an ordinary action (not part of the extrajudicial foreclosure process) to recover the deficiency from the mortgagor.
    • However, certain rulings clarify that if the foreclosure is insufficient to satisfy the debt, the mortgagee must sue for the deficiency. Judicial foreclosure under Rule 68 contemplates that the same court action can also address the deficiency. In extrajudicial foreclosure, a separate suit for deficiency is usually required.

  2. Excess:

    • If the winning bid is more than the total obligation (plus expenses), the excess must be turned over to the mortgagor.

8. Grounds to Set Aside or Enjoin Extrajudicial Foreclosure

Certain defenses or equitable grounds may be raised to prevent or annul an extrajudicial foreclosure sale, including:

  1. Non-compliance with Notice Requirements
    • Lack of or defective posting, or defective publication of the notice of sale (e.g., insufficient publication period, wrong venue of publication).
  2. Unauthorized or Irregular Conduct of Sale
    • If the foreclosure sale was done on a date, time, or place other than what was stated in the notice.
    • If no valid SPA or authority to foreclose extrajudicially was granted in the mortgage contract.
  3. Non-existence or Payment of the Mortgage Debt
    • If there was already full payment, waiver, or condonation of the debt, or if the mortgage does not exist or is invalid.
  4. Lack of Jurisdiction over the Mortgaged Property (in extremely rare cases where the property is not under the coverage area of the officer who conducted the sale).

A mortgagor seeking to enjoin (stop) an extrajudicial foreclosure or annul a foreclosure sale typically files a petition for injunction or annulment of sale before the Regional Trial Court, often with a request for preliminary injunction to maintain the status quo pending resolution.

9. Pertinent Jurisprudence

  • Garcia vs. Court of Appeals: Emphasized the requirement that the mortgage contract must contain a special power of attorney to allow extrajudicial foreclosure.
  • Castillo vs. Reyes: Underscored strict compliance with notice and publication requirements.
  • Sulit vs. Court of Appeals: Clarified the period and manner of redemption.
  • Banco Filipino vs. Datoy: Discussed the necessity of proper publication and the effects of non-compliance.
  • Medida vs. CA: Affirmed that the Sheriff or Notary Public must strictly follow the procedure set by Act 3135, or the sale may be invalidated.

10. Practical Reminders and Legal Forms

  1. Mortgage Contract:

    • Must contain a Special Power of Attorney authorizing the mortgagee to extrajudicially foreclose.
    • Should clearly specify the obligation, interest rate, due dates, and default conditions.

  2. Petition for Extrajudicial Foreclosure:

    • A typical petition (or request) to the sheriff’s office includes:
      • Name of Mortgagee and statement of their right to foreclose.
      • Name of Mortgagor and details of mortgage deed, loan obligation, and default.
      • Prayer for the sale of the property to satisfy the indebtedness.

  3. Notice of Sale:

    • Prepared by the sheriff/notary, stating the date, time, place of sale; published once a week for three consecutive weeks in a newspaper of general circulation (if required by the assessed value threshold) and posted for at least 20 days.

  4. Certificate of Sale:

    • Issued by the officer conducting the sale to the highest bidder.
    • Must be acknowledged/notarized and registered with the Register of Deeds.

  5. Affidavit of Publication:

    • The publisher or editor typically provides an affidavit attesting to the publication, which is also filed with the sheriff’s office or attached to the foreclosure records to evidence compliance.

  6. Motion for Issuance of Writ of Possession:

    • After consolidation of title, the purchaser may file a motion before the RTC to obtain possession of the foreclosed property if the mortgagor refuses to voluntarily surrender possession.

11. Legal and Ethical Considerations

  1. Good Faith and Fair Dealing:

    • Lawyers facilitating or advising on extrajudicial foreclosure must ensure honest, transparent, and fair dealings, particularly in fulfilling the notice requirements to protect the mortgagor’s rights.
    • As an officer of the court, a lawyer must not manipulate sale dates, notices, or any part of the procedure to the disadvantage of the mortgagor or other interested parties.

  2. Conflict of Interest:

    • A lawyer representing the mortgagee must avoid conflicts of interest and should not represent parties on the mortgagor’s side in related transactions unless properly cleared under the rules.

  3. Confidentiality:

    • Information obtained about the mortgagor’s finances must be treated with confidentiality, consistent with the Code of Professional Responsibility and applicable data privacy laws.

  4. Candor and Accuracy in Court Filings:

    • If there is a need to seek judicial intervention (e.g., for issuance of writ of possession or to defend an injunction suit), the lawyer must be candid to the court in presenting the facts, the mortgage contract, amounts due, etc.

12. Summary

Extrajudicial foreclosure under Act No. 3135 is a streamlined, statutory remedy allowing a mortgagee to foreclose on real property without a full-blown court action, provided there is a special power of attorney in the mortgage contract. The procedure hinges on strict compliance with notice, posting, and publication requirements to ensure due process. After the sale, the mortgagor or other qualified individuals enjoy a statutory right of redemption (typically one year from registration of the Certificate of Sale) unless shortened by special laws. Failure to comply strictly with the formalities can invalidate the sale.

For the mortgagee-purchaser, once the redemption period lapses without redemption, title consolidates, allowing the mortgagee to seek a writ of possession and ultimately to occupy or dispose of the property. However, the entire extrajudicial foreclosure process remains subject to the supervision of the courts through injunctions, annulment suits, or claims of irregularity raised by the mortgagor or any interested party.

In sum, extrajudicial foreclosure under Act No. 3135 provides a relatively faster path for lenders to realize their security interests in real property, but it also necessitates meticulous adherence to procedural requirements to protect the fundamental rights of mortgagors. Any party involved is strongly advised to consult with a knowledgeable lawyer to ensure compliance and to safeguard against pitfalls that might render the foreclosure void.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

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