Cahayag and Rivera vs. Commercial Credit Corporation

A registered real estate mortgage binds subsequent purchasers under contracts to sell who have constructive notice of the encumbrance, and where the redemption period lapses without redemption, the mortgagee's transferee acquires absolute title superior to the rights of prior unregistered contract-to-sell buyers who failed to complete payment.

Dulos Realty & Development Corporation, engaged in subdivision development, owned residential lots in Airmen's Village Subdivision, Las Piñas. To secure a P300,000 loan from Commercial Credit Corporation (CCC), Dulos Realty executed a real estate mortgage in December 1980, which was registered in February 1981. After defaulting, the mortgage was foreclosed extrajudicially in November 1981, with CCC emerging as highest bidder and consolidating title in November 1983. Meanwhile, Dulos Realty had entered into contracts to sell with individual buyers over specific lots after the mortgage was registered, and executed a deed of absolute sale with another buyer after title had already consolidated in CCC's name.

• The Mortgage: On 20 December 1980, Dulos Realty obtained a P300,000 loan from CCC, secured by a Real Estate Mortgage over five residential lots in Airmen's Village Subdivision, Las Piñas. The mortgage was annotated on the corresponding Transfer Certificate of Title (TCT) Nos. S-39767, S-39775, S-28335, S-39778, and S-29776 on 3 February 1981. The mortgage deed included a clause covering "all the buildings and/or other improvements now existing or which may hereafter be placed or constructed thereon."
• Contracts to Sell: After mortgage registration, Dulos Realty entered into Contracts to Sell with: (1) Fabio Cahayag on 29 March 1981 for the lot covered by TCT No. S-39775; (2) Conrado Rivera on 12 August 1981 for the lot covered by TCT No. S-28335; and (3) Milagros Escalona on 13 January 1983 for the lot covered by TCT No. S-29776. None of these buyers completed full payment of the purchase price.
• Foreclosure and Consolidation: Following Dulos Realty's default, CCC initiated extrajudicial foreclosure proceedings. On 17 November 1981, CCC emerged as the highest bidder at the auction sale. The Certificate of Sale was registered on 8 March 1982. On 10 November 1983, an Affidavit of Consolidation was annotated, canceling Dulos Realty's titles and issuing new TCT Nos. 74531-74534 in CCC's name.
• Subsequent Sales: On 10 December 1983—after consolidation of title in CCC—Dulos Realty executed a Deed of Absolute Sale with Iluminada Baldoza over the property covered by TCT No. S-39778. On 21 December 1983, CCC sold the consolidated properties to Teresita Qua, who obtained new TCT Nos. 77012-77015 on 5 January 1984.
• Ejectment and Annulment Suits: Qua filed ejectment suits against the individual buyers and Dulos Realty, obtaining favorable judgments from the Metropolitan Trial Court. On 5 December 1988, the buyers and Dulos Realty filed a Complaint for Annulment of Sheriff's Sale and Other Documents before the Regional Trial Court (RTC) of Makati, seeking to nullify the foreclosure and subsequent sales on the ground that the mortgage did not cover the housing units.

• Coverage of the Mortgage: Petitioners argued that the List of Properties attached to the Deed of Real Estate Mortgage referred only to the lands themselves and excluded the housing units. They invoked the contra proferentem rule, contending that as a contract of adhesion prepared by the mortgagee, ambiguities should be resolved against CCC.
• Ownership at Time of Mortgage: Petitioners claimed that Dulos Realty was no longer the owner of the properties at the time of the mortgage execution because the lots had already been sold under existing Contracts to Sell and a Deed of Absolute Sale (Baldoza), rendering the mortgage void for lack of ownership by the mortgagor under Article 2085 of the Civil Code.
• Better Right Over the Properties: Petitioners invoked Dela Merced v. GSIS to argue that CCC, as a financial institution, was not a mortgagee in good faith and could not invoke the protection afforded to purchasers who rely solely on the certificate of title. They alleged that CCC knew or should have known of the contracts to sell given Dulos Realty's nature as a subdivision developer. They also argued that Qua was not an innocent purchaser for value because she was a former investor and stockholder of CCC.
• Lack of Full Payment: Cahayag, Rivera, and Escalona attributed their failure to complete payment to Qua's "harassment and unlawful actuations," arguing this excused their default.
• HLURB Approval: Petitioners alleged that the mortgage lacked prior written approval from the Housing and Land Use Regulatory Board (HLURB) as required by Section 18 of P.D. 957, rendering the mortgage void.
• Prior Contract to Sell (Baldoza): Baldoza claimed that her Deed of Absolute Sale was preceded by a Contract to Sell executed on 10 January 1979 (Exhibit "L"), predating the mortgage, and that she had fully paid the purchase price, giving her superior title.

• Coverage of the Mortgage: Respondents countered that the mortgage deed explicitly included "all the buildings and/or other improvements now existing or which may hereafter be placed or constructed thereon," clearly covering the housing units. They argued that contra proferentem did not apply because the contract language was clear and unambiguous.
• Ownership and Registration: Respondents maintained that the Contracts to Sell were all executed after the mortgage was registered, and that under a contract to sell, ownership remains with the seller until full payment. They argued that the registration of the mortgage provided constructive notice to the subsequent buyers, binding them to the mortgage lien.
• Dela Merced Inapplicable: Respondents distinguished Dela Merced v. GSIS, noting that in that case the contract to sell preceded the mortgage, whereas here the mortgage registration predated all contracts to sell. They emphasized that the buyers failed to redeem the properties within the statutory one-year period after the foreclosure sale.
• Exhibit "L" Defective: Respondents argued that Baldoza failed to formally offer Exhibit "L" (the alleged prior Contract to Sell) in evidence, and that in any event, the Deed of Absolute Sale was executed after title had consolidated in CCC's name.
• HLURB Approval Waived: Respondents contended that the issue of HLURB approval was raised for the first time on appeal and should be barred, as it required factual determination and would prejudice respondents' right to due process.

• Coverage of the Mortgage: Whether the real estate mortgage covered only the lands or included the housing units thereon.
• Validity of the Mortgage: Whether Dulos Realty was the owner of the properties at the time of the mortgage execution in view of the prior contracts to sell and deed of absolute sale.
• Priority of Rights: Who, as between the petitioner-buyers and respondent Qua, has a better right over the properties.
• Baldoza's Title: Whether the Deed of Absolute Sale in favor of Baldoza was preceded by a Contract to Sell and full payment of the purchase price.
• HLURB Approval: Whether the mortgage is void for lack of prior written approval by the HLURB.

• Coverage of the Mortgage: The mortgage covered both the lands and the housing units. The clear language of the mortgage deed included "all the buildings and/or other improvements now existing or which may hereafter be placed or constructed thereon." The contra proferentem rule did not apply because the contract was not ambiguous; the catch-all phrase explicitly encompassed the improvements.
• Ownership at Time of Mortgage: Dulos Realty was the absolute owner at the time of the mortgage execution. All Contracts to Sell were executed after the mortgage was constituted (20 December 1980) and registered (3 February 1981). Under a contract to sell, ownership is retained by the seller until full payment of the purchase price—a condition none of the petitioners satisfied. The Court corrected the CA's erroneous finding that Cahayag's contract dated 29 September 1980; the evidence showed it was executed 29 March 1981.
• Priority of Rights: Respondent Qua has the better right. The registered mortgage bound the subsequent buyers by constructive notice. Unlike in Dela Merced, where the contract to sell predated the mortgage and the buyer had fully paid and obtained a deed of absolute sale before foreclosure, here the buyers acquired their rights after the mortgage was registered and failed to complete payment or redeem within the one-year period from registration of the Certificate of Sale (8 March 1982). The redemption period expired on 8 March 1983 without redemption, rendering CCC's title absolute and transferable to Qua.
• Baldoza's Title: While the Deed of Absolute Sale in favor of Baldoza was valid as to form, it could not transfer ownership because Dulos Realty was no longer the owner at the time of execution (10 December 1983), title having consolidated in CCC on 10 November 1983. The principle of nemo dat quod non habet applies at the consummation/delivery stage, not the perfection stage. Execution of a public instrument constitutes delivery; at that time, Dulos Realty had no title to transfer. The alleged prior Contract to Sell (Exhibit "L") was not formally offered in evidence, not incorporated in the records, and the issue was abandoned in the memoranda.
• HLURB Approval: The issue of lack of HLURB approval was raised for the first time on appeal and could not be entertained. Parties may not change their theory of the case at the appellate stage where it requires new factual determination and would prejudice the adverse party's right to due process. The exceptions to this rule (jurisdictional issues, no new evidence required) did not apply.

• Contra Proferentem Rule — Ambiguities in contracts are construed against the drafter. This doctrine applies only when the contract is ambiguous; it has no application when the language is clear and explicit.
• Effect of Registration of Mortgage — Registration of a real estate mortgage creates a real right or lien that binds third persons. It establishes constructive notice to the whole world, making the certificate of title reliable as to the status of the property.
• Contract to Sell vs. Contract of Sale — A contract to sell is distinct from a contract of sale. In a contract to sell, the seller reserves title until full payment of the purchase price, which constitutes a suspensive condition. Ownership does not transfer upon perfection but only upon fulfillment of the condition (payment) and execution of the deed of sale.
• Nemo Dat Quod Non Habet in Sales — One cannot give what one does not have. In the law on sales, this principle applies at the consummation or delivery stage, not at the perfection stage. A seller need not be the owner at the time of perfection, but must be the owner at the time of delivery to transfer valid title.
• Formal Offer of Evidence — Evidence not formally offered in court cannot be considered, even if physically marked as an exhibit. An exception exists only if the evidence is duly identified by testimony recorded in the records and is incorporated into the case records.
• Theory of the Case on Appeal — Parties are not permitted to change their theory of the case at the appellate stage. Issues not raised at the trial level will not be considered on appeal, except: (1) issues of jurisdiction; (2) when no new evidence would be required; or (3) when the question falls within the issues raised at trial.

• "The contra proferentem rule finds no application to this case. The doctrine provides that in the interpretation of documents, ambiguities are to be construed against the drafter. By its very nature, the precept assumes the existence of an ambiguity in the contract, which is why contra proferentem is also called the ambiguity doctrine."
• "A contract to sell, standing alone, does not transfer ownership. At the point of perfection, the seller under a contract to sell does not even have the obligation to transfer ownership to the buyer. The obligation arises only when the buyer fulfills the condition: full payment of the purchase price."
• "It is at the consummation stage where the principle of nemo dat quod non habet applies."
• "The registration of the mortgage, which predated the Contracts to Sell, already bound the buyers to the mortgage. Consequently, the determination of good faith does not come into play."
• "Issues raised in previous pleadings but not included in the memorandum are deemed waived or abandoned."

• Dela Merced v. GSIS, 417 Phil. 324 (2001) — Distinguished. The case involved a contract to sell executed before the mortgage and where the buyer had fully paid and obtained a deed of absolute sale before the foreclosure sale. The Court noted that the mortgagee's knowledge of the prior contract was equivalent to registration, giving the buyer priority.
• Luzon Development Bank v. Enriquez, 654 Phil. 315 (2011) — Distinguished. The mortgage therein was declared void for lack of HLURB approval, and the foreclosure had not yet occurred when the case was decided (the parties entered into a dacion en pago). The Court noted that the absence of HLURB approval rendered the mortgage void, wiping out any discussion on registration.
• Cavite Development Bank v. Spouses Lim, 381 Phil. 355 (2000) — Followed. The case established that nemo dat quod non habet applies at the consummation stage of a contract of sale, not at the perfection stage, and that ownership is required only at the time of delivery, not at the time of perfection.
• Spouses Flancia v. Court of Appeals, 496 Phil. 693 (2005) — Cited for the distinction between contracts to sell and contracts of sale.

• Article 1312, Civil Code — Provides that in contracts creating real rights, third persons who come into possession of the object are bound thereby.
• Article 1459, Civil Code — Requires that the seller be the owner of the thing sold at the time of delivery or consummation.
• Article 1462, Civil Code — Governs the sale of future goods.
• Article 1498, Civil Code — Provides that execution of a public instrument constitutes delivery of immovable property.
• Article 2085, Civil Code — Requires that the mortgagor be the absolute owner of the thing mortgaged.
• Article 2126, Civil Code — States that the mortgage directly subjects the property to the fulfillment of the obligation, whoever the possessor may be.
• Section 18, P.D. 957 (Subdivision and Condominium Buyers' Protective Decree) — Requires prior written approval of the HLURB for mortgages on subdivision lots.
• Section 47, General Banking Law of 2000 (R.A. No. 8791) — Shortens the redemption period for juridical persons to three months after foreclosure or until registration of certificate of sale, whichever is earlier.
• Section 6, Act No. 3135 — Governs the redemption period in extrajudicial foreclosures (one year from registration of sale).

Teresita J. Leonardo-De Castro, Lucas P. Bersamin, Jose Portugal Perez, Estela M. Perlas-Bernabe