Philippine National Bank vs. Teresita Tan Dee

A mortgage over a subdivision lot must be cancelled and the title released to the buyer upon full payment of the purchase price, even without prior redemption payment by the developer to the mortgagee-bank, where the bank has effectively extinguished the developer's obligation covering the specific lot through a dacion en pago agreement and is bound by the protective provisions of Presidential Decree No. 957.

Prime East Properties, Inc. (PEPI, formerly Antipolo Properties, Inc.) developed Village East Executive Homes in Binangonan, Rizal. In July 1994, Teresita Tan Dee purchased a 204-square-meter lot (Lot 12, Block 21-A, covered by TCT No. 619608) from PEPI on an installment basis. In August 1996, PEPI assigned its rights over a larger parcel of land (including Dee's lot) to AFP-RSBS, Inc. Prior to Dee's full payment, PEPI obtained a ₱205 million loan from Philippine National Bank (PNB) in September 1996, secured by a real estate mortgage over several properties including the lot sold to Dee. The mortgage was cleared by the Housing and Land Use Regulatory Board (HLURB) as required by law.

• The Purchase: In July 1994, respondent Teresita Tan Dee bought a residential lot (Lot 12, Block 21-A, Village East Executive Homes, Binangonan, Rizal, covered by TCT No. 619608) from respondent Prime East Properties, Inc. (PEPI, formerly Antipolo Properties, Inc.) on an installment basis.
• Assignment to AFP-RSBS: In August 1996, PEPI assigned its rights over a 213,093-square-meter property, which included Dee's lot, to respondent AFP-RSBS, Inc.
• The Mortgage: On September 10, 1996, PEPI obtained a ₱205,000,000.00 loan from petitioner Philippine National Bank (PNB), secured by a real estate mortgage over several properties including Dee's lot. The mortgage was cleared by the HLURB on September 18, 1996, pursuant to Section 18 of Presidential Decree No. 957.
• Completion of Payment and Sale: After Dee fully paid the purchase price, PEPI and AFP-RSBS executed a deed of absolute sale in her favor in July 1998.
• Demand and Refusal: Dee demanded from PNB the delivery of the owner's duplicate certificate of title, but PNB refused, prompting Dee to file a complaint for specific performance with the HLURB.
• Subsequent Dacion En Pago: During the pendency of the proceedings, PEPI and PNB executed a Memorandum of Agreement dated November 22, 2006, pursuant to an RTC Order dated February 23, 2004 in SP No. 02-1219 (Rehabilitation Proceedings). The agreement provided for dacion en pago of certain properties to PNB as partial settlement of PEPI's obligation, and stipulated that PNB would release its mortgage lien on fully paid mortgaged properties upon issuance of certificates of title over the dacioned properties to PNB.
• AFP-RSBS Default: AFP-RSBS failed to pay the appeal fee in the administrative proceedings, resulting in the HLURB decision becoming final and executory as to it.

• Validity of Mortgage: PNB argued that it holds a valid, registered, and HLURB-approved mortgage over the subject property, and that Dee and PEPI are bound by such mortgage.
• Privity of Contract: PNB maintained that it is not privy to the transactions between PEPI and Dee, and has no obligation to perform any of their respective undertakings under their contract, citing the principle of relativity of contracts under Article 1311 of the Civil Code.
• PD 957 and Redemption: PNB contended that PD 957 cannot nullify the subsisting mortgage agreement, and that it can only be compelled to release the mortgage after compliance with Section 25 of PD 957 regarding redemption by the owner/developer, or upon direct payment by Dee pursuant to the Deed of Undertaking.
• Protection under Act 3135: PNB asserted that its rights as mortgagee are protected by Act No. 3135, and that the CA erred in characterizing provisions in the Affidavit of Undertaking as stipulations pour autrui.

• AFP-RSBS: Contended that it cannot be compelled to pay or settle the obligation under the mortgage contract as it is merely an investor in the subdivision project and not privy to the mortgage between PEPI and PNB.
• PEPI: Claimed that the title is due for release pursuant to a Memorandum of Agreement and dacion en pago entered into with PNB during rehabilitation proceedings, which stipulated that PNB agreed to release mortgage liens on fully paid properties.
• Dee: Adopted the arguments of the Court of Appeals in support of the denial of the petition.

• Cancellation of Mortgage: Whether the Court of Appeals erred in ordering the outright release of TCT No. 619608 despite PNB's duly registered and HLURB-approved mortgage.
• Redemption and Payment: Whether the Court of Appeals erred in ordering cancellation of the mortgage and release of the title in favor of Dee despite the lack of payment or settlement by the mortgagor (PEPI/AFP-RSBS) of its existing loan obligation, or the prior exercise of the right of redemption under Section 25 of PD 957, or direct payment by Dee under the Deed of Undertaking.

• Cancellation of Mortgage: The order to cancel the mortgage and release the title was affirmed. While the principle of relativity of contracts shields PNB from assuming the obligations of PEPI and AFP-RSBS to Dee, the cancellation is mandated as a consequence of Dee's full payment under Section 25 of PD 957. The mortgage, being an accessory contract, does not affect ownership and serves merely as security for the debt. At the time of mortgage, PEPI retained ownership because the prevailing contract was still a contract to sell; however, once Dee completed payment and the contract ripened into an absolute sale, PEPI's obligation to transfer ownership and deliver the title became absolute.
• Redemption and Payment: The claim that PEPI must first redeem the property before PNB can release the mortgage was rejected. The subsequent execution of the Memorandum of Agreement providing for dacion en pago effectively extinguished PEPI's loan obligation to PNB insofar as it covers the value of Dee's property. By accepting the assigned properties as payment, PNB assumed the risk that some were covered by contracts to sell protected under PD 957. The agreement stipulated that PNB would release mortgage liens on fully paid properties upon issuance of titles over the dacioned properties, and there being no evidence that this agreement was nullified, PNB is bound to comply.
• Protection of Buyers: Banks dealing with properties subject to real estate development projects are charged with the duty to verify whether any part of the property is already intended to be the subject of contracts with buyers. PNB cannot claim superior rights against installment buyers protected by PD 957, a social justice measure favoring innocent lot buyers over financial institutions that fail to exercise due diligence.
• AFP-RSBS: The HLURB decision had long been final and executory as regards AFP-RSBS due to its failure to pay the appeal fee, constituting abandonment of appeal.

• Relativity of Contracts — Contracts produce effect only between the parties, their assigns and heirs (Article 1311, Civil Code). Third persons cannot be bound or favored by contractual stipulations, absent a stipulation pour autrui.
• Section 25 of PD 957 (The Subdivision and Condominium Buyers' Protective Decree) — The owner or developer must deliver the title of the lot or unit to the buyer upon full payment. If a mortgage exists at the time of title issuance, the owner or developer must redeem the mortgage or the corresponding portion thereof within six months from such issuance to secure and deliver the title to the buyer.
• Mortgage as Accessory Contract — A mortgage is an accessory undertaking to secure the fulfillment of a principal obligation; it does not affect ownership of the property but merely constitutes a lien thereon serving as security for a debt.
• Contract to Sell vs. Contract of Sale — In a contract to sell, ownership is retained by the seller and does not pass until full payment of the purchase price, unlike in a contract of sale where ownership transfers upon delivery. The owner/developer may validly mortgage property subject of a contract to sell, as ownership remains with the developer.
• Dacion En Pago (Dation in Payment) — A mode of extinguishing an obligation whereby the debtor delivers and transmits ownership of a thing to the creditor as an accepted equivalent of performance. It partakes the nature of a sale and extinguishes the obligation to the extent of the value of the thing delivered, unless the parties agree that the thing is equivalent to the total obligation.
• Duty of Banks in Real Estate Transactions — Financial institutions dealing with properties subject to development projects must exercise due diligence to verify the existence of contracts to sell with buyers. A bank that fails to investigate beyond the clean title of the property, despite circumstances indicating the need for thorough investigation, cannot be deemed an innocent mortgagee for value and is bound by the rights of subdivision buyers under PD 957.

• "The basic principle of relativity of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof."
• "[P.D.] No. 957 cannot totally prevent the owner or developer from mortgaging the subdivision lot or condominium unit when the title thereto still resides in the owner or developer awaiting the full payment of the purchase price by the installment buyer."
• "While it may be that the petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as against the installment buyers. This is because the contract between the respondents is protected by P.D. No. 957, a social justice measure enacted primarily to protect innocent lot buyers."
• "[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whether any part of the property was already intended to be the subject of any other contract involving buyers or potential buyers."
• "As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law—as an instrument of social justice—must favor the weak."

• Luzon Development Bank v. Enriquez, G.R. No. 168646, January 12, 2011, 639 SCRA 332 — Controlling precedent establishing that a bank dealing with property subject to a contract to sell protected by PD 957 is bound by that contract; cited for the proposition that banks must verify existence of buyers and cannot claim innocent mortgagee status if they fail to exercise due diligence.
• China Banking Corporation v. Spouses Lozada, 579 Phil. 454 (2008) — Cited for the rule that PD 957 does not totally prevent an owner/developer from mortgaging subdivision lots while title resides in the developer awaiting full payment by installment buyers.
• Spouses Borromeo v. Hon. Court of Appeals, 573 Phil. 400 (2008) — Cited for the principle of relativity of contracts under Article 1311 of the Civil Code.
• Situs Development Corporation v. Asiatrust Bank, G.R. No. 180036, July 25, 2012, 677 SCRA 495 — Cited for the definition of mortgage as an accessory contract.
• Philippine Bank of Communications v. Pridisons Realty Corporation, G.R. No. 155113, January 9, 2013, 688 SCRA 200 — Cited for the characterization of PD 957 as a social justice measure protecting innocent lot buyers.

• Section 25, Presidential Decree No. 957 (The Subdivision and Condominium Buyers' Protective Decree) — Mandates delivery of title upon full payment and requires the owner/developer to redeem any outstanding mortgage within six months from title issuance to the buyer.
• Section 18, Presidential Decree No. 957 — Prohibits the owner or developer from mortgaging any unit or lot without prior written approval of the HLURB.
• Article 1311, Civil Code — Establishes the principle of relativity of contracts.
• Articles 1495 and 1582, Civil Code — Define the obligations of the vendor to transfer ownership and deliver the thing sold, and the vendee to pay the purchase price.
• Act No. 3135 — Regulates the sale of property under special powers inserted in or annexed to real estate mortgages.
• Articles 1245 and 1755, Civil Code — Govern dation in payment (dacion en pago) as a mode of extinguishing obligations.

Maria Lourdes P. A. Sereno (Chief Justice, Chairperson), Teresita J. Leonardo-De Castro, Lucas P. Bersamin, and Martin S. Villarama, Jr.