Reyes vs. De Leon

A contract styled as a sale with right of repurchase will be treated as an equitable mortgage where the price is grossly inadequate, ownership does not pass upon execution but is conditioned on non-payment, the supposed vendors remain in possession, and the instrument contains a pactum commissorium. As an unregistered equitable mortgage, it does not bind third parties and yields to a subsequently registered real estate mortgage under the principle of prior tempore potior jure and Articles 2125 and 2242(5) of the Civil Code.

Rodolfo Lanuza and his wife Belen were the owners of a two-story house built on a leased lot in the Maria Guizon Subdivision, Tondo, Manila. The leasehold rights were held from Consolidated Asiatic Co. On January 12, 1961, Lanuza executed a “Deed of Sale with Right to Repurchase” in favor of Maria Bautista Vda. de Reyes and Aurelia R. Navarro, covering the house, the leasehold rights, a television set, and a refrigerator, in exchange for P3,000. Belen Lanuza did not sign the original deed. The spouses remained in possession of the property after the execution of the instrument.

• The Conveyance: On January 12, 1961, Rodolfo Lanuza executed a “Deed of Sale with Right to Repurchase” conveying to Maria Bautista Vda. de Reyes and Aurelia R. Navarro a two-story house, his leasehold rights to the lot, a television set, and a refrigerator, for P3,000. The deed granted Lanuza the right to repurchase within three months for the same amount without interest, and provided that upon failure to pay “ownership … shall automatically pass” to the vendees without court intervention. Belen Lanuza, the vendor’s wife, did not sign. The Lanuzas continued to occupy the property.

• Extension and Ratification: After the three-month period expired, the parties extended the redemption deadline to July 12, 1961 by annotating the extension on the left margin of the instrument. Belen Lanuza signed below the annotation, thereby giving her conformity.

• The De Leon Mortgage: On October 4, 1961, the Lanuza spouses mortgaged the same house to Martin de Leon to secure a loan of P2,720 payable within one year. The mortgage was registered with the Register of Deeds of Manila on November 8, 1961 under Act No. 3344.

• Default and Enforcement: The Lanuzas defaulted. De Leon petitioned for extra-judicial foreclosure on October 5, 1962. The house was sold to him as the sole bidder at the sheriff’s sale on October 23, 1962. De Leon took possession and also discharged a prior rural bank mortgage on the property by paying ₱2,000.

• The Petition for Consolidation: Reyes and Navarro filed their petition for consolidation of ownership on October 19, 1962 — after De Leon initiated foreclosure but before the sheriff’s sale. De Leon intervened on October 29, 1962, contending that the unrecorded sale could not prejudice his registered mortgage.

• Stipulated Facts and Trial Court Ruling: The parties submitted a stipulation of facts. The CFI recognized the sale as valid, held that Belen’s belated signature ratified the contract, rejected the characterization of the transaction as an equitable mortgage, and ruled that the prior unrecorded sale defeated the later registered mortgage under the principle of “first in time, better in right.”

• Invalidity of the Sale: Lanuza conveyed conjugal property without his wife’s consent, rendering the sale void ab initio rather than merely voidable, and therefore incapable of ratification.

• Equitable Mortgage: The transaction is in reality an equitable mortgage because the vendors retained possession and the period of redemption was extended. Consequently, a petition for consolidation of ownership is an improper remedy and cannot lie.

• Effect of Non-Registration: The “Deed of Sale with Right to Repurchase” was not registered, whereas De Leon’s mortgage was recorded under Act No. 3344 in good faith. Under Article 1544 of the Civil Code, the unrecorded instrument cannot affect him as a third party.

• Ratification Validated the Sale: The wife’s failure to sign made the contract merely voidable; her subsequent signature on the extension annotation constituted ratification in accordance with Article 1396, validating the sale retroactively.

• True Pacto de Retro Sale: The deed effected a genuine sale with right of repurchase. The extension of the redemption period, merely annotated on the same instrument, was a valid exercise of contractual freedom and did not convert the sale into an equitable mortgage.

• Priority of the Prior Sale: The sale was embodied in a public instrument and executed before the mortgage. The registration of the mortgage under Act No. 3344 is without prejudice to the better right of third parties; thus, the earlier unrecorded sale takes precedence under “first in time, better in right.”

• Validity of the Sale Without Wife’s Consent: Whether the husband’s conveyance of conjugal property without the wife’s signature is void or voidable, and whether the wife’s subsequent signature on the extension annotation operated as a ratification that cured any defect.

• Nature of the Deed: Whether the “Deed of Sale with Right to Repurchase” constitutes a true pacto de retro sale or an equitable mortgage.

• Preference Between an Unregistered Equitable Mortgage and a Registered Mortgage: Whether an unrecorded equitable mortgage can prevail over a later real estate mortgage that was duly registered under Act No. 3344.

• Validity of the Sale Without Wife’s Consent: The conveyance was merely voidable under Article 173 of the Civil Code, which grants the wife ten years to bring an annulment action. Belen Lanuza’s assent to the extension of the redemption period amounted to a ratification that validated the transaction from its inception. Only the wife possessed the standing to attack the contract on this ground, and she elected to confirm it.

• Nature of the Deed: The instrument, despite its nomenclature, did not effect a true pacto de retro sale. The following indicia compelled its reclassification as an equitable mortgage: (a) the gross inadequacy of the price — P3,000 for a new strong-materials house assessed at P4,000, plus leasehold rights, a television set, and a refrigerator; (b) the non-transmission of ownership upon execution, as the deed conditioned the vesting of ownership on the vendors’ failure to pay rather than on the mere exercise of redemption; (c) the insertion of a void pactum commissorium, which purported to allow the “vendees” to acquire the properties automatically without foreclosure, in violation of Article 2088 of the Civil Code; and (d) the vendors’ continued possession and the unexplained 15-month delay before the petition for consolidation was filed. Taken together, these circumstances demonstrated that the parties intended a loan secured by the properties, not a sale.

• Preference Between an Unregistered Equitable Mortgage and a Registered Mortgage: As an unregistered equitable mortgage, the instrument was binding only between the immediate parties (the Lanuzas and Reyes/Navarro) and could not prejudice third persons. Under Article 2125 of the Civil Code, a mortgage that is not recorded cannot affect third parties. The registered real estate mortgage in favor of De Leon was therefore preferred, applying the rule of prior tempore potior jure and Article 2242(5). The attempted consolidation of ownership premised on the equitable mortgage was improper and could not defeat De Leon’s superior registered right.

• Equitable Mortgage under Article 1602 — A contract, regardless of its designation, is presumed an equitable mortgage when (1) the price of a sale with right to repurchase is unusually inadequate; (2) the supposed vendor remains in possession and pays rent; or (3) upon or after expiration of the right to repurchase, another instrument extends the period or grants a new period. Here, the Court went beyond the statutory presumptions and applied the broader principle that courts will examine the real intention of the parties, relying on gross inadequacy of price, the postponement of ownership transfer, the presence of a pactum commissorium, and the vendors’ continued possession.

• Pactum Commissorium — A stipulation authorizing the creditor/mortgagee to appropriate the property given as security without foreclosure is null and void under Article 2088 of the Civil Code. Its presence in the “Deed of Sale with Right to Repurchase” strongly indicated a mortgage rather than a genuine sale.

• Preference of Mortgage Credits — Under Article 2125, an unregistered mortgage is valid only between the parties and does not bind third persons. The preference of mortgage credits is determined by the order of registration. Where a prior equitable mortgage is unrecorded and a subsequent mortgage is registered, the latter prevails, consonant with the maxim prior tempore potior jure.

• Non-Registration under Act No. 3344 — Registration of a real estate mortgage under Act No. 3344 operates without prejudice to the better right of third parties. An earlier conveyance, even if unregistered, may defeat a later registered instrument if the grantor had already parted with ownership; however, when the earlier instrument is itself an equitable mortgage, the later registered mortgage enjoys priority.

• ”The gross inadequacy of the price ... accounts for the error in determining the true agreement of the parties to the deed.” — The Court underscored that the heavily discounted price for multiple properties was a major factor revealing the true nature of the contract.

• ”This stipulation is contrary to the nature of a true pacto de retro sale under which a vendee acquires ownership of the thing sold immediately upon execution of the sale, subject only to the vendor’s right of redemption. Indeed, what the parties established by this stipulation is an odious pactum commissorium ...” — This passage explains why the conditional vesting of ownership and automatic forfeiture clause negated a genuine sale.

• ”Its insertion in the contract of the parties is an avowal of an intention to mortgage rather than to sell.” — The pactum commissorium was treated as direct evidence of the parties’ subjective intent.

• ”Preference of mortgage credits is determined by the priority of registration of the mortgages, following the maxim ‘Prior tempore potior jure’.” — The controlling rule for resolving competing claims.

• Umale v. Fernandez, 28 Phil. 89 — Relied upon by the trial court for the rule that an extension of the repurchase period is valid if not contrary to law; cited by the Court only in narrating the lower court’s reasoning.

• Philippine National Bank v. Rocha, 55 Phil. 497 — Established that a mortgage executed by a non-owner is void and cannot be validated by registration; the Court used this to illustrate that the Lanuzas could not encumber property they no longer owned, but ultimately the transaction was an equitable mortgage, so they retained sufficient interest to mortgage it to De Leon.

• Guerrero v. Yñigo, 96 Phil. 37 and Floro v. Granada, 83 Phil. 487 — Cited for the doctrinal point that in a true pacto de retro sale, ownership transfers to the vendee immediately upon execution.

• Reyes v. Nebrija, 98 Phil. 639 and Tan Chun Tic v. West Coast Life Ins. Co., 54 Phil. 361 — Cited for the rule that a pactum commissorium is null and void.

• Alcantara v. Alinea, 8 Phil. 111 — Early precedent that a stipulation allowing the creditor to appropriate the property without foreclosure reveals an intent to mortgage.

• Gomez v. Jugo, 48 Phil. 118 — Applied for the application of the maxim prior tempore potior jure in determining preference of mortgage credits.

• Article 173, Civil Code — The wife may, within ten years from the transaction, bring an action to annul a husband’s unauthorized disposition of conjugal property; thus the sale was voidable, not void, and capable of ratification.

• Articles 1396 and 1397, Civil Code — Voidable contracts may be ratified, and actions for annulment may be brought only by the party obliged principally or subsidiarily; the wife’s ratification purged the defect.

• Article 1602(2) and (3), Civil Code — Statutory presumptions of equitable mortgage where the vendor remains in possession or where an extension of the redemption period is granted in a new instrument; the Court acknowledged these as indicia but rested its conclusion on the totality of circumstances.

• Article 2085, Civil Code — Essential requisites of a valid mortgage; the trial court cited this, but the Supreme Court found the Lanuzas retained an interest sufficient to mortgage.

• Article 2088, Civil Code — Prohibition against pactum commissorium arrangements in mortgage contracts; the automatic transfer clause was struck down as void.

• Article 2125, Civil Code — An unregistered mortgage does not bind third persons; the equitable mortgage, though valid between the parties, could not prejudice De Leon.

• Article 2242(5), Civil Code — Preference of credits; mortgage credits enjoy preference in accordance with the order of registration.

• Article 1948, Civil Code — Execution of a public instrument is equivalent to delivery; the Court initially noted this in discussing the priority principle but ultimately it was the unregistered equitable mortgage that controlled.

• Article 1544, Civil Code — Rule on double sales; deemed inapplicable because the case involved a mortgage, not a second sale.

• Act No. 3344 — Governs the registration of instruments affecting unregistered land; the registration of De Leon’s mortgage was effective but did not cure the inherent defect of the earlier unrecorded equitable mortgage.

Concepcion, C.J., Dizon, Bengzon, J.P., Sanchez and Castro, JJ., concurred. Reyes, J.B.L., and Zaldivar, JJ., reserved their votes. Makalintal, J., concurred in the result.