Unlawful designs - A Law Each Day (Keeps Trouble Away)

This is a case which shows the ingenuity of a party in trying to profit most at the expense of another party. Only that the scheme was detected by the court with a keen eye for justice and equity.

This case involves Benito who was engaged in the business of constructing houses on lots owned by him and selling the same to buyers who pays for the same with the proceeds of the housing loans from financing institutions like the SSS.

Among his buyers was Roberto who agreed to purchase Benito's 90 square meter lot for the total price of P150,000. The arrangement was Benito would execute a Deed of Absolute Sale over the lot in favor of Roberto who will use it as collateral for the SSS loan. The proceeds of the loan will be turned over to Benito who will build a house on the lot sold to Roberto.

Roberto was indeed able to obtain a loan from the SSS but only for P119,400 payable in 25 years secured by the Real Estate Mortgage over the lot and improvement to be constructed thereon. The proceeds of the SSS loan of P119,400 were remitted to Benito by Roberto in partial payment of the house and lot. Benito did construct a house on the lots as agreed upon.

When the construction was finished, Benito demanded the balance of P43,000, the supposed difference between the SSS loan and the agreed price of their sale. However, Roberto failed to pay the aforesaid balance. So Roberto executed in favor of Benito a Deed of Sale with assumption of mortgage and with Right of Repurchase over the house and lot.

Under said Deed, Roberto sold the house and lot back to Benito for the total sum of P 60,242.86 representing the total amount including interest which Roberto owed Benito. Benito in turn agreed to assume the mortgage to the SSS and obligate himself to resell or reconvey the property to Roberto who was granted the right to redeem it in a period of one year for the amount of P69,842. If Roberto could not redeem the property within the period, then the sale to Benito will be deemed to be absolute and irrevocable sale.

Despite the execution of said Deed, Roberto remained in possession of the property. After the lapse of two years, Roberto had not yet redeemed the property despite Benito's demand.

So what Benito did was to pay the SSS loan in full totaling P144,917.06 and obtained the release of mortgage from the SSS. Then he required Roberto to execute a Deed of Absolute Sale over the property. When Roberto did not heed his request, Benito executed an affidavit of Consolidation of Ownership and filed a petition in court for the consolidation of his title over the property.

The lower court and the Court of Appeals, however, dismissed Benito's petition. They ruled that the Deed of Absolute Sale with Assumption of Mortgage and the right to repurchase entered into by the parties is actually an equitable mortgage considering that Roberto remained in possession of the property even after the execution of said Deed of Sale and considering the inadequacy of the price (P60,242). According to the courts the real intention of the parties in executing said Deed of Sale was to secure the payment by Roberto of the balance of the purchase price in the amount of P43,000. Since this transaction between them is a mortgage, Benito cannot consolidate ownership without foreclosing the property.

Benito questioned this decision. He insisted that their transaction was actually a sale, that he already bought back the property from Roberto. This is shown by the fact that he assumed the obligation of Roberto with the SSS. He said he stuck his neck out for Roberto in spending twice for the subject property for the latter's benefit, i.e. first for the expenses of building the house and second, for assuming the mortgage of the property to the SSS. Was Benito correct?

No. Contrary to Benito's pretense, he did not really spend twice for the property. Roberto remitted to him the proceeds of the loan in the amount of P119,400 which Roberto obtained from the SSS in partial payment for the subject property. When Benito therefore assumed Roberto's obligation to the SSS by paying the latter P144,917.06, all he actually paid was P25,517.06 (P144.917.06 less P119,400). Adding this amount to Roberto's balance of the purchase price in the amount of P43,000 will result in the sum of P68,517.06. By spending P68,517.06 Benito can recover the subject property which he previously sold to Roberto for P150,000.

So the transaction between Roberto and Benito denominated as Deed of Sale with assumption of mortgage and with Right to Repurchase is indeed an equitable mortgage. An action for consolidation of ownership like that filed by Benito is not the appropriate remedy to enforce a transaction declared to be a mortgage because the mortgagee (Benito) should foreclose the mortgage if he wishes to secure title to the mortgaged property (Ching Sen Ben et. al. vs. Court of Appeals et. al. G.R. No. 124355 Sept. 21, 1999).

Atty. Sison's e-mail address is: [email protected]