Protecting helpless citizens

This is a case that every subdivision lot or condominium unit buyers should be aware of. It is a case where the owner or developer of the subdivision or condominium mortgages the lot or unit of buyers. It clearly sets forth the respective rights and duties of each party as found in Section 18, PD 957. Under said section: (1) the owner or developer must first get the approval of the Housing and Land Use regulatory Board(HLURB) before it can mortgage a lot or unit of a buyer to see to it that the proceeds of the loan shall be used for the development of the subdivision or condominium project and that effective measures have been provided to ensure such utilization; (2) the loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof shall be notified before the release of the loan: and (3) the buyer, at his option, may pay his installment for the lot or unit directly to the bank or mortgagee who shall apply them to the corresponding mortgage indebtedness to enable the said buyer to obtain title over the lot or condominium unit promptly after full payment thereof. Without complying with these requirements, the mortgage is void. However, supposing the owner-developer mortgages the entire subdivision or condominium on the representation that it is "free from all liens and encumbrances" and that it has secured all permits and licenses, can the mortgagee claim that said section 18 is not applicable and that the mortgage is valid? This is the question resolved in this case of Julio.

Julio bought from TSE through its owner/general manager, Mr. Manuel. a three story townhouse unit (No. 10) on a parcel of land with an area of 52.5 sq.m. which is a portion of a land covered by TCT No. 383697. The price of the sale was P800,000 payable in monthly installments under a contract to sell.

Two months later, TSE obtained a loan from a bank in the amount of P7,650,000 and mortgaged the property covered by TCT 383697 where the townhouse project was already in progress. TSE however failed to pay its obligation to the bank, so the latter extra-judicially foreclosed the real estate mortgage over the land including that 52.5sqm townhouse unit purchased by Julio. As a result of the foreclosure, construction of the townhouse unit slackened. At that time, Julio had already paid P600,000, so when he discovered the foreclosure, he stopped further payment. He also filed with the HLURB a case to compel TSE to complete the construction of the townhouse, to prevent the enforceability of the extrajudicial foreclosure and to declare as invalid the mortgage between TSE and the bank for having been entered into in violation of section 18,PD 957.

The HLURB as affirmed by the Office of the President ruled in favor of Julio: (1) declaring the mortgage between TSE and the bank unenforceable against Julio; (2) ordering the bank to compute and determine the loan value of Julio’s unit and to receive the amortization from him and deliver the title of unit 10 upon full payment; (3) ordering the Register of Deeds to cancel the annotations of the mortgage executed by TSE in favor of the Bank as well as the certificate of sale of the extrajudicial foreclosure without prejudice to the bank’s right to require TSE to constitute new collateral in lieu of said title.

The bank questioned this ruling. It insisted that section 18 does not apply because the land mortgaged to it was one whole un-subdivided parcel, not a subdivided lot, so the approval of the HLURB was not a requirement for the constitution of the mortgage over the property. Besides, it contended that it is an innocent mortgagee in good faith. Was the bank correct?

No. It is undisputed that the subject 52.5sqm lot with a three story townhouse unit is part of the property mortgaged to the bank and is covered by TCT No. 156254. The lot was technically described and segregated in a Contract to Sell that had been entered before the mortgaged loan was contracted. The fact that the lot had no separate TCT did not make it less of a "subdivision lot" entitled to the protection of Section 18, PD 957. That the subject of the mortgage loan was the entire land, not the individual subdivided lots, does not take the loan beyond the coverage of said section. Undeniably, the lot was also mortgaged when the entire parcel of land, of which it was a part, was encumbered. The avowed purpose of PD 957, to protect innocent lot buyers, compels the reading of section 18 as prohibitory-acts committed contrary to it are void.

The bank could not also argue that it is an innocent mortgagee for value whose lien must be respected and protected since the title offered to it as security was clean of any encumbrance or lien. It should have considered that it was dealing with a townhouse project already in progress. It should bhave been aware that, to finance the project, sources of funds could have been used other than the loan which was intended to serve the prupose only partially. Hence, there was need to verify whether any part of the property was already the subject of any other contract involving buyers or potential buyers. Having been wanting in care and prudence it cannot be deemed to be an innocent mortgagee.

But the mortgage contract is void only in so far as Julio and his lot are concerned. The HLURB went overboard when it ruled that the mortgage over the entire land was void since the subject of the litigation is limited only to the lot that Julio is buying, not the entire parcel. Julio has no personality or standing to bring suit on the entire property, as he has an actionable interest over his lot only. (Far East bank etc. vs. Marquez, G.R. 147964, January 20, 2004)