G.R. No. 125055 – A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.
MENDOZA, J.
Rule Synopsis
A provision in a contract purporting to be a pacto de retro sale whereby the ownership of the subject matter shall automatically pass to the vendee should there be no redemption is void for being in essence, a pactum commissorium. In this case, the pacto de retro sale was in substance a mortgage contract.
Facts
A.Francisco Realty and Development Corporation (AFRDC) loaned P7.5M to Sps Romulo and Erlinda Javillonar, secured by a Real Estate Mortgage on the latter’s real property. The Sps also executed and promissory note and an undated deed of sale of the mortgaged property in favor of AFRDC. The PN provided that failure of the Sps to pay interest on the loan will transfer full possession of the property to AFRDC and the deed of sale will be registered. The Sps defaulted; AFRDC registered the sale and obtained title in its name. The Sps then obtained additional loan evidenced by a PN which states that in case of default, the Sps will voluntarily vacate the subject property. Sps again defaulted but they refused to vacate.
Thus, AFRDC filed an action for possession of the subject property.
The Sps argued, among others, that they did not intend to sell the property to AFRDC, and that the undated deed of sale was merely an additional security for the loan.
The RTC ruled in favor of AFRDC. The CA reversed. The SC affirmed.
Issue
Was the deed of sale void, being in the nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code?
Ruling and Discussion
Yes. The deed of sale was void, being in the nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code.
The stipulations in the promissory notes providing that, upon failure of respondent spouses to pay interest, ownership of the property would be automatically transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum commissorium. They embody the two elements of pactum commissorium, namely: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated period.
The Court, citing Olea v. CA, said that: stipulation that the ownership of the property would automatically pass to the vendee in case no redemption was effected within the stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the mortgaged property without the need of foreclosure. Such stipulation being contained in deeds of sale purporting to be pacto de retro sales but found actually to be equitable mortgages.
Dispositive
Decision affirmed with modification.