MODULE: LAW ON SALES, AGENCY, AND CREDIT TRANSACTION

CHAPTER 9: REAL MORTGAGE

Real Mortgage
Real Mortgage (“real estate mortgage” or “mortgage”) is an accessory contract whereby real property is made
the security for the faithful fulfillment of a principal obligation.

Essential requisites of mortgage

1. Must be constituted to secure the fulfillment of the principal obligation.
2. Mortgagor must be the absolute owner of the thing mortgaged
3. Person constituting the mortgage must either have the free disposal of the property, or be legally
authorized to effect said mortgage.
4. When the principal obligation becomes due, the property mortgaged is supposed to be sold so that the
creditor may be satisfied.
5. The subject matter of the contract must be immovable property or alienable real rights upon immovable.

Rules governing the principal obligation and the accessory contract

a. If the principal obligation is void-mortgage is also void
b. If the principal obligation is valid- the mortgage maybe valid or void
c. If the principal contract is voidable, unenforceable or a natural obligation- a valid mortgage can still be
made as security.

Kinds of mortgage
1. Voluntary or conventional- created by the parties
2. Legal Mortgage- one required by law to guarantee performance
3. Equitable Mortgage- one which reveals an intent to make the property a security, even if the contracts
lacks the proper formalities of a real estate mortgage.

Object of a mortgage contract

1. Immovable
2. Alienable real rights (like usufruct over lands ) in accordance with the laws imposed upon immovable.

Parties to the contract

1. Mortgagor- usually the debtor
2. Mortgage- The creditor

Formalities required
1. To be valid and effective between the parties, a written instrument (even a private one) would be
sufficient.
2. To be effective as against third persons, it must be in a public documents and registered in the registry
of property unless the third persons have actual knowledge of the existence and duration of the mortgage
(knowledge is equivalent to registration)

Real Mortgage (M) vs. Sale a retro (R)

1. M- made as security
R- not a security
2. M- no transfer of ownership
R- transfer ownership provided there is delivery
3. M- generally, there is no transfer of possession
R- generally, there is transfer of possession
4. M- Indivisible
R- redemption can be partial
5. M- applies only to real property
R- applies to real and personal property

Real Mortgage (R) vs. Chattel mortgage (C)

1. R- the subject matter is real property
C—the subject matter is personal property
2. R- requirement of registration is only for the purpose of the binding 3 rd persons.
C- registration is essential for the validity of the contract.
3. R- may guarantee future obligations
 MODULE: LAW ON SALES, AGENCY, AND CREDIT TRANSACTION

C- cannot guarantee future obligations

Characters of the real mortgage

1. Real Rights- it binds the property itself
2. Real Property by itself- the mortgage credit can itself be sold, or assigned by the creditor to somebody
else.
3. Accessory- dependent upon the validity of a principal obligation
4. Limitation on ownership- a mortgage encumbers but does not end ownership.
5. Inseparable from the property itself, as long as it subsists- it adheres to the property, regardless of who
its owner may subsequently be.
6. Indivisible- as long as the principal obligation continues to exist, the mortgage on all the properties
involved also generally subsist.
7. Unilateral- only the mortgagor has an obligation in favors of the mortgagee.

Indivisibly of mortgage
The debtor’s heir who has paid a part of the debt cannot ask for proportionate extinguishment of the mortgage
as long as the debt is not completely satisfied.
The creditor heir who received his share of the debt cannot cancel the mortgage to the prejudice of the other
heirs who have not been paid.
EXCEPTION:
If several thing have been given in mortgage, and each one guarantees only a proportionate portion of credit,
the mortgage in the sense and in this sense alone, may be regarded as divisible.

The debtor, in this case shall have a right to the extinguished of the mortgage as the portion of the debt for which
each thing is especially answerable is satisfied.

Case 15
Amoroso ,Balicotsa and Colido borrowed from Desidido P450,000. And as a security, they mortgaged their co-
owned agricultural land to Desidido.
Subsequently, Amoroso paid Desidido P150,000. Is the mortgage on Amoroso’s share of the land extinguished.

No, because mortgage is considered indivisible and payment in part shall not extinguish the mortgage.

Case 16
Alkhobar borrowed P20,000 from Bubonica by a mortgage on Alkhobar’s land. Bobonica died leaving two
children, Coyocote and Daldalera. Alkhobar paid Coyocote P10,000. Is Coyocote allowed to cancel the
mortgaged?

No, unless there is a constant from Daldalera but of course the debt is now only the balance P10,000.

Extent covered by mortgage

A mortgage constituted on immovable property is not limited to the property itself but also extends to all its
accessions, improvements, growing fruits all rents ir income not yet received when the obligation becomes due,
and to the amount of the indemnity granted or given to the proprietor from the insurers of the property mortgaged,
or in virtue of expropriation for public use, with the declarations, amplification and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of the third person.

Case 17
Ali mortgaged her land to Baba with an old building thereon. Later the building was replaced by a new and more
expensive one. Is the new building covered by the mortgage?

Yes in the absence of a contrary stipulation. Moreover, growing fruits, rents or income not yet received
when the obligation becomes due are also included except those already harvested before the obligation
falls due.

Foreclose of mortgage
1. If the debt is not paid, the creditor mortgagee does not become automatically the owner of the property
because it is a pactum commissorium which is null and void. However, a stipulation requiring prior
consent of the mortgage for such sale is valid.
2. The creditor may foreclose the mortgage, judicially or extra judicially, by selling the property at a public
auction. At the sale, the highest price generally will be accepted. The fixing of a minimum price “tipo or
upset price” for which the property will be sold is void.
 MODULE: LAW ON SALES, AGENCY, AND CREDIT TRANSACTION

3. If the price for which property will be sold is not sufficient to cover the debt, the mortgagor is still liable for
the deficiency.

Sale/Mortgage of mortgaged property

a. The mortgagor may sell the mortgaged property to a stranger, even if in the contract there is a stipulation
forbidding the owner from selling or otherwise alienating the same because such stipulation is void.
b. If despite the prohibition, the debtor makes a second mortgage is not void but the first mortgagee may
immediate foreclose upon the first mortgage.
If the property is sold at the public auction and there is a remainder after the paying off the first mortgagee,
the balance may be given to the second mortgagee.

Sale of mortgage credit

The mortgagee can sell to assign the mortgage credit, in whole or in part, because the mortgage is the owner of
said credit.
Even if the alienation is not registered, it would still be valid as between the parties. However, to prejudice third
person, the sale or assignment of the mortgage credit must be registered in the proper registry of property –
because the credit itself represents real right in real property.

CHATTEL MORTGAGE
Chattel Mortgage is that contract by virtue of which personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation.

Case 18
Alindada mortgaged a car to Baliktad. The chattel mortgage is not registered in the Chattel Mortgage Registry
and at the Land Transportation Office. Is the contact nevertheless valid?

Yes. A chattel mortgage that is not recorded is valid between the parties but void as innocent as to
innocent third person. The only purpose of registration is to give constructive notice to third persons
and not give validity to a contact.

Characteristics of chattel mortgage

1. Nominate – it has special designation or name in the Civil Code.
2. Consensual – perfected by mere consent
3. Accessory – its purpose it to secure the performance of a principal obligation.
4. Unilateral – it creates an obligation sorely on the part of the creditor to return the object mortgaged upon
fulfillment of the principal obligation which is secured.
5. Indivisible - not susceptible of partial realization.

Requisites of chattel mortgage

1. That it be constituted to secure the fulfillment of the principal obligation.
2. The mortgagor must be the absolute owner of the thing mortgaged.
3. That the person constituting the mortgage must have the free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose.
4. That the object be personal or movable property.
5. That the mortgage be recorded in the Chattel Mortgage Register.

Form of chattel mortgage

1. Between the parties – as a requisite for the validity, it must be recorded in the Chattel Mortgage Register
2. As regards third person – am affidavit of good faith must be appended to the Deed or Chattel Mortgage
and recorded in the Chattel Mortgage Register.

Place of registration
1. If the mortgagor is domiciled –
a. In the Philippines – in the province which mortgagor resides
b. Abroad – the province which the property situated
c. In the Philippines, but the chattel is situated in another province – both in the province where the
mortgagor resides and in which the property is situated
2. Chattel mortgage of vessels – office of the Collector of Customs at port entry. Registration in the
Registration of Deeds is not required.
3. Chattel mortgage of motor vehicle – Chattel Mortgage Registry and in the Land Transportation Office
 MODULE: LAW ON SALES, AGENCY, AND CREDIT TRANSACTION

4. Chattel mortgage of shares – Chattel Mortgage in the domicile of the mortgagor and of the corporation.
If their domicile is the same, a single registration is sufficient.

Chattel mortgage (C) vs. Pledge (P)

1. C – consensual contract
P – real contract
2. C – possession of the thing remains with the debtor
P – possession of the thing is vested in the creditor
3. C – registration in the Chattel Mortgage Registry is essential to bind third persons
P – contract must be on public instrument to bind third persons
4. C – if the price of the sale in case of foreclosure is less than the amount of the principal obligation, the
creditor is entitled to recover the deficiency from the debtor

Case 19
Alipusta mortgaged a movable to Balicoco. Instaead of recording a contract, the property was delivered to
creditor. Is the contract of chattel mortgage valid between the parties?

No, If the movable, instead of being recorded is delivered to the creditor or a third person, the contract
is a pledge and not a chattel mortgage.

Case 20
Apuya executed a chattel mortgage on a house built on a rented land owned by Biribid. Is the contract valid?
How about if the object is machinery placed by a tenant in a plant belonging to another?

Yes, a chattel mortgage of a house built on one`s own land or on rented land is valid between the parties,
and void insofar as a third persons. This is true event a mortgage is registered in the Chattel Mortgage
Register.
A machinery placed by a tenant, lessee, or usufructuary, etc. shall be treated as personally subject to
chattel mortgage.

Objects of chattel mortgage under Chattel Mortgage Law

1. Shares of stocks and corporation
2. Growing crops
3. Interest in business
4. Vessels
5. Large cattle

Foreclosure of chattel mortgage

If the mortgagor defaults in the payment of the secured debt or otherwise fails to comply with the conditions of
the mortgage, the creditors is permitted to recover his credit from the proceeds of sale at public auction.
He cannot appropriate to himself the property. Otherwise, it would constitute pactum commissorium, which is
prohibited by law.

Deficiency judgment
If the process of sale are not sufficient to satisfy the claim of the creditor, the creditor may institute a court action
to recover the deficiency, except in case of fore closure of a chattel mortgage constituted on personal property
which is sold at a price payable in installment (Recto Law)
 MODULE: LAW ON SALES, AGENCY, AND CREDIT TRANSACTION

Matrix 1
Summary of rules to be applied in case the property pledged/mortgaged is sold at public auction
There is an excess There is deficiency

Excess goes to the creditor Creditor cannot recover

Pledge Unless the contrary is proved The deficiency. A contrary
stipulation is void.

Real mortgage Excess goes to the Mortgagee can recover

mortgagor the deficiency.

Chattel mortgage Excess goes to the Mortgagee can recover

mortgagor The deficiency from the
mortgagor

Matrix 2
Summary of rules for the validity of pledge/mortgage between the parties and against third
persons
Between Parties Against 3rd Person
Maybe consulted in any Description of the thing And
Pledge Form; mere delivery Of Date of pledge must be
the property is sufficient in a public instrument

Must be in a writing Recorded in the registry

Real mortgage Even private one Of property

Recorded in the Chattel Accompanied by Affidavit of

Chattel Mortgage Mortgager Registry Good Faith and Registered in
A Chattel Mortgage Register

Reference:

THE LAW ON SALES, AGENCY, AND CREDIT TRANSACTIONS DE LEON 2010

For further discussion please refer to the link provided:

The Basic of a Mortgage: https://youtu.be/NeuRoxDZoUk

Difference Between Note and Mortgage: https://youtu.be/PQn5W73KvdU

What is a Mortgage: https://youtu.be/2vkhiod3f1o

MODULE: LAW ON SALES, AGENCY, AND CREDIT TRANSACTION