G. Extinguishment

1. In general

Extinguishment of sales contract:
1) Same causes with extinguishment of all other obligations;
2) Those causes under Title VI-Sales;
3) Conventional redemption; AND
4) Legal redemption

Sales are extinguished by the same causes as all other obligations, by those stated in the preceding articles of this Title, and by conventional or legal redemption. (Article 1600, Ibid.)

a. CONVENTIONAL REDEMPTION

Conventional redemption shall take place when the seller reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon. (Article 1601, Ibid.)

Cross-referenced article/s
The seller cannot avail himself of the right of repurchase without returning to the buyer the price of the sale, and in addition:
1) The expenses of the contract, and any other legitimate payments made by reason of the sale;
2) The necessary and useful expenses made on the thing sold. (Article 1616, Ibid.)

Limitation of right to repurchase

By default: 4 years. The right referred to in Article 1601, in the absence of an express agreement, shall last four years from the date of the contract. (Article 1606, Ibid.)

If stipulated: 10-year limit. Should there be an agreement, the period cannot exceed ten years. (Paragraph 2, Article 1606, Ibid.)

However, the seller may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase. (Paragraph 3, Article 1606, Ibid.)

Equitable mortgage

Cases of equitable mortgage. –

The contract shall be presumed to be an equitable mortgage, in any of the following cases:
1) When the price of a sale with right to repurchase is unusually inadequate;
2) When the seller remains in possession as lessee or otherwise;
3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;
4) When the purchaser retains for himself a part of the purchase price;
5) When the seller binds himself to pay the taxes on the thing sold;
6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. (Article 1602, Ibid.)  

In any of the foregoing cases, any money, fruits, or other benefit to be received by the buyer as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (Paragraph 2, Article 1602, Ibid.)

Contract purporting to be an absolute sale. The provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale. (Article 1604, Ibid.)

Sale with right to repurchase. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. (Article 1603, Ibid.)

Reformation of instrument

⦁ In the cases referred to in Articles 1602 and 1604, the apparent seller may ask for the reformation of the instrument. (Article 1605, Ibid.)

For real property

When judicial order is required. In case of real property, the consolidation of ownership in the buyer by virtue of the failure of the seller to comply with the provisions of article 1616 shall not be recorded in the Registry of Property without a judicial order, after the seller has been duly heard.(Article 1607, Ibid.)

Cross-referenced article/s
The seller cannot avail himself of the right of repurchase without returning to the buyer the price of the sale, and in addition:
1) The expenses of the contract, and any other legitimate payments made by reason of the sale;
2) The necessary and useful expenses made on the thing sold.(Article 1616, Ibid.)

Seller’s right to bring action against possessor

⦁ The seller may bring his action against every possessor whose right is derived from the buyer, even if in the second contract no mention should have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Land Registration Law with respect to third persons. (Article 1608, Ibid.)

Buyer is subrogated to the seller

⦁ The buyer is subrogated to the seller’s rights and actions. (Article 1609, Ibid.)

Creditors of the seller should exhaust seller’s property first

⦁ The creditors of the seller cannot make use of the right of redemption against the buyer, until after they have exhausted the property of the seller. (Article 1610, Ibid.)

Buyer of an undivided immovable

⦁ In a sale with a right to repurchase, the buyer of a part of an undivided immovable who acquires the whole thereof in the case of Article 498, may compel the seller to redeem the whole property, if the latter wishes to make use of the right of redemption. (Article 1611, Ibid.)

Cross-referenced article/s
Whenever the thing is essentially indivisible and the co-owners cannot agree that it be allotted to one of them who shall indemnify the others, it shall be sold and its proceeds distributed. (Article 498, Ibid.)

Several persons jointly selling undivided immovable in same contract

⦁ If several persons, jointly and in the same contract, should sell an undivided immovable with a right of repurchase, none of them may exercise this right for more than his respective share. (Article 1612, Ibid.)

⦁ The same rule shall apply if the person who sold an immovable alone has left several heirs, in which case each of the latter may only redeem the part which he may have acquired. (Paragraph 2, Article 1612, Ibid.)

Buyer’s right against co-sellers/co-heirs. Art. 1613. In the case of the preceding article, the buyer may demand of all the sellers or co-heirs that they come to an agreement upon the purchase of the whole thing sold; and should they fail to do so, the buyer cannot be compelled to consent to a partial redemption. (Article 1613, Ibid.)

Co-owner’s independent right of repurchase. Each one of the co-owners of an undivided immovable who may have sold his share separately, may independently exercise the right of repurchase as regards his own share, and the buyer cannot compel him to redeem the whole property. (Article 1614, Ibid.)

Right of redemption against heirs of buyer limited to their respective shares.

General Rule: If the buyer should leave several heirs, the action for redemption cannot be brought against each of them except for his own share, whether the thing be undivided, or it has been partitioned among them. (Article 1615, Ibid.)
Exception: But if the inheritance has been divided, and the thing sold has been awarded to one of the heirs, the action for redemption may be instituted against him for the whole. (Paragraph 2, Article 1615, Ibid.)

Conditions for right of redemption against seller

The seller cannot avail himself of the right of repurchase without returning to the buyer the price of the sale, and in addition:
1) The expenses of the contract, and any other legitimate payments made by reason of the sale;
2) The necessary and useful expenses made on the thing sold. (Article 1616, Ibid.)

Fruits

⦁ Visible or growing fruits at time of sale

General Rule: If at the time of the execution of the sale there should be on the land, visible or growing fruits, there shall be no reimbursement for or prorating of those existing at the time of redemption. (Article 1617, Ibid.)
Exception: …  if no indemnity was paid by the purchaser when the sale was executed. (Ibid.)

No fruits at time of sale, but exist at time of redemption. Should there have been no fruits at the time of the sale and some exist at the time of redemption, they shall be prorated between the redemptioner and the buyer, giving the latter the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of the sale. (Paragraph 2, Article 1617, Ibid.)

Recovered property free from all charges/mortgages constituted by buyer

General Rule: The seller who recovers the thing sold shall receive it free from all charges or mortgages constituted by the buyer. (Article 1618, Ibid.)
Exception: … but he shall respect the leases which the latter may have executed in good faith, and in accordance with the custom of the place where the land is situated. (Ibid.)

b. LEGAL REDEMPTION

Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (Article 1619, Ibid.)

When exercised. The right of legal pre-emption or redemption shall not be exercised except within thirty (30) days from the notice in writing by the prospective seller, or by the seller, as the case may be. (Article 1623, Ibid.)

The right of redemption of co-owners excludes that of adjoining owners. (Paragraph 2, Article 1623, Ibid.)

Recording in Registry of Property. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the seller that he has given written notice thereof to all possible redemptioners. (Article 1623, Ibid.)

Co-owner’s right of redemption excludes adjoining owners. The right of redemption of co-owners excludes that of adjoining owners. (Paragraph 2, Article 1623, Ibid.)

Right of redemption by co-owners in general

To pay reasonable price only. A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one. (Article 1620, Ibid.)

Pro rata redemption. Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common. (Paragraph 2, Article 1620, Ibid.)

Right of redemption by co-owners of adjoining lands

Rural land. –

General Rule: The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated. (Article 1621, Ibid.)
Exceptions:
1) Grantee does not own any rural land;
The owners of adjoining lands shall also have the right of redemption unless the grantee does not own any rural land. (Ibid.)
2) Adjacent lands separated by apparent servitudes
This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates. (Paragraph 2, Article 1621, Ibid.)
Order of preference. If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (Paragraph 3, Article 1621, Ibid.)

Urban land; Bought merely for speculation; If for re-sale. Whenever a piece of urban land which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price. (Article 1622, Ibid.)

Same; Same; If re-sold already. If the re-sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price. (Paragraph 2, Article 1622, Ibid.)

Same; Same; Order of preference. When two or more owners of adjoining lands wish to exercise the right of pre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (Paragraph 3, Article 1622, Ibid.)

2. Pacto de retro sale

Transfers legal title. A sale with pacto de retro transfers the legal title to the vendee and this, in the absence of an agreement to the contrary, carries with it the right of possession. (Alderete v. Amandoron, En Banc, G.R. No. L-22588, 13 November 1924)

Ownership transfers upon sale; Option to repurchase. The insertion of a stipulation for repurchase by the vendor in a contract of sale does not necessarily create any right inconsistent with the right of ownership in the purchaser. Such a stipulation is in the nature of an option, and the possible exercise of it rests upon contingency. It creates no subsisting right whatever in the property, and so far from being inconsistent with the idea of full ownership in the purchaser, it really rests upon the assumption of ownership in him. (Alderete v. Amandoron, citing Falcon v. Falcon, 26 Phil., 72)

Pacto de retro SaleEquitable Mortgage
In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro, subject only to the repurchase by the vendor a retro within the stipulated period. The vendor a retro’s failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by operation of law, absolute title to the property. Such title is not impaired even if the vendee a retro fails to consolidate title under Article 1607 of the Civil Code.An equitable mortgage is a contract that — although lacking the formality, the form or words, or other requisites demanded by a statute — nevertheless reveals the intention of the parties to burden a piece or pieces of real property as security for a debt.
 The essential requisites of such a contract are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to secure an existing debt by way of a mortgage.
 The nonpayment of the debt when due gives the mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the satisfaction of the loan obligation. (Ramos v. Sarao, G.R. No. 149756, 11 February 2005)

3. Equitable mortgage

An equitable mortgage has been defined “as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, there being no impossibility nor anything contrary to law in this intent.” (Rockville Excel International Exim Corporation v. Sps. Culla, G.R. No. 155716, 02 October 2009)

Examples of equitable mortgage: The contract shall be presumed to be an equitable mortgage, in any of the following cases:
1) When the price of a sale with right to repurchase is unusually inadequate;
2) When the vendor remains in possession as lessee or otherwise;
3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;
4) When the purchaser retains for himself a part of the purchase price;
5) When the vendor binds himself to pay the taxes on the thing sold;
6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (Article 1602, Civil Code)

Legal presumption favors equitable mortgage

⦁ Jurisprudence has consistently declared that the presence of even just one of the circumstances set forth in the forgoing Civil Code provision suffices to convert a contract to an equitable mortgage. Article 1602 specifically states that the equitable presumption applies to any of the cases therein enumerated. (Ramos v. Sarao, supra.)

For the presumption of an equitable mortgage to arise under Article 1602, two (2) requisites must concur:
1) That the parties entered into a contract denominated as a contract of sale; and
2) That their intention was to secure an existing debt by way of a mortgage.

⦁ Any of the circumstances laid out in Article 1602, not the concurrence nor an overwhelming number of the enumerated circumstances, is sufficient to support the conclusion that a contract of sale is in fact an equitable mortgage. (Rockville Excel International Exim Corporation v. Sps. Culla, supra.)

⦁ In several cases, the Court has not hesitated to declare a purported contract of sale to be an equitable mortgage based solely on one of the enumerated circumstances under Article 1602. This approach follows the rule that when doubt exists on the nature of the parties’ transaction, the law favors the least transmission of property rights. (Ibid.)

Rockville Excel International Exim Corporation v. Sps. Culla (October 2009)
In the present case, three attendant circumstances indicate that the purported sale was in fact an equitable mortgage. First, the Sps. Culla retained possession of the property. Second, Rockville kept a part of the purchase price. Third, as previously discussed, Rockville continued to give the Sps. Culla extensions on the period to repay their loan even after the parties allegedly agreed to a dacion en pago. These circumstances, coupled with the clear and unequivocal testimonies of Oligario and Bernardita that the purpose of the Deed of Absolute Sale was merely to guarantee their loan, clearly reveal the parties’ true intention to execute an equitable mortgage and not a contract of sale. That a contract where the vendor remains in physical possession of the land, as lessee or otherwise, is an equitable mortgage is well-settled. The reason for this rule lies in the legal reality that in a contract of sale, the legal title to the property is immediately transferred to the vendee; retention by the vendor of the possession of the property is inconsistent with the vendee’s acquisition of ownership under a true sale. It discloses, in the alleged vendee, a lack of interest in the property that belies the truthfulness of the sale.

When a pacto de retro is construed as an equitable mortgage

⦁ A contract purporting to be a pacto de retro is construed as an equitable mortgage when the terms of the document and the surrounding circumstances so require. The law discourages the use of a pacto de retro, because this scheme is frequently used to circumvent a contract known as a pactum commissorium. The Court has frequently noted that a pacto de retro is used to conceal a contract of loan secured by a mortgage. Such construction is consistent with the doctrine that the law favors the least transmission of rights. (Ramos v. Sarao, supra.)

Ramos v. Sarao (February 2005)
In the present factual milieu, the vendor retained possession of the property allegedly sold. Petitioner and her children continued to use it as their residence, even after Jonas Ramos had abandoned them. In fact, it remained as her address for the service of court orders and copies of Respondent Sarao’s pleadings.
The presumption of equitable mortgage imposes a burden on Sarao to present clear evidence to rebut it. Corollary to this principle, the favored party need not introduce proof to establish such presumption; the party challenging it must overthrow it, lest it persist. To overturn that prima facie fact that operated against her, Sarao needed to adduce substantial and credible evidence to prove that the contract was a bona fide pacto de retro. This evidentiary burden she miserably failed to discharge.
Contrary to Sarao’s bare assertions, a meticulous review of the evidence reveals that the alleged contract was executed merely as security for a loan.
The July 23, 1991 letter of Respondent Sarao’s lawyer had required petitioner to pay a computed amount — under the heading “House and Lot Loan” — to enable the latter to repurchase the property. In effect, respondent would resell the property to petitioner, once the latter’s loan obligation would have been paid. This explicit requirement was a clear indication that the property was to be used as security for a loan.
The loan obligation was clear from Sarao’s evidence as found by the trial court, which we quote:
“x x x [Sarao] also testified that Myrna did not tender payment of the correct and sufficient price for said real property within the 6-month period as stipulated in the contract, despite her having been shown the computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other expenses. She admitted though that Myrna has tendered payment amounting to ₱1,633,034.20 in the form of two manager’s checks, but these were refused acceptance for being insufficient. She also claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the computation of the loan obligation inclusive of said expenses. x x x.”
Respondent herself stressed that the pacto de retro had been entered into on the very same day that the property was to be foreclosed by a commercial bank. Such circumstance proves that the spouses direly needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize some profit, as Sarao suggests, they would not have retained possession of the house and continued to live there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan obligation, not to transfer ownership of the property.
Sarao contends that Jonas Ramos admitted in his June 14, 1991 letter to her lawyer that the contract was a pacto de retro. That letter, however, cannot override the finding that the pacto de retro was executed merely as security for a loan obligation. Moreover, on May 17, 1991, prior to the transmittal of the letter, petitioner had already sent a letter to Sarao’s lawyer expressing the former’s desire to settle the mortgage on the property. Considering that she had already denominated the transaction with Sarao as a mortgage, petitioner cannot be prejudiced by her husband’s alleged admission, especially at a time when they were already estranged.

Disclaimer: All information herein is for educational and general information only intended for those preparing for the bar exam. These should not be taken as professional legal advice or opinion. Please consult a competent lawyer to address your specific concerns. Any statements or opinions of the author are solely his own and do not reflect that of any organization he may be connected.

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