Equitable Mortgage Prevails When A Deed Of Sale Masks A Loan Agreement

When a borrower signs a document that appears to be a sale but is actually meant to secure a loan, Philippine law steps in to protect the borrower. The Supreme Court, in Cando v. Solis (G.R. No. 251792, February 27, 2023), reaffirmed that courts will look beyond the labels parties put on their agreements to determine their true intent. The case is a reminder that a deed of sale can be declared void if it masks what is really a mortgage.

The Facts of the Case

Spouses Jose and Flocerfida Solis owned two parcels of land in Quezon City, covered by Transfer Certificates of Title Nos. N-313735 and N-313736. In February 2012, they borrowed ₱15,000,000 from Lourdes Cando. To secure the loan, they executed a document titled "Real Estate Mortgage Without Judicial Proceedings" over the properties. The loan was payable within six months with interest at 5% per month.

Later, in October 2012, the Spouses Solis executed a Deed of Absolute Sale in favor of Cando for the same amount of ₱15,000,000. Cando then used this deed to transfer the titles to her name. When Cando demanded that the Spouses Solis vacate the properties, they filed a complaint to annul the deed of sale, claiming they never intended to sell. They said Cando told them the deed was a mere formality to help her obtain bank financing for the loan.

The Issue Before the Court

The central question was whether the agreement between the parties was an equitable mortgage, which would warrant the annulment of the deed of sale.

The Ruling: Equitable Mortgage Established

The Supreme Court denied Cando's petition and affirmed the rulings of the lower courts. The Court held that the deed of sale was, in fact, an equitable mortgage.

An equitable mortgage is one that, although lacking some formality or form required by statute, nevertheless reveals the intention of the parties to charge real property as security for a debt. The Court emphasized that the intention of the parties is determined not only by the words used in the document but also by all surrounding circumstances.

The Court applied Article 1602 of the New Civil Code, which provides that a contract shall be presumed to be an equitable mortgage in several instances, including when the price of a sale is unusually inadequate, when the vendor remains in possession, or 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.

For the presumption to arise, two requisites must concur: (a) the parties entered into a contract denominated as a sale, and (b) their intention was to secure an existing debt by way of a mortgage. Both were present in this case.

The Badges of Equitable Mortgage

The Court identified several circumstances that pointed to an equitable mortgage:

First, there was an existing loan of ₱15,000,000 guaranteed by a deed of mortgage. This alone proved the transaction was a loan, not a bona fide sale.

Second, the stated purchase price of ₱15,000,000 was grossly inadequate compared to the properties' actual market value of ₱60,000,000.

Third, the Spouses Solis continued to possess the properties even after the supposed sale. Cando's counsel even sent a demand letter asking them to vacate—a circumstance inconsistent with a voluntary sale.

Fourth, Flocerfida Solis credibly explained that Cando asked them to sign the deed of sale only to show the bank there was a transaction between the parties, to facilitate the release of the loan proceeds.

Since these presumptions remained uncontroverted, the Court found that the deed of sale was indeed an equitable mortgage. The deed of sale was declared null and void, and the original deed of mortgage stood.

Practical Takeaways

• Labels do not control. A document called a "Deed of Absolute Sale" may be treated as a mortgage if the surrounding circumstances show the parties intended to secure a debt.
• Inadequate price is a red flag. If the stated price is unusually low compared to the property's market value, courts may presume an equitable mortgage.
• Continued possession matters. If the "seller" remains in possession of the property after the supposed sale, this is a strong indicator that the transaction was not a true sale.
• Borrowers should be cautious. Signing documents presented as "mere formalities" can have serious consequences. Always read and understand what you are signing.
• The remedy is annulment. When a deed of sale masks a loan, the borrower can seek its annulment, and the original mortgage agreement will govern the parties' rights.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.