Equitable Mortgage vs Sale With Right of Repurchase: How Courts Classify Real Estate Deals

When a property owner sells real estate but keeps the right to buy it back, the law treats the deal with suspicion. Philippine courts presume such arrangements may actually be loans disguised as sales—what the Civil Code calls an equitable mortgage. But that presumption is not absolute. In Sps. Santiago v. Dizon (G.R. No. 172771, January 31, 2008), the Supreme Court showed how sellers can overcome this presumption and prove a genuine sale with option to repurchase.

The Facts of the Case

Aida Dizon mortgaged her Manila property to Monte de Piedad Bank to secure a P265,000 loan. When she defaulted, the bank foreclosed and consolidated ownership. The bank, however, gave Dizon until May 28, 1987 to repurchase the property for P550,000.

On that date, Elizabeth Santiago paid the bank on Dizon's behalf. The bank executed a deed of sale in Dizon's favor. The next day, Dizon sold the property to Santiago and her co-petitioners for the same P550,000. On the same day, the parties signed an agreement giving Dizon the option to buy back the property within three months for P900,000. If she failed, she would vacate the premises.

Dizon stayed on the property but never repurchased it. Petitioners registered the sale and obtained a title. When Dizon refused to vacate, an ejectment case followed. After that case ended, Dizon filed a separate action for reformation of the deed of sale, claiming the transaction was actually an equitable mortgage.

The Legal Issue

Was the transaction between Dizon and the Santiagos a true sale with option to repurchase, or an equitable mortgage that secured a P550,000 loan?

The Ruling: A Genuine Sale, Not an Equitable Mortgage

The Supreme Court ruled in favor of the Santiagos, holding the transaction was a bona fide sale with option to repurchase. The Court emphasized that the presumption of equitable mortgage under Article 1602 of the Civil Code is rebuttable—it yields to competent and satisfactory proof of the parties' true intention.

Why the Presumption Was Rebutted

The Court identified several factors showing a genuine sale. First, while Dizon remained in possession, she did so not as an owner but as a caretaker collecting rentals for the buyers. After the option period expired, the Santiagos directly dealt with tenants and received the rentals themselves.

Second, the tax declarations for 1987 were in the names of the bank and the Santiagos, not Dizon. The Santiagos paid realty taxes from 1988 to 1999. Dizon's claimed tax declaration was a photocopy from 1985—hardly convincing proof.

Third, the P550,000 purchase price was not inadequate. The Court looked to the property's assessed value: the land was valued at P85,550 and improvements at P27,880 as of 1988. The purchase price far exceeded these figures, so the "unusually inadequate price" ground under Article 1602 did not apply.

Distinguishing Bundalian v. Court of Appeals

The lower courts relied on Bundalian v. Court of Appeals (214 Phil. 565 [1984]), where a sharply escalating repurchase price indicated a loan. But the Court distinguished that case. In Bundalian, the repurchase price escalated monthly depending on when redemption occurred, and the vendor retained the right to build on the property. Here, the parties agreed on a fixed repurchase price of P900,000 and a fixed three-month period—no escalation, no right to build. These differences pointed to a genuine sale.

Practical Takeaways

• The presumption is rebuttable. A contract that looks like a sale with right to repurchase is presumed an equitable mortgage under Article 1602, but clear evidence of a genuine sale can overcome this.
• Possession is not decisive. Staying on the property after a sale does not automatically create an equitable mortgage if the seller's possession is not in the concept of an owner—for example, as a caretaker collecting rentals for the buyer.
• Tax payments matter. Who pays realty taxes and in whose name tax declarations stand are strong indicators of ownership. Consistent payment by the buyer supports a genuine sale.
• Price adequacy is measured by assessed value. Courts often compare the purchase price to the property's assessed or market value, not speculative or sentimental value. A price exceeding assessed value is unlikely to be "unusually inadequate."
• Fixed terms favor a sale. A fixed repurchase price and fixed redemption period, without escalating amounts or extra rights for the seller, point to a sale with option to repurchase rather than a loan.

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