Equitable Mortgage vs Sale With Right to Repurchase: Redemption Rights and Prescription

The Supreme Court recently settled a recurring confusion in Philippine property law: when a transaction is actually an equitable mortgage, the four-year redemption period for sales with right to repurchase does not apply. The case of Saclolo v. Marquito (G.R. No. 229243, June 26, 2019) clarifies the distinction and the correct prescriptive period for recovering mortgaged property. This ruling protects borrowers who unknowingly sign documents that appear to be sales but are actually loans secured by their land.

The Case Before the Court

Petitioners inherited a coconut land from their father. They claimed that in 1987, they obtained loans from respondents' father, using the property as collateral. Additional loans followed in 2003 and 2004. When petitioners tried to redeem the property in 2004, respondents refused, prompting petitioners to file a complaint for redemption of mortgaged properties.

Respondents, however, alleged that in 1984, petitioners sold the property under a Memorandum of Deed of Sale with Right of Repurchase. They claimed to have possessed the property as owners since then.

The Nature of the Transaction

Both the Regional Trial Court and the Court of Appeals found that the transaction was an equitable mortgage, not a true sale with right to repurchase. This finding became final because respondents did not appeal it.

Under Article 1602 of the Civil Code, a contract is presumed to be an equitable mortgage when, among other circumstances, the price of a sale with right to repurchase is unusually inadequate, the vendor remains in possession, or when it may be fairly inferred that the real intention was to secure the payment of a debt. The Court emphasized that the nomenclature given by the parties to a contract is not conclusive of its legal effects.

The Prescriptive Period: Four Years or Ten Years?

The critical question was which prescriptive period applied. The RTC initially applied the four-year period under Article 1606, which governs sales with right to repurchase. The CA later agreed, ruling that petitioners could no longer redeem the property.

The Supreme Court reversed. Since the transaction was an equitable mortgage—a mere accessory contract securing a loan—there was no "redemption" or "repurchase" to speak of. The periods under Article 1606 do not apply to equitable mortgages. Instead, the applicable prescriptive period is ten years under the Civil Code's provisions on actions that must be brought within ten years from the time the right of action accrues, which covers actions upon a written contract, upon an obligation created by law, and upon a judgment.

When Did the Cause of Action Accrue?

The Court found that for 19 years, the parties followed their true agreement. Respondents extended additional loans in 1987, 2003, and 2004, using the same land as security. They never filed an action to consolidate ownership over the property. This conduct showed that respondents recognized petitioners continued to own the property and that the loan and mortgage subsisted.

The cause of action accrued only in 2004, when respondents rejected petitioners' offers to pay and recover the property. Since petitioners filed their complaint in 2005, the action was well within the ten-year prescriptive period.

The Court's Remedy

The Court remanded the case to the trial court to determine the outstanding loan amount and applicable interest. Respondents remain entitled to collect the debt and may foreclose on the property if petitioners fail to pay. However, allowing respondents to keep the property without foreclosure would produce the same effect as a pactum commissorium, which is prohibited.

Practical Takeaways

• Document names do not control. A deed labeled as a "sale with right to repurchase" may actually be an equitable mortgage if the parties intended to secure a loan.
• The four-year redemption period under Article 1606 applies only to true sales with right to repurchase, not to equitable mortgages.
• For equitable mortgages, the prescriptive period is ten years, counted from when the cause of action accrues—typically when the lender refuses to accept payment or return the property.
• Continued recognition of the loan, such as extending additional loans or failing to consolidate ownership, can delay the accrual of the cause of action.
• Lenders cannot simply keep mortgaged property upon default; they must foreclose, and borrowers may recover the property upon full payment of the debt.

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