When a over his 15.3955-hectare unregistered parcel of land in Davao City in favor of Benny Go for P20,000.00.

Bacaron filed a complaint for reformation of instrument, arguing that the true agreement was an equitable mortgage. He pointed out that the P20,000.00 consideration was grossly inadequate—the market value of land in Davao City at that time was about P100,000.00 per hectare. He also stressed that he remained in possession of the property and continued to pay the real estate taxes.

Go, on the other hand, claimed the transaction was a dacion en pago—the property was given to settle Bacaron's outstanding debts of nearly P1 million. The trial court sided with Go, but the Court of Appeals reversed, ruling that the contract was an equitable mortgage. The Supreme Court affirmed the appellate court's decision.

The Issue

The central question was whether the agreement between the parties was an equitable mortgage or an absolute sale, and whether reformation of the instrument was proper.

The Ruling: Equitable Mortgage Established

The Supreme Court applied Article 1602 of the Civil Code, which lists instances when a contract is presumed to be an equitable mortgage. These include: (1) when the price is unusually inadequate; (2) when the vendor remains in possession; (3) when the vendor binds himself to pay taxes on the thing sold; and (4) any other case where it may be fairly inferred that the parties intended the transaction to secure payment of a debt.

Article 1604 extends these rules to contracts purporting to be absolute sales. In this case, three circumstances pointed to an equitable mortgage:

First, the consideration was grossly inadequate. The P20,000.00 price for a 15-hectare property was far below market value. While Go claimed the property was payment for Bacaron's debts, the Court noted that this dacion en pago claim was not reflected in the instrument itself. The discrepancy confirmed that the document did not express the true intention of the parties.

Second, Bacaron remained in possession. Witnesses testified that Bacaron continued to gather fruits and coconuts on the property after the alleged sale. Under Article 1602(2), the vendor's continued possession is a strong indicator of an equitable mortgage. Go's witnesses only showed that they were tenants who were told Go was the new owner—this did not establish that Go actually exercised possession.

Third, Bacaron paid the realty taxes. He paid taxes for 1995, 1996, and 1997—the years between the alleged sale and the filing of the case. Go only paid the back taxes in October 1997, after the complaint had been filed. The Court held that continued payment of real property taxes, coupled with possession, is evidence of great weight that the supposed vendor retained ownership.

Reformation Was Proper

The Court also rejected Go's argument that reformation was improper. Since the instrument failed to reflect the parties' true agreement, parol evidence was admissible to prove the real nature of the transaction. Under Article 1605 of the Civil Code, the supposed vendor may ask for reformation of the instrument in cases covered by Articles 1602 and 1604. Because Bacaron sufficiently established that the contract was an equitable mortgage, he was entitled to this remedy.

Practical Takeaways

• Labels do not control. A document titled "Deed of Absolute Sale" may be recharacterized as an equitable mortgage if the surrounding circumstances show the parties intended a loan secured by property.
• Watch for red flags. Grossly inadequate consideration, the vendor's continued possession, and the vendor's payment of realty taxes are all strong signs that a purported sale is actually a mortgage.
• Protect both sides. Lenders should document loans clearly as loans, with proper mortgage agreements, to avoid disputes over whether a sale was intended. Borrowers should insist on accurate documents that reflect the true nature of the transaction.
• Reformation is available. When a written contract does not reflect the parties' true intention due to mistake, fraud, or inequitable conduct, a court may order reformation of the instrument.
• Unregistered land is not exempt. Even for untitled or unregistered property, the rules on equitable mortgages apply fully.

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