Protecting Subdivision Lot Buyers: The Need for HLURB Approval in Mortgage Agreements

A person who has paid for a subdivision lot or townhouse unit can still lose it if the developer mortgages the land to a bank without the required government approval. In Far East Bank & Trust Co. v. Marquez (G.R. No. 147964, January 20, 2004), the Supreme Court addressed this risk and clarified how far the protection of lot buyers extends.

What Happened in the Case

Arturo Marquez entered into a Contract to Sell with Transamerican Sales and Exposition (TSE) in March 1989 for a 52.5-square-meter lot in Quezon City, with a three-storey townhouse unit to be built on it.

Two months later, TSE borrowed P7,650,000 from Far East Bank & Trust Co. (FEBTC) and mortgaged the entire property covered by TCT No. 156254 — the same land that included Marquez's lot. TSE failed to pay, and the bank foreclosed on the mortgage and emerged as the highest bidder.

Marquez had already paid P600,000 when construction slowed. He later discovered that the foreclosure was the reason. He filed a complaint with the HLURB, asking that the mortgage be declared invalid because it violated Section 18 of Presidential Decree No. 957, which requires the prior written approval of the HLURB before any subdivision lot or condominium unit may be mortgaged.

The HLURB ruled in his favor, and its decision was affirmed by the HLURB Board of Commissioners, the Office of the President, and the Court of Appeals. The bank then elevated the case to the Supreme Court.

The Rule on Mortgages Under PD 957

Section 18 of PD 957 states that no mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the HLURB. Approval is granted only if the proceeds will be used for the project's development and if measures ensure that use. The buyer must also be notified of the loan value of the lot or unit before the loan is released.

The bank argued that Section 18 did not apply because the mortgaged property was one whole parcel, not a "subdivision lot." The Court rejected this. The lot had already been technically described and segregated in a Contract to Sell before the mortgage was signed. The absence of a separate title did not make it less of a subdivision lot. When the entire parcel was mortgaged, the buyer's lot was mortgaged too.

The bank also argued that Section 18 was merely directory, so violating it would not void the mortgage. The Court disagreed. Because the provision relates to matters of substance and affects substantial rights, it is mandatory. Under Article 5 of the Civil Code, acts executed against mandatory or prohibitory laws are void. The Court emphasized that PD 957 exists to protect innocent lot buyers from scheming developers.

Why the Bank Was Not an Innocent Mortgagee

The bank claimed it was a mortgagee in good faith because the title was clean. The Court held otherwise.

While a mortgagee generally need not look beyond a clean Torrens title, that rule has an exception: a mortgagee who has knowledge of a defect, or of facts that would prompt a prudent person to inquire further, is bound by what such inquiry would reveal.

The bank knew it was financing a townhouse project already under construction. It should have verified whether any part of the property was already covered by contracts with buyers. It should not have relied solely on the developer's representation that all government permits were in place. Having been negligent, the bank could not claim good faith and was deemed to have constructive knowledge of Marquez's rights.

What the Court Ruled

The Supreme Court partly granted the bank's petition. It affirmed the HLURB decision but limited its application to Marquez's 52.5-square-meter lot and townhouse unit.

The mortgage was declared void as against Marquez because it was executed without the required HLURB approval and without notifying him before the loan was released. The bank's status as the winning bidder at the foreclosure sale did not improve its position, since it already had constructive knowledge of the buyer's rights.

However, the Court found that the HLURB went too far when it ordered the cancellation of annotations covering the entire parcel of land. Marquez had an interest only in his own lot, so he had no standing to seek relief over the whole property.

Practical Takeaways

• Developers cannot mortgage subdivision lots or condominium units without prior written HLURB approval. A mortgage executed without it is void as against the affected buyer.
• Buyers must be notified of the loan value of their lot or unit before loan proceeds are released. This gives them the chance to protect their investment.
• Banks cannot rely on a clean title alone. When financing a project under construction, they must verify whether buyers already hold rights over portions of the property.
• A buyer's protection covers only the lot or unit purchased. A buyer has no standing to challenge transactions affecting the rest of the subdivision.
• Buyers who discover that their lot has been mortgaged or foreclosed should act promptly by raising the violation of PD 957 before the HLURB.

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