Unauthorized Real Estate Mortgage: Strict Interpretation of Special Power of Attorney

In Mercado v. Allied Banking Corporation (G.R. No. 171460, July 27, 2007), the Supreme Court ruled on a dispute over a real estate mortgage constituted by a husband using a special power of attorney (SPA) from his wife. The Court held that when an SPA does not clearly identify the property being mortgaged, the mortgage is unenforceable — even if the mortgagee is a bank that claims good faith. The case is a reminder that powers of attorney are strictly construed, and that banks must exercise a higher degree of diligence when dealing with property that does not belong to the borrower.

The Facts

Perla N. Mercado owned several parcels of real property. On May 28, 1992, she executed an SPA in favor of her husband, Julian D. Mercado, authorizing him to sell, alienate, mortgage, lease, and deal with specific properties. The SPA enumerated the properties by title number, area, and registry of deeds.

Among the listed properties was one covered by TCT No. RT-106338, described as an 805-square-meter parcel in Susana Heights, Muntinlupa, registered with the Registry of Deeds of Pasig (now Makati).

On December 12, 1996, Julian obtained a loan of P3,000,000 from Allied Banking Corporation, secured by a real estate mortgage over a property covered by TCT No. RT-18206 (106338), registered with the Registry of Deeds of Quezon City. He obtained an additional loan of P5,000,000 on February 5, 1997, using the same property as security.

Julian defaulted. The bank foreclosed and bought the property at auction. Perla's heirs sued, arguing that the mortgage was void because the SPA did not cover the Quezon City property. They also pointed out that Perla had revoked the SPA on March 10, 1993, and had notified the Registry of Deeds of Quezon City of the revocation in a letter dated January 23, 1996.

The Issue

The central question was whether Julian had authority under the SPA to mortgage the subject property — a property covered by a different title number and registered with a different registry of deeds than the one described in the SPA.

The Ruling

The Supreme Court ruled in favor of the heirs. The mortgage was unenforceable.

A power of attorney is strictly construed. The Court cited the rule that a power of attorney grants only the powers specified in the instrument. An agent may not go beyond or deviate from the authority given. Where powers are specified and defined, all other powers are excluded. The Court quoted the civilist Manresa: the law cannot permit a person to express himself vaguely when conferring authority to alienate or hypothecate property, because such excessive authority could ruin him. It must be set down in the most formal and explicit terms.

The subject property was not identified in the SPA. The SPA referred to TCT No. RT-106338 registered with the Registry of Deeds of Pasig (now Makati). The mortgaged property was covered by TCT No. RT-18206 (106338) registered with the Registry of Deeds of Quezon City. The Court found no evidence that the two titles covered the same property. The bank presented no certification from either Registry of Deeds and did not submit copies of the titles for comparison. The bare assertion that the properties were one and the same carried no evidentiary weight.

The bank was not a mortgagee in good faith. The Court applied the rule that a mortgagee cannot close its eyes to facts that should put a reasonable person on guard. The difference in title numbers and registries was a patent defect apparent on the face of the documents. The Court emphasized that a bank, unlike a private individual, is expected to exercise greater care and prudence in its dealings. A banking institution must ascertain the status of property offered as security as a standard part of its operations. Here, the bank failed to investigate the discrepancy and even overlooked the letter of revocation on file with the Registry of Deeds.

The revocation of the SPA was effective. Perla revoked the SPA by public instrument on March 10, 1993, and notified the Registry of Deeds of Quezon City in a letter dated January 23, 1996, received on February 7, 1996. This notice worked as constructive notice to third parties. The non-annotation of the revocation on the title did not matter because actual notice is superior to constructive notice.

The mortgage was unenforceable, not void. Under Article 1403(1) of the Civil Code, a contract entered into without or in excess of authority is unenforceable. It cannot be enforced by a proper action in court unless ratified. Without Perla's ratification, the mortgage could not be enforced against her or her heirs. However, the bank could still proceed against Julian in his personal capacity for the loan amounts.

Practical Takeaways

• An SPA must be precise. When an SPA authorizes a mortgage, it must identify the property clearly — by title number, area, and registry of deeds. Vague or general descriptions will be construed strictly against the agent's authority.
• Banks must verify authority. A bank that lends against property owned by a third person must examine not only the title but also the scope of the agent's authority. A higher degree of diligence is required of banks than of ordinary individuals.
• Discrepancies on the face of documents are red flags. A difference in title numbers or registries of deeds should prompt further inquiry. Ignoring such discrepancies defeats a claim of good faith.
• Revocation need not be annotated to bind third parties. If the principal notifies the Registry of Deeds of a revocation, that notice is constructive notice to all persons dealing with the property.
• An unauthorized mortgage is unenforceable, not automatically void. It may be ratified by the principal. Without ratification, it cannot be enforced against the principal, but the agent may still be personally liable.

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