Unregistered Land and Due Diligence: A Bank's Duty in Mortgage Contracts

The Supreme Court, in Municipal Rural Bank of Libmanan, Camarines Sur v. Virginia Ordoñez (G.R. No. 204663, September 27, 2017), reminded banks of their heightened responsibility when accepting unregistered property as collateral for a loan. The case underscores that a bank's failure to conduct thorough due diligence on the true ownership of such property can void the mortgage contract, even if the bank acted in good faith.

The Facts of the Case

Virginia Ordoñez inherited a 2,174-square-meter parcel of unregistered land in Libmanan, Camarines Sur. She and her predecessors-in-interest had possessed the land since time immemorial, declaring it for tax purposes as early as 1949.

In 1995, one Roberto Hermita mortgaged the same property to the Municipal Rural Bank of Libmanan. When Hermita defaulted, the bank foreclosed on the mortgage, acquired the property, and had it titled in its name.

Ordoñez filed an action for quieting of title, arguing that the mortgage was void because Hermita never owned the land. The Regional Trial Court ruled in favor of the bank, but the Court of Appeals reversed, declaring the mortgage null and void. The bank appealed to the Supreme Court.

The Legal Issue

The central question was whether the bank exercised the degree of diligence required of banking institutions before entering into a mortgage contract over unregistered land. The Court also examined whether Ordoñez had sufficiently proven her ownership and prior possession.

The Court's Ruling

The Supreme Court affirmed the Court of Appeals' decision, declaring the mortgage contract void and Ordoñez the rightful owner. The Court reasoned that:

1. Ordoñez proved prior possession. The testimony of a neighboring landowner established that Ordoñez's mother had a caretaker occupying the property since 1975. The Court noted that possession need not be physical occupation of every square inch; having a caretaker is a valid juridical act of possession. Furthermore, Ordoñez's family had paid realty taxes on the land since 1949, which is a strong indicator of ownership claims.

2. Hermita did not acquire ownership by prescription. For ordinary acquisitive prescription, possession must be in good faith and with just title. Hermita's possession was not in good faith, as Ordoñez's mother had approached him to claim ownership before the mortgage. Extraordinary prescription also failed because the bank presented no evidence that Hermita's father had possessed the land.

3. The bank failed its duty of due diligence. The Court emphasized that banks are expected to exercise the highest degree of diligence before entering into a mortgage contract. Ascertaining the status of a property offered as security must be a standard part of a bank's operations. In this case, the property was unregistered, which should have prompted even greater caution. A simple check with the local assessor's office would have revealed the existing tax declarations in Ordoñez's favor. The bank manager's claim of having done so was not supported by the evidence.

The Peril of Buying Unregistered Land

A crucial principle in this case is that good faith is not a defense when dealing with unregistered land. The Court quoted the rule: "One who purchases an unregistered land does so at his peril." A claim of having bought the land in good faith, without notice of another's claim, will not protect the buyer if the seller turns out not to be the true owner. This rule applies to banks just as it does to individuals.

Practical Takeaways

• For banks and lenders: The duty of due diligence is non-negotiable. When the collateral is unregistered, a bank must go beyond a simple title search. It should verify tax declarations, conduct an ocular inspection, and investigate the actual possession and claims of all parties.
• For property buyers and borrowers: Buying or accepting unregistered land involves significant risk. Always verify the seller's claim of ownership through tax records and actual possession history.
• For property owners: Tax declarations and continuous possession are valuable evidence of ownership, especially for untitled property. Keep these records updated.
• The role of good faith: In transactions involving unregistered land, good faith is not a shield against a defective title. The buyer assumes the risk that the seller may not be the true owner.

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