The Real Estate Mortgage Law

Real Estate Mortgage Law
(Act 3135, as amended by RA 4118)

a. Coverage

Governs sales made under a special power inserted in or attached to any real-estate mortgage, which is made as security for the payment of money or the fulfillment of any other obligation. The Act will govern the manner in which the sale and redemption shall be effected, whether or not provision for the same is made in the power. (Sec 1, Act 3135)

The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale and redemption of the property if and when the mortgagee is given a special power or express authority to do so in the deed itself or in a document annexed thereto.

b. Remedies available to mortgagee upon default of the mortgagor

            The mortgagee has a choice of one (1) of two (2) remedies, but he cannot have both. The mortgagee may (i) foreclose the mortgage or (ii) file an ordinary action to collect the debt, i.e. specific performance.

            When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a deficiency, the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of the real property at public auction and the outstanding obligation at the time of the foreclosure proceedings. (Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinas v. Concepcion Hijos, 53 Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101)

On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in the action to collect is favorable to him, and it becomes final and executory, he can enforce said judgment by execution. He can even levy execution on the same mortgaged property, but he will not have priority over the latter and there may be other creditors who have better lien on the properties of the mortgagor. Caltex Phils. vs. IAC, August 25, 1989

If mortgagor issues post-dated checks, resorting to a criminal action for violation of BP 22 also precludes the remedy of foreclosure and vice versa. Recovery of the amount due is deemed included in the action for violation of BP 22.

TIP: If the mortgage covers the total claim, then foreclose. If not, still foreclose for after all you can still collect the deficiency from the principal debtor (if mortgagor is a third person), not the mortgagor unless the latter bound himself solidarily liable with the borrower. Make it a last resort to file a criminal action because in reality it takes much longer to pursue BP 22.

c. Need for special power of attorney

            Under Section 1 of Act No. 3135, a special power of attorney must be inserted in or attached to any Real Estate Mortgage.

Without proof of petitioner's special authority to foreclose, the Clerk of Court as Ex-Oficio Sheriff is precluded from acting on the application for extrajudicial foreclosure. (Office of the Court Administrator v. Pardo, RTJ-08-2109, April 30, 2008; Casano v. Magat, 425 Phil. 356, 360-361 (2002); Paguyo v. Gatbunton, A.M. No. P-06-2135, May 25, 2007, 523 SCRA 156, 161).

d. Authority to foreclose extrajudicially

           

            A mortgage may be foreclosed extrajudicially where there is inserted in the contract a clause giving the mortgagee the power upon default of the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgaged property. The authority to sell is not extinguished by the death of the mortgagor (or mortgagee).

e. Procedure

(1) Where to file

All applications shall be filed with the Executive Judge through the Clerk of Court, who is also the Ex-Officio Sheriff. See Sec. 1, Circular No. 7-2002, Guidelines for the enforcement of Supreme Court Resolution of December 14, 1999 in A.M. no. 99-10-05-0 (re: Procedure in extra-judicial foreclosure of mortgage), as amended by the Resolutions dated January 30, 2001 and August 7, 2001.

(2) Where to sell

           

Province where the property is situated. (Sec. 2, R.A. 3135, as amended) Sale cannot be made legally outside of the province in which the property sold is situated.

If venue is subject to stipulation, such sale shall be made in said place (i.e., the place so stipulated) or in the municipal building of the municipality in which the property or part thereof is situated. (ibid.)

(3) Posting requirement

Notice of the sale is posted in at least three (3) public places of the municipality or city (Sheriff’s Office, Assessor’s Office and Register of Deeds) where the property is situated for not less than twenty (20) days and published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city (Sec. 3, ibid). Posting of notice on mortgaged property not required.

Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale. A substantial error or omission in a notice of sale will render the notice insufficient and vitiate the sale. (PNB v. Nepomuceno, 394 SCRA 405, 2002)

           

(4) Publication requirement

         (a) Sufficiency of newspaper publication

Notice shall also be published once a week for at least three (3) consecutive weeks in a newspaper of general circulation. The newspaper need not have the largest circulation so long as it is of general circulation. To be a newspaper of general circulation, it is enough that it is published for the dissemination of local news and general information; that it has a bona fide subscription list of paying subscribers; and that it is published at regular intervals.  The newspaper must not be devoted to the interests or entertainment of a particular class, profession, trade, calling, race or religious denomination. The newspaper need not have the largest circulation so long as it is of general circulation (Perez vs. Perez (2005)) in the municipality or city where the property is located. Metrobank v. Peñafiel, G.R. No. 173976 Feb. 27, 2009

(b) Need for republication in case of postponement

Republication is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is required in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure sale. The last paragraph of the prescribed notice of sale (under SC Circular 7-2002) allows the holding of a rescheduled auction sale without reposting or republication of the notice. In the event the public auction should not take place on the said date, it shall be held on ___________,______ without further notice.  However, the rescheduled auction sale will only be valid if the rescheduled date of auction is clearly specified in the prior notice of sale.  The absence of this information in the prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication. (DBP vs. Emerald Resorts Hotel)

(c) Personal notice to the mortgagor when and when not needed

General Rule: Personal notice to the mortgagor is not generally required. Exception: Unless required in the mortgage contract, the lack of personal notice to the mortgagor is not a ground to set aside a foreclosure sale.

            Unless otherwise stipulated by the parties to the mortgage contract, the debtor-mortgagor need not be personally served a copy of the notice of the extra- judicial foreclosure.  SC Circular 7-2002

f. Possession by purchaser of foreclosed property

Upon failure of the debtor to redeem the property within one (1) year after the date of the registration of the certificate of sale, winning bidder becomes the absolute owner.

g. Remedy of debtor if foreclosure is not proper

Within thirty (30) days after the purchaser is given possession of the property, the debtor may petition that the sale be set aside on the ground that the mortgage was not violated or the sale was not made in accordance with the provisions of Act 3135. (Sec. 8. This may be done in the proceedings in which possession was requested)

h. Redemption

            Right of Redemption is the right of the mortgagor to redeem the mortgage property within a certain period (1 year) after it was sold for the satisfaction of the mortgage debt.

Requisites for valid redemption:

     1. Redemption within 1 year from registration of sale;

   2. Payment of purchase price plus 1% interest per month thereon if any, paid by purchaser; and

     3. Written notice of redemption served on officer who made the sale.

(1) Who may redeem

a.    The debtor;

b.    The debtor's successors-in-interest;

c.    Any judicial creditor or judgment creditor of the debtor;

d.    Any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold (Redemption price to be paid by accommodation mortgagors).

(2) Amount of Redemption price

a.   Limited to the winning bid price plus twelve percent (12%) interest per annum.

b. Purchase price if judgment obligor. Sum paid on last redemption if redemptioner. (Rule 39, Sec. 28, Rules of Court). The redemptioner should make an actual tender in good faith of the full amount of the purchase price (Hi-Yield Realty vs. CA (2002)

(3) Period for redemption

Natural persons: Within 1 year from and after the date of the sale. Sec. 6

Juridical persons: Until but not after the registration of the certificate of foreclosure sale with the applicable Register of Deeds, which in no case shall be more than 3 months after foreclosure, whichever is earlier. (Sec. 47, R.A. 8791)

(4) Effect of pendency of action for annulment of sale

The filing of court action to enforce redemption has effect of preserving the redemptioner’s rights; and freezing the expiration of one year period to redeem. (Banco Filipino v Court of Appeals)

i. Writ of possession

(1) Ministerial duty of the court

The duty of the trial court to grant a writ of possession is ministerial. Such writ issues as a matter of course upon the filing of the proper motion and the approval of the corresponding bond. Any question regarding the regularity and validity of the sale is to be determined in a subsequent proceeding. (Sec. 8). Mandamus will lie.

The judge to whom an application for writ of possession is filed need not look into the validity of the mortgage or the manner of its foreclosure. In the issuance of a writ of possession, no discretion is left to the Trial Court. Any question regarding the cancellation of the writ in respect to the validity/regularity of the foreclosure sale or the mortgage should be determined in a subsequent proceeding (PNB v. Sanao).  Such question cannot be raised to oppose the issuance of the writ, since the proceeding is ex parte. (Samson vs Rivera, 2004)

After the consolidation of title in the buyer’s name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right

(2) Enforcement against third parties

            The purchaser or last redemption shall be entitled to possession of the property upon the finality of the order of confirmation or upon the expiration of the period of redemption, unless a third party is actually holding the same adversely to the judgment debtor.

(3) Pendency of action for annulment of sale

            The pendency of a separate civil suit questioning the validity of the sale of the mortgaged property cannot bar the issuance of the writ of possession. DBP vs Spouses Gatal (2005)

j. Annulment of sale (See g. Remedy of debtor if foreclosure is not proper, supra)

READ ALSO: Full Text of Act 3135 Real Estate Mortgage Law

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Act 3135