The Supreme Court, in Heirs of Jose Reyes, Jr. vs. Amanda S. Reyes, ruled that a contract of sale with right to repurchase (pacto de retro sale) was in fact an equitable mortgage, protecting the rights of the original owners. This decision underscores the Court’s commitment to preventing lenders from circumventing usury laws and ensures fair treatment for borrowers in real estate transactions. It reinforces the principle that the true intent of the parties, rather than the form of the contract, dictates the nature of the agreement.

Hidden Mortgages: Unveiling the True Intent Behind a Family Land Deal

At the heart of this case lies a parcel of land in Bulacan, originally owned by Antonio Reyes and his wife Leoncia Mag-isa Reyes. The couple had four children: Jose Reyes, Sr., Teofilo Reyes, Jose Reyes, Jr., and Potenciana Reyes-Valenzuela. After Antonio’s death, Leoncia and her three sons entered into a Kasulatan ng Biling Mabibiling Muli (Deed of Sale with Right to Repurchase) with the Spouses Benedicto Francia and Monica Ajoco for P500.00. The vendors retained the right to repurchase the property sa oras na sila’y makinabang (at the time they benefit). Potenciana’s heirs were not included in this agreement. The central legal question is whether this transaction was a true sale with right to repurchase, or an equitable mortgage intended to secure a loan.

Despite the deed, Leoncia and her sons continued to possess the property and pay the real estate taxes. The Spouses Francia eventually passed away, and Alejandro Reyes, the son of Jose, Sr., paid off the debt to the Francia heirs. Subsequently, the heirs executed a Pagsasa-ayos ng Pag-aari at Pagsasalin (Settlement of Estate and Assignment) transferring their rights to Alejandro for P500.00. Alejandro then executed a Kasulatan ng Pagmeme-ari (Deed of Ownership), declaring himself the owner. However, a Magkakalakip na Salaysay (Joint Affidavit) was later created, acknowledging Leoncia, Jose, Jr., and Jose, Sr.’s right to repurchase the property at any time for P500.00. Leoncia later died intestate. The heirs of Jose Reyes, Jr., challenged the ownership asserted by the heirs of Alejandro Reyes, leading to a legal battle over the nature of the original transaction.

The Regional Trial Court (RTC) initially ruled in favor of Alejandro’s heirs, confirming the consolidation of ownership. However, the Court of Appeals (CA) reversed this decision, finding the transaction to be an equitable mortgage but ultimately ruling against the petitioners due to their failure to file an action for reformation of the deed within ten years. The Supreme Court, however, disagreed with the CA’s conclusion regarding the prescriptive period and sided with the heirs of Jose Reyes, Jr.

The Supreme Court’s analysis hinged on the true intent of the parties involved in the Kasulatan ng Biling Mabibiling Muli. Article 1602 of the Civil Code provides critical guidance here. This article states that a contract shall be presumed to be an equitable mortgage in several circumstances, including when the vendor remains in possession of the property or binds himself to pay the taxes on the thing sold. The Court emphasized that the presence of even one of these conditions is sufficient to raise the presumption of an equitable mortgage. In this case, Leoncia and her sons remained in possession and continued paying the taxes, clearly indicating that the transaction was not an absolute sale.

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:
(2) When the vendor remains in possession as lessee or otherwise;
(5) When the vendor binds himself to pay the taxes on the thing sold;

The acceptance of payments by the Spouses Francia’s heirs after the supposed period of redemption had expired further solidified the Court’s conclusion. This act of accepting payments was inconsistent with the idea of an irrevocable transfer of ownership. The Court referenced Cuyugan v. Santos, where similar conduct demonstrated that the parties intended a mortgage rather than a sale with right to repurchase.

Furthermore, the Court addressed the issue of prescription. While the general rule dictates that actions upon a written contract prescribe after ten years, the specific circumstances of this case warranted a different approach. The Court noted that both parties had failed to enforce their rights within the ten-year prescriptive period. The heirs of the Spouses Francia did not foreclose the mortgage, and instead, they accepted payments from Alejandro, effectively estopping them from claiming that the period to redeem had expired. Estoppel, in this context, prevents a party from asserting a right that is inconsistent with their previous conduct.

The Court also clarified Alejandro’s role in the transaction. By redeeming the property, Alejandro did not become a co-owner. Instead, he became the assignee of the mortgage, acquiring only the rights of his assignors. Alejandro himself acknowledged the co-owners’ right to redeem the property at any time for P500.00 in the Magkasanib na Salaysay. This acknowledgment further undermined the claim that Alejandro had consolidated ownership of the property.

The Supreme Court found the Kasulatan ng Pagmeme-ari, executed by Alejandro, to be ineffectual. As an assignee of the mortgage, Alejandro could not appropriate the mortgaged property for himself without violating the prohibition against pactum commissorium, which is prohibited by Article 2088 of the Civil Code. This article prevents a creditor from appropriating the things given by way of pledge or mortgage, and any stipulation to the contrary is null and void.

Article 2088: The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them[;] [a]ny stipulation to the contrary is null and void.

The Court emphasized the significance of the Magkasanib na Salaysay, in which Alejandro acknowledged the co-owners’ right to redeem the property. Even after the original period had lapsed, this acknowledgment effectively granted a fresh period for redemption. Article 1602(3) of the Civil Code supports this view, stating that when another instrument extending the period of redemption is executed after the expiration of the right to repurchase, the contract shall be presumed to be an equitable mortgage.

The respondents argued that Alejandro had acquired ownership of the property through prescription, based on his open, continuous, exclusive, and notorious possession. The Court rejected this argument, noting that for a co-owner’s possession to be deemed adverse, there must be unequivocal acts of repudiation of the co-ownership, made known to the other co-owners, with clear and conclusive evidence. In this case, the other co-owners continued to possess the property, and Alejandro’s actions, such as paying taxes and declaring the property in his name, did not constitute sufficient repudiation.

In light of these considerations, the Supreme Court reversed the decision of the Court of Appeals, declaring the Kasulatan ng Biling Mabibili Muli to be an equitable mortgage. The Court nullified the Kasulatan ng Pagmeme-ari executed by Alejandro and dismissed the petitioners’ counterclaim. The respondents, as heirs of Alejandro, were left with the option to demand partition of the co-owned property, seek reimbursement for the amount advanced by Alejandro, or foreclose the equitable mortgage through the appropriate legal actions.

FAQs

What was the key issue in this case?	The key issue was whether the Kasulatan ng Biling Mabibiling Muli was a true sale with right to repurchase (pacto de retro sale) or an equitable mortgage. The Court examined the intent of the parties and the surrounding circumstances to determine the true nature of the transaction.
What is an equitable mortgage?	An equitable mortgage is a transaction that, while appearing as a sale with right to repurchase, is actually intended to secure a loan. Courts often look beyond the form of the contract to determine the true intent of the parties, protecting borrowers from unfair lending practices.
What factors indicate an equitable mortgage?	Several factors can indicate an equitable mortgage, including the vendor remaining in possession of the property, the vendor paying taxes on the property, and the price being inadequate. These factors suggest that the transaction was intended as a security for a loan rather than an absolute sale.
What is pactum commissorium?	Pactum commissorium is a stipulation that allows the creditor to automatically appropriate the thing given by way of pledge or mortgage if the debtor fails to pay the principal obligation. This is prohibited under Article 2088 of the Civil Code to protect debtors from unfair practices.
What is the significance of the Magkasanib na Salaysay?	The Magkasanib na Salaysay (Joint Affidavit), in which Alejandro acknowledged the co-owners’ right to redeem the property, was significant because it effectively extended the redemption period. The Court held that this acknowledgment demonstrated the parties’ continued understanding that the transaction was an equitable mortgage.
Did Alejandro acquire ownership through prescription?	No, the Court held that Alejandro did not acquire ownership through prescription. For a co-owner to acquire ownership through prescription, there must be unequivocal acts of repudiation of the co-ownership, which were not sufficiently proven in this case.
What are the implications for the heirs of Alejandro?	The heirs of Alejandro, as respondents, were given the option to demand partition of the co-owned property, seek reimbursement for the amount advanced by Alejandro, or foreclose the equitable mortgage through the appropriate legal actions.
What is the key takeaway from this case?	The key takeaway is that courts will look beyond the form of a contract to determine its true nature. In cases of doubt, contracts purporting to be sales with right to repurchase may be construed as equitable mortgages to protect the rights of borrowers.

This case underscores the importance of carefully examining real estate transactions to ensure fairness and prevent the circumvention of legal protections. The Supreme Court’s decision serves as a reminder that the substance of an agreement, rather than its mere form, will ultimately determine the rights and obligations of the parties involved.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: HEIRS OF JOSE REYES, JR. VS. AMANDA S. REYES, G.R. No. 158377, August 13, 2010