The Supreme Court affirmed that a mortgage executed on a property intended for condominium development requires prior approval from the Housing and Land Use Regulatory Board (HLURB), even if the mortgage was constituted before the condominium project’s official commencement. This ruling underscores the HLURB’s broad authority to protect condominium buyers and ensures that financial institutions like banks are held accountable for due diligence in real estate transactions. The decision balances the interests of financial institutions with the need to safeguard the rights of individual property buyers.

From Raw Land to Residences: When Does HLURB Approval Become a Mortgage Must-Have?

This case revolves around a dispute between Philippine Bank of Communications (PBComm) and several condominium unit buyers in a project developed by Pridisons Realty Corporation. Pridisons obtained a loan from PBComm, securing it with a real estate mortgage over the land before its conversion into a condominium project. When Pridisons defaulted on the loan, PBComm sought to foreclose the mortgage. However, the condominium unit buyers contested the foreclosure, arguing that the mortgage was invalid because PBComm did not obtain prior approval from the HLURB, as required under Presidential Decree (PD) No. 957, also known as The Subdivision and Condominium Buyers’ Protective Decree.

The central legal question is whether the HLURB’s approval is necessary for a mortgage executed on a property before its official conversion into a condominium project. PBComm argued that Section 18 of PD No. 957, which requires HLURB approval for mortgages, only applies to existing condominium projects, not raw land. They contended that since the mortgage was executed before the condominium project was registered with the HLURB, the approval requirement did not apply. The respondent buyers, however, maintained that the HLURB’s regulatory power is broad enough to include mortgages, even on raw land, especially if the mortgagee (PBComm) was aware of the developer’s intention to convert the property into a condominium.

The HLURB, the Office of the President (OP), and the Court of Appeals (CA) all sided with the condominium unit buyers, ruling that the mortgage was invalid due to the lack of HLURB approval. The Supreme Court (SC) agreed with the lower courts’ decisions. The Supreme Court emphasized the protective intent of PD No. 957, designed to shield vulnerable property buyers from unscrupulous developers and ensure fair practices in real estate transactions. The court acknowledged that while Section 4 of PD No. 957 typically applies to mortgages on raw lands intended for development and Section 18 applies to existing projects, the circumstances of this case warranted the application of Section 18.

The Supreme Court based its decision on the finding that PBComm had prior knowledge of Pridisons’ plan to develop the land into a condominium project. The court noted that banks typically require loan applicants to disclose the purpose of the loan and present supporting documents, such as project feasibility studies. The court inferred that PBComm, as a financial institution dealing with a realty company, was likely aware of the intended condominium development. This awareness, combined with the fact that PBComm released the certificate of title necessary for the issuance of the condominium certificates, led the Court to conclude that PBComm was attempting to circumvent the requirements of Section 18.

The court quoted Section 18 of PD No. 957, stating:

Section 18. Mortgages. No mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the Authority. Such approval shall not be granted unless it is shown that the proceeds of the mortgage loan shall be used for the development of the condominium or subdivision project and effective measures have been provided to ensure such utilization. The loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his option, pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage indebtedness secured by the particular lot or unit being paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full payment thereto.

The Supreme Court highlighted the significance of HLURB approval in protecting the interests of condominium buyers. The approval process ensures that the proceeds of the mortgage loan are used for the development of the project and that measures are in place to protect the buyers’ investments. By requiring HLURB approval, the law aims to prevent developers from mortgaging properties without ensuring the completion of the project, thereby safeguarding the rights of the buyers.

Furthermore, the Court addressed PBComm’s argument that the HLURB was aware of the existing mortgage and should have applied Section 4 of PD No. 957 instead. Section 4 requires the mortgagee to release the mortgage on a condominium unit once the buyer has paid the full purchase price. The Court dismissed this argument, emphasizing that PBComm’s failure to comply with Section 18 rendered the mortgage invalid from the outset. The HLURB’s alleged error in granting registration and license despite the lack of an affidavit of undertaking from PBComm did not validate the illegal mortgage. The Supreme Court reiterated its stance in similar cases, emphasizing that the law must favor the weak, especially when balancing small lot buyers and large financial institutions.

While the Supreme Court upheld the nullification of the mortgage, it clarified that the mortgage document could still serve as evidence of a contract of indebtedness. PBComm can still pursue a claim for the unpaid loan against Pridisons, subject to any claims and defenses that Pridisons may have against the bank. This aspect of the ruling ensures that PBComm is not left entirely without recourse, even though the mortgage itself was deemed invalid. The decision serves as a reminder to financial institutions to exercise due diligence and comply with all relevant regulations when financing real estate projects, particularly those involving condominium developments.

FAQs

What was the key issue in this case?	The key issue was whether a mortgage executed on land before its conversion into a condominium project requires prior approval from the HLURB under PD No. 957.
What is Presidential Decree No. 957?	PD No. 957, also known as “The Subdivision and Condominium Buyers’ Protective Decree,” is a law designed to protect individuals who purchase subdivision lots or condominium units from unscrupulous developers.
Why did the Court invalidate the mortgage in favor of PBComm?	The Court invalidated the mortgage because PBComm failed to obtain prior approval from the HLURB, as required under Section 18 of PD No. 957, given their awareness of the impending condominium project.
What is the significance of HLURB approval for mortgages?	HLURB approval ensures that the proceeds of the mortgage loan are used for the development of the project and that measures are in place to protect the buyers’ investments, preventing developers from defaulting on their obligations.
Does the ruling mean PBComm cannot recover the loan amount?	No, the ruling does not prevent PBComm from recovering the loan amount. The Court clarified that the mortgage document can still serve as evidence of a contract of indebtedness.
What is the difference between Section 4 and Section 18 of PD No. 957?	Section 4 applies to mortgages on raw lands intended for development, requiring a stipulation for the release of the mortgage upon full payment by the buyer, while Section 18 applies to existing condominium projects, mandating prior HLURB approval for any mortgage.
How does this ruling protect condominium buyers?	This ruling protects condominium buyers by ensuring that financial institutions comply with the requirements of PD No. 957, preventing developers from mortgaging properties without ensuring project completion and safeguarding buyers’ investments.
What should banks do to avoid similar situations?	Banks should exercise due diligence and comply with all relevant regulations when financing real estate projects, particularly those involving condominium developments, ensuring they obtain HLURB approval when required.

In conclusion, the Supreme Court’s decision reinforces the HLURB’s critical role in regulating real estate transactions and protecting the rights of condominium buyers. The ruling underscores the importance of due diligence and compliance with PD No. 957 for financial institutions involved in real estate financing. By prioritizing buyer protection, the decision contributes to a more transparent and equitable real estate market.

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: Philippine Bank of Communications v. Pridisons Realty Corporation, G.R. No. 155113, January 09, 2013