In a real estate dispute, the Supreme Court affirmed the rights of a mortgagee over subsequent buyers in contracts to sell, emphasizing the importance of registration and the due diligence required in property transactions. The Court ruled that a real estate mortgage, duly registered, takes precedence over contracts to sell executed after the mortgage’s registration. This decision underscores the principle that registration serves as constructive notice to the world, binding subsequent purchasers to prior encumbrances on the property. This means that individuals entering into agreements involving real estate must conduct thorough due diligence to uncover existing liens or mortgages, as these will take precedence over their later claims.

Navigating Real Estate Entanglements: When Mortgages Overshadow Subsequent Sales

The case before the Supreme Court, Fabio Cahayag and Conrado Rivera vs. Commercial Credit Corporation, involved a complex web of property transactions and competing claims. Dulos Realty, the original owner, mortgaged several properties to Commercial Credit Corporation (CCC). Subsequently, Dulos Realty entered into contracts to sell these properties to various individuals, including Cahayag, Rivera, Escalona, and Baldoza. When Dulos Realty defaulted on its loan, CCC foreclosed the mortgage, leading to a legal battle over who had the superior right to the properties.

The central issue revolved around whether the subsequent buyers, who entered into contracts to sell after the mortgage was registered, had a valid claim against CCC, the mortgagee. Petitioners, the buyers, argued that the mortgage did not cover the improvements on the land and that Dulos Realty was no longer the owner of the properties when the mortgage was executed. They also contended that CCC, as a financial institution, should have exercised greater due diligence and that the mortgage required prior approval from the Housing and Land Use Regulatory Board (HLURB).

The Supreme Court, however, sided with the mortgagee, CCC, and its successor-in-interest, Qua. The Court emphasized that the real estate mortgage explicitly included not only the land but also all the buildings and improvements thereon. This was determined by examining the language of the mortgage agreement itself.

[T]he MORTGAGOR has transferred and conveyed and, by these presents, do hereby transfer and convey by way of FIRST MORTGAGE unto the MORTGAGEE, its successors and assigns the real properties described in the list appearing at the back of this document and/or in a supplemental document attached hereto as Annex “A” and made and integral part hereof, together with all the buildings and/or other improvements now existing or which may hereafter be place[d] or constructed thereon.

The Court found no ambiguity in the mortgage agreement, thereby dismissing the petitioners’ argument that the agreement should be construed against the drafter. The Court underscored the significance of the mortgage’s registration date. Since the contracts to sell were executed after the mortgage’s registration, the buyers were bound by the mortgage. The registration served as constructive notice, meaning that the buyers were legally presumed to know about the mortgage when they entered into their respective contracts.

The legal principle of constructive notice is crucial in property law, establishing that registration of an encumbrance, such as a mortgage, effectively informs all subsequent parties of its existence and implications. The Court cited Articles 1312 and 2126 of the Civil Code to support this principle.

Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration laws.

Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.

The Court distinguished this case from Dela Merced v. GSIS, where an unregistered contract to sell preceded a registered mortgage. In Dela Merced, the mortgagee, GSIS, was deemed to have knowledge of the contract to sell, which was equivalent to registration. However, in the present case, the mortgage was registered first, making it binding on the subsequent buyers. Moreover, unlike Dela Merced, the buyers in this case did not fully pay the purchase price or execute a deed of absolute sale before the foreclosure.

The Supreme Court also addressed the argument that CCC, as a financial institution, should have exercised greater due diligence. While financial institutions are generally held to a higher standard of care, the Court found that the registration of the mortgage was sufficient notice to all parties. The buyers could have protected their interests by redeeming the property within the one-year redemption period, which they failed to do.

The Court further clarified the application of the principle of nemo dat quod non habet, which means that one cannot give what one does not have. While the Court of Appeals mistakenly applied this principle to the validity of the sale, the Supreme Court clarified that it applies to the consummation stage, not the perfection stage, of a contract of sale. In this case, Dulos Realty was no longer the owner of the property at the time of delivery to Baldoza; thus, there was no valid transfer of title. This distinction highlights the critical difference between a valid contract of sale and a valid transfer of ownership.

Finally, the Court dismissed the argument that the mortgage lacked prior HLURB approval. Because this argument was raised for the first time on appeal, it was deemed waived. Parties cannot change their theory of a case at the appellate stage, as it would deprive the opposing party of the opportunity to present evidence on the issue.

FAQs

What was the key issue in this case?	The primary issue was whether a registered real estate mortgage took precedence over subsequent contracts to sell involving the same properties. The Court had to determine who had the superior right to the properties.
What is the significance of registering a real estate mortgage?	Registration serves as constructive notice to the world, legally informing everyone about the mortgage. This binds subsequent purchasers to the terms of the mortgage, giving the mortgagee a prior claim on the property.
What is the ‘nemo dat quod non habet’ principle, and how does it apply to this case?	This principle means one cannot give what one does not have. The Supreme Court clarified that this applies at the consummation (delivery) stage of a sale, not the perfection stage.
Why did the Court reject the argument about the lack of HLURB approval?	The Court rejected this argument because it was raised for the first time on appeal. Parties cannot introduce new legal theories at the appellate stage that were not presented during the trial.
How does this case compare to Dela Merced v. GSIS?	In Dela Merced, an unregistered contract to sell preceded a registered mortgage, and the mortgagee had knowledge of the prior contract. Here, the mortgage was registered first, making it binding on subsequent buyers.
What is the redemption period in foreclosure cases, and why is it important?	The redemption period is the time allowed for a mortgagor to reclaim the property after foreclosure. Failing to redeem within this period results in the title being consolidated in the purchaser.
What does it mean to be an ‘innocent purchaser for value’?	An innocent purchaser for value buys property without notice of any other person’s right or interest, paying a fair price. However, this concept was not central to this case because the mortgagee’s title was valid.
What is a contract to sell, and how does it differ from a contract of sale?	A contract to sell stipulates that the seller will execute a deed of sale only after full payment of the purchase price. Unlike a contract of sale, it does not transfer ownership until the condition of full payment is met.

The Supreme Court’s decision in this case reinforces the importance of due diligence and the legal effect of registration in property transactions. It clarifies that a registered mortgage takes precedence over subsequent contracts to sell, protecting the rights of the mortgagee. This ruling serves as a reminder to potential buyers to thoroughly investigate the status of a property before entering into any agreements.

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: Fabio Cahayag and Conrado Rivera vs. Commercial Credit Corporation, G.R. No. 168078, January 13, 2016