In a significant ruling, the Supreme Court addressed the extent to which a mortgage on a condominium project can be nullified when executed without the prior written approval of the Housing and Land Use Regulatory Board (HLURB), as required under Presidential Decree (P.D.) No. 957. The court clarified that while such a mortgage is indeed invalid, the nullification applies only to the interest of the complaining buyer and does not automatically void the entire mortgage contract. This decision balances the protection of condominium buyers with the stability of real estate financing, setting a precedent for future disputes involving similar circumstances.

Aurora Milestone Tower: Can One Unit Owner Sink an Entire Mortgage?

The case stemmed from a dispute involving United Overseas Bank of the Philippines (United Overseas Bank), J.O.S. Managing Builders, Inc. (JOS Managing Builders), and EDUPLAN Philippines, Inc. (EDUPLAN). JOS Managing Builders, the developer of the Aurora Milestone Tower condominium project, mortgaged the property to United Overseas Bank without securing the necessary HLURB approval. Subsequently, EDUPLAN, a unit buyer who had fully paid for its unit, discovered the unapproved mortgage and filed a complaint seeking to nullify the mortgage and compel the issuance of its condominium title. The HLURB initially ruled in favor of EDUPLAN, declaring the entire mortgage void. This decision was later appealed to the Court of Appeals, which initially dismissed the petition due to the failure to exhaust administrative remedies.

The Supreme Court, however, took a different view, holding that the issue of whether non-compliance with the HLURB clearance requirement would result in the nullification of the entire mortgage contract or only a part of it is a purely legal question which will have to be decided ultimately by a regular court of law. The court emphasized that the doctrine of exhaustion of administrative remedies does not apply when the issue involved is purely legal, requiring interpretation and application of the law rather than technical expertise. This determination paved the way for the Court to address the substantive legal question at the heart of the dispute.

The central legal issue revolved around the interpretation and application of Section 18 of P.D. No. 957, which mandates prior HLURB approval for any mortgage on a subdivision lot or condominium unit. The court acknowledged the varying conclusions in jurisprudence regarding the extent of nullity in such cases. Some rulings, like Far East Bank & Trust Co. v. Marquez, had previously held that the mortgage is void only with respect to the portion of the property under mortgage that is the subject of the litigation. Other cases, such as Metropolitan Bank and Trust Co., Inc. v. SLGT Holdings, Inc., had nullified the entire mortgage contract based on the principle of indivisibility of mortgage under Article 2089 of the New Civil Code, which states:

Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors-in-interest of the debtor or of the creditor, x x x.

The Supreme Court, however, sided with the view espoused in Philippine National Bank v. Lim, reverting to the principle that a unit buyer has no standing to seek the complete nullification of the entire mortgage, as their actionable interest is limited to the unit they have purchased. The Court found this approach more in line with law and equity. While a mortgage may be nullified if it violates Section 18 of P.D. No. 957, such nullification only applies to the interest of the complaining buyer and cannot extend to the entire mortgage. This ruling recognizes that a buyer of a particular unit or lot lacks the standing to demand the nullification of the entire mortgage.

Building on this principle, the Court reasoned that since EDUPLAN had an actionable interest only over Unit E, 10th Floor, Aurora Milestone Tower, it lacked the standing to seek the complete nullification of the subject mortgage. The HLURB, therefore, erred in voiding the whole mortgage between JOS Managing Builders and United Overseas Bank. The Court, however, also affirmed EDUPLAN’s right to the transfer of ownership of its unit, as it had already paid the full purchase price. This right is enshrined in Section 25 of P.D. No. 957, which states:

Issuance of Title. The owner or development shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit, x x x.

Thus, JOS Managing Builders has the obligation to cause the delivery of the Title to the subject condominium unit in favor of EDUPALN. The Court clarified that the failure of JOS Managing Builders to secure prior approval of the mortgage from the HLURB and United Overseas Bank’s failure to inquire on the status of the property offered for mortgage placed the condominium developer and the creditor Bank in pari delicto. Hence, they cannot ask the courts for relief for such parties should be left where they are found for being equally at fault.

More importantly, the Court underscored that the prior approval requirement under P.D. No. 957 is intended to protect buyers of condominium units from fraudulent manipulations by unscrupulous sellers and operators, such as failing to deliver titles free from liens and encumbrances. This is in line with the protective intent of P.D. No. 957, safeguarding buyers from unjust practices by developers who may mortgage projects without their knowledge or the HLURB’s consent. Consequently, failure to secure the HLURB’s prior written approval does not annul the entire mortgage between the developer and the bank, as this would inadvertently extend protection to the defaulting developer. To rule otherwise would affect the stability of large-scale mortgages prevalent in the real estate industry.

From all the foregoing, the Court affirmed that HLURB erred when it declared the entire mortgage constituted by JOS Managing Builders, Inc. in favor of United Overseas Bank null and void based solely on the complaint of EDUPLAN which was only claiming ownership over a single condominium unit of Aurora Milestone Tower. Accordingly, the mortgage executed between JOS Managing Builders and United Overseas Bank is valid.

FAQs

What was the key issue in this case?	The key issue was whether the lack of HLURB approval for a condominium mortgage automatically nullifies the entire mortgage or only affects the rights of the complaining unit buyer. The Supreme Court clarified the scope of nullification in such cases.
What is Presidential Decree No. 957?	P.D. 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. It aims to prevent fraudulent practices and ensure the delivery of titles free from liens.
What does Section 18 of P.D. No. 957 require?	Section 18 of P.D. No. 957 requires that any mortgage on a subdivision lot or condominium unit must have the prior written approval of the Housing and Land Use Regulatory Board (HLURB). This requirement is intended to safeguard the interests of unit buyers.
What is the significance of HLURB approval for mortgages?	HLURB approval ensures that the proceeds of the mortgage loan will be used for the development of the condominium or subdivision project, and it provides a mechanism to protect the interests of unit buyers. It helps prevent developers from using mortgage loans for other purposes.
Who bears the burden of complying with Section 18 of P.D. 957?	The burden of complying with Section 18 of P.D. 957 primarily rests on the owner or developer of the subdivision or condominium project. They are responsible for obtaining the necessary HLURB approval before mortgaging any unit or lot.
What is the ‘in pari delicto’ principle?	The in pari delicto principle states that when two parties are equally at fault, the law will not provide a remedy to either party. The parties will be left in their current situation, without any legal recourse.
What happens if a developer mortgages a property without HLURB approval?	If a developer mortgages a property without HLURB approval, the mortgage is considered null and void, but only to the extent of protecting the rights of the complaining unit buyer. The entire mortgage is not automatically invalidated.
What rights does a condominium buyer have when a mortgage lacks HLURB approval?	A condominium buyer can seek the nullification of the mortgage as it affects their specific unit and compel the developer to issue a title free from the unauthorized lien. They can protect their individual investment.
Can a condominium buyer seek the nullification of the entire mortgage contract?	No, a condominium buyer typically lacks the standing to seek the nullification of the entire mortgage contract. Their actionable interest is limited to their individual unit.

In summary, the Supreme Court’s decision in United Overseas Bank of the Philippines, Inc. vs. The Board of Commissioners-HLURB, J.O.S. Managing Builders, Inc., and Eduplan Phils., Inc. clarifies the scope of mortgage nullification under P.D. No. 957, balancing the need to protect condominium buyers with the stability of real estate financing. This ruling provides valuable guidance for developers, lenders, and unit buyers alike, ensuring a more predictable and equitable legal framework for resolving disputes related to unapproved mortgages on condominium projects.

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: United Overseas Bank of the Philippines, Inc. vs. The Board of Commissioners-HLURB, G.R. No. 182133, June 23, 2015