This case clarifies the responsibilities of banks when providing loans to real estate developers, particularly concerning the rights of condominium unit buyers. The Supreme Court affirmed that banks must exercise a high degree of diligence before accepting properties as collateral, including verifying compliance with regulations like Presidential Decree No. 957, which requires prior approval for mortgages on condominium units. Failure to do so can render the mortgage null and void, especially concerning buyers who were not properly notified of the mortgage. This decision reinforces the protection of buyers’ rights and underscores the banking sector’s duty to conduct thorough due diligence in real estate transactions.

When Banking Collides with Condominium Rights: Who Bears the Burden of Due Diligence?

The case of Prudential Bank vs. Ronald Rapanot revolves around a condominium unit buyer’s right to their property versus a bank’s claim as a mortgagee. Ronald Rapanot purchased a unit in the Wack-Wack Twin Towers Condominium from Golden Dragon Real Estate Corporation. Unbeknownst to Rapanot, Golden Dragon had mortgaged the same unit to Prudential Bank (now Bank of the Philippine Islands) as collateral for a loan. When Golden Dragon failed to deliver the unit despite full payment, Rapanot filed a complaint, leading to a legal battle that reached the Supreme Court. The core legal question is whether the bank, as a mortgagee, acted with due diligence and can thus enforce its mortgage against Rapanot, the buyer.

The facts reveal that Rapanot made a reservation payment for Unit 2308-B2 on May 9, 1995. Subsequently, on September 13, 1995, Golden Dragon secured a loan from Prudential Bank and executed a Mortgage Agreement, which included Unit 2308-B2 as collateral. Rapanot later entered into a Contract to Sell on May 21, 1996, and completed his payments by April 23, 1997, receiving a Deed of Absolute Sale. Despite this, Golden Dragon failed to deliver the unit. The bank denied Golden Dragon’s request to substitute the collateral due to unpaid accounts. Rapanot, finding himself without his purchased unit, initiated legal action.

The Housing and Land Use Regulatory Board (HLURB) initially ruled in favor of Rapanot, declaring the mortgage null and void due to violations of Presidential Decree No. 957 (PD 957). This decree is crucial because it mandates that developers obtain prior written approval from the HLURB before mortgaging any condominium unit. It also requires developers to notify buyers of the mortgage. The HLURB found that Golden Dragon failed to comply with these requirements. The HLURB Board modified the Arbiter’s Decision, reducing some damages but affirming the core ruling. The Office of the President (OP) and later the Court of Appeals (CA) upheld the HLURB’s decision, leading Prudential Bank to seek recourse with the Supreme Court.

The Supreme Court emphasized the limited scope of review under Rule 45 of the Rules of Court, which generally confines appeals to questions of law. While exceptions exist, the Court found that none applied in this case. The Bank argued that it was denied due process before the HLURB and that it should be considered a mortgagee in good faith. However, the Court rejected these arguments, highlighting that the essence of due process is the opportunity to be heard, which the Bank had through its participation in preliminary hearings and submission of its Answer.

Regarding the due diligence, the Supreme Court stated that the Mortgage Agreement was null and void as against Rapanot. The Court cited Section 18 of PD 957, which explicitly requires prior written approval from the HLURB for any mortgage on a condominium unit. Further, the buyer must be notified before the release of the loan. According to the Supreme Court, acts executed against the provisions of mandatory or prohibitory laws are void, referencing Far East Bank & Trust Co. v. Marquez, where it was stated that,

“the mortgage over the lot is null and void insofar as private respondent is concerned.”

The Court elaborated on the bank’s duty to exercise a higher degree of diligence than private individuals, especially when dealing with real estate developers. This is because the banking business is impressed with public interest, according to Philippine National Bank v. Vila,

“the highest degree of diligence is expected, and high standards of integrity and performance are even required, of it.”

The Court found that the Bank failed to ascertain whether Golden Dragon had obtained the required HLURB approval and whether the units offered as collateral already had buyers.

Moreover, the Court noted that Rapanot had made his initial payment four months before the Mortgage Agreement, a fact the Bank could have easily verified. Thus, the Supreme Court concluded that the Bank’s failure to exercise the required diligence constituted negligence, negating its claim as a mortgagee in good faith. The Court affirmed the lower courts’ decisions, emphasizing the protection of buyers’ rights in real estate transactions and the banking sector’s responsibility to conduct thorough due diligence. This underscores the principle that banks cannot simply rely on clean titles but must actively investigate potential encumbrances and compliance with relevant laws.

FAQs

What was the key issue in this case?	The key issue was whether Prudential Bank (now BPI) could be considered a mortgagee in good faith and thus enforce its mortgage on a condominium unit against the buyer, Ronald Rapanot, who had fully paid for the unit.
What is Presidential Decree No. 957 (PD 957)?	PD 957, also known as the Subdivision and Condominium Buyers’ Protective Decree, aims to protect real estate buyers from fraudulent practices. It requires developers to secure HLURB approval before mortgaging properties and to notify buyers of the mortgage.
What does it mean to be a mortgagee in good faith?	A mortgagee in good faith is someone who, without knowledge of any defect in the title, accepts a mortgage on a property. However, banks are held to a higher standard and must exercise due diligence in verifying the property’s status.
Why was Prudential Bank not considered a mortgagee in good faith?	Prudential Bank failed to verify whether Golden Dragon had secured HLURB approval for the mortgage, as required by PD 957, and whether the property already had a buyer. This lack of diligence disqualified them from being considered a mortgagee in good faith.
What is the significance of HLURB approval in mortgaging condominium units?	HLURB approval ensures that the proceeds of the mortgage loan are used for the development of the condominium project and protects the interests of the buyers. Mortgaging without approval violates PD 957 and can render the mortgage void.
What is the bank’s responsibility when dealing with real estate developers?	Banks must exercise a higher degree of diligence than private individuals. They must verify the developer’s compliance with relevant laws, such as PD 957, and investigate the property’s status to protect the interests of potential buyers.
What was the outcome of the case?	The Supreme Court affirmed the lower courts’ decisions, ruling that the mortgage was null and void concerning Ronald Rapanot. Prudential Bank was ordered to cancel the mortgage and release the title to Rapanot.
What does this case mean for condominium buyers?	This case reinforces the protection of condominium buyers’ rights, ensuring that banks cannot simply rely on clean titles but must actively investigate potential encumbrances and compliance with relevant laws before granting loans to developers.

This case serves as a crucial reminder of the importance of due diligence in real estate transactions, particularly for banks and financial institutions. It highlights the need to go beyond surface-level checks and actively investigate compliance with regulations like PD 957 to protect the rights of property buyers. The ruling reinforces the principle that banks must exercise a higher standard of care, ensuring transparency and fairness in real estate dealings.

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: Prudential Bank vs. Rapanot, G.R. No. 191636, January 16, 2017