Mortgagor’s Right to Sell Prevails: Why Mortgage Consent Clauses are Void in the Philippines

TLDR: Philippine law protects a property owner’s right to sell their mortgaged property, even without the mortgagee’s consent. Mortgage clauses requiring consent for sale are legally void, although mortgagees may have a right of first refusal. This case clarifies these rights and obligations for both borrowers and lenders in real estate transactions.

G.R. No. 130722, December 09, 1999

INTRODUCTION

Imagine owning property, but feeling trapped because it’s mortgaged. Can you sell it if you need to? Many Filipinos face this dilemma, unsure if they need their lender’s permission to sell mortgaged real estate. This is not just a theoretical question; it impacts families needing to relocate, entrepreneurs seeking capital, and the dynamism of the Philippine property market. In the case of Sps. Litonjua vs. L & R Corporation, the Supreme Court tackled this very issue, clarifying the extent of a mortgagor’s right to sell and the limitations on mortgagee restrictions. At the heart of the case was a loan secured by property, a subsequent sale by the owners without lender consent, and a resulting legal battle over property rights and redemption. Did the owners have the right to sell? Was the sale valid? This landmark case provides critical answers.

LEGAL CONTEXT: ARTICLE 2130 AND THE FREEDOM TO ALIENATE

Philippine law strongly protects property owners’ rights, including the right to dispose of their assets. This principle is enshrined in Article 2130 of the Civil Code, which explicitly states: “A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.” This provision reflects a policy against unduly restricting property ownership and ensuring free commerce. A real estate mortgage, under Philippine law, is considered a mere encumbrance. It doesn’t transfer ownership to the lender but simply creates a lien on the property to secure a debt. The mortgagor (borrower) retains ownership and all its inherent rights, including the right to sell or dispose of the property.

Prior Supreme Court decisions have touched on related issues. In Philippine Industrial Co. v. El Hogar Filipino and Vallejo (1923), the Court upheld stipulations against *subsequent mortgages* but not outright sales. However, later cases like Tambunting v. Rehabilitation Finance Corporation (1989) directly addressed clauses restricting alienation, reinforcing Article 2130’s prohibition. The legal challenge arises when mortgage contracts include clauses that, while not outright prohibitions, effectively restrict the mortgagor’s ability to sell, such as requiring mortgagee consent. The question then becomes: do these consent clauses circumvent Article 2130, and are they therefore void?

CASE BREAKDOWN: LITONJUA VS. L & R CORPORATION – A STORY OF LOANS, SALES, AND REDEMPTION

The Litonjua spouses obtained loans from L & R Corporation, secured by a mortgage on their Quezon City properties. Crucially, the mortgage contract contained two provisions at the center of the dispute:

• Clause 8: The Litonjuas could not sell or encumber the property without L & R Corporation’s prior written consent.
• Clause 9: If the Litonjuas decided to sell, L & R Corporation had the right of first refusal.

Despite Clause 8, the Litonjuas sold the properties to Philippine White House Auto Supply, Inc. (PWHAS) without seeking L & R Corporation’s consent. When the Litonjuas defaulted on their loan, L & R Corporation foreclosed on the mortgage and purchased the properties at auction. Upon attempting to register the foreclosure, L & R Corporation discovered the prior sale to PWHAS.

This discovery ignited a legal battle that went through several stages:

1. L & R Corporation’s Action: L & R Corporation tried to cancel the annotation of sale to PWHAS, citing the consent clause in the mortgage.
2. Redemption Attempt: PWHAS, acting for the Litonjuas, attempted to redeem the property, but L & R Corporation refused to accept payment. Redemption was then made through the Sheriff.
3. Initial Lawsuit (CFI): The Litonjuas and PWHAS sued L & R Corporation to compel surrender of titles and quiet title. The trial court sided with L & R, deeming the sale and redemption void.
4. Court of Appeals (Initial Decision): The Court of Appeals initially reversed the trial court, upholding the sale and redemption.
5. Court of Appeals (Amended Decision): Upon reconsideration, the Court of Appeals reversed itself again, siding with L & R Corporation.
6. Supreme Court: The case reached the Supreme Court on appeal by the Litonjuas and PWHAS.

The Supreme Court ultimately sided with the Litonjuas and PWHAS. Justice Ynares-Santiago, writing for the Court, declared Clause 8 (the consent clause) void, stating:

“True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property.”

The Court clarified that while the consent clause was void, Clause 9 (right of first refusal) was valid. However, the sale to PWHAS, while valid despite lacking consent, was deemed rescissible because the Litonjuas failed to honor L & R Corporation’s right of first refusal. The Court ordered the rescission of the sale to PWHAS, but also required L & R Corporation to pay the Litonjuas the difference between the sale price to PWHAS and the redemption price, recognizing L & R’s opportunity to purchase the property at the same price offered to PWHAS.

PRACTICAL IMPLICATIONS: PROTECTING MORTGAGORS AND RECOGNIZING MORTGAGEE RIGHTS

This case provides crucial guidance for property owners and lenders in the Philippines:

• Mortgagor’s Right to Sell: Property owners have the inherent right to sell their mortgaged property. Mortgage contracts cannot validly prohibit this, and consent clauses requiring lender approval for sale are legally void.
• Validity of Right of First Refusal: Mortgagees can include clauses granting them a right of first refusal. This means mortgagors must first offer the property to the mortgagee before selling to others, on the same terms.
• Consequences of Ignoring Right of First Refusal: Selling to a third party without honoring the mortgagee’s right of first refusal makes the sale rescissible, meaning it can be undone, as seen in this case.
• Redemption Rights of Buyers: A buyer of mortgaged property steps into the shoes of the mortgagor and has the right to redeem the property after foreclosure.

KEY LESSONS

• Review Mortgage Contracts Carefully: Mortgagors should be aware that clauses requiring mortgagee consent to sell are unenforceable. However, understand and respect any right of first refusal granted to the mortgagee.
• Mortgagees Should Use Right of First Refusal: Instead of relying on void consent clauses, mortgagees interested in acquiring the property should focus on enforcing their right of first refusal if included in the mortgage agreement.
• Due Diligence for Buyers: Buyers of mortgaged property should check the mortgage terms and be aware of any rights of first refusal. Ensure proper notification is given to the mortgagee if a right of first refusal exists.
• Seek Legal Advice: Real estate transactions involving mortgages can be complex. Consulting with a lawyer is crucial to understand your rights and obligations and ensure transactions are legally sound.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q1: Can my mortgage contract stop me from selling my property?

A: No. Under Philippine law, specifically Article 2130 of the Civil Code and as clarified in Litonjua vs. L & R Corporation, any stipulation that completely forbids you from selling your mortgaged property is void.

Q2: Is a clause requiring the mortgagee’s consent to sell valid?

A: No. The Supreme Court in Litonjua vs. L & R Corporation explicitly ruled that clauses requiring the mortgagee’s consent before a mortgagor can sell are also void as they effectively circumvent the law.

Q3: What is a right of first refusal in a mortgage contract?

A: A right of first refusal means that if you decide to sell your mortgaged property, you must first offer it to the mortgagee on the same terms you are willing to sell it to others. The mortgagee then has the first option to buy it.

Q4: What happens if I sell my mortgaged property without offering it to the mortgagee first, even if there’s a right of first refusal clause?

A: The sale is still valid, but it becomes rescissible. This means the mortgagee can legally challenge the sale and potentially have it undone through court action to enforce their right of first refusal.

Q5: Can the buyer of a mortgaged property redeem it after foreclosure?

A: Yes. As established in Litonjua vs. L & R Corporation and under Act 3135 (the law governing extrajudicial foreclosure), the buyer of a mortgaged property is considered a successor-in-interest and has the right to redeem the property within the legal redemption period.

Q6: If the sale is rescinded due to violation of the right of first refusal, what happens to the parties?

A: In Litonjua vs. L & R Corporation, the Supreme Court ordered the rescission of the sale. The seller (Litonjua spouses) had to return the purchase price to the buyer (PWHAS). The mortgagee (L & R Corporation) retained the property but had to pay the original owners (Litonjua spouses) the difference between the sale price and the redemption price, effectively allowing them to purchase the property at the price it was sold for.

Q7: Is it always necessary to go to court to enforce a right of first refusal?

A: Not always. Ideally, parties can negotiate and resolve the issue. However, if the mortgagor proceeds with a sale without respecting the right of first refusal, court action for rescission and damages may be necessary to protect the mortgagee’s rights.

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