Topic 8: real

estate mortgage
and chattel
mortgage
real estate
mortgage
concept
Q: What is real estate mortgage (REM)?
A: It is a contract whereby the debtor secures to the creditor the
fulfillment of the principal obligation, specially subjecting to such
security immovable property or real rights over immovable property in
case the principal obligation is not fulfilled at the time stipulated

Note: Registration is necessary to bind third persons but not for the
validity of the contract.

Being an accessory contract, its consideration is one and the same as

that of the principal obligation.
 ESSENTIAL REQUISITES

• It covers only immovable property and

alienable real rights imposed upon immovables
• It must appear in a public instrument
• Registration in the registry of property is
necessary to bind 3rd persons
Kinds of Real estate Mortgage
1. Conventional mortgages – constituted
voluntarily by the contracting parties.
2. Legal mortgage – required by law.
3. Equitable mortgage – intention of the
parties is to make the immovable as a
security for the performance of the
obligation but the formalities of a real
mortgage are not complied with.
IMPORTANT FEATURES
• Accessory – cannot exist without a principal obligation
• Indivisible – creates a lien on the whole or all of the
properties mortgaged
• Inseparable – it subjects the property upon which it is
imposed whoever the possessor may be, to the fulfillment
of the obligation for whose security it was constitued
• Real right – it creates a lien of the property mortgaged
whereby mortgagee has a right to have the mortgaged
properly sold to satisfy his claim
• Real property – it is a real right over the property
Q: Is registration of mortgage a matter of right?

A: Yes. By executing the mortgage, the mortgagor is

understood to have given his consent to its registration, and
he cannot be permitted to revoke it unilaterally.

Q: What is the meaning of mortgage as a real and

inseparable right?

A: 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 (Art. 2126, NCC).
What are the things that are deemed included
in the mortgage?
1. Natural accessions
2. Improvements
3. Growing fruits
4. Rents
5. Income
6. Insurance proceeds
7. Expropriation price (Art. 2127, NCC)

Q: When does the mortgage lien attach in case of new or future

improvements?
A: On the date of the registration of the mortgage (Luzon Lumber and
Hardware Co., Inc, v. Quiambao, G.R. No. L-5638, Mar. 20, 1954).
Q: What is dragnet clause?

A: It is a mortgage provision which is

specifically phrased to subsume all debts of
past or future origin. Such clauses are “carefully
scrutinized and strictly construed”. The
mortgage contract is also one of adhesion
(Philippine Bank of Communications v. CA, G.R.
No. 118552, Feb. 5, 1996).
Q: Is the amount stated in the contract
controlling in case of mortgage securing
future advancements?

A: No. The amount named in the contract

does not limit the amount for which the
mortgage stand as a security, if, from the four
corners of the instrument the intent to secure
future and other indebtedness can be
gathered.
Q: May the creditor claim from the third person in possession of the property
payment of the credit?

A: Yes, up to the extent secured by the property which the third party possesses,
in terms and with the formalities which the law establishes (Art. 2129, NCC).
• MEANING up to the value of property mortgaged
• Not liable to any deficiency except when he expressly assumed liability for the
principal obligation
Q: Is a stipulation forbidding the owner from alienating the immovable
mortgaged valid?

A: No. The prohibition to alienate is contrary to public good inasmuch as the

transmission of property should not be unduly impeded (Report, Code
Commission, p. 58).
Second mortgage is even allowed
Immovable properties
Art. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are attached to the land or form
an integral part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that it
cannot be separated therefrom without breaking the material or deterioration of
the object;
(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in
buildings or on lands by the owner of the immovable in such a manner that it
reveals the intention to attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by the owner of
the tenement for an industry or works which may be carried on in a building or on
a piece of land, and which tend directly to meet the needs of the said industry or
works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding
places of similar nature, in case their owner has placed them or
preserves them with the intention to have them permanently attached
to the land, and forming a permanent part of it; the animals in these
places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms part
of the bed, and waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their
nature and object to remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over
immovable property. (334a)
 FORECLOSURE
Q: What is foreclosure?

A: It is a remedy available to the mortgagee in which he

subjects the mortgaged property to the satisfaction of the
obligation.

GROUNDS:
• When the principal obligation is not paid when due
• When there is any violation of any condition, stipulation
or warranty by mortgagor
Q: What are the kinds of foreclosure? A:
Judicial – governed by Rule 68, Rules of
Court
Extrajudicial – mortgagee is given a SPA to
sell the mortgaged property (Act No.
3135)
 Judicial Foreclosure
Judicial – foreclosure made through filing a petition in court
1. If defendant fails to pay, property shall be sold
2. Proceeds of the sale shall be distributed as follows:
• Costs of sale
• Claim of the person foreclosing the mortgage
• Claims of junior encumbrance in order of priority
• Balance after all the above are paid to the mortgagor or his
agent
3. Deficiency judgment - judgment ordered by court against
debtor for judgment
Q: When is judicial foreclosure considered completed?

A: A foreclosure sale is not complete until it is confirmed and before such

confirmation, the court retains control of the proceedings by exercising
sound discretion in regard to it either granting or withholding confirmation
as the rights and interests of the parties and the ends of justice may require
(Rural Bank of Oroquieta v. CA, No. 53466, Nov. 10, 1980).

Q: What is the significance of confirmation in judicial foreclosure?

A: Confirmation cuts off all the rights and interests of the mortgagor and of
the mortgagee and persons holding under him, and with them the equity of
redemption in the property and vests them in the purchaser. Confirmation
retroacts to the date of the sale. It is a final order, not interlocutory (Ocampo
v. Domalanta, No. L- 21011, Aug. 30, 1967).
Q: What are the effects of confirmation of sale?

A: There can be no redemption of the property.

Such confirmation retroacts to the date of the
auction sale. After the confirmation, the previous
owners lose any right they may have had over
the property, which rights in turn vested on the
Purchaser of the property (Lonzame v. Amores,
No. L-53620, Jan. 31, 1985).
Q: What is the basis of extrajudicial foreclosure?

A: An extrajudicial foreclosure may only be

effected if in the mortgage contract covering a real
estate, a clause is incorporated therein giving the
mortgagee the power, upon default of the debtor,
to foreclose the mortgage by an extrajudicial sale
of the mortgage property (Sec. 1, Act No. 3135, as
amended by Act No. 4148).
Extra judicial foreclosure
• Stipulation in the mortgage that the
mortgage may be foreclosed extra judicially
• Or such extra judicial foreclosure sale is
made under a special power of attorney
inserted in the contract
Q: What are the options or remedies of the mortgagee in case of
death of the debtor?

A:
• To waive the mortgage and claim the entire debt from the estate
of the mortgagor as an ordinary claim;
• To foreclose the mortgage judicially and prove any deficiency as
an ordinary claim; or
• To rely on the mortgage exclusively, foreclosing the same at any
time before it is barred by prescription, without right to file
claim for any deficiency
Q: How is extrajudicial foreclosure initiated?

A: By filing a petition with the office of the sheriff. It

may also be initiated through a Notary Public
commissioned in the place where the property is
situated.

Note: Notice containing the place and date is required

before an auction sale is made in extrajudicial
foreclosure. (Sec. 3, Act No. 3135)
Q: Can the mortgagee recover the deficiency?

A: If there be a balance due to the mortgagee

after applying the proceeds of the sale, the
mortgagee is entitled to recover the deficiency
(DBP v. Mirang, G.R. No. L-29130, Aug. 8, 1975).

Note: In judicial foreclosure, the Rules of Court

specifically gives the mortgagee the right to claim
for deficiency in case a deficiency exists (Sec. 6,
Rule 70).
REDEMPTION

Q: What is redemption?

A: Transaction by which the mortgagor reacquires or buys back the

property which may have passed under the mortgage or divests the
property of the lien which the mortgage may have created.
Q: What are the kinds of redemption? A:
Equity of redemption – right of mortgagor to redeem the mortgaged
property after his default in the performance of the conditions of the
mortgage but before the sale of the mortgaged property or
confirmation of sale. It applies in case of judicial foreclosure.
Right of redemption – right of the mortgagor to redeem the
mortgaged property within one year from the date of registration of
the certificate of sale. It applies in case of extrajudicial foreclosure.
CHATTEL
mortgage
 Q: What is chattel mortgage?

• A: It is a contract by virtue of which personal

property is recorded in the Chattel Mortgage
Register as a security for the performance of
an obligation.
Q: What are the characteristics of chattel mortgage?
A:
• It is a formal contract because it must be embodied in a public
instrument and recorded in the Chattel Mortgage Register;
• It is an accessory contract because its existence depends upon an
existing valid principal obligation;
• It is a unilateral contract because the obligation is only on the
part of the creditor to free the chattel from encumbrance upon
the payment of the principal obligation
• It does not convey dominion but is only a security (In re: Du Tec
Chuan, No. 11156, March 28, 1916);
• It creates a real right or a lien which is being recorded and follows
the chattel wherever it goes (Northern Motors, Inc. v. Coquia, No.
L-40018, Dec. 15, 1975).
Q: What are the requisites in a chattel
mortgage?
1. GR: It covers only movable property
XPN: When the parties treat as personalty that which is according to its
nature realty.
2. Registration with the Chattel Mortgage Register.
3. Description of the property.
4. Accompanied by an affidavit of good faith to bind 3rd persons.

Note: The absence of an affidavit of good faith does not affect the validity of
the contract.
Q: What may be the subject matter of chattel mortgage?
A:
• Movables susceptible to appropriation
• Shares of stock in a corporation;
• Interest in business;
• Machinery and house of mixed materials treated by parties as personal
property and no innocent third person will be prejudiced thereby (Makati
Leasing and Finance Corp. v. Weaver Textile Mills, Inc., No. L-58469, May, 16,
1983);
• Vessels, the mortgage of which have been recorded with the Philippine Coast
Guard in order to be effective as to third persons;
• Motor vehicles, the mortgage of which had been registered both with the
Land Transportation Commission and the Chattel Mortgage Registry in order
to affect third persons;
• House which is intended to be demolished; or
• Growing crops and large cattle (pars. 2 and 3, Sec. 7, Act No. 1508).
Q: What is affidavit of good faith?

A: It is an oath in a contract of chattel mortgage

wherein the parties “severally swear that the
mortgage is made for the purpose of securing the
obligation specified in the conditions thereof and for
no other purposes and that the same is a just and
valid obligation and one not entered into for the
purpose of fraud.”

Note: The absence of the affidavit vitiates the

mortgage only as against third persons without
notice like creditors and subsequent encumbrances.
Q: What is the legal significance of registration?
A: It is tantamount to the symbolic delivery of the mortgage to the
mortgagee, which is equivalent to actual delivery (Meyers v. Thein, No.
5577, Feb. 21, 1910).

Q: What is the difference in registration of real mortgage and chattel

mortgage?
A: A deed of real estate mortgage is considered registered once recorded
in the entry book. However, chattel mortgage must be registered not only
in the entry book but also in the Chattel Mortgage Register. (Associated
Insurance and Surety Co. v. Lim Ang, (CA) 52 Off. Gaz. 5218)

Q: What is the effect if the chattel mortgage is not registered in the

chattel mortgage register?
A: It is still binding between the parties but it will not be binding to
innocent third parties.
 foreclosure
• Judicial foreclosure – court action
• Extrajudicial foreclosure

• How proceeds are applied?

• Costs of sale
• Claim of person foreclosing the mortgage
• Claims of persons holding subsequent mortgages
om their order
• Balance, if any, shall be paid to the mortagor
Q: How is chattel mortgage foreclosed? A:
Public sale Private sale
GR: If there is an express stipulation in the contract.
XPN: Fraud or duress

Q: What is the procedure in foreclosure of a chattel mortgage?

A: The mortgagee may, after thirty (30) days from the time of the default or from
the time the condition is violated, cause the mortgaged property to be sold at
public auction by a public officer (Sec. 14, Act No. 1508)

• The 30-day period to foreclose a chattel mortgage is the minimum period after
violation of the mortgage condition for the mortgage
• The creditor has at least ten (10) days notice served to the mortgagor
• The notice of time, place and purpose of such sale, is posted
• After the sale of the chattel at public auction, the right of redemption is no
longer available to the mortgagor. (Cabral v. Evangelista, 28 L-26860, July 30,
1969)
DEFICIENCY?
In case of foreclosure sale in chattel mortgage, may the
creditor recover deficiency if the redemption price is less
than the debt secured?
A:
GR: CR may recover deficiency.
XPN: when the chattel mortgage is used to secure the
purchase of personal property in installments (Recto Law).
- chattel mortgage here is constituted on the personal
property which is sold at a price payable in installments
 End of
TOPIC 8