Foreclosure of a real estate mortgage is a legal remedy available to a mortgagee-creditor to subject the mortgaged property to the satisfaction of the principal obligation when the debtor defaults.
Because a mortgage is a mere accessory contract, it can only be enforced if the debtor is actually in breach or default of the principal obligation. For example, if the creditor fails to release the full loan proceeds, the debtor is not considered in delay, making any foreclosure premature and void. Furthermore, if the debtor defaults solely because the interest rate imposed was unconscionable and void, the principal is not yet demandable, and the foreclosure can be annulled.
Under Philippine law, a creditor cannot automatically appropriate the mortgaged property upon the debtor’s default. Such an arrangement is called pactum commissorium and is strictly prohibited and void. The creditor must go through proper foreclosure proceedings.
Here are the legal principles and rules governing the foreclosure of real estate mortgages:
1. Kinds of Foreclosure
- Judicial Foreclosure: The mortgagee files an ordinary civil action in court. The sale of the property is not considered complete, and title does not pass to the purchaser until the sale is confirmed by a court order.
- Extrajudicial Foreclosure: Governed by Act No. 3135. This is permitted only if a special power of attorney (SPA) is inserted into or attached to the real estate mortgage contract, expressly authorizing the mortgagee to sell the property upon default.
2. Notice Requirements (Extrajudicial Foreclosure)
- The law requires the posting of notices of the sale for not less than 20 days in at least three public places in the municipality or city where the property is situated.
- If the property is worth more than P400, the notice must also be published once a week for at least three consecutive weeks in a newspaper of general circulation.
- Personal notice to the mortgagor is not required by law unless the parties specifically stipulated in the mortgage contract that personal notice must be given.
3. Redemption Rights
- Equity of Redemption (Judicial): In judicial foreclosures, there is generally no right of redemption after the sale. Instead, the mortgagor has an equity of redemption, which is the right to extinguish the mortgage by paying the debt within 90 to 120 days after the judgment becomes final, or even after the foreclosure sale but before the court confirms the sale.
- Right of Redemption (Extrajudicial): In extrajudicial foreclosures, the mortgagor has the right to redeem the property within one (1) year from the date of the registration of the certificate of sale.
- Exception for Juridical Persons: Under the General Banking Law, if the property belongs to a juridical person (e.g., a corporation) and the extrajudicial foreclosure is initiated by a bank, the right to redeem is shortened. It exists only until the certificate of sale is registered, and in no case more than three (3) months after the foreclosure.
4. Right to Possess the Property
The purchaser at the public auction has the right to petition the court for a writ of possession:
- During the redemption period: The purchaser can take possession upon an ex parte motion and the posting of an indemnity bond equivalent to the use of the property for 12 months.
- After the redemption period: If no redemption is made, the purchaser’s right of ownership becomes absolute. The issuance of a writ of possession becomes a ministerial duty of the court, and a bond is no longer required.
- Exception: The court’s duty to issue the writ ceases to be ministerial if there is a third party in actual possession of the property claiming a right adverse to the mortgagor/debtor.
5. Recovery of Deficiency
Unlike the rule in chattel mortgages for goods sold on installment (Recto Law), a real estate mortgagee is entitled to recover the deficiency if the proceeds of the public auction are insufficient to cover the entire loan. The creditor may file a motion or an independent personal action to collect the unpaid balance. However, if the mortgage was executed by a third-party accommodation mortgagor who did not assume personal liability for the debt, the creditor can only foreclose the property and must proceed against the principal debtor for any deficiency.
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