Ibrahim borrowed money from Fidel, as evidenced by a loan agreement. Ibrahim used as collateral for the loan his parcel of land situated in Maria Luisa Estate Park in Cebu City. Under the terms of their agreement, Fidel has the exclusive and irrevocable option to buy the collateral for the amount of ₱100 million, inclusive of the borrowed amount of ₱50 million and interest therein at 6% per annum. When the loan matured, Ibrahim was unable to pay his loan obligation. Ibrahim, however, refused to sell his collateral to Fidel. May Fidel compel Ibrahim to sell his collateral by exercising the option to buy under the loan agreement? Discuss your answer.
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No, Fidel cannot compel Ibrahim to sell his collateral. Under Article 2088 of the Civil Code, a creditor cannot appropriate or dispose of things given by way of pledge or mortgage, and any stipulation to the contrary is
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Quick check
Under Article 2088 of the Civil Code, what is the legal prohibition known as pactum commissorium?
Article 2088 prohibits creditors from automatically appropriating or disposing of mortgaged property upon default.
Under Bustamante v. Rosel, why is a clause giving a mortgagee an option to buy the collateral upon default void?
Granting an option to buy collateral upon default constitutes pactum commissorium because it circumvents foreclosure.
What is the proper legal remedy of a mortgagee when the mortgagor defaults on a loan obligation?
The proper legal remedy for a default on a mortgage is to foreclose on the mortgaged property.
Which of the following elements is required to establish a prohibited pactum commissorium under Philippine law?
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Why was Fidel unable to compel Ibrahim to sell his mortgaged parcel of land by exercising the option to buy?
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Learn more about these topics
1. Pactum Commissorium Prohibition
Under Article 2088 of the Civil Code, a creditor cannot appropriate the things given by way of pledge or mortgage, nor dispose of them. Any stipulation to the contrary is void ab initio. This statutory prohibition, known as pactum commissorium, prevents a creditor from automatically acquiring ownership of mortgaged property upon the debtor's default without undergoing proper judicial or extrajudicial foreclosure proceedings.
2. Option to Buy
Under the doctrine in Bustamante v. Rosel, a contractual provision granting a mortgagee an exclusive option to purchase the mortgaged property upon default constitutes a prohibited pactum commissorium. Even if structured as an independent option contract, absorbing the outstanding loan debt into the purchase price enables the creditor to acquire ownership of the collateral upon non-payment. Such a stipulation is void for circumventing foreclosure requirements.
3. Foreclosure Obligation
When a debtor defaults on a secured loan obligation, the mortgagee's sole legal remedy is to initiate foreclosure proceedings on the mortgaged property. The creditor cannot compel the debtor to execute a deed of absolute sale or enforce an option to buy the collateral. Foreclosure ensures that any excess proceeds from the public sale are returned to the debtor and protects against unfair property appropriation.