On March 13, 2008, Ariel entered into a Deed of Absolute Sale (DAS) with Noel where the former sold his titled lot in Quezon City with an area of three hundred (300) square meters to the latter for the price of P300,000.00. The prevailing market value of the lot was P3,000.00 per square meter. On March 20, 2008, they executed another “Agreement To Buy Back/Redeem Property” where Ariel was given an option to repurchase the property on or before March 20, 2010 for the same price. Ariel, however, remained in actual possession of the lot. Since Noel did not pay the taxes, Ariel paid the real property taxes to avoid a delinquency sale.
On March 21, 2010, Ariel sent a letter to Noel, attaching thereto a manager’s check for P300,000.00 manifesting that he is redeeming the property. Noel rejected the redemption claiming that the DAS was a true and valid sale representing the true intent of the parties. Ariel filed a suit for the nullification of the DAS or the reformation of said agreement to that of a Loan with Real Estate Mortgage. He claims the DAS and the redemption agreement constitute an equitable mortgage. Noel however claims it is a valid sale with pacto de retro and Ariel clearly failed to redeem the property.
As the RTC judge, decide the case with reasons. (5%)
Suggested answer only. Not an official answer and not legal advice.
I will rule in favor of Ariel and declare the transaction as an equitable mortgage, granting the reformation of the instrument. Under Article 1602 in relation to Article 1604 of the Civil Code, a contract purporting to be an absolute sale or
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Quick check
Under Article 1602 of the Civil Code, what is the legal presumption when a purported contract of sale exhibits an unusually inadequate purchase price and the vendor remains in possession?
Article 1602 presumes a contract of sale to be an equitable mortgage when the price is unusually inadequate or the vendor remains in possession.
How many badges specified under Article 1602 of the Civil Code are required to raise the presumption that a contract is an equitable mortgage?
The presence of even a single badge under Article 1602 is sufficient to raise the presumption of an equitable mortgage.
What remedy is available to a party when a contract purporting to be a sale with pacto de retro is in reality an equitable mortgage?
Article 1359 allows reformation of an instrument when it fails to express the true intent of the parties as an equitable mortgage.
Why did Ariel's transaction with Noel constitute an equitable mortgage rather than a valid sale with pacto de retro?
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Under Article 1604 of the Civil Code, to what types of contracts do the presumptions in Article 1602 apply?
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Learn more about these topics
1. Equitable Mortgage Presumption
Under Article 1602 in relation to Article 1604 of the Civil Code, a contract purporting to be an absolute sale or a sale with right to repurchase shall be presumed to be an equitable mortgage when any of the statutory circumstances or badges exist. These include an unusually inadequate purchase price, the vendor remaining in possession as lessee or otherwise, or the vendor binding himself to pay taxes on the property sold. The presence of even a single badge listed under Article 1602 is sufficient to raise the legal presumption that the contract is an equitable mortgage.
2. Instrument Reformation Remedy
Under Article 1359 of the Civil Code, when the true intention of the parties is not expressed in the instrument purporting to embody their agreement by reason of mistake, fraud, inequitable conduct, or accident, one of the parties may ask for the reformation of the instrument to express such true intention. Where a contract of sale with a right to repurchase is executed to secure a loan obligation, the real agreement is an equitable mortgage. The aggrieved vendor-mortgagor is entitled to bring an action for reformation to declare the true nature of the contract.
3. Badges of Mortgage
In sales with pacto de retro, courts strictly scrutinize the conduct of the parties and the surrounding circumstances to prevent the circumvention of laws prohibiting pactum commissorium. Where the purported vendor retains actual physical possession of the land, continues paying real property taxes, and sells the property for a price substantially lower than its prevailing market value, the transaction manifests clear badges of an equitable mortgage. Equity dictates that the contract be construed as a mere security for a loan, allowing the debtor to redeem the property upon full satisfaction of the debt.