G.R. No. 126800 November 29, 1999
NATALIA P. BUSTAMANTE, petitioner, vs. SPOUSES RODITO F. ROSEL and NORMA A. ROSEL, respondents.

FACTS

On March 8, 1987, petitioner Natalia Bustamante and her late husband obtained a loan of P100,000.00 from respondent Norma Rosel, secured by a 70-square-meter portion of the Bustamantes’ land. The loan agreement stipulated an 18% annual interest for two years and contained a provision stating that if the borrowers failed to pay, the lender had the “option to buy or purchase the collateral for a total consideration of P200,000.00, inclusive of the borrowed amount and interest therein.” Upon the loan’s maturity, the Bustamantes tendered payment, which the Rosels refused, insisting instead on enforcing the option to buy the collateral for P200,000. The Rosels filed a complaint for specific performance.
The Regional Trial Court dismissed the complaint, ordering the Bustamantes merely to pay the loan with interest. The Court of Appeals reversed, ordering the Bustamantes to execute a deed of sale over the collateral upon the Rosels’ payment of P47,500.00 (the balance of the P200,000.00 purchase price after deducting the principal and accrued interest). The Supreme Court initially denied Bustamante’s petition but granted her motion for reconsideration.

ISSUE

Whether the stipulation in the loan agreement granting the lender an “option to buy” the collateral upon the borrower’s failure to pay constitutes a pactum commissorium and is therefore void.

RULING

Yes. The Supreme Court reversed the Court of Appeals and dismissed the complaint. The stipulation is a pactum commissorium, expressly prohibited under Article 2088 of the Civil Code, which voids any agreement allowing the creditor to appropriate the things given as security. The Court’s legal logic focused on the substance and effect of the contractual provision. Although phrased as an “option to buy,” the stipulation’s operative trigger was the borrower’s failure to pay the loan. This made the lender’s acquisition of the property directly contingent upon the non-payment of the debt. Furthermore, the purchase price of P200,000.00 was not a true valuation but was effectively the sum of the principal loan (P100,000.00) and the interest for the stipulated period. This arrangement meant the creditor would acquire the collateral for a consideration essentially equivalent to the unpaid debt, which is the precise evil the prohibition against pactum commissorium seeks to prevent. It allows a lender to automatically appropriate a security, often at a gross undervalue, upon default, oppressing the borrower. The Court emphasized that the true intention of the parties, gleaned from the agreement’s terms, was to create a security for the loan, not a genuine option to purchase. Consequently, the void stipulation could not be enforced, and the respondents were limited to collecting the unpaid loan debt with lawful interest.