G.R. No. 162112 ; July 3, 2007
DOMINGO R. LUMAYAG and FELIPA N. LUMAYAG, Petitioners, vs. HEIRS OF JACINTO NEMEÑO and DALMACIA DAYANGCO-NEMEÑO, represented by MELITON NEMEÑO, Respondents.

FACTS

The spouses Jacinto and Dalmacia Nemeño owned two parcels of coconut land. In 1985, Jacinto, joined by five of his children, executed a “Deed of Sale with Pacto De Retro” over the lots in favor of his daughter Felipa and her husband, Domingo Lumayag, for ₱20,000. The deed granted the vendors a retro the right to repurchase within five years, after which the sale would become absolute. Jacinto died shortly after. Over a decade later, the Lumayags filed a petition for reconstitution of a lost title to one lot, which was opposed by the other heirs. Subsequently, the heirs filed a complaint to declare the deed as an equitable mortgage, alleging the ₱20,000 was a loan for Jacinto’s medical expenses, not a sale price.
The heirs contended the contract was a mortgage, citing the gross inadequacy of the price compared to the lots’ market value, their continued payment of realty taxes, the retention of the title and tax declarations in the original owners’ names, their continued possession of the property, and a stipulation that automatic ownership would vest in the Lumayags upon non-repayment, which constitutes a pactum commissorium. The Lumayags insisted it was a true sale and argued the action was barred by laches and prescription.

ISSUE

Whether the “Deed of Sale with Pacto De Retro” is a true sale with right of repurchase or an equitable mortgage.

RULING

The Supreme Court affirmed the lower courts’ ruling that the contract is an equitable mortgage. The legal logic rests on the confluence of circumstances enumerated under Article 1602 of the Civil Code, which indicate a loan with security was intended rather than a sale. Critically, the purchase price of ₱20,000 was grossly inadequate compared to the lots’ market value, a strong indicator of a mortgage. The vendors’ continued possession of the property and their payment of real estate taxes further demonstrated that ownership was not intended to pass absolutely.
Most conclusively, the deed contained a pactum commissorium clause stating that if repurchase did not occur within the period, the conveyance would become “absolute and irrevocable without the necessity of drawing up a new absolute deed of sale.” This stipulation, which allows the mortgagee to automatically appropriate the property upon non-payment, is void under Article 2088 of the Civil Code and is utterly contrary to the nature of a true pacto de retro sale, where ownership transfers to the vendee a retro immediately, subject only to a resolutory condition of repurchase. The presence of this void clause definitively reveals the parties’ intention to create a mortgage. Therefore, the contract was correctly declared an equitable mortgage.