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 contract 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. This prompted the other heirs of Jacinto and Dalmacia to file a complaint seeking a declaration that the deed was actually an equitable mortgage, accounting, and redemption.
The respondent heirs alleged the ₱20,000 was a loan for Jacinto’s medical expenses, not a sale price. They pointed to 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 absolute ownership would vest in the Lumayags upon non-redemption.

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 is grounded on the application of the presumptions under Article 1602 of the Civil Code. The Court found several circumstances concurring to establish the true nature of the contract as a loan secured by the property.
First, the purchase price was grossly inadequate. The total market value of the two lots was approximately ₱44,880, starkly disproportionate to the ₱20,000 consideration. Second, the vendors remained in possession of the property. Third, the vendors continued to pay the real estate taxes. Fourth, the title and tax declarations remained in the names of the original owners. These factors collectively rebut the presumption of a sale and indicate a loan transaction.
Crucially, the Court highlighted the presence of a pactum commissorium in the stipulation that the conveyance would become “absolute and irrevocable” without foreclosure if repurchase did not occur within the period. This stipulation, which allows the creditor to appropriate the property upon non-payment without due process, is void under Article 2088 of the Civil Code. Its inclusion strongly evidences an intention to mortgage, not to sell. Therefore, the contract was correctly declared an equitable mortgage, entitling the heirs to redeem the property.