G.R. No. 83664 November 13, 1989
RENATO S. SANTOS, petitioner, vs. THE HONORABLE COURT OF APPEALS AND THE SPOUSES CESAR A. FERRERA AND REYNALDA PEDRONIA AND RUFINO NAZARETH AND DOMINGO NAZARETH, respondents.

FACTS

The registered owners, spouses Cesar Ferrera and Reynalda Pedronia, executed a Deed of Absolute Sale over a 2,221.86-square meter parcel of land in Pasig in favor of spouses Apolonia and Rufino Santos for P22,000 on February 1, 1971. However, only P16,000 was actually delivered. Simultaneously, the Santos spouses executed a separate “Promise to Sell” in favor of the Ferreras, granting them the right to repurchase the property for P22,000 within six months. The Ferreras failed to repurchase. Subsequently, the Santos spouses sold the property to their daughter, who then executed another promise to sell it back to the Ferreras. Despite the purported sale, the Ferreras remained in possession of the land through their tenants, the Nazareths, who refused to recognize the Santoses as new owners and continued delivering harvest shares to the Ferreras.
Nearly seven years later, Renato Santos, as attorney-in-fact, filed an action for breach of warranty and damages based on the Deed of Absolute Sale. The Ferreras contended the transaction was not a true sale but a loan secured by the property, arguing the price was grossly inadequate, they remained in possession, and the execution of the separate repurchase agreement indicated a loan transaction. Both the trial court and the Court of Appeals dismissed the complaint, declaring the contract to be an equitable mortgage.

ISSUE

Whether the transaction between the parties constitutes an absolute sale or an equitable mortgage.

RULING

The Supreme Court ruled the transaction is an equitable mortgage. The legal logic hinges on the application of Article 1602 of the Civil Code, which enumerates circumstances where a contract purporting to be a sale is presumed to be an equitable mortgage. The Court found several of these “badges of a concealed mortgage” present. First, the purchase price of P22,000 (with only P16,000 received) was unusually inadequate for prime land in Pasig, which evidence showed could command between P100,000 to P200,000 in 1971. Second, the vendors remained in possession of the property. Third, the contemporaneous execution of a separate “Promise to Sell” on the same date as the deed of sale indicated a loan with a right of repurchase, not an absolute conveyance. The Court distinguished cited precedents where an “option to buy” granted later did not convert a sale into a mortgage, noting here the repurchase agreement was simultaneous and the price was inadequate. Since the terms of the deed alone did not clearly reflect the parties’ intent, their contemporaneous and subsequent acts, as allowed under Article 1371 of the Civil Code, were principally considered. The confluence of circumstances—inadequate price, continued vendor possession, and simultaneous repromise—sufficiently established the parties’ true intention was to secure a loan, making the deed a mortgage. The petition was denied.