G.R. No. 98282 September 6, 1993
Emiliano G. Lizares, Jr., petitioner, vs. Court of Appeals and Spouses Julio C. Lopez and Cristina Orlanda Lopez, respondents.

FACTS

On September 30, 1983, petitioner Emiliano G. Lizares, Jr. loaned P545,000.00 to respondent spouses Julio and Cristina Orlanda Lopez, secured by a real estate mortgage over a parcel of land in Mandaluyong. The spouses failed to pay the loan due on December 30, 1983. On January 29, 1985, petitioner initiated extrajudicial foreclosure. The auction sale set for March 4, 1985, was temporarily enjoined by the Regional Trial Court based on a complaint for injunction filed by the spouses. While the injunction case was pending, the parties executed a Deed of Sale with Right to Repurchase on October 26, 1985, terminating the injunction proceedings. Under this deed, the spouses ceded ownership of the property to petitioner in consideration of their outstanding debt, computed as of March 4, 1984, at P2,005,647.78, but they were allowed to retain possession. They were given the right to repurchase the property for P1,600,000.00 within six months from November 1, 1985. The spouses failed to repurchase within the period. Consequently, petitioner filed an action to consolidate his title over the property. The trial court ordered consolidation in favor of petitioner. The spouses appealed. The Court of Appeals reversed the trial court’s decision, declaring the contract to be an equitable mortgage, and denied reconsideration. Hence, this petition.

ISSUE

Whether the contract executed by the parties is a sale with right to repurchase or an equitable mortgage.

RULING

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals. The contract is an equitable mortgage. The presence of circumstances enumerated in Article 1602 of the New Civil Code supports this conclusion. Specifically: (1) The vendors (respondent spouses) retained physical possession of the property, a circumstance under paragraph 2 of Article 1602. (2) The purchase price stated in the contract was the amount of the loan itself, including interests, albeit reduced. (3) The execution of the disputed contract extended the original period of the mortgage by another six months, a circumstance under paragraph 3 of Article 1602. (4) A provision in the contract allowed the vendors to substitute another property as security if partial payments reached P1,000,000.00, indicating the transaction was intended to secure payment of a debt. The Court held that the true intention of the parties, which prevails over the literal terms of the contract, was to secure the payment of the debt, not a transfer of ownership. Therefore, the transaction is presumed to be an equitable mortgage.