“The Supreme Court explained that credit agreements which are potestative in character violates the principle of mutuality of contracts, rendering them null and void”
IS A foreclosure sale due to non-payment of a loan valid even if the borrower could not have agreed to the interest rates imposed by the lender?
The answer is NO.
The Supreme Court explained that credit agreements which are potestative in character violates the principle of mutuality of contracts, rendering them null and void (United Coconut Planters Bank v. Ang and Fernandez, G.R. 222448, March 3, 2025).
“[A]s long as the interest rates were unconscionable or unilaterally imposed by the mortgagee, the foreclosure proceedings that followed should be annulled.” “The unilateral imposition of interests, at such rate that the lender or mortgagee so pleases, cannot and should not be reason to justify a foreclosure sale” (Op cit.).
“The mortgagor should be given a chance to pay their indebtedness at an interest rate clearly agreed upon by the parties, otherwise, they shall be at the mercy of their creditor, standing to lose their property without being afforded a fair opportunity to settle their indebtedness” (Op cit.).
“Jurisprudence has held that in a situation wherein a debtor was not given an opportunity to settle his/her debt at the correct amount due to the imposition of a null and void interest rate scheme, no foreclosure proceedings may be instituted.
“The registration of such foreclosure sale has been held to be invalid and cannot vest title over the mortgaged property” (Op cit.).
“In a situation wherein null and void interest rates are imposed under a contract of loan, the non-payment of the principal loan obligation does not place the debtor in a state of default, considering that under Article 1252 of the Civil Code, if a debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered” (Op cit.).
“Necessarily, since the obligation of making interest payments in the instant case is illegal and thus non-demandable, the payment of the principal loan obligation was likewise not yet demandable on the part of [ the lender]. With [the borrower] not being in a state of default, the foreclosure of the subject properties should not have proceeded” (Op cit.).
“In Heirs of Zoilo Espiritu v. [Spouses] Landrito, the loan obligation involved, which was secured by a mortgage, was marred by an iniquitous imposition of monetary interest because the creditors omitted to specifically identify the imposable interest rate… Because of the failure of the debtors to pay back the loan, the mortgaged property was foreclosed [which the] debtors failed to redeem…” (Op cit. cited in United Coconut Planters Bank [UCPB] v. Ang and Fernandez).
“Since the [s]pouses Landrito… were not given an opportunity to settle their debt, at the correct amount and without the iniquitous interest imposed, no foreclosure proceedings may be instituted.” “[I]t has not yet been shown that the [s]pouses Landrito had already failed to pay the correct amount of the debt and, therefore, a foreclosure sale cannot be conducted…” (Op cit.).
“As a result, the subsequent registration of the foreclosure sale cannot transfer any rights over the mortgaged property to the [s]pouses Espiritu. The registration of the foreclosure sale… cannot vest title over the mortgaged property” (Op cit.).
“The Torrens system does not create or vest title where one does not have a rightful claim over a real property. It only confirms and records title already existing and vested.” “Thus, the decree of registration, even after the lapse of [one] year, cannot attain the status of indefeasibility.” (Op cit.)
In the case of “[Spouses] Castro v. Tan… the [Supreme] Court nullified the foreclosure proceedings ‘since the amount demanded as the outstanding loan was overstated… [A]ccordingly, we declare the registration of the foreclosure sale invalid and cannot vest title over the mortgaged property’” (Op cit. cited in the UCPB case).
“Also, in [Spouses] Andal v. PCB, the Court upheld the nullification of the foreclosure sale, affirming the appellate court’s holding that “since the interest rates are null and void, [respondent] bank has no right to foreclose [petitioners-spouses’] properties and any foreclosure thereof is illegal…
“Since there was no default yet, it is premature for [respondent] bank to foreclose the properties subject of the real estate mortgage contact” (Op cit. cited in the UCPB case).
