What is pactum commisorium?

Pactum commissorium may be implied from the parties’ acts or found in documents other than the real estate mortgage (REM) contract.

For instance, in Spouses Pen v. Spouses Julian, Adelaida Pen extended loans to Spouses Santos and Linda Julian, which were secured by a REM over their property.

According to Adelaida, Spouses Julian failed to pay the loans despite several demands. Instead of instituting REM foreclosure proceedings, Adelaida took upon Linda’s offer to settle the payment of the loans by selling to her their mortgaged property.

They executed the corresponding deed of absolute sale, after which, however, Spouses Julian offered to repurchase said property and tendered P100,000 in cash to signify their good faith. Instead of paying the balance, Spouses Julian supposedly filed the instant complaint, as well as an adverse claim and lis pendens, which were annotated at the back of the title.

Meanwhile, according to Spouses Julian, Adelaida required them to execute a blank deed of absolute sale upon executing the REM over their property. Despite attempts to partly settle the loans, Linda discovered that the mortgaged property was already registered in Adelaida’s name. Moreover, while obtaining the necessary documents, Spouses Julian found that Adelaida and her husband had caused the deed of sale over said property to be executed and notarized.

Both the Regional Trial Court (RTC) and Court of Appeals ruled in favor of Spouses Julian, declaring that the deed of absolute sale was void. In this regard, the Court of Appeals found that the sale partook the nature of pactum commisorium since the corresponding deed had been executed in blank as to the consideration and date, to be filled up by Spouses Julian, and at the same time as the REM.

Upon appeal, the Supreme Court upheld the Court of Appeals’ findings. To be sure, Adelaida’s authority to automatically appropriate the mortgaged property upon Linda’s default was implied from the latter having to sign the blank deed of sale alongside the deed of REM.

Contrary to Spouses Pen’s argument, the transaction did not partake the nature of dacion en pago, which is in the nature of a valid sale because property is alienated in favor of the creditor to satisfy the payment of a monetary debt. Dacion en pago causes the full extinguishment of the debt upon the sale of the property. In this case, however, Spouses Julian’s debt subsisted despite the transfer of the property in Adelaida’s name.

Meanwhile, in A. Francisco Realty and Development Corporation v. Court of Appeals, A. Francisco Realty and Development Corp. (AFRDC) granted a loan to Spouses Romulo and Erlinda Javillonar, which was evidenced by a promissory note and secured by a REM over their property. The promissory note stated that upon the failure of Spouses Javillonar, as the mortgagors, to pay the interest without prior arrangement with AFRDC, as the mortgagee, “full possession of the property will be transferred and the deed of sale will be registered.”

Spouses Javillonar failed to pay the interest, constraining AFRDC to cause the registration of the sale of the property in its favor. Nevertheless, Spouses Javillonar obtained from AFRDC another loan and executed the corresponding promissory note, which stated that they promised to vacate the mortgaged property, without any need for prior demand or notification, upon their failure to settle the loan.

AFRDC demanded the possession of the mortgaged property. Spouses Javillonar refused to vacate the premises, causing AFRDC to file an action for possession before the RTC.

RTC declared AFRDC as the lawful owner of the mortgaged property. Meanwhile, the Court of Appeals reversed the RTC’s ruling since, among others, the sale was void for being pactum commissorium.

Upon appeal, the Supreme Court affirmed the Court of Appeals’ finding on this matter. Contrary to AFRDC’s argument, pactum commissorium stipulations are not exclusively found in the deed of REM.

To be sure, pactum commissorium arises for as long as: (a) there is a creditor-debtor relationship between the parties; (b) property was used as security for the loan; and (c) the creditor is authorized to automatically appropriate the property in case of debtor’s default. According to the Supreme Court, this prohibited stipulation can be found in a deed of constructive trust, a deed of sale, or as in this case, in a promissory note.