Civil Law,  Legally Yours

Romulo v. Layug

Romulo v. Layug

G.R. No. 151217; September 8, 2006


In 1986, Spouses Romulo obtained from respondents a loan in the amount of P50,000.00 with a monthly interest of 10%, which subsequently ballooned to P580,292.00.

To secure the payment of the loan, respondents allegedly duped petitioners into signing a Contract of Lease and a Deed of Absolute Sale covering petitioners’ house and lot.

The Deed of Absolute Sale purportedly facilitated the cancellation of petitioners’ title on the house and lot and the issuance of TCT No. 20489 in the name of respondents.

Thus, petitioners prayed for the nullification of the Deed of Absolute Sale, the contract of lease and TCT No. 20489, and the award of moral and exemplary damages.

Respondents claim that the Deed of Absolute Sale was voluntarily executed by the parties for the purpose of extinguishing petitioners’ indebtedness to respondents.

As consideration of the sale, respondents allegedly paid the amount of P200,000.00 in addition to the writing off of petitioners’ obligation to them. That they allowed petitioners to occupy the house and lot as lessees thereof was founded on the trust they reposed on petitioners, claimed respondents.

Also, prior to the filing of the civil action, Spouses Layug filed for ejectment, against petitioners to compel the latter to vacate the house and lot allegedly sold by petitioners to Moises and subsequently rented out by him to petitioners.

Moises alleged that petitioners violated the terms of the Contract of Lease when the latter failed to pay any rental or exercise their option to repurchase the house and lot and refused to vacate the property despite demand.


Whether or not the parties intended an equitable mortgage


Yes, the parties intended an equitable mortgage and this is a factual issue.

The form of the instrument cannot prevail over the true intent of the parties as established by the evidence. in determining the nature of a contract, courts are not bound by the title or name given by the parties.

The decisive factor in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the contract but by their conduct, words, actions, and deeds prior to, during, and immediately after execution of the agreement. 

In order to ascertain the intention of the parties, their contemporaneous and subsequent acts should be considered. Once the intention of the parties has been ascertained, that element is deemed as an integral part of the contract as though it has been originally expressed in unequivocal terms. As such, documentary and parol evidence may be submitted and admitted to prove such intention. And, in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

Between 1985 and 1987, petitioner Nenita Romulo obtained from respondent Felisarin Layug loans in various amounts totaling around P500,000.00.

Being close friends at that time, Felisarin did not require any written instrument to secure payment, other than the title to the house and lot, which Nenita handed to Felisarin sometime in 1988.

When respondents demanded payment of the loan, petitioners defaulted. Nevertheless, as admitted by Layug, despite her repeated demands, she allowed petitioners some more time within which to pay their debts. 

Felisarin claimed that eventually, petitioners offered their house and lot as payment for their debt because petitioners no longer had any money. 

However, even after the execution of the assailed Deed of Absolute Sale, respondents continued to grant petitioners loan accommodations as evidenced by the three promissory notes executed by petitioner Cesar Romulo.

Respondents’ continuing to lend money to petitioners does not make sense if the intention of the parties was really to extinguish petitioners’ outstanding obligation.

The logical and inevitable conclusion is that respondents deemed it wise to formalize a security instrument on petitioners’ house and lot by executing the Deed of Absolute Sale after realizing that petitioners could no longer fully satisfy their obligation to respondents.

At that time, as petitioners were hard-pressed to come up with funds to pay their loans, they were hardly in a position to bargain. The preponderance of evidence shows that they signed knowing that said documents did not express their real intention, and if they did so notwithstanding this, it was due to the urgent necessity of obtaining funds.

“Necessitous men are not, truly speaking, free men; but to answer a present emergency will submit to any terms that the crafty may impose upon them.” The circumstances surrounding the execution of the Deed of Absolute Sale, particularly the fact that respondents continued to extend some loans to petitioners after its execution, precludes the Court from declaring that the parties intended the transfer of the property from one to the other by way of sale.

Art. 1602. The contract shall be presumed to be an equitable mortgage in any of the following cases:

1. When the price of a sale with right to repurchase is unusually inadequate

2) When the vendor remains in possession as lessee or otherwise;

xxx              xxx

6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation. 

For the presumption of equitable mortgage to arise, two requisites must be satisfied, namely: that the parties entered into a contract denominated as a contract of sale and that their intention was to secure an existing debt by way of mortgage.

Under Article 1604 of the Civil Code, a contract purporting to be an absolute sale shall be presumed to be an equitable mortgage should any of the conditions in Article 1602 be present. To stress, the existence of any one of the conditions under Article 1602, not a concurrence, or an overwhelming number of such circumstances, suffices to give rise to the presumption that the contract is an equitable mortgage.

It must be emphasized too, however, that there is no conclusive test to determine whether a deed absolute on its face is really a simple loan accommodation secured by a mortgage.

In fact, it is often a question difficult to resolve and is frequently made to depend on the surrounding circumstances of each case. When in doubt, courts are generally inclined to construe a transaction purporting to be a sale as an equitable mortgage, which involves a lesser transmission of rights and interests over the property in controversy.

In the case at bar, petitioners remained in possession of the house and lot even after the execution of the Deed of Absolute Sale. Moreover, they remained in possession of the property for more than a reasonable time that would suggest that petitioners were mere lessees thereof.

For one, it took respondents more than five years from the time of the execution of the Deed of Absolute Sale and the Contract of Lease to file the action for ejectment. Within this period, petitioners neither paid any rental nor exercised the option to buy purportedly the leased property from respondents.

Under paragraph 1 of Article 1602, where the purchase price is inadequate, a contract of sale is also presumed to be an equitable mortgage. Based on respondents’ evidence, petitioners’ property was valued at P700,000.00 but the assailed Deed of Absolute Sale stated a consideration of only P200,000.00.

Contrary to the appellate court’s declaration that the inadequacy of the purchase price is not sufficient to set aside the sale, the Court finds the same as clearly indicative of the parties’ intention to make the property only collateral security of petitioners’ debt. The Court is not convinced that petitioners would allow the sale of their residential property for even less than half of its market value.

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