Annotating Encumbrances on Tax Declarations for Buildings

I. Nature and Purpose of Tax Declarations for Buildings

In the Philippine real property taxation system, a Tax Declaration (TD) is the primary document used by local government units (LGUs) to assess and impose real property taxes on buildings and other improvements classified as real property under Article 415 of the Civil Code. Unlike the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT) issued by the Registry of Deeds, which constitutes indefeasible proof of ownership, the Tax Declaration is merely an administrative record maintained by the City or Municipal Assessor for taxation purposes only.

A separate Tax Declaration is issued for buildings/improvements apart from the Tax Declaration for the land, especially in the following common situations:

• The building is constructed on land owned by a different person (e.g., under a lease or usufruct).
• The property is under the Condominium Act (R.A. No. 4726, as amended), where each unit has its own CCT and corresponding TD.
• The building contains permanently affixed machinery that is appraised together with the building under Section 199(i) of the Local Government Code (LGC).

The Tax Declaration contains, among others, the assessed value, classification, area, location, owner’s name, and — crucially — any annotated encumbrances or legal interests affecting the property.

II. Legal Basis for Annotation of Encumbrances on Tax Declarations

While the Local Government Code (R.A. No. 7160) does not contain an explicit provision mandating annotation of encumbrances on Tax Declarations, the practice is firmly grounded on the following legal and administrative issuances:

1. Section 202, LGC – Defines real property as including buildings and improvements.
2. Section 205, LGC – Requires the provincial, city, or municipal assessor to maintain a complete record of all real properties, including their legal status.
3. Section 224, LGC – Mandates that upon discovery of any change in the ownership, encumbrance, or legal interest in the property, the assessor shall make the corresponding correction or annotation on the Tax Declaration.
4. Bureau of Local Government Finance (BLGF) Memorandum Circular No. 09-2011 (and subsequent issuances) – Explicitly directs assessors to annotate mortgages, leases, and other encumbrances on the Tax Declaration upon presentation of the proper documents.
5. BLGF Assessment Regulations and the Manual on Real Property Appraisal and Assessment Operations (2007 and later editions) – Provide that the dorsal portion of the Tax Declaration shall contain annotations of encumbrances, particularly real estate mortgages, to reflect the true legal status of the property for assessment purposes.
6. Department of Finance Local Finance Circular No. 3-92 and related circulars – Require annotation of mortgages on Tax Declarations to protect the interest of mortgagees in the payment of real property taxes.

The Supreme Court has consistently recognized in numerous cases (e.g., City Assessor of Cebu City v. Association of Benevola de Cebu, Inc., G.R. No. 152160, June 8, 2007; Manila Electric Company v. Barlis, G.R. No. 114136, May 29, 2001) that Tax Declarations must accurately reflect all legal interests and encumbrances affecting the property.

III. Encumbrances Commonly Annotated on Tax Declarations for Buildings

The following are regularly annotated by assessors on the dorsal portion of the Tax Declaration for buildings:

1. Real Estate Mortgage (the most common).
2. Long-term Lease Contracts (20 years or more, or with option to purchase).
3. Judicial or Extrajudicial Foreclosure Proceedings.
4. Notice of Lis Pendens.
5. Attachment or Levy on Execution.
6. Adverse Claim.
7. Court Orders or Writs affecting the building (e.g., demolition order, injunction).
8. Section 4, Rule 74 of the Rules of Court Summary Settlement of Estate (when the building forms part of an estate under extrajudicial settlement).
9. Contract to Sell or Deed of Conditional Sale (in practice, especially when registered with the Registry of Deeds).

IV. Procedure for Annotation of Encumbrance on Tax Declaration for Buildings

A. For Real Estate Mortgage (Standard Procedure)

1. After registration of the Real Estate Mortgage with the Registry of Deeds and annotation on the title, the mortgagee (usually the bank) or mortgagor shall secure:

   • Certified true copy of the Mortgage Contract with RD annotation stamp.
   • Owner’s Duplicate Copy of the TCT/CCT showing the mortgage annotation (or at least the RD-issued annotated title).
   • Latest Tax Declaration (original or certified copy).
   • Real Property Tax Clearance or latest tax receipt.
   • Special Power of Attorney if filed by a representative.

2. File a written request for annotation with the Office of the City/Municipal Assessor, together with the above documents.

3. The assessor verifies the documents and annotates on the dorsal portion of the Tax Declaration substantially in this form:

   “ANNOTATED REAL ESTATE MORTGAGE in favor of [Name of Bank] for P___________ per Doc. No. ____, Page No. ____, Book No. ____, Series of ____, Not. Pub. of ___________, registered with the Registry of Deeds of ___________ on ___________ under Entry No. ___________.”

4. The assessor signs the annotation and indicates the date.

5. No annotation fee is usually charged, although some LGUs collect a minimal certification or processing fee (P100–P500).

B. For Other Encumbrances

• Lis Pendens, Attachment, Adverse Claim – Present the court order or RD-annotated document.
• Long-term Lease – Present the notarized lease contract and proof of registration with the RD (if required under R.A. 9646 or jurisprudence).

V. Legal Effects and Importance of Annotation on Tax Declaration

1. The annotation serves as constructive notice to the assessor and all persons dealing with the property that a third party has a legal interest in the building.
2. It prevents the unilateral cancellation or transfer of the Tax Declaration without the mortgagee’s or encumbrancer’s knowledge or consent.
3. In practice, many assessors refuse to issue a new Tax Declaration in the name of a buyer or to cancel the old TD unless the annotated mortgage or encumbrance is first cancelled or released.
4. It protects the mortgagee’s right to pay real property taxes and add the amount to the loan balance, since the real property tax lien is superior to the mortgage lien (Section 257, LGC).
5. Banks almost invariably require annotation on the Tax Declaration as a condition for loan release or take-out.
6. In condominium projects, annotation on the TD of the unit is required by banks in addition to annotation on the CCT.

Failure to annotate the mortgage on the Tax Declaration does not invalidate the mortgage itself (since validity is governed by registration with the Registry of Deeds), but it exposes the mortgagee to the risk that the Tax Declaration may be transferred or cancelled without its knowledge, thereby complicating foreclosure or tax monitoring.

VI. Procedure for Cancellation of Annotated Encumbrance

Cancellation is mandatory upon full payment or release of the encumbrance.

1. Secure Cancellation/Release of Real Estate Mortgage duly registered with the Registry of Deeds and annotated on the title.
2. Present to the Assessor:
   • RD-registered Cancellation/Release of Mortgage.
   • Owner’s Duplicate Title showing cancellation.
   • Original Tax Declaration with the previous annotation.
   • Tax Clearance.
3. The assessor cancels the annotation by drawing a line across it and writing “CANCELLED per Release of Real Estate Mortgage dated ___________, Entry No. ___________, Registry of Deeds of ___________” with date and signature.

Many LGUs now require the physical presence of the bank’s authorized signatory or a Cancellation Request Letter on bank letterhead.

VII. Common Issues and Jurisprudential Doctrines

1. Refusal of Assessor to Cancel Annotation – This is a common source of litigation. The remedy is mandamus under Rule 65, as the duty is ministerial once proper documents are presented (Bank of the Philippine Islands v. Hontanosas, G.R. No. 157163, June 25, 2014).
2. Sale of Building with Annotated Mortgage – The buyer steps into the shoes of the seller; the mortgage remains unless expressly assumed or released.
3. Tax Delinquency Sale – The auction sale extinguishes all junior liens but not the real property tax lien itself. An annotated mortgagee is not automatically notified of delinquency, but in practice banks monitor through the annotated TD.
4. Condominium Units – The Condominium Corporation’s lien for unpaid association dues under R.A. 4726, as amended by R.A. 9904, may also be annotated on the unit’s Tax Declaration upon request.

VIII. Conclusion

Annotation of encumbrances on the Tax Declaration for buildings, while not constitutive of the encumbrance itself, is an indispensable administrative requirement in Philippine real estate practice. It complements registration with the Registry of Deeds and provides an additional layer of protection for creditors, particularly banks, while ensuring that local assessors maintain accurate and updated records for taxation purposes. Failure to annotate or cancel such encumbrances invariably leads to unnecessary delays, expenses, and litigation in subsequent transactions involving the property. Practitioners and property owners are therefore well-advised to treat annotation on the Tax Declaration with the same seriousness as annotation on the certificate of title.