Introduction

Extrajudicial foreclosure is a non-judicial mechanism for enforcing a mortgage security interest in real property under Philippine law. It allows the mortgagee (creditor) to sell the mortgaged property without court intervention upon the mortgagor's (debtor's) default. This process is primarily governed by Republic Act No. 3135 (An Act to Regulate the Sale of Property Under Special Powers Inserted in or Annexed to Real Estate Mortgages), as amended by Republic Act No. 4118. It is distinct from judicial foreclosure, which requires a court action under Rule 68 of the Rules of Court.

Extrajudicial foreclosure is only available if the mortgage contract expressly includes a special power of attorney authorizing the mortgagee to sell the property extrajudicially. This provision is common in bank loans and real estate financing agreements. The process emphasizes efficiency but includes safeguards to protect the mortgagor's rights, such as mandatory notices and a redemption period. Failure to comply with procedural requirements can render the foreclosure void.

This article provides a comprehensive overview of the process, required notices, and redemption rights in the Philippine context, drawing from statutory provisions, jurisprudence, and standard practices.

Legal Basis and Prerequisites

Governing Laws

Republic Act No. 3135 (1937), as amended: The core statute outlining the extrajudicial foreclosure procedure.
Republic Act No. 4118 (1964): Amended RA 3135 to include provisions on venue and other clarifications.
Administrative Order No. 3 (1984) and subsequent issuances by the Supreme Court: Provide guidelines for clerks of court and sheriffs in handling extrajudicial foreclosures.
Related Jurisprudence: Supreme Court decisions, such as in Union Bank of the Philippines v. Court of Appeals (G.R. No. 134068, 2001), emphasize strict compliance with notice requirements. Cases like Fort Bonifacio Development Corp. v. Yllas Lending Corp. (G.R. No. 158143, 2008) clarify redemption rights.

Prerequisites for Extrajudicial Foreclosure

Valid Mortgage Contract: The property must be secured by a real estate mortgage registered with the Register of Deeds.
Special Power Inserted: The mortgage must contain a clause granting the mortgagee the power to sell the property extrajudicially upon default.
Default by Mortgagor: This typically includes non-payment of principal, interest, or other obligations as stipulated in the contract. Demand for payment is not always required unless specified, but good practice involves sending a demand letter.
No Pending Litigation: The property should not be subject to ongoing judicial proceedings that could affect the foreclosure.

If these are met, the mortgagee can initiate the process without filing a lawsuit, making it faster and less costly than judicial foreclosure.

The Extrajudicial Foreclosure Process

The process is administrative and handled by the Clerk of Court and Sheriff, with oversight from the Executive Judge. It unfolds in several stages:

1. Filing of the Petition

The mortgagee files a verified petition for extrajudicial foreclosure with the Executive Judge of the Regional Trial Court (RTC) where the property is located, through the Clerk of Court.
Required documents include:
- Original or certified true copy of the mortgage contract.
- Proof of default (e.g., statement of account, demand letters).
- Affidavit of good faith (attesting no collusion).
- Payment of filing fees based on the loan amount or property value.
Venue: As per RA 4118, the sale must be held in the province or city where the property lies. If the property spans multiple jurisdictions, the mortgagee may choose the venue.
The Clerk of Court examines the petition for completeness and issues a notice of sale if approved.

2. Preparation and Issuance of Notice of Sale

The notice must specify:
- Description of the property (including title number, location, and area).
- Date, time, and place of the auction sale (must be between 9:00 AM and 4:00 PM on a weekday).
- Terms of sale (e.g., cash payment).
- Outstanding obligation amount.
The sale must be scheduled not less than 20 days nor more than 30 days from the notice issuance, but publication and posting extend the effective timeline.

3. Posting and Publication of Notices

Posting: The notice must be posted for at least 20 days in at least three conspicuous public places in the municipality or city where the property is situated (e.g., municipal hall, barangay hall, public market).
Publication: The notice must be published once a week for at least three consecutive weeks in a newspaper of general circulation in the province or city. The newspaper must be selected through raffle if multiple qualify.
Personal Notice: While not statutorily required, jurisprudence (e.g., PNB v. Nepomuceno Productions, Inc., G.R. No. 139479, 2002) suggests that sending a copy to the mortgagor is advisable to ensure due process, though its absence does not invalidate the sale if posting and publication are complied with.
Strict compliance is mandatory; defects in notices can lead to nullification of the foreclosure, as held in Tambunting v. Court of Appeals (G.R. No. 148218, 2007).

4. Conduct of the Public Auction Sale

The sale is conducted by the Sheriff, Deputy Sheriff, or a Notary Public (if authorized).
Bidding is open to the public; the mortgagee can bid.
The highest bidder wins and must pay in cash or certified check immediately or within the day.
If no bidders appear, the mortgagee may purchase the property at the upset price (usually the outstanding debt).
Post-sale: The Sheriff issues a Certificate of Sale to the winning bidder, detailing the purchase price and property description. This is registered with the Register of Deeds.

5. Confirmation of Sale

Unlike judicial foreclosure, extrajudicial sales do not require court confirmation. The Certificate of Sale becomes the basis for consolidation of title after the redemption period.

6. Possession and Consolidation of Title

After the sale, the purchaser is entitled to possession upon demand, but the mortgagor may remain during the redemption period if they pay rent (equivalent to interest on the purchase price).
If no redemption occurs within the period, the purchaser files an affidavit of consolidation with the Register of Deeds, leading to cancellation of the old title and issuance of a new one in the purchaser's name.

Notices in Detail

Notices are the cornerstone of due process in extrajudicial foreclosure. Non-compliance renders the proceedings void ab initio.

Types of Notices

Notice of Default/Demand Letter: Not mandatory under RA 3135 but often sent by mortgagees to allow curing of default. It specifies the breach and grace period.
Notice of Foreclosure Petition: Filed with the court; no direct notice to mortgagor required at this stage.
Notice of Sale: The critical notice, which must include all details as above.
Post-Sale Notices: The Certificate of Sale is annotated on the title, serving as constructive notice.

Requirements for Validity

Content Accuracy: Must correctly describe the property and obligation to avoid misleading bidders (e.g., DBP v. CA, G.R. No. 125838, 2000).
Timeliness: Posting for 20 days; publication three weeks.
Proof of Compliance: Affidavits from the Sheriff and publisher's affidavit of publication are required.
Special Cases: For condominiums or subdivisions, additional notices to homeowners' associations may apply under related laws like RA 4726 (Condominium Act).

Defects, such as improper publication or posting in wrong places, have led to Supreme Court rulings invalidating sales, emphasizing protection of mortgagors' equity of redemption.

Redemption Rights

Redemption is the mortgagor's right to repurchase the property after the sale, preserving ownership.

Redemption Period

One-Year Rule: Under Section 6 of RA 3135, the mortgagor has one year from the registration of the Certificate of Sale with the Register of Deeds to redeem.
Exceptions:
- For juridical persons (e.g., corporations), redemption is limited to the registration date plus interest until actual redemption, but not exceeding one year.
- In banking contexts, under the General Banking Law (RA 8791), natural persons have one year, while juridical persons have until registration.
The period is mandatory and cannot be shortened by contract.

How to Redeem

Pay the purchaser the sale price plus:
- 1% monthly interest from sale date to redemption.
- Any assessments or taxes paid by the purchaser.
- Interest on such amounts.
Payment must be tendered to the purchaser or Sheriff.
Upon payment, the purchaser executes a Certificate of Redemption, annotated on the title.

Effects of Redemption

Restores the mortgagor's title as if no sale occurred.
If the purchaser has consolidated title prematurely, it can be challenged via action for annulment.

Jurisprudence on Redemption

Equity of Redemption vs. Right of Redemption: Equity exists before sale (right to pay debt); right of redemption after sale.
Cases like Spouses Litonjua v. L&R Corp. (G.R. No. 164618, 2011) clarify that the period runs from registration, not sale date.
During redemption, the mortgagor retains possession unless a writ of possession is issued (rare in extrajudicial cases without court order).

Extension or Waiver

Contracts cannot waive redemption, but parties may agree to extensions post-sale.
Bankruptcy or insolvency may affect redemption under the Financial Rehabilitation and Insolvency Act (RA 10142).

Common Issues and Remedies

Challenges to Foreclosure

Annulment Actions: Mortgagors can file suits to annul the sale for procedural defects, fraud, or lack of default within the redemption period or via quieting of title.
Injunctions: Temporary restraining orders can halt sales if irreparable injury is shown.
Consignation: If redemption is disputed, funds can be consigned in court.

Rights of Third Parties

Junior mortgagees or lienholders have subordinate redemption rights.
Buyers at auction acquire rights subject to redemption.

COVID-19 and Moratoria

During the pandemic, Bayanihan Acts (RA 11469 and 11494) imposed moratoria on foreclosures, but these have expired. Current practices revert to standard rules.

Conclusion

Extrajudicial foreclosure balances creditor efficiency with debtor protections through rigorous notice and redemption requirements. Mortgagors should monitor obligations closely, while mortgagees must adhere strictly to procedures to avoid litigation. Consulting legal counsel is advisable for specific cases, as nuances may vary based on contract terms and evolving jurisprudence. This mechanism underscores the Philippine legal system's emphasis on contractual freedom tempered by equity.