Liability for Renting Out Foreclosed Property with a Verbal Agreement in the Philippines (A comprehensive legal primer)
1. Foreclosure and Ownership: Who Really Owns the Property?
| Stage | Who holds title? | Key statutes | Practical effect on leasing |
|---|---|---|---|
| Pre‐foreclosure (mortgage still current) | Mortgagor/borrower | Art. 2088, Civil Code | Borrower may lease freely. |
| Auction date – Certificate of Sale issued | Conditional title to purchaser (usually the bank) | Act No. 3135 (extrajudicial), Rule 68 (judicial) | Borrower keeps right of possession and redemption for 1 year (extrajudicial) or until confirmation (judicial). |
| Post‐redemption/consolidation | Purchaser becomes absolute owner; consolidation annotated on TCT | Sec. 6, Act 3135 | Purchaser may eject occupants via ejectment (Rule 70). Any lease granted after auction and without purchaser’s consent is voidable. |
Key takeaway: The borrower’s power to create a lease meaningfully erodes the moment the Certificate of Sale is registered. After the redemption period lapses (or the court confirms the sale), the borrower can no longer bind the new owner unless the latter expressly ratifies the lease.
2. Are Verbal Leases Valid?
- General rule (Art. 1356, Civil Code): Contracts are obligatory regardless of form unless the law requires a particular form for validity.
- Statute of Frauds (Art. 1403[2][e]): A lease of real property for a period longer than one year must be in writing to be enforceable, not to be valid per se.
- Partial performance cures enforceability defects. If the lessee has taken possession and already paid rent, the verbal lease becomes enforceable despite non‑compliance with the Statute of Frauds (see Embree v. Philippine Islands, G.R. No. 12592, 1918).
- Recording matters. Even a written lease executed before the foreclosure is binding on the purchaser only if it is recorded on the title (Arts. 1626–1628, Civil Code; F.F. Cruz & Co. v. Briones, G.R. No. 50425, 19 Feb 1990).
Rule of thumb:
- ≤ 1 year: Oral lease is both valid and enforceable.
- > 1 year: Oral lease is valid but unenforceable unless partly performed.
- Unrecorded lease, any length: Not binding on a subsequent purchaser in good faith and for value (e.g., a foreclosing bank).
3. Civil Liabilities of the Person Who Rents Out a Foreclosed Property
| Scenario | Possible claims by purchaser/new owner |
|---|---|
| Borrower leases during redemption without disclosure | Annulment of lease; damages for lost use & fruits (Art. 1170); unjust enrichment (Art. 22). |
| Borrower leases after redemption lapses or without any ownership at all | Same as above plus action for ejectment (Rule 70, unlawful detainer). |
| Leasee improves property in good faith | Borrower must refund useful expenses or allow retention until reimbursed (Arts. 448‑456). |
Illustrative case: DBP v. CA, G.R. No. 82111 (31 Jan 1992) – Mortgagor who continued to collect rents after redemption period was held liable to the bank for fruits and occupancy, notwithstanding a verbal “lease” he concocted to delay ejectment.
4. Criminal Exposure: Can Renting Out Be Estafa?
Under Article 315(2)(a), Revised Penal Code, estafa is committed by “misappropriating or converting… property received in trust or on commission.” A borrower who knowingly leases a property he no longer owns and pockets the rent may be prosecuted if the lessee can show deceit and damage (e.g., advance rent, security deposit). Courts, however, are cautious:
- People v. Gulion (C.A.‑G.R. No. 01476‑CR, 12 Aug 1983) – Conviction where mortgagor fraudulently leased foreclosed farmland and fled with one‑year advance rent.
5. Tenant’s Rights and Remedies
Rent Control Act (R.A. 9653, as extended):
- Tenant cannot be evicted except on grounds enumerated (non‑payment, expiry of lease, owner’s bona‑fide need, etc.).
- Foreclosure per se is not an enumerated ground—but expiry of the lessor’s right of possession is.
Good‑faith Possessor Protection (Arts. 526–527):
- If the lessee acted in good faith, the purchaser must allow reasonable time (usually 3 months) to vacate and may need to reimburse advance rentals.
Refund of Deposits:
- Lessor (borrower) remains personally liable to return deposits; purchaser is not automatically liable unless he ratifies the lease.
6. Best Practices to Manage Risk
| For would‑be tenants | For borrowers/owners | For banks/purchasers |
|---|---|---|
| 🔍 Due diligence: inspect TCT for annotations (mortgage, foreclosure notices). | • Disclose pending foreclosure & secure bank’s written consent. | • Send demand notices promptly post‑consolidation to prevent claims of tacit lease. |
| ✍️ Demand written lease (≥ 1 year) and insist on SPA or bank waiver if foreclosure has begun. | • Avoid leases longer than redemption period. | • Consider honoring bona fide short‑term leases to avoid litigation costs. |
| 📝 Record the lease with the Registry of Deeds (Sec. 53, Property Registration Decree) to bind third parties. | • Segregate rent collected for potential turnover. | • File ejectment (Rule 70) within one year from demand to avoid resorting to accion publiciana. |
7. Sample Scenario Walk‑Through
Facts: Ana’s house in Quezon City was extrajudicially foreclosed on 3 March 2024. She still has until 3 March 2025 to redeem. On 15 April 2024 she verbally leases the house to Ben for two years; Ben pays six months’ advance. Ana fails to redeem. The bank consolidates title on 10 June 2025 and demands Ben to vacate.
Validity of lease: Verbal, > 1 year, unenforceable under Art. 1403 unless partly performed. Ben’s possession and payment cure the defect as between him and Ana.
Against the bank: Lease was after the Certificate of Sale, unrecorded, and without bank consent ⇒ not binding.
Liabilities:
- Ana must refund unused advance rent + deposit (Art. 1170).
- Ben must vacate; if done within reasonable time, cannot be liable for damages.
Bank’s remedy: File unlawful detainer within one year from last demand (Rule 70) to recover possession and mesne profits.
8. Checklist of Governing Laws & Doctrines
- Civil Code of the Philippines – Arts. 1305–1403 (contracts), 1654–1688 (lease), 448–456 (useful expenses), 526–527 (good/bad faith possession).
- Act No. 3135 (Sale of Real Property Under Special Powers) – Extrajudicial foreclosure & redemption.
- Property Registration Decree (PD 1529) – Registration/annotation rules.
- Rule 68 & Rule 70, Rules of Court – Judicial foreclosure; ejectment.
- Statute of Frauds – Art. 1403(2)(e).
- Revised Penal Code – Art. 315(2)(a) Estafa.
- Rent Control Act (R.A. 9653, as periodically extended by Congress & HUDCC resolutions).
- Key jurisprudence: F.F. Cruz & Co. v. Briones (1990); DBP v. CA (1992); Embree v. PI (1918); People v. Gulion (1983); Macasaet v. Soriano (G.R. No. 156809, 20 Aug 2009).
9. Conclusion
Renting out a foreclosed property on the strength of a verbal lease is fraught with pitfalls:
- Form defects (Statute of Frauds) and recording gaps make the lease fragile.
- Title shifts during and after foreclosure often strip the borrower of authority to bind the property.
- Civil (damages, ejectment) and even criminal (estafa) liabilities loom if the lessor conceals the foreclosure.
- Tenants, though protected under rent‑control and good‑faith doctrines, should exercise diligent verification to avoid costly displacement.
In short, all parties—borrower, tenant, and purchaser—must balance their rights with transparency and proper documentation. Written leases, clear disclosures, and registry annotations remain the surest shields against future liability.