1) Why this topic matters

In the Philippines, many private loans and even business financings are documented with a Promissory Note (PN) and a “collateral” paper—often styled as a Deed of Sale, Deed of Absolute Sale, Deed of Sale with Right to Repurchase, Deed of Conditional Sale, or an arrangement where the borrower signs a deed transferring property “as security.” Borrowers may believe they “sold” the property; lenders may believe they can simply take it when there is default. The enforceability of those arrangements depends less on the document title and more on the true intent of the parties and compliance with formal legal requirements for mortgages, pledges, and foreclosure.

The central Philippine principle is this: security arrangements must follow the law on security, and courts will look through labels to prevent circumvention—especially where a “sale” is actually a disguised mortgage or a device to let a creditor automatically appropriate property.

2) Key documents and what each really does

2.1 Promissory Note (PN)

A Promissory Note is the borrower’s written promise to pay a sum at a certain time (or on demand), typically with interest, penalties, attorney’s fees, and default clauses. In practice, the PN is the principal evidence of the debt.

What a PN can do well:

Fix the amount, interest, maturity, and default triggers
Provide acceleration (entire balance due on default)
Provide penalty interest and liquidated damages (subject to reduction if unconscionable)
Provide for attorney’s fees (also subject to judicial scrutiny)

What a PN cannot do by itself:

Create a valid lien over property without a proper security instrument (e.g., mortgage/pledge/chattel mortgage) and required formalities (e.g., registration).

2.2 Deed of Sale used as “collateral”

Many disputes arise when a Deed of Sale is used to secure a loan. Common patterns include:

Borrower signs a deed “selling” land/vehicle to lender, but borrower keeps possession and continues acting as owner.
Sale price equals the loan amount; “repurchase” price equals principal plus interest/penalties.
Lender keeps the deed “in escrow” to be registered upon default.
Lender requires signing of blank deeds, undated deeds, or deeds with “to be filled” terms.

Legally, these structures can be:

A true sale (ownership passes), or
An equitable mortgage (a mortgage in substance even if drafted as a sale), or
A prohibited arrangement where the creditor can automatically take property (pactum commissorium)—invalid as a method of enforcement.

3) The controlling concept: substance over form (Equitable Mortgage)

3.1 Equitable mortgage—what it is

Under Philippine civil law, when a transaction appears to be a sale but the parties actually intended it as security for a debt, the law treats it as an equitable mortgage. This matters because:

A mortgagee generally cannot automatically become owner upon default.
Enforcement must typically be through foreclosure or other lawful process, not unilateral appropriation.

3.2 Indicators that a “sale” is really a mortgage

Philippine law and jurisprudence recognize multiple indicators, including (commonly encountered in practice):

The “price” is unusually inadequate compared to market value.
The seller/borrower remains in possession.
There is an agreement allowing the “seller” to repurchase (especially if the “repurchase price” mirrors principal + interest).
The “buyer” does not act like an owner (no possession, no taxes, no improvements).
The transaction was executed to secure payment of an existing or contemporaneous loan.
The lender keeps the deed and threatens registration only upon default.

Even one strong indicator can tilt courts toward finding an equitable mortgage, because the policy is to prevent circumvention of mortgage and foreclosure rules.

3.3 Consequences of an equitable mortgage finding

If the “Deed of Sale” is deemed an equitable mortgage:

The lender is treated as a mortgagee, not an owner.
The borrower retains ownership subject to the mortgage lien.
The lender must enforce through foreclosure (judicial or extrajudicial, depending on requirements and instrument).
Any attempt to “take ownership” by default is vulnerable to nullity and damages.

4) The hard stop: Pactum commissorium (automatic appropriation is void)

4.1 What is pactum commissorium

Pactum commissorium is a prohibited stipulation where, upon default, the creditor automatically becomes owner of the collateral (or the creditor can appropriate it) without foreclosure or a similar lawful process.

In Philippine law, this is generally void. The creditor’s remedy is to:

Foreclose (sell the collateral and apply proceeds to the debt), or
Use other legally recognized collection and execution mechanisms.

4.2 How it shows up in PN + “sale as collateral” setups

Examples of problematic clauses or structures:

“If borrower defaults, the deed of sale may be registered and lender becomes owner.”
“Borrower hereby irrevocably transfers title upon default.”
“This sale is final upon non-payment.”
A “conditional sale” whose condition is essentially loan repayment, converting non-payment into ownership.

Courts often treat these as invalid shortcuts. Even where a deed is executed, if its purpose is security and default converts into ownership, the structure is vulnerable.

5) Choosing the correct security: mortgage vs pledge vs chattel mortgage

5.1 Real estate: Real Estate Mortgage (REM)

If collateral is land or a building, the standard security is a Real Estate Mortgage. Core points:

Must be in a public instrument (notarized).
Must be registered with the Registry of Deeds to bind third persons and for practical enforceability.
Enforcement is typically through foreclosure:
- Extrajudicial foreclosure (common if there is a special power of attorney / authority to foreclose embedded or separately executed in proper form, and statutory requirements are met), or
- Judicial foreclosure (filed in court).

If a lender uses a “Deed of Sale” instead of a REM to “avoid foreclosure,” it increases the risk of being recharacterized as an equitable mortgage or struck down as pactum commissorium.

5.2 Movables: Chattel Mortgage

For vehicles, equipment, receivables in certain structures, etc., a Chattel Mortgage is the standard security:

Must be in a public instrument and registered in the Chattel Mortgage Register (and often noted in relevant registries, e.g., LTO annotations for vehicles).
Enforcement is typically by foreclosure and sale of the chattel, not automatic appropriation.

5.3 Pledge

A pledge requires delivery of possession of the movable to the creditor or a third person by agreement:

Possession is central.
Enforcement also cannot be automatic appropriation; sale procedures apply.

5.4 Practical takeaway

If the asset is:

Land/building → REM + foreclosure route
Vehicle/equipment → Chattel Mortgage + foreclosure route
Movable with delivery → Pledge + sale route

A “deed of sale as collateral” is usually a litigation magnet unless the transaction is genuinely intended as an actual sale (with genuine price, delivery/possession, owner behavior, and tax/registration compliance).

6) Enforcement routes when there is default

6.1 Pure collection suit on the Promissory Note

Even with collateral, a lender may sue on the PN for payment (collection of sum of money). If the lender obtains judgment, enforcement occurs through execution (levy on assets, garnishment, etc.). Collateral may or may not be involved depending on the chosen remedy and the instrument’s terms.

Important: The lender must be mindful of rules on:

Interest and penalty rates (courts may reduce unconscionable charges)
Attorney’s fees (must be proven reasonable)

6.2 Foreclosure of mortgage (REM or chattel mortgage)

Foreclosure is the security-specific remedy:

It converts the collateral into cash through a public sale (with notice/publication requirements).
Proceeds are applied to the debt; excess goes to the debtor; deficiency may be pursued depending on the structure and applicable rules.

Redemption: In many real estate foreclosure contexts, the debtor may have rights to redeem (depending on whether foreclosure is judicial or extrajudicial and the governing rules). Redemption is often time-bound and procedural; mistakes can be fatal.

6.3 Dacion en pago (dation in payment)

Instead of foreclosure, parties may agree that the debtor conveys the property to the creditor as payment, fully or partially satisfying the debt:

This must be a new agreement, typically executed after default pressures arise.
It must be voluntary and supported by agreement on valuation and satisfaction extent.
It is distinct from an automatic “on default, you own it” clause—which is precisely what pactum commissorium forbids.

If done correctly, dacion en pago can be clean. If done as a pre-signed “deed of sale” to be activated on default, courts may treat it as a disguised pactum commissorium or equitable mortgage.

6.4 Compromise / restructuring

A lender and borrower may restructure:

Extend term, waive penalties, adjust interest
Convert to formal mortgage with proper registration This often reduces litigation risk.

7) Specific problems with “pre-signed deed of sale held by lender”

7.1 Registration upon default

A common lender tactic is to register the deed once default happens. Risks:

If courts find the deed is an equitable mortgage, registration does not cure the underlying character.
Borrower can sue to cancel title, annotate lis pendens, and seek damages/injunction.
Potential criminal exposure can arise in extreme cases where fraud, falsification, or coercion is proven (case-specific).

7.2 Blank or undated deeds; “to be filled” terms

These are high-risk:

They invite challenges for lack of consent, defective meeting of minds, or fraud.
They complicate notarization integrity, and notarization issues can unravel the instrument’s evidentiary weight.

7.3 Possession and control

If the borrower never relinquished possession and the lender never exercised attributes of ownership, that pattern strongly supports recharacterization as mortgage rather than sale.

8) Formalities that decide enforceability

8.1 Notarization

Notarization:

Converts private documents into public instruments
Affects admissibility and evidentiary presumptions Defects in notarization can destroy presumptions of regularity and authenticity.

8.2 Registration

For real estate:

Registration is crucial for effectiveness against third persons and for creating a real right that follows the property. For chattels:
Registration in the chattel mortgage registry is similarly key.

A “collateral deed of sale” that is unregistered may still bind the parties in some contexts, but enforcement against third parties and clarity of rights become contested.

8.3 Authority and capacity

Signatories must have capacity and proper authority (e.g., corporate signatories need board authority; spouses’ consent can matter depending on property regime and whether property is conjugal/community).
For properties subject to special laws (e.g., some restrictions on alienation), additional compliance may be needed.

9) Borrower defenses and lender counter-strategies

9.1 Borrower defenses commonly raised

Equitable mortgage: deed of sale is security, not sale.
Pactum commissorium: automatic appropriation is void.
Unconscionable interest/penalty: seek reduction.
Defective notarization / fraud / undue influence: invalidate document or reduce evidentiary weight.
Lack of consideration: “sale price not actually paid.”
Simulation: absolute sale is simulated or intended only for security.

9.2 Lender positions commonly raised

It was a true sale: price paid, delivery made, borrower vacated, taxes paid by buyer, deed registered promptly.
Separate loan vs sale: claim the PN and sale are independent transactions (this is heavily fact-driven).
Dacion en pago: if there is a later agreement after default with clear intent to accept property in payment.

Because litigation turns on intent and factual indicators, documentation quality and behavior after signing (possession, taxes, improvements, communications) matter.

10) Remedies, damages, and interim relief

10.1 Injunction and lis pendens

Borrowers often seek:

Temporary restraining order / preliminary injunction to stop registration, eviction, foreclosure, or transfer.
Lis pendens annotation in title disputes.

Lenders may oppose with:

Proof of ownership, urgency, and irreparable injury defenses.

10.2 Cancellation of title / reconveyance

If a deed of sale was registered and title transferred, borrower may sue for:

Annulment/cancellation of deed or title
Reconveyance
Damages and attorney’s fees

10.3 Deficiency and surplus

In foreclosure:

If sale proceeds are insufficient, deficiency may be pursued (subject to conditions and defenses).
If proceeds exceed debt, the excess should be returned to the debtor.

11) Drafting and structuring best practices (Philippine setting)

11.1 If you are a lender

Use the correct security instrument (REM, chattel mortgage, pledge) instead of a “sale as collateral.”
Ensure proper notarization, registration, and authority.
Keep interest/penalty provisions reasonable; avoid clauses that resemble automatic appropriation.
If taking property in payment, do it via a clearly negotiated dacion en pago at the appropriate time, with fair valuation and clear satisfaction extent.

11.2 If you are a borrower

Avoid signing deeds of sale “for collateral,” especially blank or undated.
If collateral is needed, insist on standard security instruments and clear foreclosure remedies.
Keep records showing possession, taxes paid, and communications proving the true nature of the transaction.
Scrutinize interest, penalty, acceleration, and attorney’s fees provisions.

12) Special note on “Deed of Sale with Right to Repurchase”

Sales with right to repurchase (often called pacto de retro sales) exist in Philippine law. However, when used in a loan setting, they are frequently challenged as equitable mortgages because:

The economic reality mirrors a loan with interest (repurchase price = principal + interest)
The “buyer” acts like a lender
The “seller” remains in possession

Whether it is upheld as a true pacto de retro sale or recharacterized as mortgage depends on the same intent-and-indicia analysis.

13) Criminal-law spillovers (contextual and fact-specific)

While most disputes are civil, certain patterns can lead to criminal allegations depending on evidence:

Falsification (e.g., forged signatures, false notarization entries)
Estafa (e.g., deceit in inducing signing, misappropriation under specific circumstances)
Perjury or false statements in affidavits

These are not automatic; they depend on proof beyond reasonable doubt and specific factual contexts.

14) Bottom line

In the Philippines, a Promissory Note establishes the debt, but enforcement against collateral must follow the legal framework for security interests. Using a Deed of Sale as “collateral” is risky because courts may treat it as an equitable mortgage and invalidate any attempt at automatic appropriation as pactum commissorium. The legally stable path is to use the correct instrument (REM/chattel mortgage/pledge), comply with notarization and registration, and enforce through foreclosure or lawful collection, with dacion en pago only as a genuinely voluntary, subsequent settlement.