Purchase of Property With Encumbered Title Philippines

I. Introduction

Real estate buyers in the Philippines often focus on who owns the property and forget to ask: “What burdens are attached to it?” A property may be validly titled, but the title may be encumbered—subject to mortgages, liens, court cases, leases, easements, or other burdens that follow the property even after it is sold.

This article discusses, in a Philippine legal context, what it means to purchase a property with an encumbered title, the legal consequences for buyer and seller, the types of encumbrances commonly found in titles, and practical steps to manage the risks.

II. Legal Concept of Encumbrance

A. Definition

An encumbrance is any right or burden on a property that limits the owner’s full enjoyment of it or secures the performance of an obligation, without necessarily depriving the owner of title.

Examples:

  • Mortgage
  • Lease annotated on title
  • Easement (right of way, drainage, etc.)
  • Adverse claim
  • Notice of lis pendens (pending litigation)
  • Attachment or levy on execution
  • Tax lien
  • Restrictions in favor of subdivision/condominium corporations

The Civil Code, the Property Registration Decree (P.D. No. 1529), and various special laws govern these.

B. Real vs. Personal Obligations

An encumbrance is typically linked to a real right (jus in re) rather than a purely personal obligation. Real rights are enforceable against the whole world and, when duly registered, bind subsequent purchasers of the property.

III. The Torrens System and the Importance of the Title’s Back Page

A. What a Torrens Title Represents

Under the Torrens system, a Transfer Certificate of Title (TCT) or Original Certificate of Title (OCT):

  • Is conclusive evidence of ownership, subject to certain exceptions;
  • Shows on its front page the registered owner and basic property description;
  • Shows on its back page (or subsequent pages) the encumbrances, liens, and annotations affecting the property.

A clean front does not mean a clean property. Buyers must examine the annotations carefully.

B. Registration and Constructive Notice

Under Philippine law:

  • Rights affecting registered land must be registered in order to bind third persons in good faith.
  • Once an encumbrance is annotated, it serves as constructive notice to the world. A buyer cannot claim good faith against what is plainly written on the title.
  • As a rule: What appears on the title binds; what does not, generally does not bind third persons (with exceptions—e.g., overriding statutes, unregistered but known encumbrances, or certain legal liens).

IV. Types of Encumbrances Commonly Encountered

1. Real Estate Mortgage

A mortgage is a real right that secures the performance of an obligation (usually payment of a loan).

Key points:

  • The mortgagor (owner-borrower) remains the registered owner, but the property stands as security for the debt.
  • If the debt is not paid, the mortgagee (e.g., bank) may foreclose, leading to auction sale and possible loss of the property.
  • A mortgage over registered land must be annotated on the title to bind third persons.

2. Lease (Long-Term) Annotated on Title

Long-term leases (especially those exceeding one year) may be annotated on the title.

  • The lessee has a real right of possession and, within the lease period, the buyer of the property steps into the shoes of the lessor and must respect the lease.
  • “Buyer is substituted to the lessor” principle: the buyer becomes the new landlord, bound by the lease under the Civil Code.

3. Easements (Servitudes)

Examples:

  • Right of way (passage in favor of a neighbor or as required by law);
  • Drainage easement;
  • Utility easement (electric posts, pipelines);
  • Light and view restrictions.

Easements:

  • May be legal (created by law) or voluntary (by agreement);
  • Often notated on the title;
  • Bind subsequent owners of both the servient estate (bearing the burden) and the dominant estate (benefitting from it).

4. Adverse Claim

An adverse claim is annotated by someone who asserts an interest in the property (e.g., buyer under an unregistered contract to sell, co-owner, heir).

  • It is meant to warn third persons that someone disputes the registered owner’s title or claims an interest.
  • It has a limited lifespan under P.D. 1529 but may be renewed or replaced by other actions.
  • A buyer who sees an adverse claim is not in good faith and buys subject to the claim’s outcome.

5. Notice of Lis Pendens

A lis pendens notation indicates a pending court case involving title or possession of the property (e.g., ownership dispute, annulment of title, specific performance).

  • It is a red flag. The purchaser takes the property subject to the result of the litigation.
  • If the plaintiff wins and the court orders cancellation of the title, the buyer can be affected.

6. Attachment and Levy on Execution

  • A notice of attachment is annotated when a court provisionally secures a defendant’s property to answer for a claim.
  • A levy on execution is annotated when property is seized to satisfy a judgment.

Buying such a property is legally risky:

  • The encumbrance can lead to auction sale and possible loss of the property if the debt is not settled.

7. Tax Liens and Delinquency

  • Unpaid real property taxes can result in a tax lien and possible tax delinquency sale.
  • Even without annotation, the LGU may have a statutory lien on the property.
  • Buyers of properties with significant tax arrears may need to settle the same or risk public auction.

8. Subdivision / Condominium Restrictions

Titles may bear annotations:

  • Restrictions on use (e.g., residential only, building setbacks, height limits);
  • Conditions in favor of homeowners’ association or condominium corporation;
  • Developer’s right to approve building plans.

These restrictions run with the land and bind subsequent buyers.

V. Legal Effects of Buying Property With Encumbered Title

A. General Rule: You Take the Property Subject to Encumbrances

A buyer of encumbered property generally acquires:

  • Ownership of the property, but
  • Subject to existing encumbrances that appear on the title (and some that may be imposed by law).

In simple terms: you can become the owner, but the bank, lessee, easement holder, judgment creditor, or other right-holder keeps their rights unless and until those encumbrances are lawfully extinguished or cancelled.

B. Good Faith vs. Bad Faith Purchaser

  1. Good faith purchaser for value:

    • Buys for a price, without notice of adverse claims or defects not apparent on the title.
    • With registered land, one relies primarily on the face and annotations of the title.

  2. Bad faith purchaser:

    • Has actual knowledge of adverse claims, or
    • Is willfully blind to obvious red flags, or
    • Cannot claim good faith if the encumbrance is clearly annotated on the title.

You cannot claim to be a buyer in good faith against encumbrances that are actually annotated; the law treats you as having notice.

C. Double Sale Scenarios (Article 1544, Civil Code)

In cases where the seller has sold the same property to multiple buyers:

  • For registered land, the buyer who first registers in good faith generally prevails.

  • If you buy a property already encumbered or subject to a prior unregistered sale, your fate may depend on:

    • whether the earlier buyer has annotated their claim;
    • whether you registered first in good faith;
    • whether the land is registered or unregistered at the time.

VI. Special Focus: Buying Property With a Mortgage

This is the most common scenario.

A. Options for the Buyer

  1. Assumption of Mortgage

    • Buyer accepts to “take over” the mortgage.
    • Typically requires the mortgagee’s consent (e.g., bank approval of the buyer’s creditworthiness).
    • The mortgage remains annotated on the title even after transfer; the buyer becomes the new debtor (or co-debtor).

  2. Payoff at or Before Sale

    • Part of the purchase price is used to pay and fully release the mortgage.
    • The mortgagee executes a release of mortgage, which is registered and the annotation is cancelled.
    • Buyer receives a title free from that particular encumbrance.

  3. Purchase at Foreclosure Sale

    • Buyer participates in an extrajudicial or judicial foreclosure auction.
    • After sale and (for extrajudicial foreclosure of residential property, for instance) the lapse of any redemption period without redemption, the purchaser may obtain a consolidated title.
    • Even then, possible occupants, tenancy issues, and junior liens may complicate matters.

B. Risks

  • If the mortgage is not validly released and remains unpaid, the mortgagee may foreclose despite the sale.
  • If the buyer simply “trusts” the seller to handle the loan payoff without bank participation or proper documentation, the buyer could lose the property.

VII. Buying Property Involved in Litigation

When there is lis pendens or a known lawsuit involving the property:

  • The buyer acquires the property subject to the outcome of the case.
  • If the court later declares that the seller was not the true owner, the buyer may lose the property.
  • The buyer’s remedy often lies against the seller (warranty against eviction) and possibly against the seller’s assets—if there are any left.

Buying a litigated property is like stepping into the battlefield mid-fight; you inherit the risk.

VIII. Buying Property With Lease, Easements, or Use Restrictions

A. Lease

  • The buyer becomes the new lessor, bound to respect the lease until its expiry.
  • The buyer cannot simply eject the lessee because of the sale, unless the lease or law allows an early termination.

B. Easements

  • The buyer of a servient estate must respect easements already constituted (e.g., road right of way, drainage).
  • Removing or obstructing an easement can lead to legal liability and injunction.

C. Subdivision / Condo Restrictions

  • These are binding and may limit:

    • your ability to build certain structures;
    • business use of the property;
    • alterations to façade or common areas.

IX. Hidden or Unregistered Encumbrances

Not all burdens appear on the title. Examples:

  • Unannotated long-term leases;
  • Informal tenancy or occupancy by third persons;
  • Unregistered chattel mortgages on improvements;
  • Pending but not yet annotated court claims;
  • Legal restrictions by zoning, environment law, or agrarian reform that may not appear on the title itself.

The law often protects a truly innocent purchaser for value, but there are situations where:

  • Knowledge of actual possession or occupation by others should trigger further inquiry;
  • The buyer’s failure to investigate can be treated as bad faith.

X. Due Diligence Before Buying Encumbered Property

Even if you are willing to buy an encumbered property, due diligence is vital.

Typical steps (non-exhaustive):

  1. Secure latest Certified True Copy (CTC) of Title from the Registry of Deeds

    • Examine front and back pages for any annotation.

  2. Check the Encumbrances Section Thoroughly

    • Note all mortgages, liens, court orders, claims.
    • Understand whether they are still effective or have expired.

  3. Ask for Supporting Documents

    • Mortgage contracts, release of mortgage, court orders, compromise agreements.
    • Lease contract, easement agreement, or HOA restrictions.

  4. Verify Tax Status

    • Get tax clearance for real property taxes or at least a statement of tax arrears.
    • Check if there have been tax delinquency notices or auctions.

  5. Check for Actual Occupants

    • Visit the property.
    • Ask neighbors who has been living or using it.
    • Presence of long-time occupants or tenants is a serious clue requiring more checks.

  6. Review Seller’s Capacity to Sell

    • Is the seller the registered owner?
    • Is it conjugal or community property requiring spousal consent?
    • For corporations or associations, is there proper board authority?

  7. Consult Professionals

    • Lawyer – to interpret encumbrances, draft safe contracts, and propose ways to clean title.
    • Licensed broker or appraiser – to evaluate the property and identify red flags.

XI. How to “Clean” an Encumbered Title

Encumbrances are not always permanent. They can sometimes be removed by complying with law and procedure.

Examples:

  1. Mortgage

    • Pay the loan and secure a release of mortgage;
    • Register the release with the Registry of Deeds for cancellation of the annotation.

  2. Adverse Claim

    • Negotiate settlement and secure a sworn cancellation by the claimant;
    • Or file a court petition to cancel the adverse claim if it is unfounded or has lapsed.

  3. Lis Pendens

    • Once the case is resolved with finality, the winning party may move to cancel the lis pendens annotation.

  4. Attachment/Levy

    • Satisfy the judgment or obtain a court order lifting the attachment;
    • Register the order to cancel the annotation.

  5. Erroneous/Obsolete Encumbrances

    • Petitions for correction of title or administrative processes may be invoked if the encumbrance was annotated by mistake or has become obsolete by operation of law, subject to court/Registry approval.

XII. Contractual Protections for Buyers

When drafting a Contract to Sell or Deed of Absolute Sale involving encumbered property, parties may incorporate:

  1. Warranties and Undertakings

    • Seller warrants title is free from unknown encumbrances.
    • Seller undertakes to cause cancellation of specified encumbrances by a certain time (e.g., prior to final payment).

  2. Conditions Precedent

    • Buyer’s obligation to pay balance is conditioned on:

      • release of mortgage;
      • lifting of notices of attachment or lis pendens;
      • issuance of tax clearance.

  3. Escrow Arrangements

    • Buyer’s funds may be held in escrow until specified encumbrances are removed.

  4. Indemnity and Remedies

    • Clauses specifying liquidated damages, rescission rights, or indemnity if certain encumbrances turn out to be undisclosed or impossible to remove.

XIII. Practical Risks and Best Practices

  1. You can own, yet lose

    • Buying a heavily encumbered property can make you owner “on paper” but vulnerable to foreclosure, auction, or adverse judgment.

  2. Cheap for a reason

    • Properties with problematic encumbrances are often sold at a discount. The discount must be weighed against legal risk and cost of clearing the title.

  3. Never rely solely on the seller’s word

    • Always independently verify with the Registry of Deeds, assessor’s office, and, when needed, the courts or lending institutions.

  4. Use formal, written, and notarized documents

    • Unnotarized, unregistered side agreements offer weak protection compared to properly registered documents.

  5. Get legal advice before signing

    • A short consultation can prevent major, costly mistakes.

XIV. Conclusion

Purchasing property with an encumbered title in the Philippines is legally possible but fraught with risk. The Torrens title tells only part of the story; the encumbrances section often tells the rest. A buyer who ignores annotations, lawsuits, liens, and actual possession does so at their own peril.

The central principles are:

  • Encumbrances follow the land, not the owner.
  • Registered encumbrances bind subsequent purchasers.
  • A buyer must engage in thorough due diligence, insist on proper documentation, and, where possible, require that serious encumbrances be cleared before or as a condition to full payment and transfer.

This discussion is for general information only and does not replace advice from a Philippine lawyer who can review actual title documents, contracts, and specific circumstances.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

Privacy Policy

Terms of Use

Lawyer Login

 
 
Privacy Policy         Terms of Use         Lawyer Login