In real estate transactions in the Philippines, it is common for a buyer to acquire a property while the seller’s loan (usually with a bank) remains outstanding, and the title is still annotated with the mortgage in favor of the bank. The usual arrangement is that the buyer pays the seller a downpayment/equity, then assumes the balance of the seller’s loan (“assume balance”) or pays it off directly to the bank. The seller undertakes to cause the cancellation of the mortgage and deliver a clean title to the buyer.

Problems arise when, after receiving full or substantial payment from the buyer, the seller defaults on the remaining loan with the bank. The bank forecloses, or threatens to foreclose, the property, and the buyer—who has already paid the seller—suddenly discovers that the title remains mortgaged or has even been extrajudicially foreclosed. The buyer is now at risk of losing both the money paid and the property itself.

This article discusses the legal remedies available to the buyer under Philippine law to recover the title (or the property itself) when the seller defaults on the bank loan after the sale.

1. Nature of the Sale When Title Remains with the Seller and Mortgage Is Not Cancelled

Under Article 1498 of the Civil Code, the seller is obliged to transfer and deliver ownership of the thing sold. In real estate, ownership is transferred only upon registration of the deed of sale with the Register of Deeds (Section 51, P.D. 1529). Until registration and cancellation of the mortgage, the seller remains the registered owner and the mortgagor liable to the bank.

If the parties executed a Deed of Absolute Sale (DOAS) but it was not registered because the mortgage was not yet released, the sale is still valid and binding between the parties (Article 1475 in relation to Article 1496, Civil Code), but it does not bind third parties such as the mortgagee bank (Article 1313, Civil Code; Section 51, P.D. 1529).

In practice, courts treat such transactions as sale with assumption of mortgage under Articles 1484 and 1291 (subrogation) or as an equitable mortgage under Article 1602 if the intention was merely to secure the balance.

2. Remedies of the Buyer When Seller Defaults

A. Action for Specific Performance + Damages (Most Common Remedy)

The buyer may file a civil case for specific performance to compel the seller to:

Pay the bank and cause the cancellation of the mortgage;
Deliver the clean Owner’s Duplicate Certificate of Title (ODCT); and
Execute any document needed to register the sale.

If the seller is insolvent or refuses, the court may authorize the buyer to pay the bank directly and offset the amount against the purchase price still owed to the seller (or recover it if already fully paid).

Landmark case: Chua v. IAC (1989) – The Supreme Court allowed the buyer to pay the bank directly and ordered the Register of Deeds to cancel the mortgage and issue a new title in the buyer’s name upon presentation of the court order.

B. Rescission of the Sale + Recovery of Payments (Article 1191, Civil Code)

If the seller’s breach is substantial (e.g., refuses to pay the bank, title is foreclosed), the buyer may ask for rescission (cancellation) of the contract and recovery of all payments with interest, plus damages.

Rescission is proper when the seller’s non-delivery of clean title goes to the root of the contract (Spouses Reyes v. Spouses Bugarin, G.R. No. 170679, 2006).

C. Annulment of Foreclosure Sale If Already Foreclosed

If the bank has already foreclosed and consolidated title, the buyer may file an action to annul the foreclosure sale on the ground that the bank had actual knowledge of the prior sale to the buyer.

Requirements (Davide v. CA, 1999; Rural Bank of Milan v. CA, 2004):

The bank was informed in writing of the sale to the buyer before foreclosure;
The buyer tendered payment or showed willingness to pay the loan; and
The foreclosure was made in bad faith.

If successful, the foreclosure is annulled, and the buyer is subrogated to the rights of the bank.

D. Action Against the Bank for Damages (If Bank Acted in Bad Faith)

If the bank foreclosed despite actual notice of the sale and the buyer’s offer to pay, the bank may be held solidarily liable with the seller for damages (Rural Bank of Sta. Maria v. CA, 1999).

E. Third-Party Claim or Terceria During Foreclosure

If foreclosure proceedings are ongoing, the buyer may file a tercia de propietario (third-party claim) with the sheriff and post the required bond to stop the auction sale. Thereafter, the buyer must file a separate action to establish superior title (Section 16, Rule 39, Rules of Court).

F. Criminal Action for Estafa Through Deceit (Article 315(2)(a), Revised Penal Code)

If the seller misrepresented that he would pay the bank or deliver clean title, knowing he had no intention or capacity to do so, the act may constitute estafa by means of deceit. Many buyers successfully file criminal cases to pressure the seller into settling.

3. Special Remedy: Direct Payment to the Bank and Judicial Cancellation of Mortgage

Even without the seller’s cooperation, Philippine courts have consistently allowed the buyer to:

Deposit the remaining loan balance in court (consignation);
File a petition for the cancellation of the mortgage annotation and issuance of new title in the buyer’s name.

Leading cases:

Philippine National Bank v. CA (1999) – Allowed direct payment by the assuming buyer.
Spouses Go v. Yamane (2005) – Court authorized cancellation of mortgage and issuance of TCT in the name of the buyer upon proof of full payment to the bank.
Development Bank of the Philippines v. CA (2001) – Confirmed that the buyer steps into the shoes of the seller via conventional subrogation (Article 1301, Civil Code).

Procedure (usually filed in the Regional Trial Court):

File complaint for specific performance/consignation;
Consign the amount needed to settle the loan;
Implead the seller, the bank, and the Register of Deeds;
Pray for judgment declaring the mortgage extinguished and ordering RD to cancel the annotation and issue new title.

4. Effect of Registration of the Deed of Sale Before Cancellation of Mortgage

If the Deed of Absolute Sale was registered and a new TCT issued in the buyer’s name with carry-over of the mortgage annotation, the buyer becomes the new registered owner/mortgagor. The bank can no longer foreclose against the original seller; the buyer is now directly liable. The buyer can then pay the bank and request cancellation.

5. Practical Tips for Buyers to Protect Themselves

Execute a notarized Deed of Sale with Assumption of Mortgage and have it annotated on the title as an adverse claim immediately (Section 70, P.D. 1529).
Secure a written authority from the seller allowing the buyer to deal directly with the bank.
Place the loan balance in escrow until the clean title is delivered.
Obtain a written undertaking from the bank acknowledging the assumption (some banks issue a “Deed of Assumption with Release of Mortgagor”).
Register the sale immediately even if mortgage remains, so the buyer appears as registered owner.

6. Conclusion

Under Philippine law, a buyer who has paid the seller is not left without remedy when the seller defaults on the remaining bank loan. The buyer may compel performance, rescind the contract, annul foreclosure, or—most effectively—pay the bank directly and obtain judicial cancellation of the mortgage. Courts have been consistent in protecting innocent buyers who have parted with their money in good faith, often treating the transaction as one with conventional subrogation or equitable mortgage.

The key is prompt action: file the appropriate case before the bank consolidates title after foreclosure, because once a new title is issued in the name of the bank or its buyer at auction, redemption becomes the only remedy (and the one-year redemption period is short).

With the right legal steps, recovery of the clean title—or the property itself—is not only possible but has become standard jurisprudence in Philippine real estate practice.