In the landscape of Philippine property law, the relationship between a mortgagor (the property owner/debtor) and a mortgagee (the creditor) is governed primarily by the Civil Code of the Philippines and relevant special laws. A common point of legal inquiry arises when a mortgagor seeks to lease out a property that is currently burdened by a real estate mortgage.
Understanding the extent of a mortgagor's right to rent out encumbered property requires a balancing act between the ownership rights retained by the debtor and the security interests protected for the creditor.
I. The Principle of Retained Ownership
Under Philippine law, a real estate mortgage is merely an accessory contract and a lien. It does not divest the mortgagor of their title. Since ownership remains with the mortgagor, they continue to enjoy the jus disponendi (right to dispose) and jus utendi (right to use) the property, albeit subject to the lien.
The General Rule on Leasing
As a rule, a mortgagor has the right to lease the mortgaged property to third parties. Because the mortgagor remains the owner, they possess the legal capacity to enter into lease agreements. The existence of a mortgage does not, by itself, freeze the economic utility of the asset.
II. The Validity of "Prohibitory Clauses"
A critical point of contention is whether a mortgagee can contractually prohibit the mortgagor from leasing the property.
- Stipulations Against Alienation: Under Article 2130 of the Civil Code, a stipulation forbidding the owner from alienating (selling) the mortgaged immovable is considered void.
- Stipulations Against Leasing: While the law explicitly voids prohibitions on selling, it is more nuanced regarding leasing. Generally, "Contractual Prohibitions" against leasing are considered restrictive covenants. However, if a contract explicitly requires the mortgagee's consent before leasing (a "Consent to Lease" clause), such a provision is generally held as valid and binding between the parties to protect the mortgagee's security interest from potential devaluation or physical waste.
III. Effects of Foreclosure on Existing Leases
The rights of a tenant (lessee) and the mortgagor change significantly if the mortgage is foreclosed. The legal outcome depends on whether the lease was recorded.
1. Registered Leases
If the lease agreement is registered in the Registry of Deeds and annotated on the Transfer Certificate of Title (TCT) prior to the registration of the mortgage, or if the mortgagee had actual knowledge of the lease, the lease must be respected by the purchaser at the foreclosure sale.
2. Unregistered Leases
If the lease is not recorded, or if it was entered into after the mortgage was registered:
- The purchaser at the foreclosure sale (often the bank) is generally not bound by the lease.
- Upon the consolidation of title in the name of the purchaser, the lease is effectively terminated by operation of law, as the new owner is not a party to the original lease contract.
IV. Right to Rents During the Redemption Period
A pivotal right of the mortgagor concerns the "fruits" of the property—specifically the rental income—during the Period of Redemption (usually one year from the registration of the certificate of sale).
- Possession: During the one-year redemption period, the mortgagor remains in possession of the property.
- Right to Rents: Consequently, the mortgagor is entitled to receive the rents and profits derived from the property during this window. These rents do not belong to the purchaser at the foreclosure sale until the period of redemption has expired and the title has been consolidated.
Legal Note: If the purchaser or a receiver takes possession of the property during the redemption period and collects rents, these amounts must be credited as a deduction from the redemption price the mortgagor must pay to reclaim the property.
V. The Issue of "Waste" and Value Diminution
While the mortgagor has the right to rent the property, they are under a legal obligation to maintain the value of the security.
- Physical Waste: If a lease leads to the substantial deterioration of the property (waste), the mortgagee may seek judicial intervention or injunctions to protect the collateral.
- Prejudicial Leases: Leases that are entered into in bad faith or for a grossly inadequate consideration (e.g., a 50-year lease at a nominal rate) to defeat the mortgagee's rights can be challenged as simulated or fraudulent contracts.
Summary Table: Mortgagor Rights vs. Limitations
| Aspect | Mortgagor's Right | Limitation / Exception |
|---|---|---|
| Right to Lease | Generally allowed as an exercise of ownership. | May be subject to "Prior Consent" clauses in the contract. |
| Rental Income | Mortgagor keeps all rent during the life of the mortgage. | Rents may be assigned to the mortgagee in case of default. |
| Redemption Period | Entitled to collect rents until the period expires. | Rents collected by the purchaser must credit the redemption price. |
| Foreclosure | Can lease even during the foreclosure process. | The lease may be terminated if not registered/annotated. |
Conclusion
In the Philippine jurisdiction, the mortgagor of a real estate property retains significant autonomy, including the right to generate rental income. However, this right is not absolute. It is tempered by the contractual obligations found in the mortgage deed and the superior rights of a foreclosure purchaser should the debt remain unpaid. For a lease to be fully protected against the vagaries of foreclosure, registration and annotation remain the primary safeguards for both the mortgagor and the lessee.