In the Philippine legal system, a mortgage does not divest the mortgagor (the borrower/owner) of their ownership rights over the property. Because ownership remains with the mortgagor until a valid foreclosure and the subsequent expiration of the redemption period, the right to lease the property is a significant attribute of that ownership.
The following is an analysis of the legal framework, limitations, and consequences surrounding the mortgagor’s right to lease property before the full payment of the debt.
1. The Principle of Ownership
Under Article 2088 of the Civil Code, the creditor cannot appropriate the things given by way of pledge or mortgage, nor dispose of them. This reinforces the principle that the mortgagor remains the owner.
As the owner, the mortgagor enjoys the jus disponendi (right to dispose) and jus utendi (right to use). Leasing is considered an exercise of the right to use and to enjoy the fruits of the property (jus fruendi). Consequently, a mortgagor has the inherent right to enter into a lease contract with a third party even while the mortgage subsists.
2. Validity of the Lease Contract
A lease executed by the mortgagor is valid and binding between the mortgagor (lessor) and the tenant (lessee). The consent of the mortgagee (the bank or lender) is not a prerequisite for the validity of the lease unless there is a specific, valid contractual prohibition in the mortgage deed.
- Registration of Lease: If a lease is recorded in the Registry of Property, it becomes a real right that binds third persons.
- The "Pactum de non Aliendo": While a mortgage contract may contain a prohibition against selling the property without the mortgagee's consent, such a clause is generally considered void under Article 2130 of the Civil Code. However, a prohibition against leasing is generally viewed differently; if the contract explicitly requires consent for a lease, the mortgagor may be in technical default of the mortgage terms, even if the lease remains valid between the lessor and lessee.
3. Limitations and the Rights of the Mortgagee
While the right to lease exists, it is not absolute and is subject to the superior lien of the mortgagee.
- Subordination of the Lease: If the mortgage was registered prior to the lease, the mortgage takes precedence. In the event of foreclosure, the buyer at the public auction is generally not bound by the lease (subject to the Tenant Protection Act for residential units in specific cases).
- Assignment of Rents: It is common in Philippine banking practice to include an "Assignment of Lease" or "Assignment of Rents" clause. This means that if the mortgagor defaults, the mortgagee has the right to collect the rentals directly from the lessee to satisfy the outstanding debt.
4. Effects of Foreclosure on the Lease
The most critical period for a lease is when the mortgagor fails to pay the debt and the mortgagee initiates foreclosure.
- During the Redemption Period: Following a foreclosure sale, there is a one-year redemption period (for individuals) or a shorter period for juridical persons under the General Banking Law. During this time, the mortgagor remains the owner and is entitled to the possession and the fruits (rents) of the property.
- Consolidation of Title: Once the redemption period expires and the purchaser consolidates title, the lease is typically terminated by operation of law, unless the lease was recorded in the Registry of Property prior to the mortgage or the purchaser chooses to honor it.
5. Essential Protections for the Mortgagor-Lessor
To navigate this legal landscape effectively, the mortgagor must be aware of the following:
| Feature | Legal Implication |
|---|---|
| Contractual Covenants | Review the mortgage deed for "negative covenants" that may restrict leasing or require prior notification to the lender. |
| Rental Income | Unless there is a court order or a specific assignment clause triggered by default, the mortgagor owns the rent collected. |
| Notice to Lessee | It is prudent to disclose the existence of the mortgage to the lessee to avoid future claims of fraud or breach of contract if foreclosure occurs. |
Conclusion
Under Philippine law, the status of a property as "mortgaged" does not paralyze its economic utility. The mortgagor retains the legal authority to lease the property and collect rentals. However, this right is perpetually shadowed by the mortgagee’s security interest. Should the debt remain unpaid, the lease is ultimately precarious, as a foreclosure sale can extinguish the lessee’s right to stay, regardless of the remaining term of the lease agreement.