Securing a Loan on Property with an Adverse Claim (Philippines)

Overview

An adverse claim is a statutory annotation on a Transfer Certificate of Title (TCT) or Original Certificate of Title (OCT) by a person who asserts an interest in registered land that is adverse to the registered owner and is not otherwise registrable. It serves as public notice within the Torrens system that someone else is asserting a right (e.g., a buyer under an unregistered sale, a co-owner or heir alleging beneficial ownership, or a claimant to an easement or trust).

Because lenders—especially banks and quasi-banks—are held to a high standard of diligence in real estate transactions, an adverse claim on title is a red flag. It does not make the title void, but it does usually prevent credit approval unless the claim is resolved or the risk is otherwise neutralized.

This article explains how adverse claims work, their effects on mortgages and foreclosures, diligence and structuring options, and practical pathways to clear or navigate the annotation.

Legal Foundations (What the Law Contemplates)

Torrens System principle. Registration is the operative act that binds third persons. However, annotations such as adverse claims and notices of lis pendens qualify the registered owner’s title and warn third parties, including lenders.
Adverse claim mechanics. A claimant may file a sworn statement with the Register of Deeds (RD) asserting an adverse interest. The RD assesses formal sufficiency and, if in order, annotates the claim on the title and its memorandum of encumbrances.
Duration and cancellation. Although the rules provide a path for cancellation (by consent, by petition before the RD with notice and hearing, or by court order), an adverse claim does not simply disappear on its own and, in practice, may remain until specifically cancelled.
Effect on third parties. Once annotated, the adverse claim puts everyone on notice. A mortgage registered after an adverse claim is typically subject to that claim. A lender cannot rely on “mortgagee in good faith” when the very certificate of title flags a pending adverse interest.

Key distinction: An adverse claim is a claimant’s notice of an asserted interest; a notice of lis pendens refers to a pending court action affecting title or possession. A lis pendens is often more serious because it signals active litigation.

Practical Effects on Loan Transactions

1) Bankability of the Property

Banks and regulated lenders usually require a clean title—i.e., no adverse claims, no lis pendens, no tax liens, no adverse annotations—before drawdown.
If the loan is approved despite the annotation, expect lower loan-to-value (LTV), higher pricing, and stringent conditions precedent.

2) Priority of Interests

Order of registration controls. If the adverse claim is annotated before the real estate mortgage (REM), the mortgage is taken subject to the claim. If the mortgage is first and validly registered, later adverse annotations do not retroactively impair it (subject to fraud/forgery exceptions).
Buyer at foreclosure steps into the mortgagee’s shoes and takes the property subject to prior annotations.

3) Mortgagee-in-Good-Faith Doctrine (Banks)

Banks are expected to investigate beyond the title when red flags exist. If an adverse claim is on the face of the title, a bank that proceeds without resolving it risks losing good-faith protection and, in extreme cases, the mortgage’s enforceability against the adverse claimant.

Due Diligence: What Lenders (and Borrowers) Should Do

Secure a fresh CTC (certified true copy) of the title from the RD to confirm all annotations.
Obtain the source documents behind the adverse claim (the sworn statement filed with the RD, supporting deeds, correspondence).
Cross-check tax and land records: real property tax clearance, tax declarations, assessor’s records.
Investigate possession and improvements: who’s in actual possession, who collects rents, and who paid for improvements.
Look for related proceedings: probate/estate cases, partition suits, reconveyance/annulment actions, agrarian reform coverage, ancestral domain claims, or barangay conciliation attempts.
Identify personal circumstances: marital property regime (spousal consent may be required), corporate authority (board approvals), and restrictions (e.g., homestead, CLOA/CARP, resettlement).
Title chain review: previous titles, mode of acquisition, and any gaps.

Clearing or Managing an Adverse Claim

A. Voluntary Cancellation

Quitclaim/Release from the claimant, duly notarized, presented to the RD for annotation of cancellation. Often the fastest route if the dispute is commercial (e.g., unpaid balance under a private sale).
Settlement/Escrow. Borrower and claimant settle the dispute using loan proceeds placed in escrow, releasing funds to the claimant upon simultaneous cancellation at the RD.

B. Administrative Petition before the RD

Petition to cancel the adverse claim, with notice to the claimant and summary hearing. Grounds often include lack of legal basis, satisfaction/extinguishment of obligation, or formal defects.
Outcome is an RD order directing cancellation (which is then annotated), or denial (which can be appealed).

C. Judicial Relief

Quieting of title / reconveyance / annulment of instruments. When facts are contested, court action may be necessary. A lis pendens may then replace or supplement the adverse claim.
Provisional remedies (e.g., injunction) can be sought to prevent further prejudicial acts during litigation.

D. Substitution of Collateral

If clearing will take time, parties may:
- Switch to other unencumbered property;
- Use additional collateral (e.g., pledge of shares, assignment of receivables) until the title is cleaned;
- Take a bridge loan secured by movable assets, then refinance with an REM after cancellation.

Structuring Techniques if the Lender Will Proceed (Rare but Possible)

Conditions Precedent (CPs)
- Delivery of the claimant’s release/quitclaim or RD cancellation order;
- Escrow instructions: no drawdown until the RD issues the cancellation annotation;
- Updated CTC dated the same day as drawdown.
Risk Allocation
- Representations & Warranties: Borrower warrants full ownership, absence of undisclosed claims, and accuracy of disclosures.
- Indemnity: Borrower indemnifies lender for losses from the adverse claim.
- Default/Material Adverse Change: Any adverse development regarding the claim is an Event of Default.
Lien Priority Management
- If unavoidable, the REM states it is subject to the identified adverse claim, with a covenant that the borrower will cause cancellation by a fixed date (a sunset covenant).
- Controlled disbursements: staged release of proceeds as milestones toward cancellation are met.
Pricing and LTV
- Expect haircuts on appraised value, higher interest, and stricter covenants to compensate for legal risk.

Common Scenarios & How They Play Out

Unregistered buyer’s interest (Double sale risk). A buyer who paid but failed to register may file an adverse claim. A later mortgagee is bound by the notice and risks subordination to the buyer’s equitable ownership. Banks will usually require a quitclaim from the buyer or rescission evidence.
Heir/co-owner dispute. One heir claims beneficial ownership. Lender will insist on estate settlement (extrajudicial or judicial) and consolidation of title before any REM.
Spousal claims. If property is conjugal/community, lack of spousal consent to the mortgage renders it void as to the non-consenting spouse. An adverse claim from the spouse signals high litigation risk.
Agrarian reform/CLOA restrictions. If the land is covered by agrarian reform, transfers and encumbrances may be restricted. An adverse claim by a beneficiary or DAR-related annotation can make the asset largely non-bankable.
Annotation vs. actual possession. If the adverse claimant is also in actual possession, courts tend to take the claim seriously; lenders will typically stand down until cleared.

Registration and Fees (When the Mortgage Is Otherwise Acceptable)

Real Estate Mortgage (REM) must be in a public instrument (notarized) and registered with the RD where the property is located.
Taxes and fees: documentary stamp tax (on the loan amount), registration and entry fees, notarial fees, and other RD charges.
Insurance: Fire/Allied Perils/Earthquake insurance on improvements; sometimes mortgage redemption insurance on the borrower’s life.
Post-registration: obtain an updated CTC showing the REM annotation, and ensure tax payments are current.

Impact on Foreclosure

Extrajudicial foreclosure (Act No. 3135) or judicial foreclosure proceeds on default.
If the adverse claim predates the REM, the foreclosure does not extinguish that earlier adverse right; the purchaser at auction acquires the property subject to the claim and its eventual court resolution.
If the REM is prior and valid, the adverse claimant who later annotates typically cannot defeat the mortgage—absent fraud.

Lender Playbook (Checklist)

Pre-Approval

☐ Fresh CTC with all pages
☐ Copy of adverse claim affidavit + attachments
☐ Site visit and possession check
☐ Tax clearance and arrears check
☐ Identity/authority and marital status checks
☐ Search for lawsuits and pending cases

Credit Decision

☐ Require release/quitclaim or RD cancellation order
☐ If proceeding, set CPs, LTV haircut, pricing, and covenants
☐ Escrow structure for simultaneous cancellation and drawdown

Closing

☐ Same-day updated CTC showing (a) adverse claim cancelled; and (b) REM annotated
☐ Insurance and undertakings in place
☐ Original owner’s duplicate title held by lender (if applicable)

Post-Closing

☐ Monitor any reappearance of claims or new annotations
☐ Keep taxes and insurance current

Borrower Playbook (If You Need the Loan)

Engage the claimant early. Determine what will resolve the claim (payment, rescission, deed correction).
Paper the settlement. Draft a clear quitclaim/release with waiver of rights and authority to cancel.
Schedule with the RD. Prepare simultaneous filing: (i) cancellation of adverse claim; (ii) REM registration.
Use escrow if needed. Protect both sides by conditioning fund release on successful cancellation.
Avoid partial fixes. If litigation is threatened, consider deferring the REM or substituting collateral.

Frequently Asked Questions

Does an adverse claim automatically expire? No. While there are procedures for cancellation, in practice the annotation remains until cancelled by consent, by the RD after notice and hearing, or by court order.

Can I still register a mortgage with an adverse claim in place? Yes, the RD may accept the REM for registration. But the REM’s effectiveness against the claimant depends on priority and the merits of the adverse claim. Most lenders will not release funds until the claim is cleared.

What if the adverse claim is frivolous? You may petition the RD for cancellation, presenting evidence of lack of basis. If contested, court action for cancellation/quieting of title may be required.

Is a bank ever a mortgagee in good faith when there’s an adverse claim on title? Rarely. The annotation is constructive notice of trouble; banks are expected to investigate and will struggle to claim good faith if they ignore it.

Is title insurance a solution? Local title insurance products exist but are not universal and may exclude known adverse claims. They are, at best, supplementary, not a substitute for cancellation.

Model Clauses (Illustrative Only)

Condition Precedent – Cancellation of Adverse Claim “No drawdown shall occur until the Register of Deeds has annotated the Cancellation/Release of Adverse Claim on TCT No. ________, and Borrower has delivered a certified true copy of said title reflecting the cancellation and the Real Estate Mortgage in favor of Lender.”

Sunset Covenant – Clearing of Annotation “Borrower shall cause the cancellation of the Adverse Claim annotated on TCT No. ________ on or before [date]. Failure constitutes an Event of Default.”

Indemnity “Borrower shall indemnify and hold Lender harmless from any loss, claim, or expense arising out of or in connection with the Adverse Claim annotated on TCT No. ________, including reasonable attorneys’ fees.”

Bottom Line

An adverse claim is a serious, registrable warning sign that typically blocks or conditions real estate lending.
The safest path to loan funding is to cancel the adverse claim—via quitclaim and RD annotation, RD cancellation after hearing, or court order—before drawdown.
If a lender proceeds notwithstanding, expect subordinated rights, pricing/LTV adjustments, escrowed closings, and heavy covenants.
Priority of registration governs, but banks and sophisticated lenders are still expected to exercise enhanced diligence, making a clean title the practical prerequisite.

This article provides general information on Philippine practice and should not be taken as legal advice. For a specific transaction, consult counsel to tailor strategy, documentation, and timing to your facts and the applicable registry’s procedures.