In Philippine property law, a Real Estate Mortgage (REM) is a contract whereby a debtor (mortgagor) secures to the creditor (mortgagee) the fulfillment of a principal obligation by subjecting immovable property to the security in case of default. A common question arises: What happens if the mortgage deed is signed, notarized, but never registered with the Registry of Deeds?
While registration is a key step in the mortgage process, an unregistered mortgage is far from a "scrap of paper." It carries specific legal weights and limitations under the Civil Code and the Property Registration Decree (P.D. 1529).
1. Validity and Enforceability
The distinction between a "valid" contract and a "binding" effect on third parties is the crux of unregistered mortgages.
- Between the Parties (Binding): Under Article 2125 of the Civil Code, even if the instrument is not recorded, the mortgage is nevertheless binding between the parties. As long as the essential requisites of a contract (consent, object, and cause) and the specific requisites of a mortgage (Art. 2085) are present, the mortgagor cannot escape the obligation simply because it wasn't registered.
- Against Third Persons (Not Binding): The primary purpose of registration is notice to the whole world. Without registration, the mortgage does not constitute a lien that "follows" the property if it is sold to a "purchaser in good faith and for value." If the mortgagor sells the property to someone who has no knowledge of the unregistered mortgage, that buyer usually takes the property free from the mortgage lien.
- The Right to Compel Registration: Since the contract is valid between the parties, the mortgagee has the legal right to demand the execution of a registrable document or to compel the mortgagor to surrender the Owner's Duplicate Certificate of Title to facilitate registration.
2. The Doctrine of "Equitable Mortgage"
If a contract appears to be an absolute sale (a Pacto de Retro sale) but the parties actually intended it to secure a debt, Philippine law treats it as an Equitable Mortgage (Art. 1602, Civil Code).
Even if this "sale" is not registered as a mortgage, the court will treat it as one. This protects the debtor from losing their property without the formal foreclosure process required by law.
3. Judicial vs. Extrajudicial Foreclosure
Can you foreclose on an unregistered mortgage?
- Judicial Foreclosure: Yes. A mortgagee can file a petition for judicial foreclosure based on the unregistered deed because, as mentioned, the contract is valid between the parties.
- Extrajudicial Foreclosure: This is more complex. Act No. 3135 (the law governing extrajudicial foreclosure) generally requires the mortgage to be registered. Most Registries of Deeds will refuse to conduct an extrajudicial sale or process the resulting Sheriff's Certificate of Sale if the underlying mortgage was never annotated on the title.
4. Criminal Liability: Article 316 of the Revised Penal Code
This is the most critical area for mortgagors to understand. Non-registration does not grant immunity from criminal prosecution if the property is dealt with dishonestly.
Under Article 316 (Paragraph 2) of the Revised Penal Code (Other Forms of Swindling/Estafa), criminal liability is imposed upon:
"Any person who, knowing that real property is encumbered, shall dispose of the same as unencumbered."
Key points on criminal liability:
- The Act: Selling or pledging a property as "free and clear" when the owner knows there is an existing (even if unregistered) mortgage.
- The Element of Deceit: The crime is committed because the owner misrepresented the status of the property to a third party or prejudiced the original mortgagee.
- The Result: A mortgagor who signs an unregistered REM and then sells the property to a third party without disclosing that mortgage can be charged with Estafa.
Summary Table: Registered vs. Unregistered REM
| Feature | Registered Mortgage | Unregistered Mortgage |
|---|---|---|
| Validity | Valid between parties | Valid between parties |
| Effect on 3rd Parties | Binds the whole world | Does not bind innocent 3rd parties |
| Foreclosure | Easy (Judicial or Extrajudicial) | Difficult (Likely Judicial only) |
| Criminal Risk | Low (Public record exists) | High (If sold as "unencumbered") |
Conclusion
An unregistered Real Estate Mortgage is a valid and enforceable contract between the borrower and the lender. While the lender loses the "priority" and "protection" against third-party buyers that registration provides, they retain the right to sue for the debt or foreclose the property. Conversely, for the mortgagor, failing to disclose an unregistered mortgage during a subsequent sale is not a "loophole"—it is a criminal act of Estafa.
Would you like me to draft a demand letter for a mortgagee seeking to compel the registration of an existing mortgage deed?