The law protects the weak

Art entered into a contract to sell with Trans Sales Inc. over a lot located in a flood prone city with a townhouse to be constructed by the latter.

Trans Sales thereafter obtained a loan from a bank using the said property as collateral. When the company defaulted on the loan, the bank extrajudicially foreclosed the mortgaged property and acquired it through auction.

Art had already paid a sizable amount when he stopped payment because the construction of his townhouse unit slackened. He then discovered that this was due to the foreclosure.

Art filed a case against the company to compel it to compete the construction of the townhouse and prevent the enforceability of the extra-judicial foreclosure made by the bank and to have the mortgage between Trans Sales and the bank declared invalid because one, the said mortgage was entered in violation of Section 18 of Presidential Decree No. 957 (PD 957), which requires the prior written approval of the Housing and Land Use Regulatory Board (HLURB) for mortgages on subdivision lots or condominium units; and (b) that the mortgage was void because it lacked HLURB approval.

The Bank countered that Section 18 of PD 957 does not apply because the land mortgaged to it was one whole parcel not of a subdivision lot, but of an unsubdivided one. It insists that the written approval of the HLURB
 was not a requirement for the constitution of the mortgage on the property.

Q: Did the mortgage contract executed between Sales Trans, Inc. and the bank violate Section 18 of P.D. 957?

A: Yes. Section 18 of PD 957 provides as follows:

“SEC. 18. Mortgages. – No mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the Authority. Such approval shall not be granted unless it is shown that the proceeds of the mortgage loan shall be used for the development of the condominium or subdivision project and effective measures have been provided to ensure such utilization. The loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his option, pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage indebtedness secured by the particular lot or unit being paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full payment thereof.”

The fact that the subject of the mortgage was the entire land, not the individual subdivided lots, does not take the loan beyond the coverage of Section 18 of PD 957.

The lot was also mortgaged when the entire parcel of land, of which it was a part, was encumbered. The lot was mortgaged in violation of Section 18 of PD 957. Art, who was the buyer of the property, was not notified of the mortgage before the release of the loan proceeds by the bank. Acts executed against the provisions. of mandatory or prohibitory laws shall be void.

Under PD 957, the mortgage of a subdivision lot or a condominium unit is void, if executed by a property developer without the prior written approval of the HLURB. That an encumbrance has been constituted over an entire property, of which the subject lot or unit is merely a part, does not affect the invalidity of the lien over the specific portion at issue.

Hence, the mortgage over the lot is null and void insofar as the private respondent is concerned.

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Q: Is Section 18 of PD 957 merely directory or prohibitory law?

A: It is a prohibitory law. The unmistakable intent of the law is to protect innocent lot buyers from scheming subdivision developers.

As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law—as an instrument of social justice—must favor the weak.

Section 18 is of the decree directly addresses the problem of fraud committed against buyers when the lot they have contracted to purchase, and which they have religiously paid for is mortgaged without their consent. The avowed purpose of the law compels the reading of Section 18 as prohibitory. Thus, acts committed against Section 18 are void.

(Source: Far East Bank vs. Marquez, G.R. No. 147964, January 20, 2004, J. Panganiban, First Division)

The author is the Dean at Lyceum of the Philippines University, a trustee at the Movement against Disinformation (MAD), and founder of Mawis Law Office