SPOUSES REYNALDO AND EDITHA LOPEZ, PETITIONERS, VS. MARGARITA SARABIA, RESPONDENT.

Lopez versus Sarabia

The Case

This is a petition for review on certiorari brought by the spouses Reynaldo and Editha Lopez against Margarita Sarabia. Margarita sued the spouses to annul a document called an Assumption of Mortgage with Quitclaim, to compel them to redeem and reconvey two parcels of land and the house standing on one of them, and to recover damages. The spouses claimed that Margarita had sold them the property. The case matters because the Supreme Court uses it to draw a sharp line between an equitable mortgage and a true sale, and then to settle who may invoke the law on builders in good faith. The answer is that a lessee who builds on the land he leases cannot claim the rights of a builder in good faith under the law on accession; his rights are governed by the law on lease.

Procedural History

Margarita Sarabia filed her complaint for annulment of document, specific performance and reconveyance with damages before the Regional Trial Court of Kalibo, Aklan, Branch 6, naming the Lopez spouses and the Development Bank of the Philippines as defendants. The trial court rendered judgment in favor of Margarita. It declared the Deed of Assumption and Quitclaim a relatively simulated contract, declared the transfer of title to the spouses simulated and void, held that they merely held legal title in trust for Margarita, declared the mortgage to the bank null and void, ordered the properties conveyed back to Margarita, ordered the spouses to vacate, and ordered them to pay attorney's fees, litigation expenses and costs. It also found the spouses in bad faith and forfeited the improvements in Margarita's favor.

The spouses appealed to the Court of Appeals. The appellate court affirmed the finding that the transaction was an equitable mortgage and not a sale, but modified the decision by declaring the spouses builders in good faith, so that the improvements they introduced after the transaction should either be purchased by Margarita or removed at the spouses' expense. The spouses then elevated the case to the Supreme Court by petition for review on certiorari.

Facts

Margarita Sarabia owned two lots in Poblacion, Kalibo, Aklan, with a residential house built on one of them. The Lopez spouses rented the second floor of that house for three hundred pesos a month. The other lot carried a building rented by a boarder. Margarita's property had been mortgaged to the Philippine National Bank since 1978, and by March 1984 her outstanding balance had ballooned to about sixty-three thousand pesos, with foreclosure looming.

In March 1984 the spouses asked Margarita if they could construct additional rooms for their growing children. She told them she had no money for construction. They proposed to apply for a housing loan from the Development Bank of the Philippines using her property as collateral. To facilitate the loan, the property had to be placed in their names. Relying on their assurances that they would religiously pay the amortization, Margarita agreed. A document denominated Assumption of Mortgage with Quitclaim was executed, authorizing the Register of Deeds to cancel her titles and issue new ones in the names of the spouses. The spouses then mortgaged the properties to the bank and obtained a loan of one hundred sixty-three thousand pesos, paid off the Philippine National Bank, stopped paying rent to Margarita, and even collected the rentals from the other lot.

In October 1987 Reynaldo Lopez asked Margarita for thirty thousand pesos to update the loan payments, and she gave it, expecting an official receipt from the bank. When none came, she inquired at the bank and discovered that the amortization had not been paid and that her property was again in danger of foreclosure. She then filed the action. The spouses insisted that she had sold them the property, while she maintained that she had merely lent her titles so that they could obtain a loan to redeem her property.

Issues

• Whether or not the transaction between Margarita Sarabia and the Lopez spouses was a true sale or an equitable mortgage.
• Whether or not the Lopez spouses may invoke the rights of a builder in good faith under the law on accession, specifically Article 448 of the Civil Code.
• Whether or not the rights of the spouses over the improvements are governed instead by Article 1678 of the Civil Code on lease.

Applicable Provisions

Article 1602 of the New Civil Code provides:

When the price of a sale with right to repurchase is usually inadequate; When the vendor remains in possession as lessee or otherwise; When upon the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; When the purchaser retains for himself a part of the purchase price; When the vendor binds himself to pay the taxes on the thing sold; In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation; In any of the foregoing cases, any money, fruits or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws.

This provision supplies the presumption that a contract is an equitable mortgage, and the Court uses it to characterize the transaction here.

Article 1678 of the New Civil Code provides:

If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease, shall pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary.

This is the provision that governs the spouses' claim for reimbursement, because they were lessees of the property.

Ruling

On the first issue, the Court held that there is no dispute that the transaction was one of equitable mortgage and not a sale. No matter what nomenclature is given to a document, Article 1602 presumes an equitable mortgage in the enumerated cases. The Court found that Margarita remained in possession of the house, that it was inconceivable she would sell her house and two lots just to pay the bank loan, that the acknowledgment receipt signed by Reynaldo Lopez showed she was paying them a partial refund of the loan they had assumed, and that the spouses never paid the monthly amortization. The Court stressed that the law favors the least transmission of rights and interests, and that the spouses took advantage of Margarita's advanced age and urgent necessity for money. The real agreement was a mere loan to enjoin foreclosure, not a transfer of property.

On the second issue, the Court held that the spouses cannot invoke Article 448. The Court explained that the provisions on accession and possession apply only to a possessor in good faith, one who builds on land with the belief that he is the owner thereof, and who is unaware of any flaw in his title at the time he builds. Here the spouses knew that Margarita's titles were merely lent to them to secure the loan, so they could not claim to be owners. More importantly, they were lessees of Margarita, and the Court held that Article 448 does not apply where the only interest of the builder is that of a holder, such as a tenant or a lessee. Whether or not Margarita consented to the construction was therefore of no moment.

On the third issue, the Court held that the spouses' right to reimbursement is governed by Article 1678, which entitles a lessee in good faith to one-half of the value of useful improvements, or to remove them if the lessor refuses to reimburse. Their reliance on Article 448 was misplaced.

Doctrine

First, a contract is presumed to be an equitable mortgage in any of the cases enumerated in Article 1602 of the Civil Code, and the decisive factor is the intention of the parties as shown by all the surrounding circumstances, not the terminology used in the document. Documentary and parol evidence may be admitted to prove that intention.

Second, the rights granted to a builder in good faith under the law on accession belong only to a possessor who builds on land believing himself to be the owner and unaware of any flaw in his title. A lessee cannot invoke them, because his only interest is that of a holder.

Third, the claim of a lessee in good faith for useful improvements is governed by Article 1678 of the Civil Code, which entitles him to one-half of the value of the improvements at the time, or to remove them if the lessor refuses to reimburse.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Appeals with modification, holding that the spouses, being mere lessees, are not builders in good faith and that their rights over the improvements are governed by Article 1678 of the Civil Code.

Remember This

The single line worth memorizing is that Article 448 does not apply where the only interest of the builder is that of a lessee, whose claim is governed by Article 1678. Examiners like to use this case to test the distinction between an equitable mortgage and a sale, and to test whether a candidate knows that the law on builders in good faith excludes tenants and lessees.