Monday, April 4, 2011

Extrajudicial Foreclosure of Real Estate Mortgage

Extrajudicial Foreclosure of Real Estate Mortgage

Coverage

The law covers only real estate mortgages. It is intended merely to regulate the extrajudicial sale and redemption of the property if and when the mortgagee is given a special power or express authority to do so in the deed itself or in a document annexed thereto.

Remedies available to mortgagee upon default of the mortgagor

The mortgagee has the right to foreclose the mortgage and to have the property seized and sold, in order to apply the proceeds to the payment of the principal obligation.

Requisites:

1. Debtor is in default in the payment of his obligation; and

2. Foreclosure limited to the amount mentioned in the mortgage document.

Note:

If there is an acceleration clause, the failure of the mortgagor to pay any installment will trigger the activation of the acceleration clause and give the mortgagee the right to foreclose the mortgage against the convention of prematurity.

Once the proceeds have been applied to the payment of the obligation, the debtor cannot anymore be required to pay, unless there is a deficiency between the amount of the loan and the foreclosure sale price.

The only rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his property are the right to redeem the same and the possession, use, and enjoyment of the same during the period of redemption.

Kinds of foreclosure

1. Judicial Foreclosure (Rule 68 of the Rules of Court)

2. Extrajudicial Foreclosure (Act 3135 as amended by Act 4118)

Need for “Special Power of Attorney” (SPA)

Under Section 1 of Act No. 3135, An SPA must be inserted in or attached to any Real-Estate Mortgage.

Authority to Foreclose Extrajudicially

A mortgage may be foreclosed extrajudicially where there is inserted in the contract a clause giving the mortgagee the power upon default of the debtor, to foreclose the mortgage by an extrajudicial sale of the mortgaged property.

Note: The authority to sell is not extinguished by the death of the mortgagor (or mortgagee).

Procedure in Extrajudicial Foreclosure Sale

(1) Where to file

All applications shall be filed with the Executive Judge, through the Clerk of Court, who is also Ex-Officio Sheriff.

(2) Where to sell

General Rule: The Sale must be made inside the province in which the property sold is situated.

Exception: In case the place within said province in which the sale is to be made is subject to stipulation, such sale shall be made in said place or in the municipal building of the municipality in which the property or part thereof is situated.

(3) Posting requirement

Notice of Sale shall be posted for not less than 20 days in at least 3 places of the municipality/city where the property is situated. (Sheriff’s Office, Assessor’s Office and Register of Deeds).

Posting of notice on mortgaged property not required.

Note: Failure to advertise a mortgage foreclosure sale in compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale. A substantial error or omission in a notice of sale will render the notice insufficient and vitiate the sale. (PNB v. Nepomuceno 394 SCRA 405, 2002)

(4) Publication requirement

Notice of Sale shall also be published in a newspaper of general circulation in such municipality/city where the property is located.

a. Sufficiency of newspaper publication

Notice shall also be published once a week for at least 3 consecutive weeks in a newspaper of general circulation in the municipality or city where the property is located. (Metrobank v. Peñafiel G.R. No. 173976 Feb. 27, 2009)

b. Need for republication in case of postponement

Notice of Sale shall be republished in case of postponement.

c. Personal notice to the mortgagor when and when not needed

General Rule: Personal notice to the mortgagor is not generally required.

Exemption: Unless required in the mortgage contract, the lack of personal notice to the mortgagor is not a ground to set aside a foreclosure sale.

f. Possession by purchaser of foreclosed property

The purchaser may file a petition with the CFI of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period.

Required Bond: A bond in an amount equivalent to the use of the property for a period of twelve months shall be filed, to indemnify the debtor in case it is shown that the sale was made without violating the mortgage or without complying with the requirements of this Act.

Note: The court shall order that a writ of possession be issued upon approval of the bond.

The sheriff of the province in which the property is situated shall execute the writ of possession immediately.

g. Remedy of debtor if foreclosure is not proper

The debtor may petition that the sale be set aside and the writ of possession cancelled for the reason that the mortgage was not violated or the sale was not made in accordance with the provisions thereof.

This may be done in the proceedings in which possession was requested.

Redemption

Right of Redemption is the right of the mortgagor to redeem the mortgage property within a certain period (1 year) after it was sold for the satisfaction of the mortgage debt.

Requisites for valid redemption:

1. Redemption within 1 year from registration of sale;

2. Payment of purchase price plus 1% interest per month thereon if any, paid by purchaser; AND

3. Written notice of redemption served on officer who made the sale.

(1) Who may Redeem

The following persons may redeem the property:

a. Debtor,

b. Debtor’s successors in interest,

c. Judicial creditors,

d. Judgment creditors of said debtor, or

e. Any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold.

(2) Amount of Redemption price

It shall consist of:

a. Purchase price, plus

b. 1% interest per month thereon if any.

(3) Period for redemption

General Rule: The property may be redeemed at any time within the term of one (1) year from and after the date of the sale.

Exemption: RA 8791 limits the redemption period of juridical mortgagors to only 3 months, to begin from the date of the foreclosure sale but not after the registration of the certificate of foreclosure sale whichever comes first whenever the mortgagee is a bank.

Table:

Mortgagee à

Banks

Non-Banks

Individual Debtors/Mortgagors

1 year from registration of sale

1 year from registration of sale

Juridical Persons as Debtors/Mortgagors

Until registration of certificate of sale or 3 months from sale whichever is earlier

1 year from registration of sale

(4) Effect of pendency of action for annulment of sale

The filing of court action to enforce redemption has effect of preserving the redemptioner’s rights; and freezing the expiration of one year period to redeem (Banco Filipino v CA).

Writ of possession

Upon finality of the order of confirmation or upon the expiration of the period of redemption allowed by law, the purchaser or last redemptioner shall be entitled to possession of the property.

The said purchaser or last redemptioner may secure a writ of possession, upon motion, from the court that ordered the foreclosure.

Note:

A bond is required for the writ to be issued when it is within the 1 year period of redemption.

If the mortgagor fails to redeem within the 1 year period, the buyer in the public auction may file a motion for the issuance of a writ of possession. On the strength of the sheriff’s certificate of sale, the she sheriff is duty-bound to place the buyer at the public auction in actual possession of the foreclosed property after the consolidation of title in the buyer’s name for failure of the mortgagor to redeem (De Vera v. Agloro).

(1) Ministerial duty of the court

After the consolidation of title in the buyer’s name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right.

Note:

Mandamus will lie.

The judge to whom an application for writ of possession is filed need not look into the validity of the mortgage or the manner of its foreclosure. In the issuance of a writ of possession, no discretion is left to the Trial Court. Any question regarding the cancellation of the writ in respect to the validity/regularity of the foreclosure sale or the mortgage should be determined in a subsequent proceeding (PNB v. Sanao).

(2) Enforcement against third parties

The purchaser or last redemption shall be entitled to possession of the property upon the finality of the order of confirmation or upon the expiration of the period of redemption, unless a third party is actually holding the same adversely to the judgment debtor.

(3) Pendency of action for annulment of sale

The Person who obtained possession shall furnish a bond. If the court finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession.

The order of possession shall continue in effect during the pendency of the appeal.

Annulment of Sale

The debtor may petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof.

Period for filing shall not be later than thirty (30) days after the purchaser was given possession.

Note:

It shall be done in the proceedings in which possession was requested.

Summary Procedure shall be followed.

Either of the parties may appeal from the order of the judge.

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