A property owner was made to sign a deed of sale but the intention was actually a loan with the property as security. Can he recover his property? The answer is, yes. Because it may be considered as an equitable mortgage.
As held by the Supreme Court "an equitable mortgage is defined as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. Its essential requisites are:
1. That the parties entered into a contract denominated as a contract of sale; and
2. That their intention was to secure an existing debt by way of a mortgage.
Articles 1602, 1603 and 1604 of the New Civil Code were designed to prevent circumvention of the laws and the prohibition against the creditor appropriating the mortgaged property. Courts have taken judicial notice of the well-known fact that contracts of sale with right of repurchase have been frequently used to conceal the true nature of a contract, that is a loan secured by a mortgage. The wisdom of the provisions cannot be ignored nor doubted considering that in many cases unlettered persons or even those of average intelligence invariably find themselves in no position whatsoever to bargain with the creditor. Besides, it is a fact that in times of grave financial distress which render persons hard-pressed to meet even their basic needs or answer an emergency, such persons would have no choice but to sign a deed of absolute sale of property or a sale thereof with pacto de retro if only to obtain a much-needed loan from unscrupulous money lenders.
Under the wise, just and equitable presumption in Article 1602, a document which appears on its face to be a sale - absolute or with pacto de retro - may be proven by the vendor or vendor-a-retro to be one of a loan with mortgage. In this case, parol evidence becomes competent and admissible to prove that the instrument was in truth and in fact given merely as a security for the payment of a loan. And upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the true intent of the parties at the time of the execution of the contract. Sales with a right to repurchase are not favored. As before, instruments shall not be construed to be sales with a right to repurchase, with the stringent and onerous effects which follow, unless the terms of the document and the surrounding circumstances so require. Whenever, under the terms of the writing, any other construction can be fairly and reasonably inferred, such construction will be adopted and the contract construed as a mere loan unless the court sees that, if enforced according to its terms, it is not an unconscionable pact."
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