Deed of Sale Valid Between Parties Even If Not Notarized

THE ESTATE OF PEDRO C. GONZALES and HEIRS OF PEDRO C. GONZALES, Petitioners, vs. THE HEIRS OF MARCOS PEREZ,  Respondents (THIRD DIVISION, G.R. No. 169681, November 5, 2009, has provided that:

"On the question of whether the subject Deed of Sale is invalid on the ground that it does not appear in a public document, Article 1358 of the same Code enumerates the acts and contracts that should be embodied in a public document, to wit:

            Art. 1358. The following must appear in a public document:

(1)      Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by Articles 1403, No. 2 and 1405;

(2)   The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;

(3)   The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; and

(4)  The cession of actions or rights proceeding from an act appearing in a public document.

            All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles 1403, No. 2 and 1405.

          On the other hand, pertinent portions of Article 1403 of the Civil Code provide as follows:

            Art. 1403. The following contracts are unenforceable, unless they are ratified:

x x x x

            (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a)       An agreement that by its terms is not to be performed within a year from the making thereof;

            x x x x

(e)   An agreement for the leasing for a longer period than one year,    or for the sale of real property or of an interest therein;  x x x x

          Under Article 1403(2), the sale of real property should be in writing and subscribed by the party charged for it to be enforceable. In the case before the Court, the Deed of Sale between Pedro and Marcos is in writing and subscribed by Pedro and his wife Francisca; hence, it is enforceable under the Statute of Frauds.

          However, not having been subscribed and sworn to before a notary public, the Deed of Sale is not a public document  and, therefore, does not comply with Article 1358 of the Civil Code.

          Nonetheless, it is a settled rule that the failure to observe the proper form prescribed by Article 1358 does not render the acts or contracts enumerated therein invalid. It has been uniformly held that the form required under the said Article is not essential to the validity or enforceability of the transaction, but merely for convenience. The Court agrees with the CA in holding that a sale of real property, though not consigned in a public instrument or formal writing, is, nevertheless, valid and binding among the parties, for the time-honored rule is that even a verbal contract of sale of real estate produces legal effects between the parties. Stated differently, although a conveyance of land is not made in a public document, it does not affect the validity of such conveyance. Article 1358 does not require the accomplishment of the acts or contracts in a public instrument in order to validate the act or contract but only to insure its efficacy."

"my intention was not to sell!"

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."

Source : http://sc.judiciary.gov.ph/jurisprudence/1997/jul1997/115033.htm