Lease, Accessory Contracts, Credits

LEASE OF THINGS LEASE OF RURAL AND URBAN LANDS

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THOSE DQ’D TO BUY ALSO CANNOT BE LESSEES
BASIC CONCEPTS
Art. 1490. - The husband and the wife cannot sell property to
Art. 1642. - The contract of lease may be of things, or of work each other, except:
and service. (1) When a separation of property was agreed upon in the
marriage settlements;
(2) When there has been a judicial separation of property
Proper Lease Piece of Work under article 191.

when subject matter is a thing when subject matter is a service

lease of things
ESSENCE
Art. 1643. - In the lease of things, one of the parties binds
himself to give to another the enjoyment or use of a thing for a
price certain, and for a period which may be de nite or
inde nite. However, no lease for more than ninety-nine years
shall be valid.
• contract w/c involves grant of temporary use/enjoyment of
property to another in consideration of payment of price
certain in money or its equivalent (rent)
• it’s commodatum when the grant is gratuitous
• it’s an innominate contract when the consideration is delivery
of another thing or rendition of service
LESSOR NEED NOT BE OWNER
• as lease does not involve any transfer of ownership
• but lessor has a right (usufructuary or lessee) or at least an
authority (agent of owner), otherwise contract is void due to
cause/object of w/c did not exist at time of transaction
Art. 1491. - The following persons cannot acquire by purchase,
even at a public or judicial auction, either in person or through
the mediation of another:
lease of service (1) The guardian, the property of the person or persons who
may be under his guardianship;
(2) Agents, the property whose administration or sale may
have been intrusted to them, unless the consent of the
principal has been given;
(3) Executors and administrators, the property of the estate
under administration;
(4) Public o cers and employees, the property of the State or
of any subdivision thereof, or of any government-owned or
controlled corporation, or institution, the administration of
which has been intrusted to them; this provision shall apply
to judges and government experts who, in any manner
whatsoever, take part in the sale;
(5) Justices, judges, prosecuting attorneys, clerks of superior
and inferior courts, and other o cers and employees
connected with the administration of justice, the property
and rights in litigation or levied upon an execution before
the court within whose jurisdiction or territory they exercise
their respective functions; this prohibition includes the act
of acquiring by assignment and shall apply to lawyers, with
respect to the property and rights which may be the object
of any litigation in which they may take part by virtue of
their profession;
(6) Any others specially disquali ed by law.

CONSENSUAL CONTRACT FOREIGNERS ALLOWED TO LEASE IN PH

• preferred at moment there is a meeting of minds on thing and When Foreigner is investing in the PH
cause and consideration to constitute the contract
• lease shall be for a period not > 50 years
SUBJECT MATTER • renewable once for a period of not > 25 years
• shall be used solely for purpose of investment upon the
Art. 1645. - Consumable goods cannot be the subject matter of mutual agreement of the parties
a contract of lease, except when they are merely to be
exhibited or when they are accessory to an industrial When Foreigner is not investing in the PH
establishment.
• he is allowed to lease private lands in PH for max period of
25 years
• renewable for another period of 25 years upon parties’
mutual agreement

WHEN GOVERNED BY STATUTE OF FRAUDS

• needs to be in writing (those leases of real property > 1 year)

WHEN SPA IS UNNECESSARY

Art. 1647. - If a lease is to be recorded in the Registry of

Property, the following persons cannot constitute the same
without proper authority: the husband with respect to the wife’s
paraphernal real estate, the father or guardian as to the
property of the minor or ward, and the manager without special
power.

Art. 1878. - Special powers of attorney are necessary in the

following cases:
(8) To lease any real property to another person for more than
one year.

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RIGHTS AND OBLIGATIONS OF PARTIES

• otherwise, lease is void
RIGHT TO ASSIGN CONTRACT
EFFECT OF RECORDING IN REGISTRY OF PROPERTY
Art. 1649. - The lessee cannot assign the lease without the
Art. 1648. - Every lease of real estate may be recorded in the consent of the lessor, unless there is a stipulation to the
Registry of Property. Unless a lease is recorded, it shall not be contrary.
binding upon third persons.
Rule
Art. 1676. - The purchaser of a piece of land which is under a
lease that is not recorded in the Registry of Property may • lessee cannot assign lease
terminate the lease, save when there is a stipulation to the
contrary in the contract of sale, or when the purchaser knows XPNs
of the existence of the lease.
If the buyer makes use of this right, the lessee may demand • assignment is w/ lessor’s consent
that he be allowed to gather the fruits of the harvest which • stipulation in contract allowing assignment
corresponds to the current agricultural year and that the vendor
indemnify him for damages su ered. RIGHT TO SUBLEASE
If the sale is ctitious, for the purpose of extinguishing the
lease, the supposed vendee cannot make use of the right Art. 1650. - When in the contract of lease of things there is no
granted in the rst paragraph of this article. The sale is express prohibition, the lessee may sublet the thing leased, in
presumed to be ctitious if at the time the supposed vendee whole or in part, without prejudice to his responsibility for the
demands the termination of the lease, the sale is not recorded performance of the contract toward the lessor.
in the Registry of Property.
Rule
TERM OF LEASE
• lessee allowed to sublet
Term Agreed Upon
XPN
• but no lease for > 99 years shall be valid
• expressly prohibited in contract
For All Time Necessary for Gathering of Fruits
Sublessee’s Duties
Art. 1682. - The lease of a piece of rural land, when its duration
has not been xed, is understood to have been for all the time Bound to Lessor re Acts for Use and Preservation of Thing
necessary for the gathering of the fruits which the whole estate
leased may yield in one year, or which it may yield once, Art. 1651. - Without prejudice to his obligation toward the
although two or more years may have to elapse for the sublessor, the sublessee is bound to the lessor for all acts
purpose. which refer to the use and preservation of the thing leased in
the manner stipulated between the lessor and the lessee.
Year to Year
Subsidiarily Liable for Rent
Art. 1687. - If the period for the lease has not been xed, it is
understood to be from year to year, if the rent agreed upon is Art. 1652. - The sublessee is subsidiarily liable to the lessor for
annual; from month to month, if it is monthly; from week to any rent due from the lessee. However, the sublessee shall not
week, if the rent is weekly; and from day to day, if the rent is to be responsible beyond the amount of rent due from him, in
be paid daily. However, even though a monthly rent is paid, and accordance with the terms of the sublease, at the time of the
no period for the lease has been set, the courts may x a extra-judicial demand by the lessor.
longer term for the lease after the lessee has occupied the Payments of rent in advance by the sublessee shall be deemed
premises for over one year. If the rent is weekly, the courts may not to have been made, so far as the lessor’s claim is
likewise determine a longer period after the lessee has been in concerned, unless said payments were e ected in virtue of the
possession for over six months. In case of daily rent, the courts custom of the place.
may also x a longer period after the lessee has stayed in the
place for over one month.
LESSOR’S PRINCIPAL OBLIGATIONS
• but when the lease provides that it “shall continue for an Art. 1654. - The lessor is obliged:
inde nite period provided the lessee is up-to-date in the
(1) To deliver the thing which is the object of the contract in
payment of his monthly rentals,” then 1687 is N/A
such a condition as to render it t for the use intended;
(2) To make on the same during the lease all the necessary
repairs in order to keep it suitable for the use to which it
has been devoted, unless there is a stipulation to the
contrary;
(3) To maintain the lessee in the peaceful and adequate
enjoyment of the lease for the entire duration of the
contract.

DELIVER THING IN CONDITION FIT FOR INTENDED USE

• since delivery of object of contract is merely an obligation

created by contract upon perfection, the lessor can be
compelled to make the delivery

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MAKE NECESSARY REPAIRS IMPLIED NEW LEASE

• during lease Art. 1670. - If at the end of the contract the lessee should
• on the leased premises continue enjoying the thing leased for fteen days with the
• to keep it suitable for use to w/c it has been devoted acquiescence of the lessor, and unless a notice to the contrary
by either party has previously been given, it is understood that
XPN: Stipulation to the Contrary there is an implied new lease, not for the period of the original
contract, but for the time established in articles 1682 and 1687.
Where “Repairs” does not extend to The other terms of the original contract shall be revived.

Reconstruction of Leased House completely destroyed by CONCEPT

Fire
• aka tacita reconducción
• since repairs can refer only to a partial destruction or • lessee’s right to continue enjoying the material/de facto
impairment possession of thing leased w/in period xed by law
• during its existence, the lessee can prevent the lessor from
“Filling Up” of a Lot evicting him from the disputed premises

REQUISITES
• would actually be an improvement rather than a repair

MAINTAINING LESSEE IN PEACEFUL AND ADEQUATE • term of lease expired

ENJOYMENT FOR DURATION OF LEASE • lessor has not given the lessee a notice to vacate
• lessee continued enjoying thing leased for 15 days w/
Art. 1664. - The  lessor is not obliged to answer for a mere act acquiescence of lessor
of trespass which a third person may cause on the use of the
thing leased; but the lessee shall have a direct action against Note:
the intruder. • acquiescence may be inferred from failure of lessor to serve
There is a mere act of trespass when the third person claims no notice to vacate upon lessee
right whatever.
EFFECT
• lessor is liable only for cases of legal trespass
• no liability in cases of mere trespass in fact • other terms of original contract, besides period, are revived
• such terms as are germane to lessee’s right of continued
Note: enjoyment of property leased
• simply put, lessor’s duty to maintain lessee in such enjoyment
for such duration is merely a warranty that lessee shall not be Examples
disturbed in having legal and not physical possession of the
property • amount of rental
• date when to be paid
• care of property
LESSEE’S PRINCIPAL OBLIGATIONS
• responsibility of repairs
OVERVIEW
Note:
Art. 1657. - The lessee is obliged: • no such presumption may be indulged in w/ respect to
special agreements w/c by nature are foreign to the right of
(1) To pay the price of the lease according to the terms
occupancy or enjoyment inherent in a lease (like option to
stipulated;
bye eased premises or a right of rst refusal granted in
(2) To use the thing leased as a diligent father of a family,
original contract)
devoting it to the use stipulated; and in the absence of
stipulation, to that which may be inferred from the nature of
TERM
the thing leased, according to the custom of the place;
(3) To pay the expenses for the deed of lease.
For Urban Lands
TO SUSPEND PAYMENT OF RENT
• year to year (rent agreed upon is annual)
• month to month (monthly)
Art. 1658. - The lessee may suspend the payment of the rent in
• week to week (weekly)
case the lessor fails to make the necessary repairs or to
• day to day (daily)
maintain the lessee in peaceful and adequate enjoyment of the
property leased.
For Rural Lands

• understood made for all the time necessary for the gathering
of fruits w/c whole estate leased may yield in 1 year, or w/c it
may yield once, although 2 or more years may have to elapse
for the purpose

EFFECT WHEN NO IMPLIED NEW LEASE

• when lessee continues enjoying thing after contract’s

expiration, and there is no implied new lease because lessor
objected to continued enjoyment by lessee, the latte shall be
subject to responsibilities of a possessor in bad faith

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PIECE OF WORK EFFECT OF MATERIALS’ DEFECT

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Art. 1722. - If the work cannot be completed on account of a
BASIC CONCEPTS defect in the material furnished by the employer, or because of
orders from the employer, without any fault on the part of the
DEFINITION contractor, the latter has a right to an equitable part of the
compensation proportionally to the work done, and
Art. 1713. - By the contract for a piece of work the contractor reimbursement for proper expenses made.
binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. The MECHANIC’S LIEN
contractor may either employ only his labor or skill, or also
furnish the material. Art. 1731. - He who has executed work upon a movable has a
right to retain it by way of pledge until he is paid.
• obligation created upon contractor is one to do
• right of retention is conditioned upon execution of work upon
KINDS the movable
• thus, if contractor fails to accomplish the repairs on the truck,
• employment of labor or skill the right to retain the truck in accordance w/ article 1731 does
• employment of labor and furnishing of material not rise

WHEN CONTRACTOR ALSO FURNISHES MATERIALS

CONTRACTOR’S PRINCIPAL OBLIGATIONS

Art. 1714. - If the contractor agrees to produce the work from

material furnished by him, he shall deliver the thing produced
to the employer and transfer dominion over the thing. This
contract shall be governed by the following articles as well as
by the pertinent provisions on warranty of title and against
hidden defects and the payment of price in a contract of sale.

• deliver thing produced

• transfer dominion over thing
• warrant that he has right to transfer ownership of thing
• warrant that thing is free from hidden defects/faults

EFFECT OF LOSS PRIOR TO DELIVERY

Art. 1717. - If the contractor bound himself to furnish the

material, he shall su er the loss if the work should be
destroyed before its delivery, save when there has been delay
in receiving it.

WHEN CONTRACTOR ONLY EMPLOYS LABOR

Art. 1718. - The contractor who has undertaken to put only his
work or skill, cannot claim any compensation if the work should
be destroyed before its delivery, unless there has been delay in
receiving it, or if the destruction was caused by the poor quality
of the material, provided this fact was communicated in due
time to the owner. If the material is lost through a fortuitous
event, the contract is extinguished.

RULE

• contractor cannot claim any compensation if the work is

destroyed before delivery

XPNs

• when there’s been delay in receiving it

• when destruction was caused by material’s poor quality
(provided, this fact was communicated in due time of owner)

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EFFECT OF ACCEPTANCE OF WORK EXTENT OF LIABILITY OF CONTRACTOR

RULE WORK DONE BY HIS EMPLOYEES

Art. 1719. - Acceptance of the work by the employer relieves Art. 1727. - The contractor is responsible for the work done by
the contractor of liability for any defect in the work, unless: persons employed by him.
(1) The defect is hidden and the employer is not, by his special
knowledge, expected to recognize the same; or DEATH AND PHYSICAL INJURIES DURING CONSTRUCTION
(2) The employer expressly reserves his rights against the
contractor by reason of the defect. Art. 1728. - The contractor is liable for all the claims of laborers
and others employed by him, and of third persons for death or
XPNs physical injuries during the construction.

Hidden Defect w/ Employer not expected to know UNPAID WAGE OF EMPLOYEES

• due to latter’s special knowledge
Express Reservation of Rights against Contractor for Defect
• by employer
Descent of Building/Edi ce w/in 15 Years on Account of
Defects in Construction or Use of Inferior Materials
Art. 1723. - The engineer or architect who drew up the plans
and speci cations for a building is liable for damages if within
fteen years from the completion of the structure, the same
should collapse by reason of a defect in those plans and
speci cations, or due to the defects in the ground. The
contractor is likewise responsible for the damages if the edi ce
falls, within the same period, on account of defects in the
construction or the use of materials of inferior quality furnished
by him, or due to any violation of the terms of the contract. If
the engineer or architect supervises the construction, he shall
be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply
waiver of any of the causes of action by reason of any defect
mentioned in the preceding paragraph.
The action must be brought within ten years following the
collapse of the building.
Art. 1729. - Those who put their labor upon or furnish materials
for a piece of work undertaken by the contractor have an
action against the owner up to the amount owing from the
latter to the contractor at the time the claim is made. However,
the following shall not prejudice the laborers, employees and
furnishers of materials:
(1) Payments made by the owner to the contractor before they
are due;
(2) Renunciation by the contractor of any amount due him from
the owner.
This article is subject to the provisions of special laws.
• contractor liable for unpaid wages of employees
• owner is also liable to pay such unpaid wages “up to amount
owing from (him) to the contractor at the time the claim is
made”
• to this extent, owner’s liability is solidary w/ contractor, if both
are sued together
• but, if owner already fully paid the contractor, the former’s
liability ceases
• payments made by owner to the contractor before they are
due, or renunciation by contractor of any amount due him
from the owner shall not prejudice the laborers or employees

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ACCESSORY CONTRACTS GUARANTY AND SURETY

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CONCEPT GUARANTY

CONCEPT, NATURE AND CHARACTERISTICS

• cannot exist w/o valid principal contract
• synonymous w/ guaranty or security
Art. 2047. - By guaranty a person, called the guarantor, binds
KINDS himself to the creditor to ful ll the obligation of the principal
debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
Contracts of Personal Security Contracts of Real Security provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
faithful performance of faithful performance of
obligation by principal debtor is obligation of debtor is secured Art. 2048. - A guaranty is gratuitous, unless there is a
secured by personal by a speci c property, such that stipulation to the contrary.
commitment of another if principal obligation becomes
due and debtor defaults, then De nition
ex: suretyship the property encumbered can be
alienated for payment of the • whereby a person binds himself to the creditor for the
obligation ful llment of the obligation of the principal debtor, just in case
there is failure thereof

Accessory

• in the sense that it is entered into for the purpose of securing

the performance of another obligation w/c is denominated as
the principal obligation

Guarantor cannot be the Debtor

• person guaranteeing must be distinct from the person

guaranteed

Obligation of Guarantor is Subsidiary

• it is only after the creditor has proceeded against the

properties of the principal debtor and the debt remains
unsatis ed that a guarantor can be held liable to answer for
any unpaid amount
• aka principle of excussion

Unilateral Contract

• as what arises therefrom are solely obligations on the part of

the guarantor in relation to the creditor

Governed by SoF

• it is only the undertaking of the guarantor that is to be in

writing
• consent of creditor and acceptance of guaranty may be
proven by parol evidence

KINDS

According to Source

Conventional Legal Judicial

created by parties’ constituted in where court requires

agreement compliance w/ a in order to secure
provision of law the eventual right of
a party to a legal
action/proceeding

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According to Consideration When Guarantor is not entitled

Art. 2059. - This excussion shall not take place:

Gratuitous Onerous
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
where guarantor receives no where guarantor receives (3) In case of insolvency of the debtor;
compensation for guaranteeing consideration for guaranteeing (4) When he has absconded, or cannot be sued within the
the principal obligation the principal obligation Philippines unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of
but gratuitousness is not the
the principal debtor would not result in the satisfaction of
essence, as parties may
stipulate to the contrary the obligation.

Bene t of Division
According to Person Guaranteed
Applicability
Simple Double
• when there are several guarantors of just 1 debtor, and for
same debt, but they did not bind themselves solidarily
obligation secured is that of the obligation secured is that of the
principal debtor’s rst or anterior guarantor (sub-
guaranty)
Concept

Art. 2073. - When there are two or more guarantors of the

EXCLUSIVE PRINCIPLES same debtor and for the same debt, the one among them who
has paid may demand of each of the others the share which is
Bene t of Excussion proportionally owing from him
If any of the guarantors should be insolvent, his share shall be
Concept borne by the others, including the payer, in the same
proportion.
• guarantor cannot be compelled to pay creditor, unless latter The provisions of this article shall not be applicable, unless the
exhausted all of the debtor’s property and resorted to all the payment has been made in virtue of a judicial demand or
legal remedies against the debtor unless the principal debtor is insolvent.

Requisites When Bene t ceases

Timely Invocation • guarantor’s express renunciation

• guarantor has bound himself solidarily
• guarantor must set it up against the creditor upon latter’s • insolvency of co-guarantors
demand for payment • co-guarantors absconded or cannot be sued w/in the PH
(unless they left managers or reps)
Proper Invocation • when it may be presumed that an execution on the co-
guarantor’s property would not result in the satisfaction of
their respective portion of the obligation
• guarantor points out to the creditor available property of the
debtor w/in the PH su cient to cover the debt’s amount

Failure to Comply w/ Reqs

• results in the foreclosure of right to set up the defense

Success in Complying w/ Reqs

Art. 2061. - The guarantor having ful lled all the conditions
required in the preceding article, the creditor who is negligent
in exhausting the property pointed out shall su er the loss, to
the extent of said property, for the insolvency of the debtor
resulting from such negligence.

Not a Condition for Filing Action against Guarantor

• nor is it a prerequisite to secure judgment against the same

• guarantor may still demand deferment of execution of
judgment against him until after the principal debtor’s assets
have been exhausted (it is in this sense that the guarantor
cannot be held liable in absence of judgment against debtor
and latter is unable to pay)

Personal Defense of Guarantor

• guarantor may however choose to waive the defense

• but the debtor may not avail of it

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SURETY
Guarantor Surety
NATURE AND CHARACTERISTICS
agrees that creditor, after promises to pay the principal’s
De nition proceeding against principal, debt if the principal will not pay
may proceed against guarantor
if the principal is unable to pay
• created when a guarantor binds itself solidarily w/ principal
obligor insurer of the debtor’s solvency insurer of the debt
• arises upon solidary binding of a person deemed surety w/
principal debtor for purpose of ful lling an obligation

Accessory

• surety’s obligation is collateral to the obligation created by

the principal

Direct and Primary Liability

• although a security contract is in essence secondary only to a

valid principal obligation, his liability to creditor/promisee of
the principal is said to be direct, primary, and absolute
• creditor can go directly against the surety although the
principal debtor is solvent and is able to pay or no prior
demand is made on the principal debtor

Governed by SoF

• suretyship is a contractual relation resulting from an

agreement whereby one person (surety) engages to be
answerable for the debt, default, or miscarriage of another
(principal)

Consideration

• surety becomes liable for debt/duty of another, although he

possesses no direct/personal interest over the obligations,
nor does he receive any bene t therefrom
• consideration necessary to support a surety obligation need
not pass directly to the surety
• consideration moving to the principal alone will su ce

Distinguished from Solidary Debtor

Surety Solidary Debtor

entire obligation belongs to there is a portion of the

someone else obligation that properly pertains
to him

entitled to seek reimbursement not entitled to full

from principal debtor for the
amount paid, upon payment of
the entire obligation
reimbursement of amount he
paid, but may only claim from
his co-debtors the share w/c
corresponds toe act, w/ interest
for payment already made

DISTINGUISHING PRINCIPLCES

Guarantor Surety

does not bind himself solidarily binds himself solidarily w/

w/ principal debtor principal debtor

entitled to bene t of excussion not entitled to such bene t

only secondarily liable principally liable

undertaking w/c debtor shall pay undertaking that the debt shall
be paid

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COMMON PRINCIPLES RIGHT TO REIMBURSEMENT AND SUBROGATION UPON

PAYMENT
AS TO SUBJECT MATTER
Application of 2066 and 2067
Nature of Obligation Guaranteed
Art. 2066. - The guarantor who pays for a debtor must be
Art. 2052. - A guaranty cannot exist without a valid obligation. indemni ed by the latter.
Nevertheless, a guaranty may be constituted to guarantee the The indemnity comprises:
performance of a voidable or an unenforceable contract. It may (1) The total amount of the debt;
also guarantee a natural obligation. (2) The legal interests thereon from the time the payment was
made known to the debtor, even though it did not earn
Art. 2053. - A guaranty may also be given as security for future interest for the creditor;
debts, the amount of which is not yet known; there can be no (3) The expenses incurred by the guarantor after having
claim against the guarantor until the debt is liquidated. A noti ed the debtor that payment had been demanded of
conditional obligation may also be secured. him;
(4) Damages, if they are due.
• valid
• voidable/unenforceable Art. 2067. - The guarantor who pays is subrogated by virtue
• civil/natural thereof to all the rights which the creditor had against the
• may be conditional debtor.
If the guarantor has compromised with the creditor, he cannot
OBLIGATIONS COVERED demand of the debtor more than what he has really paid.

Covers Principal Debtor’s Present Obligations and Secures • rights to indemni cation and subrogation (as established and
Future Debts granted to guarantor in the above provisions) extend to
sureties
• the amount of such debts not yet known
• this serves as the basis for contracts denominated as Right to Reimbursement
continuing guaranty or suretyship
• guarantor who pays for debtor must be indemni ed by latter
Generally Prospective
XPNs
• unless a contrary intent is shown
• when parties clearly provided that guaranty would cover “the Art. 2070. - If the guarantor has paid without notifying the
sums obtained and/or to be obtained,” the same can be given debtor, and the latter not being aware of the payment, repeats
retroactive application the payment, the former has no remedy whatever against the
debtor, but only against the creditor. Nevertheless, in case of a
PARTIES gratuitous guaranty, if the guarantor was prevented by a
fortuitous event from advising the debtor of the payment, and
Who the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid.
Art. 2050. - If a guaranty is entered into without the knowledge
or consent, or against the will of the principal debtor, the Art. 2050. - supra.
provisions of articles 1236 and 1237 shall apply. 
Guarantor paid w/o notifying Debtor who repeats Payment
• only bet. guarantor/surety and creditor
• principal debtor is not a party thereto • former shall be w/o remedy against latter
• instead remedy is against the creditor
Quali cations of Guarantor/Surety • but if guaranty was gratuitous, and guarantor was by FE
prevented from advising debtor re payment, and creditor
Art. 2056. - One who is obliged to furnish a guarantor shall becomes insolvent, then the debtor shall reimburse the
present a person who possesses integrity, capacity to bind guarantor for the amount paid
himself, and su cient property to answer for the obligation
which he guarantees. The guarantor shall be subject to the Guaranty entered into w/o Knowledge or Consent, or Against
jurisdiction of the court of the place where this obligation is to
the Will, of Principal Debtor
be complied with.

• present such person w/ integrity, capacity to bind, and • guarantor is entitled to indemnity only to the extent that the
payment has been bene cial to the debtor
su cient property to answer
• if payment was not bene ted the debtor at all, the guarantor
does not acquire any valid claim for reimbursement
Art. 2057. - If the guarantor should be convicted in rst
instance of a crime involving dishonesty or should become
insolvent, the creditor may demand another who has all the Extent of Indemnity
quali cations required in the preceding article. The case is
Art. 2066. - supra.
excepted where the creditor has required and stipulated that a
speci ed person should be the guarantor.
• debt’s total amount
• where guarantor is personally designated by creditor, the • legal interest therefrom from time payment was made known
to debtor (even if it did not earn interest for creditor)
subsequent insolvency/dishonesty of guarantor does not
entitle the creditor to demand for replacement • expenses incurred by guarantor after having noti ed the
debtor that payment had been demanded of him
• damages (if due)

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 Lease, Accessory Contracts, Credits

If Guarantor pays before Maturity Special Causes

Art. 2069. - If the debt was for a period and the guarantor paid Grant of Extension to Debtor by Creditor
it before it became due, he cannot demand reimbursement of
the debtor until the expiration of the period unless the payment Art. 2079. - An extension granted to the debtor by the creditor
has been rati ed by the debtor. without the consent of the guarantor extinguishes the guaranty.
The mere failure on the part of the creditor to demand payment
From Home may Guarantor demand Reimbursement after the debt has become due does not of itself constitute any
extension of time referred to herein.
Art. 2072. - If one, at the request of another, becomes a
guarantor for the debt of a third person who is not present, the • also applicable to surety
guarantor who satis es the debt may sue either the person so • req that guarantor must consent to any extension granted by
requesting or the debtor for reimbursement.  creditor to debtor is for guarantor’s bene t, so even if
extensions were granted by creditor to principal debtor, the
• ordinarily the principal debtor guarantor may opt to waive the need for consent to such
extension
Right to Subrogation
When Guarantor cannot be Subrogated due to Creditor’s
Rule Fault

• guarantor who pays is surrogated by virtue thereof to all the Art. 2180. - The guarantors, even though they be solidary, are
rights w/c creditor previously had against the debtor released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages,
In Case of Partial Payment and preferences of the latter.
Applicability
• guarantor is not yet entitled, for he may only exercise the
right of subrogation when the principal obligation is fully
extinguished Guarantor Surety

REMEDY OF GUARANTOR BEFORE PAYMENT YES discharged from liability, in

absence of express stipulation,
What Remedy may be exercised if the creditor’s act was such as
would be declared negligent or
constitutive of a material
• to obtain release from guaranty; or alteration of the contract
• to demand security that will protect him from any
proceedings by the creditor and from danger of debtor’s
insolvency

When Remedy may be exercised

Art. 2071. - The guarantor, even before having paid, may

proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of principal debtor;
(3) When the debtor has bound himself to relieve him from the
guaranty within a speci ed period, and this period has
expired;
(4) When the debt has become demandable, by reason of the
expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no xed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall
protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.

EXTINGUISHMENT OF GUARANTY

Modes

Art. 2076. - The obligation of the guarantor is extinguished at

the same time as that of the debtor, and for the same causes as
all other obligations.

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 Lease, Accessory Contracts, Credits

REAL ESTATE MORTGAGE; ANTICHRESIS XPN (Blanket Mortgage Clause)

—————————————————————————————————
• aka dragnet clause
CONCEPT(S) • amount named as consideration in mortgage does not limit
the amount for w/c mortgage may stand as security if, from
SIMILARITIES AND DISTINCTIONS the four corners of the instrument, the intent to secure future
and other indebtedness can be gathered
• stipulation is valid and binding bet. parties
REM Antichresis
Rule on Subsequent Advancements
Similarities collateral consists of real property
• mortgage given to secure future advancements is a
continuing security, and is not discharged by repayment of
Distinctions no such express by express amount named in mortgage until the advancements’ full
agreement of the agreement bet. the amounts are paid
terms and parties, whereby…
obligations in • hence, where the subsequent loans were not covered by any
antichresis security other than that for the mortgage deed that contained
the dragnet clause, such subsequent loans are covered by
does not give the creditor maintains the same mortgage
mortgagee the right possession of • but those subsequent advancements secured by other
to possession of the debtor’s real collaterals, the rules all be that only the de ciency after
property, unless the property (security) exhausting the security speci ed therein shall be covered by
mortgage should the mortgage deed w/c contained the dragnet clause
contain some
special provision to
that e ect MORTGAGOR MUST BE ABSOLUTE OWNER

hence, creditor may creditor shall then GR

be in possession of apply fruits to
the immovable in interest owed by • debtor-mortgagor in either contract must absolutely own the
both contracts debtor (if any) to the collateral
principal amount
• otherwise, contract and any subsequent foreclosure sale of
creditor retains
mortgaged property is void
enjoyment of
property until debtor XPN: Mortgagee in GF
has totally paid what
he owes • even if the mortgagor is not the owner of the mortgaged
property, the mortgage contract and any foreclosure sale
should obligation be arising therefrom are given e ect by reason of public policy
duly paid, then the
contract is
• principle is based on rule that all persons dealing w/ property
covered by Torrens title, as buyers/mortgagees, are not
automatically
extinguished required to go beyond what appears on the title’s face

Instances when Mortgagee cannot rely simply on Title

ASSIGNMENT AS SECURITY
Circumstances that put party on Guard and prompt Same to
• assignment that is not an absolute conveyance w/c confers Investigate or inspect Property being Sold to Him
ownership on the assignee, but merely guarantees an
obligation
• ex: presence of occupants or tenants
• either (i) REM (real property is subject matter), or (ii) pledge • rule that persons dealing w/ registered lands can rely solely
(personal property) on the certi cate of title does not apply to banks and to
investment and nancing institutions
SUBJECT MATTER

Nature of Obligation guaranteed in Both Contracts Banks; Investment and Financing Institutions

valid obligation • these institutions are required to ascertain the status and
• condition of properties o ered to them as security for loans
• may be voidable/unenforceable
extended by them
• civil/natural obligation
• both may secure all kinds of obligations, whether pure or
conditional GSIS

Obligations covered • must exercise care and prudence in investing its funds

GR Person engaged in Real Estate Business

• mortgage liability usually limited to amount mentioned in • expected to ascertain the status and condition of the
contract properties o ered to him as collaterals, as well as to verify
the identities of the persons he transacts business with

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 Lease, Accessory Contracts, Credits

THIRD PARTY MORTGAGOR COMMON CHARACTERISTICS

Art. 2085, last par. - Third persons who are not parties to the PERFECTION
principal obligation may secure the latter by pledging or
mortgaging their own property. • both are consensual

Art. 2139. - The last paragraph of article 2085, and articles For Antichresis
2089 to 2091 are applicable to this contract.
• delivery of the immovable is not a requirement for its
• rule that 2rd persons are not parties to the principal perfection
obligation, and may secure the latter by mortgaging their own • instead, upon perfection of said contract by mere consent, it
property, applies to both contracts will create the obligation on the debtor’s part to deliver the
• aka accommodation mortgagors, who is not solidarily bound immovable to the creditor
w/ principal debtor
• liability extends only to the property mortgaged REQUIRED FORMALITIES

Art. 2134. - The amount of the principal and of the interest shall
be speci ed in writing; otherwise, the contract of antichresis
shall be void.

For Antichresis

• amount of principal and interest of loan must be in writing

• the antichresis contract itself need not be written
• even if the contract itself is not reduced to a public doc, the
contract remains valid and enforceable (mere convenience
for it to be embodied in a public doc)

For REM

• not covered by SoF

CREATES REAL RIGHTS

Art. 2125, par. 1. - In addition to the requisites stated in article

2085, it is indispensable, in order that a mortgage may be
validly constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding between the
parties.

Art. 2126. - The mortgage directly and immediately subjects

the property upon which it is imposed, whoever the possessor
may be, to the ful llment of the obligation for whose security it
was constituted.

INDIVISIBILITY OF MORTGAGE AND ANTICHRESIS

• both contracts are indivisible even though the debt may be

divided among successors-in-interest of debtor or of creditor
• indivisibility is not a ected by the fact that the debtors are not
solidarily liable
• each and every parcel under mortgage answers for the
debt’s totality, regardless of the existence or not of several
heirs of either party

Consequences

First

• mortgagee cannot be divided among di erent lots

mortgaged to secure it
• instead, each and every parcel of land under mortgage
answers for debt’s totality

Second

• debtor cannot ask for release of any portion of mortgaged

property or of one/some of the several properties mortgaged,
unless and until loan secured has been fully paid

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Quali cations PROHIBITION AGAINS STIPULATION FORBIDDING

• doctrine ceases to apply when the mortgage is extinguished
by complete foreclosure thereof
• concept n/a to right of redemption of an accommodation
mortgagor and his assignees
Third
• mortgagor cannot opt or compel the mortgagee to apply any
payment made by him on a speci ed portion of the
mortgaged property to e ect release
• since every portion of the property mortgaged is answerable
for the whole obligation as soon as the latter falls due
Fourth
• annulment of mortgage is an all or nothing proposition, and it
cannot be divided into valid or invalid parts
• mortgage is either valid in its entirety or not valid at all
MORTGAGOR FROM ALIENATING
Art. 2130. - A stipulation forbidding the owner from alienating
the immovable mortgaged shall be void.
• prohibition is still violated even if REM Deed contains no
absolute prohibition against the sale of property mortgaged,
but only requires the mortgagor to obtain the prior written
consent of the mortgagee before any such sale
• stipulation practically gives mortgagee the sole prerogative
to prevent any sale of mortgaged property to a 3rd party
mortgagee can simply withhold its consent and prevent the
mortgagor from selling the property, w/c creates an
unconscionable advantage for the mortgagee and amounts
to a virtual prohibition on owner to sell his mortgaged
property
• but a stipulation prohibiting the mortgagor from entering into
2nd or subsequent mortgages was held to be valid

PROHIBITION AGAINST PACTUM COMMISSORIUM

Rule

Art. 2088. - The creditor cannot appropriate the things given

by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.

Art. 2137. - The creditor does not acquire the ownership of the
real estate for non-payment of the debt within the period
agreed upon.
Every stipulation to the contrary shall be void. But the creditor
may petition the court for the payment of the debt or the sale of
the real property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.

Elements

• property is mortgaged by way of security for payment of

principal obligation
• stipulation for automatic appropriation by creditor of thing
mortgaged in case of non-payment of the principal obligation
w/in stipulated period

Essence

• ownership of security will pass to creditor by mere default of

the debtor

Instances

• transaction looks like a sale w/ RTR but property only stands

as a security for payment of principal obligation, and period
for repurchase is actually the period for payment of loan (in
w/c case an equitable mortgage exists(, the consolidation of
ownership in person of mortgagee in equity upon mortgagor
in equity’s failure to pay the obligation
• transaction looks like an assignment of property but property
merely stands as security for payment of existing obligation
and not absolute conveyance of title to assignee
• transaction looks like a dacion en pago but debt subsisted
despite transfer of property in creditor’s name

Reqs for DEP

• existence of money obligation

• alienation to creditor of property by debtor w/ consent of
former
• satisfaction of money obligation of debtor

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REMEDIES, IN CASE OF DEFAULT possession of such property immediately after the date of the
con rmation of the auction sale and administer the same in
ALTERNATIVE REMEDIES accordance with law. Any petition in court to enjoin or restrain
the conduct of foreclosure proceedings instituted pursuant to
For Mortgagee in REM/Antichresis this provision shall be given due course only upon the ling by
the petitioner of a bond in an amount xed by the court
• foreclose mortgage; or conditioned that he will pay all the damages which the bank
• le ordinary action to collect debt may su er by the enjoining or the restraint of the foreclosure
proceeding. Notwithstanding Act 3135, juridical persons whose
Note: property is being sold pursuant to an extrajudicial foreclosure,
• mere act of ling a collection suit for recovery of debt shall have the right to redeem the property in accordance with
secured by mortgage constitutes waiver of foreclosure this provision until, but not after, the registration of the
remedy certi cate of foreclosure sale with the applicable Register of
Deeds which in no case shall be more than three (3) months
FORECLOSURE OF MORTGAGE after foreclosure, whichever is earlier. Owners of property that
has been sold in a foreclosure sale prior to the e ectivity of this
MANNER Act shall retain their redemption rights until their expiration.

For REM If Mortgagee is Bank

• such right exists whether foreclosure is judicial or not

Judicial Extrajudicial
Rules under CIR v. United Coconut Planters Bank (2009)
when no such SPA is provided allowed only when the
mortgagee is given a SPA to do First
so in deed itself or in doc
annexed thereto • for purposes of reckoning the 1-year redemption period (for
individual mortgagors) and the 3-month period (for juridical
For Antichresis persons/mortgagors), the same shall be reckoned from date
of con rmation of auction sale w/c is the date when the
• always judicial certi cate of sale is issued
• if the mortgagor is a juridical person, the latter is allowed to
PRESCRIPTIVE PERIOD exercise right of redemption only until (but not after) the
registration of the certi cate of foreclosure sale, and in no
Art. 1142. - A mortgage action prescribes after ten years. case beyond 3 months after foreclosure, whichever comes
rst
• right of action accrues when the mortgagor defaults in the • 3 month period is counted from date when certi cate of sale
payment of his obligation to the mortgagee is issued
• shorter period for exercise of right of redemption on part of a
RECOVERY OF DEFICIENCY juridical person is applicable, even if the mortgage was
executed prior to a ectivity of RA 8791, so long as
• whether the foreclosure is extrajudicial or judicial, there is a foreclosure was made during law’s e ectivity
right to recovery the de ciency
Second
In Extrajudicial Foreclosure
• constitutional proscription against impairment of obligation of
• de ciency recoverable by ling ordinary action for collection contract is not violated because section 47 of GBL does not
w/in same 10-year period divest juridical persons of the right to redeem their foreclosed
• suit for recovery of de ciency after mortgage’s foreclosure is properties but only modi ed the time for the exercise of such
in the nature of a mortgage actioN right by reducing the 1-year period originally provided in Act
3135
In Judicial Foreclosure • di erence in treatment of juridical persons and natural
persons is based on nature of properties foreclosed, whether
• mortgagee has right to recover de ciency in case of judicial these are used as resident (for w/c the 1-year redemption
foreclosure by way of a mere motion period is retained) or used for industrial purposes (shorter
term is thus necessary to reduce period of uncertainty in
RIGHT OF REDEMPTION ownership of property and enable mortgagee-banks to
dispose sooner of these acquired assets)
Sec. 47, RA 8791. - In the event of foreclosure, whether
judicially or extra-judicially, of any mortgage on real estate If Mortgagee is not a Bank
which is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property has Extrajudicial Foreclosure
been sold for the full or partial payment of his obligation shall
have the right within one year after the sale of the real estate, • governing law is Act 3135, w/c grants a right of redemption w/
to redeem the property by paying the amount due under the in 1 year, whether mortgagor is natural or juridical
mortgage deed, with interest thereon at rate speci ed in the • counted from date of registration of certi cate of sale
mortgage, and all the costs and expenses incurred by the bank
or institution from the sale and custody of said property less the Judicial Foreclosure
income derived therefrom. However, the purchaser at the
auction sale concerned whether in a judicial or extra-judicial • only equity of redemption, not right of redemption (unless
foreclosure shall have the right to enter upon and take mortgagee is a banking institution)

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 Lease, Accessory Contracts, Credits
Equity of Redemption
• simply defendant mortgagor’s right to extinguish the
mortgage and retain ownership of property by paying
secured debt w/in period of not less than 90 days nor more
than 120 days from entry of judgment (or even after
foreclosure sale but prior to con rmation)
• after con rmation order, no redemption can be e ected
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ANTICHRESIS
ESSENCE
Art. 2132. - By the contract of antichresis the creditor acquires
the right to receive the fruits of an immovable of his debtor,
with the obligation to apply them to the payment of the interest,
if owing, and thereafter to the principal of his credit.
• there must be an express agreement w/in contract that the
creditor has the right to receive the fruits of the immovable w/
the obligation of applying it to the interest, if owing, or excess
to the principal
• thus, if a loan w/ security provides for delivery to creditor by
debtor of the property given as security, in order that the
latter may gather its fruits but w/o stating that said fruits are
to be applied to the payment of interest (if any), and
afterwards that of the principal. the contract is am mortgage
and not antichresis
CREDITOR ENTITLED TO POSSESSION
Art. 2136. - The debtor cannot reacquire the enjoyment of the
immovable without rst having totally paid what he owes the
creditor.
But the latter, in order to exempt himself from the obligations
imposed upon him by the preceding article, may always compel
the debtor to enter again upon the enjoyment of the property,
except when there is a stipulation to the contrary.
CREDITOR’S OBLIGATIONS
Apply Fruits to Payment of Interest (if any) and Thereafter to
Principal of His Credit
Art. 2132. - supra.
Art. 2133. - The actual market value of the fruits at the time of
the application thereof to the interest and principal shall be the
measure of such application.
Pay Taxes and Charges upon Estate
Art. 2135. - The creditor, unless there is a stipulation to the
contrary, is obliged to pay the taxes and charges upon the
estate.
He is also bound to bear the expenses necessary for its
preservation and repair.
The sums spent for the purposes stated in this article shall be
deducted from the fruits.
• if creditor wants to exempt himself from the obligation
mentioned in number 2 of 2136’s 2nd paragraph, he may
compel the debt to enter again upon property’s enjoyment,
except when there is a contrary stipulation

 Lease, Accessory Contracts, Credits

PERSONAL PROPERTY AS SECURITY CREATION OF SECURITY INTEREST

—————————————————————————————————
CONCEPT
EFFECT OF RA 11507
Sec. 3( j), RA 11507. - A property right in collateral that secures
REPEAL OF PROVISIONS ON PLEDGE AND CHATTEL payment or other performance of an obligation, regardless of
MORTGAGE whether the parties have denominated it as a security interest,
and regardless of the type of asset, the status of the grantor or
• aka the PPSA secured creditor, or the nature of the secured obligation;
• caused repeal of articles 2085-2123 NCC (Pledge), articles including the right of a buyer of accounts receivable and a
2140-2141 NCC (Chattel), and sections 1-16 of Chattel lessor under an operating lease for not less than one (1) year.
Mortgage Law (Act 1508)
FORMS OF COLLATERAL, WHERE SECURITY INTEREST CAN
PLEDGE AND CHATTEL MORTGAGE NO MORE BE CREATED

Sec. 6, RA 11507. - A security agreement must be contained in • over ALL forms of tangible or intangible assets or personal
a written contract signed by the parties. It may consist of one or property as de ned by the NCC
more writings that, taken together, establish the intent of the
parties to create a security interest. Under Old Law Under PPSA
The security agreement shall likewise provide for the language
to be used in agreements and notices. The grantor shall be
given the option to have the agreement and notices in Filipino. future property cannot be security agreement may provide
The Department of Finance (DOF) shall prepare model pledged/mortgaged, since the for creation of a security interest
req was that the pledgor/ in a future property, but the
agreements in plain English and Filipino. mortgagor must be the absolute security interest in that property
owner of thing pledged/ is created only when the grantor
CREATION OF CENTRALIZED REGISTRY mortgaged acquires rights in it or the power
to encumber it
• registry is centralized, nationwide and electronic
• lodged in LRA, where notice of a security interest and lien in
personal property may be registered MANNER OF CREATING SECURITY INTEREST

SCOPE Sec. 5, RA 11507. -

(a) A security interest shall be created by a security
Sec. 4, RA 11507. - This Act shall apply to all transactions of any agreement;
form that secure an obligation with movable collateral, except (b) A security agreement may provide for the creation of a
interests in aircrafts subject to Republic Act No. 9497, or the security interest in a future property, but the security
"Civil Aviation Authority Act of 2008", and interests in ships interest in that property is created only when the grantor
subject to Presidential Decree No. 1521, or the "Ship Mortgage acquires rights in it or the power to encumber it.
Decree of 1978”.
Sec. 6, par. 1. RA 11507 - supra.
• covers ALL transactions of any form that secure an obligation
w/ movable collateral Continuity of Security Interest

XPNs Sec. 9, RA 11507. - A security interest shall continue in

collateral notwithstanding sale, lease, license, exchange, or
• aircraft of PH registry or any interest therein as collateral other disposition of the collateral, except as otherwise provided
• vessels of domestic ownership as collateral in Section 21 of this Act, or agreed upon by the parties.

Note: Sec. 21. RA 11507. - Any party who obtains, in the ordinary
• since PPSA did not repeal pertinent provisions of Civil course of business, any movable property containing a security
Aviation Authority Act and Ship Mortgage Decree, a security interest shall take the same free of such security interest
agreement involving an aircraft of PH registry must still be provided he was in good faith. No such good faith shall exist if
registered w/ PH Civil Aviation Authority, while security the security interest in the movable property was registered
agreement covering a vessel must still be registered w/ PH prior to his obtaining the property.
Coast Guard o ce at port of vessel’s documentation
XPNs

• as agreed upon by parties

• third person obtains any movable containing security interest
in the ordinary course of business and in GF

PERFECTION OF SECURITY INTEREST

Importance

Sec. 11, RA 11507. -

(a) A security interest shall be perfected when it has been
created and the secured creditor has taken one of the
actions in accordance with Section 12.
(b) On perfection, a security interest becomes e ective against
third parties.

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 Lease, Accessory Contracts, Credits

Means interests in the books maintained for that purpose by or on

behalf of the issuer shall have priority over a security
Overview interest in the same securities perfected by any other
method.
Sec. 12. - A security interest may be perfected by: (g) A security interest in electronic securities not held with an
(a) Registration of a notice with the Registry; intermediary perfected by the conclusion of a control
(b) Possession of the collateral be secured creditor; and agreement shall have priority over a security interest in the
(c) Control of investment property and deposit account. same securities perfected by registration of a notice in the
A security interest in any tangible asset may be perfected by Registry.
registration or possession. A security interest in investment (h) The order of priority among competing security interests in
property and deposit account may be perfected by registration electronic securities not held with an intermediary
or control. perfected by the conclusion of control agreements is
determined on the basis of the time of conclusion of the
Perfection by Control control agreements.

Sec. 13, RA 11507. - Priority for Instruments and Negotiable Documents

(a) A security interest in a deposit account or investment
property may be perfected by control through: Sec. 19, RA 11507. - A security interest in an instrument or
(1) The creation of the security interest in favor of the negotiable document that is perfected by possession of the
deposit-taking institution or the intermediary; instrument or the negotiable document shall have priority over
(2) The conclusion of a control agreement; or a security interest in the instrument or negotiable document
(3) For an investment property that is an electronic that is perfected by registration of a notice in the Registry.
security not held with an intermediary, the notation of
the security interest in the books maintained by or on Priority and Plight of Retention by Operation of Law
behalf of the issuer for the purpose of recording the
name of the holder of the securities.(b) Nothing in this Sec. 20, RA 11507. - A person who provides services or
Act shall require a deposit-taking institution or an materials with respect to the goods, in the ordinary course of
intermediary to enter into a control agreement, even if business, and retains possession of the goods shall have
the grantor so requests. A deposit-taking institution or priority over a perfected security interest in the goods until
an intermediary that has entered into such an payment thereof.
agreement shall not be required to con rm the
existence of the agreement to another person unless Purchase Money Security Interest
requested to do so by the grantor.
Sec. 23, RA 11507. -
PRIORITY RULES (a) A purchase money security interest in equipment and its
proceeds shall have priority over a con icting security
In General interest, if a notice relating to the purchase money security
interest is registered within three (3) business days after the
Sec. 17, RA 11507. - The priority of security interests and liens in grantor receives possession of the equipment.
the same collateral shall be determined according to time of (b) A purchase money security interest in consumer goods that
registration of a notice or perfection by other means, without is perfected by registration of notice not later than three (3)
regard to the order of creation of the security interests and business days after the grantor obtains possession of the
liens. consumer goods shall have priority over a con icting
security interest.
Priority for Perfection by Control (c) A purchase money security interest in inventory, intellectual
property or livestock shall have priority over a con icting
Sec. 18, RA 11507. - perfected security interest in the same inventory,
(a) A security interest in a deposit account with respect to intellectual property or livestock if:
which the secured creditor is the deposit-taking institution (1) The purchase money security interest is perfected
or the intermediary shall have priority over a competing when the grantor receives possession of the inventory
security interest perfected by any method. or livestock, or acquires rights to intellectual property;
(b) A security interest in a deposit account or investment and
property that is perfected by a control agreement shall (2) Before the grantor receives possession of the
have priority over a competing security interest except a inventory or livestock, or acquires rights in intellectual
security interest of the deposit-taking institution or the property, the purchase money secured creditor gives
intermediary. written noti cation to the holder of the con icting
(c) The order of priority among competing security interests in perfected security interest in the same types of
a deposit account or investment property that were inventory, livestock, or intellectual property. The
perfected by the conclusion of control agreements shall be noti cation sent to the holder of the con icting
determined on the basis of the time of conclusion of the security interest may cover multiple transactions
control agreements. between the purchase money secured creditor and
(d) Any rights to set-o that the deposit-taking institution may the grantor without the need to identify each
have against a grantor’s right to payment of funds credited transaction.
to a deposit account shall have priority over a security (d) The purchase money security interest in equipment or
interest in the deposit account. consumer goods perfected timely in accordance with
(e) A security interest in a security certi cate perfected by the subsections (a) and (b), shall have priority over the rights of
secured creditor’s possession of the certi cate shall have a buyer, lessee, or lien holder which arise between delivery
priority over a competing security interest perfected by of the equipment or consumer goods to the grantor and the
registration of a notice in the Registry. time the notice is registered.
(f) A security interest in electronic securities not held with an
intermediary perfected by a notation of the security

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 Lease, Accessory Contracts, Credits

Livestock ENFORCEMENT OF SECURITY INTEREST

Sec. 24, RA 11507. - A perfected security interest in livestock REMEDIES OF SECURED CREDITOR
securing an obligation incurred to enable the grantor to obtain
food or medicine for the livestock shall have priority over any Sell/Dispose Collateral
other security interest in the livestock, except for a perfected
purchase money security interest in the livestock, if the secured Sec. 49, RA 11507. -
creditor providing credit for food or medicine gives written (a) After default, a secured creditor may sell or otherwise
noti cation to the holder of the con icting perfected security dispose of the collateral, publicly or privately, in its present
interest in the same livestock before the grantor receives condition or following any commercially reasonable
possession of the food or medicine. preparation or processing.
(b) The secured creditor may buy the collateral at any public
In Certain Movable Property disposition, or at a private disposition but only if the
collateral is of a kind that is customarily sold on a
Sec. 25, RA 11507. - A perfected security interest in a movable recognized market or the subject of widely distributed
property which has become a xture, or has undergone standard price quotations.
accession or commingling shall continue provided the movable
property involved can still be reasonably traced. In determining Sec. 51, RA 11507. -
ownership over xtures, accessions, and commingled goods, (a) Not later than ten (10) days before disposition of the
the provisions of Book II of Republic Act No. 386 or the "Civil collateral, the secured creditor shall notify:
Code of the Philippines" shall apply. (1) The grantor;
(2) Any other secured creditor or lien holder who, ve (5)
days before the date noti cation is sent to the grantor,
held a security interest or lien in the collateral that was
perfected by registration; and
(3) Any other person from whom the secured creditor
received noti cation of a claim of an interest in the
collateral if the noti cation was received before the
secured creditor gave noti cation of the proposed
disposition to the grantor.
(b) The grantor may waive the right to be noti ed.
(c) A noti cation of disposition is su cient if it identi es the
grantor and the secured creditor; describes the collateral;
states the method of intended disposition; and states the
time and place of a public disposition or the time after
which other disposition is to be made.
(d) The requirement to send a noti cation under this section
shall not apply if the collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on
a recognized market.

Retain Collateral or Part Thereof in Full or Partial Satisfaction

of Secured Obligation

Sec. 54. -
(a) After default, the secured creditor may propose to the
debtor and grantor to take all or part of the collateral in total
or partial satisfaction of the secured obligation, and shall
send a proposal to:
(1) The debtor and the grantor;
(2) Any other secured creditor or lien holder who, ve (5)
days before the proposal is sent to the debtor and the
grantor, perfected its security interest or lien by
registration; and
(3) Any other person with an interest in the collateral who
has given a written noti cation to the secured creditor
before the proposal is sent to the debtor and the
grantor.
(b) The secured creditor may retain the collateral in the case
of:
(1) A proposal for the acquisition of the collateral in full
satisfaction of the secured obligation, unless the
secured creditor receives an objection in writing from
any person entitled to receive such a proposal within
twenty (20) days after the proposal is sent to that
person; or
(2) A proposal for the acquisition of the collateral in partial
satisfaction of the secured obligation, only if the
secured creditor receives the a rmative consent of
each addressee of the proposal in writing within
twenty (20) days after the proposal is sent to that
person.

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 Lease, Accessory Contracts, Credits

RIGHT OF SECURED CREDITOR TO BUY THE COLLATERAL

Sec. 49(b), RA 11507. - supra.

• he has right to buy it at any public disposition

• if sale is done privately, he is allowed to buy only if the
collateral is o a kind customarily sold on a recognized market
or subject of widely distributed standard price quotations

RIGHT TO RECOVER DEFICIENCY

Sec. 52(b), RA 11507. - supra.

• under PPSA, there is now a right of redemption in relation to

personal property as security

Who may Redeem

Sec. 45. -
(a) Any person who is entitled to receive a noti cation of
disposition in accordance with this Chapter is entitled to
redeem the collateral by paying or otherwise performing
the secured obligation in full, including the reasonable cost
of enforcement.
(b) The right of redemption may be exercised, unless:
(1) The person entitled to redeem has not, after the
default, waived in writing the right to redeem;
(2) The collateral is sold or otherwise disposed of,
acquired or collected by the secured creditor or
(3) The secured creditor has retained the collateral.

Grantor

Another Secured Creditor or Lien Holder

• who, ve days before the date that noti cation is sent to the
grantor, held a security interest or lien in the collateral that
was perfected by registration

Any Other Person from Whom Secured Creditor received

Noti cation re Claim of Interest in the Collateral

When Right may be exercised

• anytime

XPNs

• person entitled to redeem has, after default, waived in writing

the right to redeem
• collateral is sold or otherwise disposed of, acquired or
collected by the secured creditor, or until conclusion of an
agreement by the secured creditor for that purpose
• secured creditor has retained collateral

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 Lease, Accessory Contracts, Credits

PREFERENCE AND CONCURRENCE OF CREDIT CLASSIFICATION OF CREDITS

—————————————————————————————————
IN GENERAL
CONCEPTS
Concurrence
Applies when:
bestows upon the preferred
(i) same speci c property of
debtor or all of his property
is subjected to the claims of
several creditors; and
established against the debtor subdivision thereof;
(ii) said assets are insu cient to
pay all of them
REQUIREMENT OF LIQUIDATION PROCEEDINGS
• provisions on both concurrence and preference of credits
shall only be applicable if there is bankruptcy, insolvency, or
general liquidation proceedings
Preference
creditor an advantage of having
his credit satis ed rst ahead of
other claims w/c may be
SPECIAL PREFERRED
• constitute liens/encumbrances on speci c property to w/c
they relate
• enjoy preference over that of ordinary preferred and common
credits
SPECFIIC MOVABLES OF DEBTOR
Art. 2241. - With reference to speci c movable property of the
debtor, the following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any
(2) Claims arising from misappropriation, breach of trust, or
malfeasance by public o cials committed in the
performance of their duties, on the movables, money or
securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the
debtor, up to the value of the same; and if the movable has
been resold by the debtor and the price is still unpaid, the
lien may be enforced on the price; this right is not lost by
the immobilization of the thing by destination, provided it
has not lost its form, substance and identity; neither is the
right lost by the sale of the thing together with other
property for a lump sum, when the price thereof can be
determined proportionally;
(4) Credits guaranteed with a pledge so long as the things
pledged are in the hands of the creditor, or those
guaranteed by a chattel mortgage, upon the things pledged
or mortgaged, up to the value thereof;
(5) Credits for the making, repair, safekeeping or preservation
of personal property, on the movable thus made, repaired,
kept or possessed;
(6) Claims for laborers’ wages, on the goods manufactured or
the work done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from
the contract of tenancy on shares, on the share of each in
the fruits or harvest;
(9) Credits  for transportation, upon the goods carried, for the
price of the contract and incidental expenses, until their
delivery and for thirty days thereafter;
(10)Credits for lodging and supplies usually furnished to
travellers by hotel keepers, on the movables belonging to
the guest as long as such movables are in the hotel, but not
for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;
(12)Credits for rent for one year, upon the personal property of
the lessee existing on the immovable leased and on the
fruits of the same, but not on money or instruments of
credit;
(13)Claims in favor of the depositor if the depositary has
wrongfully sold the thing deposited, upon the price of the
sale.
In the foregoing cases, if the movables to which the lien or
preference attaches have been wrongfully taken, the creditor
may demand them from any possessor, within thirty days from
the unlawful seizure.

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 Lease, Accessory Contracts, Credits

SPECIFIC IMMOVABLES AND REAL RIGHTS OF DEBTOR (6) Support during the insolvency proceedings, and for three
months thereafter;
Art. 2242. - With reference to speci c immovable property and (7) Fines and civil indemni cation arising from a criminal
real rights of the debtor, the following claims, mortgages and o ense;
liens shall be preferred, and shall constitute an encumbrance (8) Legal expenses, and expenses incurred in the
on the immovable or real right: administration of the insolvent’s estate for the common
(1) Taxes due upon the land or building; interest of the creditors, when properly authorized and
(2) For the unpaid price of real property sold, upon the approved by the court;
immovable sold; (9) Taxes and assessments due the national government, other
(3) Claims of laborers, masons, mechanics and other workmen, than those mentioned in articles 2241, No. 1, and 2242, No.
as well as of architects, engineers and contractors, 1;
engaged in the construction, reconstruction or repair of (10)Taxes and assessments due any province, other than those
buildings, canals or other works, upon said buildings, canals referred to in articles 2241, No. 1, and 2242, No. 1;
or other works; (11) Taxes and assessments due any city or municipality, other
(4) Claims of furnishers of materials used in the construction, than those indicated in articles 2241, No. 1, and 2242, No. 1;
reconstruction, or repair of buildings, canals or other works, (12)Damages for death or personal injuries caused by a quasi-
upon said buildings, canals or other works; delict;
(5) Mortgage credits recorded in the Registry of Property, upon (13)Gifts due to public and private institutions of charity or
the real estate mortgaged; bene cence;
(6) Expenses for the preservation or improvement of real (14)Credits,   which, without special privilege, appear in (a) a
property when the law authorizes reimbursement, upon the public instrument; or (b) in a nal judgment, if they have
immovable preserved or improved; been the subject of litigation. These credits shall have
(7) Credits annotated in the Registry of Property, in virtue of a preference among themselves in the order of priority of the
judicial order, by attachments or executions, upon the dates of the instruments and of the judgments, respectively.
property a ected, and only as to later credits;
(8) Claims of co-heirs for warranty in the partition of an COMMON
immovable among them, upon the real property thus
divided; Art. 2245. - Credits of any other kind or class, or by any other
(9) Claims of donors or real property for pecuniary charges or right or title not comprised in the four preceding articles, shall
other conditions imposed upon the donee, upon the enjoy no preference.
immovable donated;
(10)Credits of insurers, upon the property insured, for the Art. 2251. - Those credits which do not enjoy any preference
insurance premium for two years. with respect to speci c property, and those which enjoy
preference, as to the amount not paid, shall be satis ed
Notes: according to the following rules:
• only taxes, duties and fees on speci c property enjoy (1) In the order established in article 2244;
preference while all others stand on same footing, to be (2) Common credits referred to in article 2245 shall be paid
satis ed pari passu and pro rata pro rata regardless of dates.
• security interest (in personal or movable) perfected pursuant
to PPSA prior to commencement of insolvency proceedings • paid only after paying all special preferred and ordinary
re grantor shall remain perfected and retain the priority it had preferred credits
before commencement of said proceedings • among these, there shall be no preference
• to be paid pro rata, regardless of dates
ORDINARY PREFERRED

• credits not attached to a speci c movable or immovable, but

they enjoy preference over that of common credits
• to be paid in order mentioned under 2244, except that item 2
has been moved from second to rst, and that the one-year
limitation therein is no more

Art. 2244. - With reference to other property, real and personal,

of the debtor, the following claims or credits shall be preferred
in the order named:
(1) Proper funeral expenses for the debtor, or children under
his or her parental authority who have no property of their
own, when approved by the court;
(2) Credits for services rendered the insolvent by employees,
laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;
(3) Expenses during the last illness of the debtor or of his or
her spouse and children under his or her parental authority,
if they have no property of their own;
(4) Compensation due the laborers or their dependents under
laws providing for indemnity for damages in cases of labor
accident, or illness resulting from the nature of the
employment;
(5) Credits and advancements made to the debtor for support
of himself or herself, and family, during the last year
preceding the insolvency;

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