In loan transactions, creditors usually require a security be it in the form of real property or personal property to ensure the payment of the loan obligation.

However, it must be noted that a contract of mortgage does not result in an ipso facto transfer of the property in favor of the creditor in case the debtor fails to pay the loan obligation.

Time and again, the Supreme Court has emphasized that a real estate mortgage merely creates an encumbrance in favor of a mortgagee — it does not affect, much less extinguish the title or ownership of the mortgagor.

As such, the only remedy available to the creditor-mortgagee in case of non-payment or failure to comply with the conditions of the contract is to either institute a collection suit or foreclose the mortgage by selling the encumbered property to satisfy the outstanding indebtedness.

Foreclosure proceedings may be done judicially under Rule 68 of the Rules of Court, or extrajudicially, the process and requirements of which are laid down under Act 3135.

The acquisition of ownership of the mortgaged property via judicial foreclosure is a long process. Extra-judicial foreclosure is simpler and faster. The property shall be sold and if the mortgagor fails to redeem the property within the period provided by law, the mortgagee becomes the absolute owner thereof.

However, compliance with the provisions (notice/publication requirements) of Act 3135 is considered a condition sine qua non for the validity of an extrajudicial foreclosure.

In this regard, is a provision granting the mortgagee the authority to extrajudicially foreclose sufficient to carry out an extrajudicial sale under Act 3135?

Answering in the negative, the Supreme Court held in the case of Palo v. Sps. Baquirquir, G.R. No. 228919, 23 August 2023, that under our prevailing law on extrajudicial foreclosure, the mortgagee must be given an express authority to sell the mortgaged property and that a stipulation giving the mortgagee the power to extrajudicially foreclose, or a general provision regarding extrajudicial foreclosure, does not constitute a special power to effect an extrajudicial sale.

In this case, the real estate mortgage contract relevantly provides: “Should the MORTGAGOR fail to redeem the above-described properties within the period, then this mortgage shall be foreclosed either judicially or extrajudicially in accordance with law.” Accordingly, this provision does not confer upon the mortgagee sufficient authority to foreclose extra-judicially.

The Supreme Court explained that in the formulation of the specific rules governing the extrajudicial foreclosure of real estate mortgage under Act No. 3135, the legislature used the particular term “sale made under a special power,” which, undeniably, contemplates an express authority to sell the mortgaged property.

Furthermore, by referring to “special powers that are inserted or attached to real estate mortgages,” Act No. 3135 precludes the invocation of any implicit power to sell, since the act of insertion or attachment necessarily implies that the special power must be expressly and distinctly granted.

The requirement of express authorization is intended to protect mortgagors by giving them notice that when they agree to an extrajudicial foreclosure, they also agree to share a portion of their ownership rights, i.e., the power to sell, with the mortgagee, to facilitate the enforcement of the mortgage contract, and in lieu of regular judicial foreclosure proceedings.

While it is not necessary that the words “sale” or “sell” be used in the special power, the terms thereof must clearly evince the mortgagee’s intent to vest in the mortgagee the power to sell or to otherwise alienate the secured property for purposes of foreclosing upon the mortgage.

On the other hand, a provision that “in case of non-payment or violation of the terms of the mortgage… the mortgagee is hereby appointed attorney-in-fact- of the mortgagor with full power and authority to take any legal action as may be necessary to satisfy the mortgage debt” can only be construed to include the power to sell or otherwise alienate the mortgaged property for satisfaction of the secured debt.

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