Can a Mortgagee Pay Real Residential Or Commercial Property Tax Arrears and Foreclose in The Philippines?

Can a Mortgagee Pay Real Residential Or Commercial Property Tax Arrears and Foreclose in the Philippines?

Introduction

In the Philippine legal system, property mortgages function as a typical security instrument for loans, allowing lenders (mortgagees) to secure repayment by holding a lien on the borrower's (mortgagor's) real residential or commercial property. A regular concern develops when the mortgagor stops working to pay genuine residential or commercial property taxes (RPT), leading to arrears that could endanger the mortgagee's interest. This post explores whether a mortgagee can pay these tax arrears and subsequently foreclose on the residential or commercial property, taking a look at the interaction in between mortgage law, tax commitments, and foreclosure treatments under Philippine jurisprudence. The analysis is rooted in the Civil Code of the Philippines, the Local Government Code, and pertinent statutes, highlighting the mortgagee's protective rights while underscoring the conditions for valid foreclosure.

Legal Framework Governing Mortgages and Real Residential Or Commercial Property Taxes

Mortgage Law in the Philippines

Property mortgages are primarily governed by Articles 2085 to 2123 of the Civil Code of the Philippines (Republic Act No. 386). A mortgage develops a genuine right over stationary residential or commercial property, protecting the satisfaction of a principal responsibility, usually a loan. The mortgagee does not acquire ownership but holds a lien that allows enforcement through foreclosure upon default.

Key provisions consist of:

Article 2085: A mortgage needs an existing primary obligation, and the mortgagor should be the absolute owner of the residential or commercial property.
Article 2124: The mortgage extends to the natural accessions, growing fruits, and enhancements on the residential or commercial property, however it is indivisible and secondary to certain remarkable liens.
Article 2126: The mortgage straight and instantly topics the residential or commercial property to the satisfaction of the obligation, empowering the mortgagee to act required to secure the security.

Mortgage agreements typically consist of covenants requiring the mortgagor to preserve the residential or commercial property, pay taxes, and insure it against loss. Breach of these covenants can constitute an event of default, activating acceleration of the debt and foreclosure.

Real Residential Or Commercial Property Taxes and Liens

Real residential or commercial property taxes are imposed under the City government Code of 1991 (Republic Act No. 7160), particularly Title II, which mandates yearly ad valorem taxation on lands, structures, and other improvements. The tax is payable to the city government unit (LGU) where the residential or commercial property is positioned, normally by January 20 of each year, with quarterly installations permitted.

Section 246: RPT accrues on January 1 and ends up being delinquent if overdue.
Section 257: Unpaid RPT constitutes a remarkable lien on the residential or commercial property, priming all other liens, mortgages, or encumbrances, no matter registration. This lien is enforceable versus the residential or commercial property itself, not personally against the owner.
Enforcement Mechanisms: If arrears persist, the LGU can levy and sell the residential or commercial property at public auction after due notice (Sections 254-260). The tax lien makes it through modifications in ownership, consisting of mortgage foreclosures, unless satisfied.

This superiority means that any mortgage lien is secondary; thus, unsettled taxes can cloud the title, decreasing the residential or commercial property's worth and complicating foreclosure sales.

Rights of the Mortgagee to Pay Tax Arrears

Authority to Pay Taxes

A mortgagee is not obliged to pay the mortgagor's RPT however has the right to do so to safeguard its security interest. This comes from the principle that the mortgagee, as a stakeholder in the residential or commercial property's integrity, can intervene to prevent remarkable claims from eroding the collateral.

Civil Code Basis: While not explicitly mentioned in a single post, this right is inferred from Article 2126 (defense of the mortgage) and comparable arrangements like Article 2105 for promises, which allow lenders to pay financial obligations chargeable to the thing vowed. In practice, mortgage deeds regularly authorize the mortgagee to pay taxes, insurance coverage premiums, or other charges if the mortgagor defaults, with compensation rights.
Reimbursement and Addition to Debt: Amounts paid by the mortgagee for taxes are recoverable from the mortgagor. These sums are added to the primary responsibility, bearing interest at the rate stipulated in the mortgage contract. This is supported by standard banking practices and jurisprudence emphasizing the mortgagee's subrogation rights under Article 1302 of the Civil Code (subrogation in payment of debts).
No Automatic Ownership: Paying taxes does not transfer ownership or snuff out the mortgage; it merely protects the status quo. The mortgagee serves as a voluntary payor with a right to indemnity.

In scenarios where the mortgagor is insolvent or unresponsive, the mortgagee might pay directly to the LGU to avert a tax sale, which might eliminate the mortgage lien if the LGU auctions the residential or commercial property.

Influence on Default and Acceleration

Failure to pay RPT does not naturally default the mortgage unless the contract specifies it as an event of default. However, most basic property mortgage arrangements (e.g., those used by banks like BPI or Metrobank) include stipulations where non-payment of taxes constitutes a breach, allowing the mortgagee to:

- Declare the whole loan due and demandable.
- Pay the financial obligations and demand immediate repayment.
- Proceed to foreclosure if the default continues.

If the primary commitment (e.g., loan installments) is currently in default, paying taxes enhances the mortgagee's position by clearing the exceptional lien, helping with a cleaner foreclosure.

Foreclosure Process and the Role of Tax Arrears

Types of Foreclosure

Philippine law offers two foreclosure modes:

Judicial Foreclosure (Rule 68, Rules of Court): Initiated by submitting a grievance in court. The court orders sale if default is proven. The proceeds satisfy the debt, consisting of any advances like tax payments.
Extrajudicial Foreclosure (Act No. 3135, as changed): More typical genuine estate mortgages with an unique power of attorney provision. The mortgagee petitions the clerk of court for a public auction after notification and publication.
In both, the mortgagee needs to account for all amounts due, consisting of taxes paid.

Effect of Unpaid Taxes on Foreclosure

Pre-Foreclosure: Unpaid RPT does not bar foreclosure initiation, however the tax lien persists, potentially hindering bidders or needing the mortgagee to pay taxes to market the residential or commercial property effectively. In practice, mortgagees frequently settle financial obligations before auction to guarantee the sale conveys clear title.
During Foreclosure: The auction notice should reveal known liens, however the sale is "as is." Proceeds from the sale initially please superior liens like taxes if declared by the LGU, then the mortgage debt (Article 2127, Civil Code).
Post-Foreclosure: If the mortgagee purchases the residential or commercial property (typical in low-bid circumstances), it assumes the tax lien unless paid previously. Redemption by the mortgagor (within one year under Act 3135) requires payment of the quote rate plus taxes paid by the purchaser.
Inclusion of Tax Payments in Foreclosure Amount: Taxes paid by the mortgagee are consisted of in the total indebtedness declared in the foreclosure petition. This increases the upset rate or judgment amount, ensuring healing.

Jurisprudential Insights

Philippine courts have consistently maintained the mortgagee's right to pay taxes and foreclose:

- In cases like Philippine National Bank v. Court of Appeals (G.R. No. 108630, 1994), the Supreme Court verified that advances for taxes are secured by the mortgage and recoverable in foreclosure.
DBP v. CA (G.R. No. 125838, 2000) clarified that tax liens are exceptional, but mortgagees can pay them subrogatively without bias to foreclosure rights.
- Rulings stress that non-payment of taxes by the mortgagor, if contractually a default, justifies acceleration and foreclosure, offered due procedure is observed (e.g., demand letters).

Courts scrutinize for excellent faith: If the mortgagee pays taxes opportunistically to pump up the debt without notification, it might be considered usurious or inequitable.

Practical Considerations and Risks

Steps for Mortgagees

Monitor Tax Payments: Mortgagees (e.g., banks) typically require proof of tax payment every year.
Demand Compliance: Upon discovering defaults, send out a need letter to the mortgagor.
Pay and Notify: If unsettled, pay the LGU and inform the mortgagor of the addition to the debt.
Declare Default: If applicable, speed up the loan.
Initiate Foreclosure: File under Act 3135 or judicially, including tax advances in the claim.
Post-Sale Management: Settle any staying liens during the redemption period.
Risks and Limitations

LGU Intervention: If the LGU starts a tax sale initially, the mortgagee needs to redeem or bid to secure its interest (Section 261, LGC).
Redemption Rights: Mortgagors or junior lienholders can redeem, compensating taxes paid.
Usury Concerns: Excessive interest on tax advances might break the Usury Law (though mostly deregulated post-Central Bank Circular No. 905).
Equitable Defenses: Mortgagors may challenge foreclosure in court if tax payment is viewed as early or without chance to treat.
COVID-19 and Moratoria: Recent Bayanihan Acts (2020-2021) momentarily suspended foreclosures and tax enforcements, however these have lapsed; look for extensions.

In business contexts, like with corporate mortgagors, insolvency procedures under the Financial Rehabilitation and Insolvency Act (FRIA) may remain foreclosures, making complex tax payments.

Conclusion

Yes, a mortgagee in the Philippines can pay genuine residential or commercial property tax arrears to safeguard its interest and subsequently foreclose on the residential or commercial property, offered there is a valid default on the primary commitment or contractual covenants. This right is protective instead of punitive, guaranteeing the mortgage's enforceability against superior tax liens. However, foreclosure is not automatically activated by tax payment alone; it needs breach of the mortgage terms. Mortgagees should act vigilantly, file advances, and adhere to procedural requirements to prevent legal pitfalls. For specific cases, speaking with an attorney is recommended, as outcomes depend upon contract language, accurate circumstances, and developing jurisprudence. This mechanism balances financial institution security with debtor rights, showing the Philippine legal system's emphasis on equity and excellent faith in guaranteed transactions.