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

Introduction

In the Philippine legal system, realty mortgages act as a common security instrument for loans, allowing lenders (mortgagees) to protect payment by holding a lien on the borrower's (mortgagor's) genuine residential or commercial property. A frequent concern develops when the mortgagor stops working to pay genuine residential or commercial property taxes (RPT), resulting in arrears that might endanger the mortgagee's interest. This article explores whether a mortgagee can pay these tax defaults and subsequently foreclose on the residential or commercial property, examining the interplay in between mortgage law, tax obligations, and foreclosure treatments under Philippine jurisprudence. The analysis is rooted in the Civil Code of the Philippines, the Local Government Code, and appropriate statutes, highlighting the mortgagee's protective rights while underscoring the conditions for legitimate 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 unmovable residential or commercial property, protecting the satisfaction of a principal commitment, usually a loan. The mortgagee does not obtain ownership but holds a lien that enables enforcement through foreclosure upon default.

Key arrangements include:

Article 2085: A mortgage needs an existing primary responsibility, and the mortgagor needs to be the outright owner of the residential or commercial property.
Article 2124: The mortgage reaches the natural accessions, growing fruits, and improvements on the residential or commercial property, but it is indivisible and secondary to particular superior liens.
Article 2126: The mortgage straight and immediately subjects the residential or commercial property to the satisfaction of the responsibility, empowering the mortgagee to take actions needed to protect the security.

Mortgage contracts typically consist of covenants requiring the mortgagor to keep the residential or commercial property, pay taxes, and guarantee it against loss. Breach of these covenants can make up an event of default, triggering 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), specifically Title II, which mandates annual ad valorem tax on lands, structures, and other enhancements. The tax is payable to the regional government unit (LGU) where the residential or commercial property is situated, typically by January 20 of each year, with quarterly installations allowed.

Section 246: RPT accrues on January 1 and becomes delinquent if unpaid.
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 against the residential or commercial property itself, not personally versus the owner.
Enforcement Mechanisms: If financial obligations continue, the LGU can levy and sell the residential or commercial property at public auction after due notice (Sections 254-260). The tax lien endures changes in ownership, consisting of mortgage foreclosures, unless satisfied.

This supremacy implies that any mortgage lien is subordinate; therefore, unsettled taxes can cloud the title, minimizing 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 obligated to pay the mortgagor's RPT however has the right to do so to secure its security interest. This stems from the concept that the mortgagee, as a stakeholder in the residential or commercial property's integrity, can step in to avoid superior claims from eroding the collateral.

Civil Code Basis: While not clearly stated in a single article, this right is inferred from Article 2126 (protection of the mortgage) and comparable arrangements like Article 2105 for pledges, which allow financial institutions to pay financial obligations chargeable to the important things vowed. In practice, mortgage deeds regularly license the mortgagee to pay taxes, insurance premiums, or other charges if the mortgagor defaults, with reimbursement rights.
Reimbursement and Addition to Debt: Amounts paid by the mortgagee for taxes are recoverable from the mortgagor. These amounts are added to the primary responsibility, bearing interest at the rate specified in the mortgage agreement. This is supported by standard banking practices and jurisprudence highlighting the mortgagee's subrogation rights under Article 1302 of the Civil Code (subrogation in payment of debts).
No Automatic Ownership: Paying taxes does not move ownership or snuff out the mortgage; it merely preserves the status quo. The mortgagee functions 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 erase the mortgage lien if the LGU auctions the residential or commercial property.

Effect on Default and Acceleration

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

- Declare the entire loan due and demandable.
- Pay the financial obligations and need immediate compensation.
- Proceed to foreclosure if the default persists.

If the primary responsibility (e.g., loan installations) is currently in default, paying taxes strengthens the mortgagee's position by clearing the superior lien, helping with a cleaner foreclosure.

Foreclosure Process and the Role of Tax Arrears

Kinds of Foreclosure

Philippine law provides 2 foreclosure modes:

Judicial Foreclosure (Rule 68, Rules of Court): Initiated by filing a problem in court. The court orders sale if default is shown. The profits please the financial obligation, consisting of any advances like tax payments.
Extrajudicial Foreclosure (Act No. 3135, as amended): More common genuine estate mortgages with a special power of lawyer clause. 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 defaults before auction to guarantee the sale communicates clear title.
During Foreclosure: The auction notification need to reveal known liens, but the sale is "as is." Proceeds from the sale first satisfy 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 earlier. Redemption by the mortgagor (within one year under Act 3135) needs 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 overall insolvency declared in the foreclosure petition. This increases the upset rate or judgment quantity, guaranteeing recovery.

Jurisprudential Insights

Philippine courts have actually regularly upheld 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 affirmed 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, however mortgagees can pay them subrogatively without prejudice to foreclosure rights.
- Rulings stress that non-payment of taxes by the mortgagor, if contractually a default, justifies velocity and foreclosure, provided due process is observed (e.g., demand letters).

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

Practical Considerations and Risks

Steps for Mortgagees

Monitor Tax Payments: Mortgagees (e.g., banks) frequently need proof of tax payment every year.
Demand Compliance: Upon finding defaults, send out a need letter to the mortgagor.
Pay and Notify: If unpaid, pay the LGU and inform the mortgagor of the addition to the financial obligation.
Declare Default: If suitable, accelerate the loan.
Initiate Foreclosure: File under Act 3135 or judicially, consisting of tax advances in the claim.
Post-Sale Management: Settle any remaining liens throughout the redemption period.
Risks and Limitations

LGU Intervention: If the LGU starts a tax sale initially, the mortgagee should redeem or bid to protect its interest (Section 261, LGC).
Redemption Rights: Mortgagors or junior lienholders can redeem, repaying taxes paid.
Usury Concerns: Excessive interest on tax advances might violate the Usury Law (though largely decontrolled post-Central Bank Circular No. 905).
Equitable Defenses: Mortgagors might challenge foreclosure in court if tax payment is seen as early or without opportunity to cure.
COVID-19 and Moratoria: Recent Bayanihan Acts (2020-2021) briefly suspended foreclosures and tax enforcements, but these have lapsed; check for extensions.

In business contexts, like with business 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 financial obligations to secure its interest and consequently foreclose on the residential or commercial property, offered there is a legitimate default on the primary responsibility or legal covenants. This right is protective rather than punitive, ensuring the mortgage's enforceability against remarkable tax liens. However, foreclosure is not immediately set off by tax payment alone; it needs breach of the mortgage terms. Mortgagees need to act diligently, file advances, and adhere to procedural requirements to avoid legal risks. For specific cases, speaking with an attorney is a good idea, as outcomes depend upon agreement language, factual situations, and developing jurisprudence. This system balances creditor defense with debtor rights, reflecting the Philippine legal system's emphasis on equity and excellent faith in protected deals.

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