Short answer. No. Article 2088 states that the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them, and that any stipulation to the contrary is null and void. The clause saying the property becomes his on default is void even though you signed it.
What the law says
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.
Civil Code, Article 2088 — Pactum Commissorium Void. Read the full provision →
Why automatic forfeiture is forbidden
Security is meant to secure a debt, not to transfer property. A lot worth three million pesos may secure a loan of four hundred thousand, and if default alone passed ownership, the lender would collect nine times what he was owed. So the law refuses the shortcut and requires the security to be turned into money in a way that produces a price. Article 2087 puts the same idea positively: it is of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for payment to the creditor.
The clause is void, not merely unfair
This is not a matter of a court weighing whether the bargain was harsh. Article 2088 declares the stipulation null and void, so it produces no effect at all and the borrower does not need to have objected at the time. Nor does the label save it. The arrangement appears in many disguises — an automatic dation in payment on default, an undated deed of sale signed at the same time as the loan, a blank deed with the space for the buyer left open, a promise to transfer title if the debt is not paid by a certain date. Substance decides.
What the lender must do instead
He must sell, and by a process. For a pledge, Article 2112 requires a sale before a Notary Public at public auction, with notification to the debtor and the owner stating the amount for which the sale is to be held, and the creditor may appropriate the thing only after two auctions have failed — in which case he must give an acquittance for his entire claim. A mortgage is foreclosed under its own rules. In every version the point is the same: the value is tested in a sale, not assumed by the lender.
If the transfer has already happened
A void stipulation does not become good because title has moved. Gather the loan document and the transfer document and compare their dates, the stated consideration and whether any price actually changed hands, because a deed executed alongside the loan and dated later is the classic pattern. Article 1409 treats contracts whose cause or object is contrary to law, and those that are absolutely simulated, as void from the beginning. Bring the two documents together to a lawyer rather than either one alone — it is their relationship that tells the story.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Development Bank of the Philippines vs. Court of Appeals, et al, G.R. No. 118342, January 5, 1998 — read the decision on LawPhil →
- A. Francisco Realty And Development Corp. vs. Court of Appeals, et al, G.R. No. 125055, October 30, 1998 — read the decision on LawPhil →
- Fort Bonifacio Development Corporation vs. Yllas Lending Corporation, et al, G.R. No. 158997, October 6, 2008 — read the decision on LawPhil →
- Solid Homes, Inc. vs. Court of Appeals, et al, G.R. No. 117501, July 8, 1997 — read the decision on LawPhil →
Related provisions
- Civil Code, Article 2088 — Pactum Commissorium Void
- Civil Code, Article 2087 — Sale on Default
- Civil Code, Article 2112 — Extrajudicial Sale of the Pledge
- Civil Code, Article 1409 — Void or Inexistent Contracts