Short answer. No. That stipulation is null and void. Article 2088 of the Civil Code expressly prohibits the creditor from appropriating or disposing of property given by way of pledge or mortgage, and declares any contrary agreement void. The lender must go through proper foreclosure, not automatic seizure.
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 →
What pactum commissorium is and why it is banned
A pactum commissorium is a contractual clause that allows a creditor to automatically own pledged or mortgaged property upon the debtor's default — without going through any legal proceeding, sale, or judicial process. Article 2088 bans this outright. The prohibition exists because such clauses give creditors an unfair advantage: a debtor who defaults by a small margin could lose property worth far more than the outstanding debt, with no auction, no public bidding, and no opportunity for third parties to offer a fair price. The law protects the debtor from that outcome.
The proper route: foreclosure
When a borrower defaults, the creditor's remedy is foreclosure — a formal process where the collateral is sold, either through court proceedings or through the extrajudicial process authorized by law when a special power of attorney was included in the mortgage. The proceeds of the sale are applied to the debt. If the sale brings more than what is owed, the surplus goes to the borrower. If it brings less, the creditor may have a deficiency claim. This process, not automatic seizure, is the only lawful way a creditor can realize on a pledge or mortgage.
What happens to the void clause
Because Article 2088 declares any contrary stipulation null and void, a pactum commissorium clause has no legal effect from the moment it is written. The rest of the loan agreement may remain valid — the nullity of one void clause does not necessarily void the entire contract — but the bank cannot invoke that specific clause to claim ownership of your property. If a lender attempts to take over pledged or mortgaged property under such a clause without going through proper foreclosure, that action itself would be unlawful and contestable.
What to do if a lender is trying to invoke this
If your lender is claiming that it automatically owns your property because of a default, and basing that claim on a clause in your agreement rather than a completed foreclosure proceeding, you have a legal basis to challenge that action. The key questions are: Was there a proper foreclosure sale? Was notice given? Were the legal requirements for extrajudicial or judicial foreclosure followed? A clause simply declaring ownership upon default, without a sale, violates Article 2088 and cannot be enforced. Preserving your documentation of the loan terms and any communications from the lender is an important first step.
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 →