FACTS:

Spouses Valino were the owners of a house, payable on installments from Philippine Realty Corporation.  To be able to purchase on  credit rice from NARIC, they filed a surety bond subscribed by petitioner and therefor, they executed an alleged chattel mortgage on the house in favor of the surety company.    The  spouses  didn’t  own  yet  the  land  on  which  the  house  was constructed  on  at  the  time  of  the  undertaking.    After  being  able  to purchase  the  land,  to  be  able  to  secure  payment  for  indebtedness,  the spouses executed a real estate mortgage in favor of Iya.
 
The spouses were not able to satisfy obligation with NARIC, petitioner was compelled  to  pay.    The  spouses  weren’t  able  to  pay  the  surety  company despite demands and thus, the company foreclosed the chattel mortgage.  It later learned of the real estate mortgage over the house and lot secured
by the spouses.  This prompted the company to file an action against the spouses. Also, Iya filed another civil action against the spouses, asserting that she has a better right over the property.  The trial court heard the two cases jointly and it held that the surety company had a preferred right over the  building  as  since  when  the  chattel  mortgage  was  secured,  the  land wasn’t owned yet by the  spouses making the building then a chattel and not a real property.
 

HELD:

A building certainly cannot be divested of its character  of a realty by the fact that the land on which it is constructed belongs to another.  To hold it the  other  way,  the  possibility  is  not  remote  that  it  would  result  in confusion,  for  to  cloak  the  building  with  an  uncertain  status  made dependent  on  ownership  of  the  land,  would  create  a  situation  where  apermanent fixture changes its nature or character as the ownership of the land changes hands.  In the case at bar, as personal properties may be the only subjects of a chattel mortgage, the execution of the chattel mortgage covering said building is null and void.