A mortgagee who has foreclosed property is not considered in good faith when such mortgagee has or is expected to have knowledge of any defect in the title; a prior buyer in good faith, although merely under a contract to sell, is preferred over a mortgagee since if the original owner delivered title, he would not anymore be able to mortgage the thing.


A contrcat to sell was executed between spouses Canuto and Oreta, and Solid Homes. The sale involved a parcel of land (511 sq. m.). Upon signing of the contract, Oreta made payment with the agreement that the balance shall be paid in installments. Meanwhile. Solid Homes executed several mortgages in favor of State Investment over its subdivided parcels of land, including the subject of land of the mentioned contract to sell. Such mortgage was foreclosed upon failure of Solid to comply with its obligations. Thereafter, Solid through a MOA, negotiated for the deferment of consolidation of ownership over the foreclosed properties. It further committed itself to redeem the properties.
Spouses Canuto after a few years filed a complaint before the HLURB against Solid and State for failure on the part of Solid to execute the necessary absolute deed of sale as well as to deliver title to property subject of the contract to sell despite full payment. Solid alleged that its obligations under the contract have become so difficult for performance. Solid , in effect, asked to be partially released from its obligations by delivering another parcel of land in substitution to the subject of the sale. State, on the other hand averred that unless Solid pays the redemtion price, it has a right to hold on to the foreclosed properties. However, HLURB ordered State to execute a deed of conveyance in favor of complainants and deliver the title to the land. Solid was then ordered to pay State the portion of the loan which corresponds to the value of the lot. this judgment was sutained by the Board of Commissioners, Office of the President, and Court of Appeals.


(1) W/N spuses Oreta's unregistered rights are superior over State's registered mortgage over the property
(2) W/N State has the right to rely on the face of the Torrens title


(1) State's registered mortgage right over the property is inferior to that of respondents' unregistered right. The unrecorded sale is preferred for the reason that if the original owner (Solid) had parted with the ownership of the thing sold, he would no longer have the free disposal of it and would not be able to mortgage it. Registration of the mortgage is not important since it is understood to be without prejudice to the rights of third persons.

(2) As a general rule, where there is nothing in the title to indicate any cloud or vice in the ownership thereof, the purchaser is not required to explore further. An exception to this is when the mortgagee or purchaser has knowledge of a defect or lack of title on the part of the vendor or that he was aware of sufficient facts to induce a reasonably prudent man to inquire furher. In this case, petitioner knows full well that Solid is engaged in selling subdivision lots. Therefore, as founded on jurisprudence, it should have taken necessary precautions to ascertain any flaw. Moreover, the uniform practice of financing institutions is to investigate, examine, and assess real property offered as security. State is therefore not a mortgagee in good faith.