—Paolo E. Abarquez, Partner
—Gio Raymond P. Ceniza, Associate

In times of calamities and crisis, business enterprises are often among the hardest hit. Their affairs become limited, if not completely halted. This results in the depletion of cash flow leading to reduced financial flexibility – making it difficult to meet obligations when they become due as well as reducing the ability to pursue opportunities. Businesses are constrained to stretch their remaining money in ways that would ordinarily be considered inefficient, inaccessible and disadvantageous. Businesses, however, may opt to leverage or utilize their assets to obtain additional funds to keep it afloat and gain some degree of financial flexibility. Assets are ideal sources for allowing additional capitalization without need of additional effort, other than transacting with the business’ preferred financial institution to open a line of credit or refinance existing debt, among others.

There are several options under Philippine law allowing businesses to leverage their property and obtain the needed funds. Gaining financial flexibility gives businesses a degree of safety, security and ability to move forward.

Strategic leveraging allows businesses to survive and be capable of reengaging investments and opportunities.

Real Estate Mortgage

The most common way of utilizing real property assets to raise funds is through a loan secured by a mortgage.

In a real estate mortgage,[1] the property is subjected to a lien[2] that is registered with the Register of Deeds, to secure the payment of the loan. The owner retains ownership and possession of the property and the loan can then be used to, among others, address any losses and maintain his business position to pursue opportunities. A business, for example, may continue using its real property for its operations while retaining the flexibility to generate income during the validity of the loan.

Benefits:

• Additional cash flow and financial flexibility;
• Retention of Ownership, Possession and Use of the Leveraged Immovable Property;
• The need for foreclosure to transfer the Immovable Property.

Disadvantages:

• Slow to process due to formal requirements and legal scrutiny;
• Need to explore best possible deal, since terms of loan vary per institution;
• Cost of interest rate over a long period of time;
• Additional fees, charges and penalties.

Chattel Mortgage

A business may also leverage personal property to obtain funds via a chattel mortgage[3]—where a lien[4] is registered over personal property with the Register of Deeds to secure a loan.  It is worthy to note that rights, receivables, title, or interest under a contract may be the object of a chattel mortgage.  A business may also combine or obtain a chattel mortgage and a real estate mortgage to secure a loan.

Like in a real estate mortgage, personal property in a chattel mortgage is still retained by the owner allowing it to continue using the property during the validity of the chattel mortgage.

A new law called the Personal Property Security Act or PPSA,[5] although not yet effective,[6] simplified the constitution of a chattel mortgage.  Perhaps the government may find the need to implement this law now in order to boost access to credit and manage the effects of the Covid-19 Pandemic.

Benefits:

• Additional cash flow and financial flexibility;
• Retention of Ownership, Possession and Use of the Leveraged Movable Property;
• The need for foreclosure to transfer the Immovable Property.

Disadvantages:

• Not a preferred mode of collateral for banks and lending institutions;
• Reduced bargaining power to secure a favorable loan;
• Slow to process due to formal requirements and legal scrutiny;
• Need to explore best possible deal, since terms of loan varies per institution;
• Cost of interest rate over a long period of time;
• Additional fees, charges and penalties.

Pledge

Another mode for a business to leverage assets and generate funds is through a pledge.

A pledge is a transaction where the debtor puts in the possession of a creditor a movable property or a document evidencing incorporeal rights in order to secure the fulfillment of a principal obligation.[7]

Unlike in a real estate mortgage or chattel mortgage, possession of the pledged property is given to the creditor or to a third party they have designated. The most common type of a pledge transaction is the delivery of a piece of personal property to a pawnshop.

Like the Chattel Mortgage Law, the rules on the constitution of a pledge have been amended and simplified by the Personal Property Security Act.

Benefits:

• Additional cash flow and financial flexibility;
• More common and easier to process among smaller lending institutions and informal lenders.

Disadvantages:

• Possession and Utilization of the Property is surrendered to the Creditor;
• Greater risk of depreciation, damage and/or loss of Property;
• Greater risk of losing the Property. In informal transactions, the Creditor automatically assumes ownership and possession of the Property upon default. Thus, in case the Creditor unlawfully refuses to surrender the Property, the need for court intervention to repossess the Property.

Antichresis

A contract of antichresis, although fairly uncommon nowadays, remains an option to generate funds.

In antichresis, a creditor acquires the right to receive the fruits of a real property from the debtor. The payment of interest is credited first and thereafter the principal.[8] While it does not create a lien on the immovable property, it grants the use of the fruits to the creditor. Possession of the property need not be transferred in this type of agreement.

The actual market value of the fruits at the time of application will be the measure of application to the interest and the principal.[9]

Benefits:

• Additional cash flow and financial flexibility;
• Retention of Ownership, Possession and Use of the Leveraged Property;

Disadvantages:

• Uncommon as a means to acquire loan;
• The fruits/income of the Leveraged Property are surrendered to the Creditor.

Lease

A lease contract may also be utilized to generate funds from real properties. In a contract of lease, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, for a certain period.[10]

It should be noted that the lessor need not be the owner of the property. In sub-contract scenarios, a possessor or a lessee may sub-lease a property under its possession.[11] In order to sub-lease a property, the possessor must not be prohibited to sub-lease the property by the owner in the lease contract.[12]

Benefits:

• Additional cash flow and financial flexibility;
• Retention of Ownership of the Leveraged Property, if the lessor is the owner.

Disadvantages:

• Possession of the property is surrendered to the Lessee;
• Highly restrictive on the part of the lessor;
• Greater risk of depreciation, damage and/or loss of Property;
• In case of disagreement between the parties, the lessor may be forced to resort to institute ejectment suits against the lessee.

Partnerships and Joint Ventures

The creation of Partnerships and Joint Ventures are also possible avenues to generate funds through the utilization of assets. Partnerships and Joint Ventures are hardly distinguishable from each other, since both concepts involve community of interest, sharing in the profits or losses, and mutual right of control.[13]

In this mode of utilizing property, the owner of the property may agree with another to invest on the property with the end goal of raising profit, to be divided among the investing parties.

Benefits:

• Additional Possible Source of revenue;
• Retention of Ownership and Possession of the Property.

Disadvantages:

• Control of the property may be restricted due to entry of investors and interested parties;
• Generation of revenue may be slower compared to other modes;
• Business Losses remains a possibility.

The Personal Property Security Act (PPSA)

The Personal Property Security Act or PPSA created other sources of personal or movable property that can be leveraged to generate funds or credit. The law covers all security transactions over moving collateral, except interests in aircrafts subject to Republic Act No. 9497, or the “Civil Aviation Authority Act of 2008”, and interests in ships subject to Presidential Decree No. 1521, or the “Ship Mortgage Decree of 1978”.[14]

Under the PPSA, a security interest may be created over the following, among others: interest over tangible assets commingled in a mass,[15] interest over funds credited to a bank account, [16] tangible assets with respect to intellectual property,[17] interests over proceeds and commingled goods,[18] and future property or after-acquired-assets.[19]

However, this law has not yet been implemented given that the government has not yet established the central registry for the security transactions under the PPSA.

Relevant Issuances regarding COVID-19

The National Government, through the Department of Finance, has issued the “Implementing Rules and Regulations of Section 4 (aa) of Republic Act No. 11469”, otherwise known as the “Bayanihan to Heal as One Act”. In these regulations, the National Government has imposed a Mandatory Grace Period of 30 days[20] for all loans with principals and/or interests falling due within the Enhanced Community Quarantine Period, without incurring additional interest. The Government also imposes no additional Documentary Stamp Tax as a consequence of the relief granted.

The grace period may be extended if the President of the Republic chooses to do so, pursuant to his emergency powers under R.A. No. 11469. This Grace Period cannot be waived and any previously executed waiver of the same shall be void.[21] Further, the refusal to provide the grace period subjects the refusing party to a penalty of imprisonment two (2) months or a fine of not less than Ten Thousand Pesos (P10,000.00) but not more than One Million Pesos (P1,000,000.00), or both, subject to the discretion of the Court.[22]

The abovementioned issuance also exempts parties from Documentary Stamp Tax imposed on credit extensions and credit restructuring, micro-lending including those obtained from pawnshops and extensions thereof for the duration of the Enhanced Community Quarantine.[23]

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[1] An Act to Ordain and Institute the Civil Code of the Philippines [Civil Code], Republic Act No. 386, art. 2085 (1950).

[2] A real estate mortgage should be recorded in the Register of Deeds where the property is located in order to be validly constituted and for the same to be binding against third persons.

[3] Civil Code, art. 2140; An Act Providing for the Mortgaging of Personal Property and for the Registration of Mortgages so Executed [The Chattel Mortgage Law], Act No. 1508, Section 3 (1906).

[4] A chattel mortgage must be registered in the Chattel Mortgage Registry in the Register of Deeds. If the movable, however, can be found in a different province from the residence of the mortgagor, registration must be done both in both the location of the personal property and the mortgagor’s residence.

[5] Republic Act No. 11057, August 17, 2018.

[6] This new law is not yet effective as the Registry for registration of the security has not yet been established by the Government. See discussion below.

[7] Civil Code, art. 2085 and 2093.

[8] Civil Code, art. 2132.

[9] Civil Code, art. 2133.

[10] Civil Code, art. 1643.

[11] Maunlad Homes, Inc. v. Union Bank of the Philippines, G.R. No. 179898, December 23, 2008.

[12] Civil Code, art. 1650.

[13] Aurbach v. Sanitary Wares Manufacturing Corporation, G.R. No. 75875, December 15, 1989.

[14] Personal Property Security Act [PPSA], Republic Act No. 11057, §4 (2018).

[15] Rules and Regulations Implementing the Personal Property Security Act [PPSA Rules], Rule 3, §3.07.

[16] PPSA Rules, Rule 3, §3.10.

[17] PPSA Rules, Rule 3, §3.11.

[18] PPSA Rules, Rule 3, §3.06.

[19] PPSA Rules, Rule 3, §3.05.

[20] Implementing Rules and Regulations of R.A. No. 11469 [Bayanihan Rules], Rule III, §3.01.

[21] Bayanihan Rules, Rule III, §3.03.

[22] Bayanihan to Heal as One Act [Bayanihan Act], R.A. No. 11469, §6.

[23] Bayanihan Rules, Rule V, §5.01.