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Spring 2007-09 Sale declared to be a mortgage

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Number 67
Spring 2007


Sale declared to be a mortgage


A so-called "sale" of a tract of land was in fact a mortgage, since the "seller" could buy the same back at the end of one year, and other circumstances present. So decided the Supreme Court of Puerto Rico in the case of Gallardo Hernandez v. Petition García, 132 D.P.R. 39 (1992).


Repurchase agreement

On August 14, 1987, Cecilia Petition García executed before notary Ángel Millet Martínez a deed of "Sale with Agreement to Repurchase," pursuant to which she sold a tract of land to Jaime Gallardo Hernandez for the sum of $13,000. The deed contained a clause whereby Petition could repurchase the land at the end of one year for the sum of $18,000. The deed provided that the repurchase price was set at $18,000 due to the fact that the site was expected to increase substantially in value, which the parties estimated in $5,000.

Upon signing the deed, Petition inquired about the meaning of the phrase "with agreement to repurchase," because what she wanted to receive from Gallardo was a loan secured by a mortgage. The notary explained that it was a mere formality, and that the sale with agreement to repurchase in fact was a loan that she had to pay in one year.

Civil Code

Article 1395 of the Puerto Rico Civil Code acknowledges the validity of a repurchase agreement. One happens when a seller reserves the right to recover the thing sold within a set period of time, which can never exceed ten years. Nevertheless, article 1410 of the same code indicates that a sale of real estate coupled with a repurchase agreement is presumed to be a loan of the sale price, secured by a mortgage in the property, if any of the following circumstances is present:

  • if the purchaser does not take material possession of the property,
  • if the seller pays interest on the sale price to the purchaser, even if these are otherwise called,
  • if the contract stipulates an inadequate sale price.

Interest

The Supreme Court decided that the $5,000 difference between the sale price ($13,000) and that of the repurchase ($18,000) in fact constituted disguised interest. Moreover, on one hand Gallardo never took possession of the land, and on the other, the so-called sale price was inadequate, as the property had been appraised at $107,500.



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