Dear PAO,
I obtained two loans from ABC Bank. The first one amounted to P200,000 and the second one amounted to P300,000. For the first loan, I executed a Real Estate Mortgage, which included a provision stating that “this mortgage shall also stand as security for any and all other obligations of whatever nature that Mortgagor/ Borrower may have with the Mortgagee.” I did not execute a Real Estate Mortgage for the second loan. Due to financial woes, I was able to pay only the first loan, but I defaulted my payments on the second loan. Thus, ABC Bank foreclosed the real estate mortgage. They said that they could do so because the Real Estate Mortgage contains a Dragnet Clause. I want to understand this clause.
Vanster

Dear Vanster,
In the case of Prudential Bank vs. Spouses Alviar (GR 150197, July 28, 2005), the Supreme Court, through Associate Justice Dante Tiñga, defined Dragnet Clause or a Blanket Mortgage Clause as one which is specifically phrased to subsume all debts of past or future origins, to wit:

“A ‘blanket mortgage clause,’ also known as a ‘dragnet clause’ in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are “carefully scrutinized and strictly construed. Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction.”
A Dragnet Clause stipulation extends the applicability of a real estate mortgage beyond the amount originally contemplated by the parties. If the real estate mortgage contains a Dragnet Clause, it intends to secure not only the original loan contemplated by the parties but also future obligations which the debtor may incur with the creditor, even those incurred after the execution of the contract.

On one end, it operates as a convenience to borrowers as it makes available additional funds without having to execute additional security documents. On the other end, it also operates in favor of the creditor because it reduces the exposure to risk of non-payment because the security given can be applied even to future obligations that the debtor may incur.
Hence, if the debtor incurs another loan with the creditor, after the execution of the contract secured by the real estate mortgage with a Dragnet Clause, such contract constitutes a continuing offer by the borrower to secure further loans under the security of the first real estate mortgage.

In your case, your first loan contract with real estate mortgage contains a statement that “this mortgage shall also stand as security for any and all other obligations of whatever nature that Mortgagor/ Borrower may have with the Mortgagee.” This may be considered as a Dragnet Clause, which ABC bank may apply to your second loan or subsequent loans.
We hope that we were able to answer your queries. This advice was based solely on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.

Thank you for your continued trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]