Due Diligence in Real Property
Transactions in the Philippines

Real estate transactions in the Philippines carry significant legal and financial risk if approached without adequate preparation. Unlike movable property, land and improvements are governed by a complex web of statutes, administrative regulations, and local ordinances. A buyer who skips due diligence may inherit encumbrances, tax liabilities, or title defects that could prove far more costly than the purchase price itself. This article outlines the essential steps that both buyers and sellers must undertake before completing any real property transaction.

I. Title Verification at the Register of Deeds

The starting point of all property due diligence is obtaining a certified true copy of the Transfer Certificate of Title (TCT) or Original Certificate of Title (OCT) from the Register of Deeds (RD) of the city or municipality where the property is located. The RD copy � not a photocopy provided by the seller � must be inspected.

Key points to verify on the title:

• Registered owner � confirm the seller is the registered owner. If the seller is acting as an attorney-in-fact, verify the Special Power of Attorney (SPA) is current, authentic, and covers the specific transaction;
• Technical description � confirm the lot area and boundaries match the tax declaration and any survey plan;
• Annotations on the back of the title � this is where encumbrances, liens, adverse claims, notices of lis pendens, and restrictions are recorded. Every annotation must be examined and, where possible, resolved before closing;
• Erasures or alterations � any unexplained correction on the face of the title is a serious red flag that may indicate a falsified document.

II. Encumbrance and Lien Search

An encumbrance is any charge, claim, or liability attached to a property. Encumbrances that are annotated on the title are binding on all persons who deal with the property, whether or not they have actual knowledge of them � this is the doctrine of constructive notice under Section 52 of PD 1529.

Common encumbrances to check for include:

• Mortgage � a real estate mortgage (REM) in favor of a bank or private lender must be discharged before or simultaneously with the transfer of ownership, or the buyer must secure the mortgagee's consent and assumption arrangements;
• Notice of Lis Pendens � signals an ongoing court case involving the property. A buyer who purchases property subject to a lis pendens takes it subject to the outcome of the litigation;
• Adverse Claim � a third party's assertion of a right or interest in the property. Under Section 70 of PD 1529, an adverse claim is effective for thirty (30) days and may be renewed;
• Restrictions � developer-imposed restrictions on use, subdivision, or construction, typically in subdivision and condominium developments;
• Usufruct or Lease � a registered lease or usufruct gives the lessee or usufructuary the right to continue occupying the property notwithstanding a sale.

III. Tax Verification and Clearances

Tax obligations run with the land. A buyer may inherit unpaid real property taxes, which become a lien on the property under the Local Government Code (RA 7160). The following tax checks are essential:

Real Property Tax (RPT)

Obtain a Tax Clearance Certificate from the City or Municipal Treasurer's Office confirming that all real property taxes up to the current year have been paid. Unpaid RPT, including penalties and surcharges, is a lien on the property that the new owner inherits.

Bureau of Internal Revenue (BIR) Clearance

The BIR imposes Capital Gains Tax (CGT) at six percent (6%) of the gross selling price or zonal value, whichever is higher, on the sale of real property classified as a capital asset. Documentary Stamp Tax (DST) at one and a half percent (1.5%) also applies. Both taxes must be paid � typically by the seller for CGT and by either party as agreed for DST � before the BIR will issue a Certificate Authorizing Registration (CAR), which is required for the transfer of title at the RD.

Estate Tax (for Inherited Properties)

If the property was acquired by the seller through inheritance, verify that the estate tax has been fully paid and that the estate has been judicially or extrajudicially settled. An unadministered estate creates a cloud on the title that cannot be cleared without a settlement proceeding.

IV. Zoning and Land Use Verification

Confirm the zoning classification of the property with the local government unit's (LGU) Office of the City or Municipal Planning and Development Coordinator (CPDC). Zoning determines what uses are permitted on the property under the Comprehensive Land Use Plan (CLUP) of the LGU. A buyer intending to use the property for commercial purposes must verify that the zone classification permits commercial use.

Additionally, check for any national government restrictions � such as coverage under the Comprehensive Agrarian Reform Program (CARP under RA 6657), protected area designations under the National Integrated Protected Areas System (NIPAS), foreshore areas, or easements along waterways, roads, and power lines.

V. Foreign Ownership Rules

Foreign nationals and foreign-owned entities are subject to constitutional and statutory restrictions on land ownership in the Philippines. Key rules:

• Land ownership � the 1987 Constitution restricts private land ownership exclusively to Filipino citizens and corporations or associations at least sixty percent (60%) of whose capital is owned by Filipinos (Article XII, Section 7). Foreign nationals generally cannot own land in the Philippines;
• Condominium units � under the Condominium Act (RA 4726), foreign nationals may acquire condominium units, provided that foreign ownership of the entire condominium project does not exceed forty percent (40%) of the total units;
• Long-term lease � under RA 7652 (Investor's Lease Act), foreign investors may lease private lands for an initial period of fifty (50) years, renewable once for twenty-five (25) years, for the purpose of investment;
• Former Filipino citizens � under RA 8179, former natural-born Filipino citizens who have lost their citizenship may acquire urban land not exceeding 1,000 square meters, or agricultural land not exceeding one (1) hectare.

VI. Physical and Documentary Inspection

Beyond legal due diligence, buyers should also undertake a physical inspection of the property and verify:

• Actual occupancy � whether the property is occupied by a tenant, caretaker, or informal settler, and what legal rights (if any) the occupant holds under RA 6552 (Maceda Law) for installment buyers of residential real estate, or relevant urban land reform laws;
• Consistency between the tax declaration and the title � the tax declaration issued by the City or Municipal Assessor's Office should reflect the same area and boundaries as the title;
• Geodetic survey � for large tracts of land, a relocation survey conducted by a licensed geodetic engineer confirms the boundaries as described in the technical description of the title.

Conclusion

A thorough due diligence process is not a formality � it is the primary safeguard against purchasing a defective, encumbered, or disputed property. The cost of legal counsel during the due diligence phase is invariably a fraction of the cost of resolving title disputes, clearing liens, or unwinding a failed transaction after the fact.

Rimando Law Office assists buyers, sellers, developers, and investors in all aspects of real property transactions, including title examination, contract review, and representation in property disputes. For guidance on a specific transaction, we encourage you to contact our office.

References: Presidential Decree No. 1529 (Property Registration Decree); Republic Act No. 7160 (Local Government Code); Republic Act No. 6657 (CARP); Republic Act No. 4726 (Condominium Act); Republic Act No. 6552 (Maceda Law); Republic Act No. 7652 (Investor's Lease Act); Republic Act No. 8179; 1987 Constitution, Article XII, Section 7. This article reflects the law as of December 2024.