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A person dealing with a Torrens Title need not go beyond the title and may safely rely on its correctness. The law will in no way oblige him to go behind the certificate to determine the condition of the property. But if the title indicates upon its face that the same is subject to encumbrance, such encumbrance should prompt him to investigate further. If he fails to do so, he may not be considered in good faith. But in this case, even if there is an encumbrance annotated on the title, the person who is dealing with it did not investigate the circumstances behind the encumbrance. Yet he was still considered in good faith. Let's find out why.

This case involved an unregistered parcel of land with an area of 21,773 square meters originally owned by the late Maximo, father of Herminia and David. Maximo donated said property to his third wife Ofelia subject to either of two conditions: (a) upon the death or remarriage of Ofelia, the title shall revert to either Herminia or David or their heirs expressly designated by Ofelia; or (b) in the absence of such an express designation made by Ofelia before her death or marriage, the title shall automatically revert to Herminia and David in common.

Pursuant to the first condition, Ofelia executed on Sept. 27, 1960, a Deed of Conveyance of said land in favor of Herminia for and in consideration of her "love and affection" except that the "the possession and enjoyment of said property shall remain vested in me (Ofelia) during my lifetime or widowhood and which upon my death or remarriage shall automatically revert to and be also transferred to Herminia.

Pursuant to such conveyance, Herminia filed an application for registration to title over the subject unregistered land. So on June 8, 1962 an Original Certificate of Title was issued in the name of Herminia with the annotation that Ofelia shall have the usufructuary right over the parcel of land herein described during her lifetime or widowhood.

Two years later or on June 4, 1964, Herminia and her husband mortgaged said property in favor of an insurance Company to serve as security for a loan they obtained from said insurance company. Herminia however failed to pay said loan when due. So the Insurance Company foreclosed the mortgage and emerged as the highest bidder at the auction held on May 3, 1968. Thereafter, Herminia still failed to redeem the property. The Insurance Company however consolidated its ownership over the property only about 7 years later or on May 21, 1975 when title was issued in its name.

Prior thereto or on May 27, 1971, it turned out Ofelia executed another "Kasunduan" whereby she transferred said land to her stepson David also pursuant to the condition of the Donation made by her late husband Maximo. Since then David has been paying the real estate taxes on the property and in 1974, he was designated as the owner of the subject property in the cadastral survey and the records of the Ministry of Agrarian Reform.

Later or on February 28, 1979, David sold the property to a Realty Company which in turn leased it to its sister corporation (AB Incorporated). AB Inc. thereafter constructed two warehouses on said property. When the Insurance Company learned of this, it sent a letter to AB Inc. informing the latter that it was the owner of said property as evidenced by a TCT issued in its favor. The Insurance Company also informed AB Inc. of its right to appropriate the warehouses as said AB Inc. is a builder in bad faith.

This prompted the Realty Co. (AB Inc's sister corporation) and David to file a suit in Court to annual the Insurance Company's title. The Realty Company claimed that it was the absolute owner of the property by virtue of the sale executed by David who in turn obtained ownership thereof from Ofelia by virtue of the "Kasunduan" signed by the latter. They asserted among others that Ofelia never transferred the land to Herminia and that David had no knowledge of the registration of title in favor of Herminia nor her sale to the Insurance Company. They further claimed that the Insurance Company could not be an innocent purchaser because, when the title was mortgaged to it, said title indicated on its face an encumbrance i.e. the usufructuary rights of Ofelia during her lifetime. So, the Insurance Company should have investigated further on the circumstances behind said annotation. Where they correct?

No. The annotation of the usufructuary rights of Ofelia upon the title of Herminia does not impose upon the Insurance Company the obligation to investigate the validity of its mortgagor's (Herminia) title. Usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance. The usufructuary is entitled to all the actual, industrial and civil fruits of the property and may enjoy the thing in usufruct, lease it to another, or alienate her right even by gratuitous title, but all contracts she may enter into shall terminate upon the expiration of the usufruct.

Clearly only the right to use and the right to the fruits over the property are transferred to the usufructuary. The owner (Herminia) retains the right to dispose, alienate, encumber, transfer and even destroy the same. There is no doubt that the owner may validly mortgage said property. So the usufructuary rights in favor of Ofelia is not sufficient cause to require the Insurance Co. to investigate Herminia's title for the reason that Herminia's ownership remained unimpaired despite said encumbrance. The Insurance Co. had a right to rely on the certificate of title and was not in had faith in accepting the property as a security for the loan it extended to Herminia. Being an innocent mortgage for value, the Insurance Company validly acquired ownership of the property at the foreclosure sale subject only to the usufructuary rights of Ofelia, as this encumbrance was properly annotated on Herminia's title (Maxima Hemedes vs Court of Appeals et. al. G.R. No. 107132; R&B Insurance Corporation vs. Court of Appeals, et. a. G.R. No. 108472 October 8, 1999).