STUDY ON THE REMOVAL OF

AGRICULTURAL FREE PATENT

RESTRICTIONS

Atty. Erwin L. Tiamson

Foundation for Economic Freedom

July 2015

1
 Disclaimer
This publication is made possible by the support of the Australian Embassy – The
Asia Foundation Partnership in the Philippines. The views expressed in this
publication are those of the author and not necessarily those of the Department of
Foreign Affairs and Trade (DFAT) of the Australian Embassy and The Asia
Foundation.

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 LIST OF ACRONYMS AND ABBREVIATIONS

ARB Agrarian Reform Beneficiaries

CA Commonwealth Act
CLOA Certificate of Land Ownership Award
DAR Department of Agrarian Reform
DENR Department of Environment and Natural Resources
EP Emancipation Patent
FP Free Patent
LRA Land Registration Authority
NAFCO National Abaca and Fiber Corporation
PD Presidential Decree
RA Republic Act
US United States of America

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 EXECUTIVE SUMMARY

One of the binding constraints to Philippine development is the restricted agricultural land
market in the rural area. The restriction was primarily due to the prohibition on
encumbrances, sale and mortgage specifically, that are imposed on agricultural free
patents and homestead patents issued to public land grantees. Most of our agricultural
lands in the rural areas are covered by agricultural free patents and homestead patents
issued by the DENR. In a span of 105 years, there are 3.93 million parcels, covering 8.92
million hectares of agricultural lands, which have already been issued free patents.

The policy behind the restrictions imposed on lands covered by patents was made to
address the problems existing in the early 1900s when the Philippines was still a
predominantly agricultural society. The existence of the restrictions prevents the patentee
from formally transacting the land in the formal market where the prohibition is most
effective due to the formal conveyancing and registration requirement of the sale.
However, the prohibition does not prevent the patentee from disposing the land in the
informal market where the formal requirement is not strictly followed.

In the 1970s, State policy towards preservation of ownership of land disposed by the State
through transfer restriction and repurchase has slowly been relaxed. It has been
recognized that such restrictions on the right to alienate or encumber the lands have
worked to the disadvantage of the people who are intended to benefit from the law by
depriving them of the full enjoyment and utilization of the property. Patentees’ access to
credit and the financial market have been hampered by this limitation, putting them at a
disadvantage relative to other property owners who can make use of their property as
collateral. Thus, the concept of preserving ownership through restrictions on transfers can
no longer be justified by present circumstances.

The private formal credit suppliers welcome the lifting of the prohibition on encumbrances,
sale and mortgage. It allows their institutions to increase their lending portfolio to the small
farmers who are the main beneficiaries of the Free Patent. While it is not automatic for
landholders to use their land as collateral for credit, especially from formal credit suppliers,
the lifting of the provision is enough to widen the options for the agricultural free patent
holders to get access to lower cost of credit in the formal land market.
Restrictive policies limit the movement of free patent holders in a land market. Restrictions
impose high transaction costs and prevent the land going to the highest and best use.
Removing these restrictions will enhance transactions within the land market.
Undervaluation of lands due to informal transactions will be avoided. The removal of the
restrictions on sale and repurchase will free up the dead capital estimated at PhP 2.20
Trillion, almost equivalent to the budget of the whole country for one fiscal year. The more
exchanges, buying and selling, the more vibrant the land market is, and so is the
economy.

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 Table of Contents
I. Background 6
A.The Problem 6
B. Public Land Grants in the Philippines 7
1. Land Patents 8
2. Decreed Lands 8
3. Transfer or Derivative Titles 8
C. Restriction on Free Patent and Homestead Patent 9
1. Five Year Prohibition on Encumbrance and Alienation 9
2. Five Year Repurchase 10
II. Public Policies Behind the Restrictions 10
A. American Public Land Grants 10
B. American Homestead Patents and Restrictions 10
C. Patent Restrictions under Philippine Public Land Laws 11
1. Under Act No. 926 - Homestead protection against prior debts only 11
2. Under Act No. 926 - Free Patent exemption against prior debts and prohibition
on sale 12
3. Under Act No. 2875 and Commonwealth Act No. 141 - Encumbrance includes
Mortgage and Lease 12
4. Policy Behind the Restriction and Its Interpretation 13
III. Current Policies Towards Lessening of Restrictions 13
A. Restrictions on Public Lands Disposed under Republic Act No. 477 14
B. Presidential Decree No. 2004 (1985) 14
C. Republic Act No. 10023 (2010) 15
D. Liberal Interpretations of Section 117 & 118 by the Court in the 1970s 15
IV. Negative Effects of the Restrictions 15
A. Interference to Property Rights 16
B. Proliferation of an Informal Market and Denial of Access to Capital 16
C. Diminution of the Indefeasibility of Torrens Title 17
V. Impact of the Removal of Restriction to the Economy 18
A. Potential Capital Release to the Economy (Dead Capital) 18
B.Transfer of Property (Free Market) is a Tool that Promotes Best Use 21
VI. Scope of Private Lands with Agricultural Free Patent Titles 22
VII. Conclusion 23

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 I. Background

A. The Problem

The fundamental challenge confronting the Philippines is how to accelerate

inclusive growth by creating more and better jobs to reduce poverty. Among the
principal reasons for persistent poverty are low agricultural productivity, poor
contribution of manufacturing and a low-productivity, low-skill services sector. The
World Bank points to a lack of competition in key sectors, insecurity of property
rights, complex regulations, and severe underinvestment by the government and
the private sector.
One of the binding constraints to Philippine development is the restricted
agricultural land market in the rural area. The restriction was primarily due to the
prohibition on encumbrances, sale and mortgage specifically, that are imposed on
agricultural free patents and homestead patents issued to public land grantees.
Most of our agricultural lands in the rural areas are covered by agricultural free
patents and homestead patents issued by the Department of Environment and
Natural Resources (DENR). From 1986 to 2015 alone, the DENR issued around 2.5
million patents. All of these lands are covered by the restrictions.
The effect of the restriction is bad for the rural economy. The restriction becomes a
barrier to move the land within the land market as it prevents the land owners from
transferring or trading the land formally. A productive economy requires that assets
are used by those who can do so most productively and the “right to transfer”1
properties facilitate this movement of assets from the non-productive to the
productive. In other words, hindering transfers of land from the inefficient to the
more efficient user is bad for the economy. The economic activity is stunted
because individuals who can make the most of the land are prevented from
acquiring it from those who are not economically benefiting from ownership of the
land and who could be better off by exchanging the land for other resources that the
owner can more effectively utilize for his or her own benefit and of society.
In addition, the freedom to enter into voluntary exchanges should increase the
subjective well-being of individuals in a society. If two people agree to exchange
something, both parties expect to benefit from the trade and thus both expect their
well-being to increase. Any regulations that prohibit or interfere with certain types of
voluntary transactions necessarily must limit the economic well-being of people
since they are stuck with something that has less value to them. The less voluntary
interaction is interfered with, the more people will exchange resources to increase
their subjective wealth.
More importantly, the restriction limits the ability of agricultural land owners to make
use of the land as collateral and thereby relax credit constraints. The prohibition
makes it difficult for land owners to use the land as collateral for a loan. It has long
been recognized that modern market economies rely on collateral, i.e. mortgage, to
support a variety of financial market transactions to acquire capital, i.e. capital loan,
that are necessary for economic activities. This restriction on the right to transfer,
thus, prevents the full contributions to investment, employment, and economic
growth of patented agricultural land.
1
The trinity of rights on property is the right to exclude, the right to use and the right to transfer.

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 In terms of creating a more vibrant land market, some progress has been made. In
2010, an amendment in the Public Land Act was introduced under the Residential
Free Patent Law (Republic Act No. 10023). The law provided for a simpler and
cheaper process of titling residential lands through administrative adjudication. The
residential patent issued pursuant to the law does not have the usual restrictions on
transfers included in agricultural free patent and homestead patent. As of end of
2014, the law put into the formal land market more than 240,000 unrestricted titles,
a 1400% increase in the number of original land titles issued on residential lands.
Figure 1. Number of residential titles issued annually (2011-2014)

60,000

45,000

30,000

15,000

Source: DENR, 2014

B. Public Land Grants in the Philippines

The root of land ownership in the Philippines is based on the principle of Regalian
Doctrine which holds that at the beginning, all lands belong to the State and that
land can pass into private ownership through a grant coming from it. Thus, all
original sources of private rights to land should be able to trace its roots from a land
grant, express or implied, from the State.2 These land grants or dispositions are all
coming from what is called “alienable and disposable” “lands of the public domain”.
Public domain lands are made up of agricultural lands, forest lands, mineral lands
and national parks (land classification) but only agricultural lands can be declared
alienable and disposable lands.
Once alienable and disposable lands of the public domain have been disposed by
the State, the land becomes private property that can be used and transferred freely
by the private owner. However, it is subject to certain limitations imposed by the
State in the exercise of its police power (i.e. environmental and land use
regulations) and eminent domain (i.e. road right of way acquisition).
The process where private rights to land is awarded to private persons is either
through a direct grant where a qualified citizen applies for land patent under public
land laws (Commonwealth Act No. 141, as amended) or by operation of law. In the
direct grant, the application is administratively processed and the right for a grant is
determined and adjudicated by the DENR through land patent application. Land can

2
This discussion does not include indigenous people’s ownership rights over ancestral lands. Ancestral lands are deemed private lands
based on customary or native title and is outside the operation of the regalian doctrine.

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 also be acquired by operations of law without need of a formal patent application.
The following are the different public land grants in the Philippines:
1. Land Patents

There are three types of patents that the DENR issues; homestead, sales,
and free patents. Homestead patents are generally issued to unoccupied
alienable and disposable agricultural lands where no private rights recognized
by law exist. Homesteads are distributed at almost no costs in favor of land-
destitute citizens for the establishment of their homes and cultivation. It is
intended to encourage agricultural production and settlement in frontier lands
by providing private land rights for those who are willing to cultivate and settle
in the area. Sales patents, on the other hand, are disposed to those who
intend to buy lands from the public domain for purposes of agricultural,
commercial, industrial or residential use. Like homestead, the land applied for
in sales patent should be alienable and disposable and free from any private
claim. Free patents are different from the other patents since this type of land
grant is issued to the actual occupant, possessor, and/or cultivator/resident of
agricultural or residential lands. Unlike in homestead and sales, free patent
applicants are already on the land and have been using it for a long period of
time. Land patents, once issued are directly registered by the Register of
Deeds where the land is located and a certificate of title under the Torrens
system is issued to the patentee. Titles acquired by way of agricultural free
patents and homestead patents are restricted titles. Patentees of this kind of
patent cannot transfer ownership of the land for a period of five (5) years and
if they sell the land after the lapse of the period, they are given five (5) years
to redeem the land from the purchaser (right of repurchase). Thus, the sale
actually operates like a mortgage, with the seller acquiring a five (5) years
right of redemption.
2. Decreed Lands

The State also allows acquisition of ownership over alienable and disposable
agricultural lands “by operation of law.” Under this concept, a qualified person
becomes the owner of a land without a need of a formal application or
government grant once all the requirements or conditions necessary for
acquisition of land under the law are fulfilled. However, said acquisition is
considered imperfect until said ownership is judicially confirmed. The
conditions set under the present law for the indirect grant to be valid are
provided under Section 14 of Presidential Decree (P.D.) No. 1529 or the
Property Registration Decree. Once confirmed by the court, a “Decree of
Registration” is issued by the Land Registration Authority (LRA) and a
certificate of title under the Torrens system is thereafter issued by the
Register of Deeds. The title acquired through a decree is referred to as a “full”
title. Unlike patents, the owners of decreed lands are not subject to the
prohibition on sale neither is he given the right of redemption that is
characteristic of patented lands.
3. Transfer or Derivative Titles

Generally, once lands of the public domain have been disposed or granted,
the grantee acquires ownership in full. This includes the right to exclude
others including the State, the right to use the land subject only to police
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 power and the right to transfer the property to qualified persons3. Transfers
are made through voluntary or involuntary dealings on land. Voluntary
dealings are made by the registered owner in favor of another qualified
person through sale, donation, foreclosure of mortgage, and as a
consequence of successional rights or of marriage (absolute community of
property). Ownership can also be lost through involuntary processes
consequent to court’s levy on execution or in the exercise of the powers of
eminent domain.
Once land is transferred and the transaction is registered before the Register
of Deeds, the “Original Certificate of Title” of the registered owner is cancelled
and a new one is issued in favor of the new owner. The Register of Deeds
shall issue a “Transfer Certificate of Title” in the name of the new registered
owner. This transfer titles are also called derivative titles.
Grantees of public lands under free patent (agricultural) and homestead
patents are prohibited to sell within a period of five (5) years. However,
transfer certificate of titles coming from patents (residential) are no longer
bound by these restrictions.
C. Restriction on Free Patent and Homestead Patent

Original owner patented (free patent agricultural and homestead) and decreed
lands do not stand in the same footing when it comes to the right of the owner to
transfer the land. Patents operate like a contract between the government and the
grantee, and therefore are subject to conditions stated under Commonwealth Act
(C.A.) No. 141 or the Public Land Act. These conditions include: Section 90, Par. (i)
preservation of forty meter strip of river banks as forest; Section 112, sixty (60)
meters right of way for public highways, utilities, etc.; Section 113 and 114 on use of
waters and state reservation of its ownership; and Section 118 on five (5) year
prohibition on transfer of free patent and homestead patent.
Section 119 is intended to benefit the patentee by giving him/her a period of five (5)
years to redeem the land from the buyer from the time of the sale. This, however,
operates like a restriction because buyers, as much as possible, would prefer
transfer in full, since transfers with repurchase creates uncertainty. Any violation of
these restrictions produce the effect of annulling and cancelling the grant, title or
patent and cause the reversion of the property and its improvements to the State.
The restrictions on transfer and the right to repurchase are cited in full below:
1. Five Year Prohibition on Encumbrance and Alienation

SECTION 118, C.A. No. 141. Except in favor of the

Government or any of its branches, units, or institutions, lands
acquired under free patent or homestead provisions shall not be
subject to encumbrance or alienation from the date of the
approval of the application and for a term of five years from and
after the date of issuance of the patent or grant, nor shall they
become liable to the satisfaction of any debt contracted prior to
the expiration of said period, but the improvements or crops on

3
Subject to some exceptions (hereditary succession, former Filipinos, dual citizens), only citizens of the Philippines are allowed by the
Constitution to acquire and own land.

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 the land may be mortgaged or pledged to qualified persons,
associations, or corporations.
2. Five Year Repurchase

SECTION 119, C.A. No. 141. Every conveyance of land

acquired under the free patent or homestead provisions, when
proper, shall be subject to repurchase by the applicant, his
widow, or legal heirs, within a period of five years from the date
of the conveyance.

II. Public Policies Behind the Restrictions

A. American Public Land Grants

Under the American law on public lands, the United States Federal Government is
the owner in fee simple4 of all public lands which it holds and generally divested title
only by the issuance of a patent.5 Thus, the government and its grants are the true
source of title to all lands.6 7 Congress creates a land department and enacts laws
on sales and disposition of the public lands that prescribe the manner by which the
United States may be divested of the legal title to land in favor of private persons.
There are various modes of disposing public lands.8 They may be granted directly
by act of Congress or if authorized by statute, public land maybe disposed of by
sale or homestead9. Most of the acts relating to the control and disposition of public
lands are performed administratively through the Secretary of Interior and the
Bureau of Land Management. Upon compliance with all the conditions necessary
for a grant, a land patent10 is issued to the public land applicant.

B. American Homestead Patents and Restrictions

The Homestead law in the United States was one of several Federal laws that gave
an applicant ownership of land, typically called a "homestead", at little or no cost. It
gives an applicant freehold title up to 160 acres (1/4 section) of undeveloped and
unappropriated public lands in tracts outside of the original 13 original colonies. The
law required three (3) steps: 1) file an application, 2) improve the land, and 3) file for
deed of title. Anyone who had never taken up arms against the U.S. Government,
including freed slaves, could file an application and improvements to a local land
office. A manifest intent of the law was to induce settlement upon and cultivation of
4
A title in fee simple means a title to the whole of the thing absolutely (Dumont vs Dufore, 27 Ind. 263, 267). Likewise a title in fee is a
full and absolute state beyond which and outside of which there is no other interest or right (Bailey vs Henry, 143 S.S. 1124, 1127).
Hence, when such a title exists, there cannot be even a shadow of right beyond it because it means complete and unconditional
ownership in fact. It involves the exercise of the maximum rights of dominion over the property without limitations except those which
may be established by law.
5
Schell vs. White, 80 Ariz 156, 294 P2d 385, 63 Am Jur 2d, p. 478
6
By the law of nations generally, the title of the government may have its origin in discovery and occupation, in conquest and cession as
one of the incidents of war and in peaceful possession by treaty with foreign nations. Title to public lands in territory that is ceded to the
United States passes to the Federal Government, but it takes in a proprietary capacity only those lands which the superseded
government held in a proprietary capacity. Title to land that is covered by a valid grant of a superseded government does not pass to the
government to which the territory is ceded nor does a succeeding government acquire title to land that is classified by the predecessor
government as “private individual property”. See 63 Am Jur 2d, Public Lands, § 3
7
Lands that has been ceded to private persons under grants from former sovereign are usually protected but has to be presented for
confirmation under a statute. This statute usually requires persons to present their claims within a specified period. Confirmation of title
claimed under a grant by a former sovereign has generally been regarded as equivalent to a patent or a grant. It is in effect a quitclaim
by the Federal Government which operates to segregate the land from the public domain or to prevent it from becoming a part of the
public domain and ordinary vests title in the grantee.
8
Under United States law on public land, disposal often refers to the final act by which the right of a person, purchaser or grantee
attaches and an equitable right becomes complete to receive legal title by patent.
9
An act to secure homesteads to actual settlers on the public domain,' approved May 20, 1862 (12 Stat. c. 75, p. 392),
10
A patent is an instrument by which the United States convey title to public land and the issuance thereof is a prerequisite to the
passage of the fee from the United States.

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 these lands by those who, five (5) years after proper entry, would become owners in
fee simple through issuance of homestead patents. Homesteading is intended to
convert underdeveloped lands to permanent settlements. Thus, occupancy and use
is the most important consideration and were rightly expected to yield larger public
benefits than selling the land.
In granting the patent, the US Congress puts a restriction to the patent that provides
that no lands acquired under the provisions of the homestead laws and laws
supplemental thereto and amendatory thereof, shall in any event become liable to
the satisfaction of any debt contracted prior to the issuance of the patent. It is the
only section of the statues that imposes any restriction on the title acquired by
patent under homestead laws. Section 4 of the Act (12 Stat. c. 75, p. 392), provides
that:
No lands acquired under the provisions of this Act shall in
any event become liable to the satisfaction of any debt or
debts contracted prior to the issuing of the patent therefor.
The legislative purpose in enacting the provision was to provide the homesteader
with sufficient land upon which to make home and to secure that land against the
homesteader’s prior misfortune or providence. The provision is designed not for the
benefit of antecedent creditor, but for the protection of the homesteader and his
family from previous creditors. Thus, by virtue of the statute, no lands acquired
under the homestead laws are liable for the satisfaction of any debt contracted by
the homesteader prior to their final acquisition from the government. The statue is
said to be not strictly an exempting act, but an inducement to settlers.

C. Patent Restrictions under Philippine Public Land Laws

Our present Public Land Law was originally created and modeled after the Revised
Statues of the United States. Section 3, Paragraph 2 of Act No. 218 (An Act
Creating a Bureau of Public Lands) enacted in 1901 provides that the Bureau of
Public Lands, the predecessor agency of the DENR, has to be framed as nearly as
may be after the organization of the Public Land Office in the United States. The
original Public Land Law (1903) was drafted and passed by the Philippine
Commission composed mostly of Americans. As the United States has had its vast
public lands and has had the same problems as we now have, involving their
settlement and occupation, it is reasonable to assume that it was their intention to
introduce into the country these laws in relation to our problems of land settlement
and disposition.
When the US acquired the Philippines from Spain, the Americans enacted Act No.
926 in 1903 that provides for the disposition of lands of the public domain through
homestead, sales and lease. It also provides for the issuance of a free grant (later
known as Free Patent) to native settlers under certain conditions and for the
completion and confirmation of all imperfect and incomplete land grants. The new
law replaced the Royal Decree of February 13, 1894 that governs disposition of
land during the Spanish period.
1. Under Act No. 926 - Homestead protection against prior debts only.

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 Act No. 926 adopted the conditions provided under the American
homestead law for the issuance of a homestead patent, principally entry,
cultivation and residency requirement.11 It also lifted entirely the restrictions
on liability to the satisfaction of debt prior to the issuance of the homestead
patent under Section 4 of the law that provides:
Sec. 4. No lands acquired under the provisions of this
chapter shall in any event become liable to the
satisfactions of any debt contracted prior to the issuance of
a patent therefor.
Originally, land titles coming from homestead patents could be freely
transferred once issued. The law only exempts it from liability from
“previous” debts. The intention is clearly to provide a fresh start to
homesteaders by preventing previous debtors from going after the land
grant issued by the government at the expense of the homesteader.
2. Under Act No. 926 - Free Patent exemption against prior debts and
prohibition on sale.

The Americans also introduced a free grant without compensation to

“natives” who are occupant and cultivator of unreserved, unappropriated
agricultural public land who has continuously occupied and cultivated such
land not exceeding 16 hectares. This is the predecessor of the land grant
that we now call “Free Patent”. Like homestead, the lands granted to
qualified applicants are not liable for debt contracted prior to the issuance
of the patent. However, an additional restriction was provided on Free
Patents prohibiting encumbrance of the land covered of the patent for a
period of seven (7) years from the issuance of the patent.12

3. Under Act No. 2874 13 and Commonwealth Act No. 141 -

Encumbrance includes Mortgage and Lease

The present restriction under the Public Land Act was first introduced under
Act No. 2874 under Section 116 and 117. The restriction on “conveyance”
however is more liberal compared to the present versions since “legally
constituted banking corporations” are not covered by the restriction. Free
patent and homestead title holders under Act No. 2874 are free to use the
land as collateral with banks.14 However, these conveyances are subject to
repurchase by the applicant, his widow, or legal heirs, for a period of five
(5) years from the date of the conveyance.15 The right to repurchase exists
not only when the original homesteader makes the conveyance, but also
when it is made by his widow or heirs.

11
Section 1 and 3 of Act No. 926
12
Sec. 35 of Act No. 928
13
Entitled, “To Amend and Compile the Laws Relative to the Public Domain, and for Other Purposes (1919)”
14
Section 116. Except in favor of the Government or any of its branches, units or institutions, or legally constituted banking corporations,
lands acquired under the free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the
approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become
liable to the satisfaction of any debt contracted prior to the expiration of said period; but the improvements or crops on the land may be
mortgaged or pledged to qualified persons, associations, or corporations.
15
Section 117. Every conveyance of land acquired under the free patent or homestead provisions, when proper, shall be subject to
repurchase by the applicant, his widow, or legal heirs, for a period of five years from the date of the conveyance.

12
 The term “encumbrance” as used in the restriction is not only limited to sale
of the land. The term “encumbrance” has been interpreted by the court to
include lease and mortgage. 16 According to the Supreme Court, Section
118 of the present Public Land Act includes even lease and mortgage and
is mandated by the rationale for the grant. A mortgage, as interpreted by
the court, constitutes a legal limitation on the estate, and the foreclosure of
such mortgage would necessarily result in the auction of the property.17
Even if only part of the property has been sold or alienated within the
prohibited period of five (5) years from the issuance of the patent, such
alienation is a sufficient cause for the reversion of the whole estate to the
State.18
Lease on the other hand, is seen to impair the use of the property by the
grantee since the owner temporarily grants the use of his or her property to
another who undertakes to pay rent.19 During the term of the lease, the
grantee of the patent cannot enjoy the beneficial use of the land leased
and this, according to the court, made lease included within the meaning of
encumbrance.
4. Policy Behind the Restriction and Its Interpretation

As originally envisioned, homestead laws were designed to distribute

disposable agricultural lots of the State to land-destitute citizens for their
home and cultivation. Free patents, on the other hand, are intended to
legalise the holding or occupation of qualified citizens to public agricultural
lands that they have cultivated especially when such occupation or
possession has not yet ripen to a full title or ownership.
The underlying principle behind Sections 118 and 119 of C.A. No. 141 in
1948, according to Justice Bengzon, is to give the homesteader or free
patent holder a chance to preserve for himself and his family the land that
the State had gratuitously given to him. 20 It is a reward for his labor in
cleaning up and cultivating the land. 21 The land will give his family the
chance to settle and live beyond the reach of financial misfortune. It is also
intended to create a class of independent small landowners who will not be
divested of support from the land they till. The ultimate objective of the law
is to provide home and decent living for the destitute, aimed at creating a
class of agricultural small landholders.
It is intended to promote the spread of small land ownership and the
preservation of public land grants in the names of the underprivileged for
whose benefits they are specially intended and whose welfare is a special
concern of the State. As it is in the law, the motives of the patentee in
exercising the right to repurchase are inconsequential.

III. Current Policies Towards Lessening of Restrictions

16
Republic vs. Court of Appeals, Morato, et al., G.R. No. 100709, November 14, 1997
17
Prudential Bank vs. Panis, 153 SCRA 390, 397, August 31, 1987
18
Republic of the Philippines vs. Garcia, et al., 105 Phil. 826, May 27, 1959
19
Lim Si vs. Lim, 98 Phil. 868, 870, April 25, 1956
20
J. Benzon in Pascua vs. Talens (En Banc, G.R. No. L-348 April 30, 1948)
21
Avedaño vs. Hao Su Ton, 47 OG 357; Reveros vs. Abel, et al., 48 OG 5318

13
 In the 1970s, State policy towards preservation of ownership of land disposed by
the State through transfer restriction and repurchase has slowly been relaxed. It has
been recognized that such restrictions on the right to alienate or encumber the
lands have worked to the disadvantage of the people who are intended to benefit
from the law by depriving them of the full enjoyment and utilization of the property.
Patentees’ access to credit and the financial market have been hampered by this
limitation, putting them at a disadvantage relative to other property owners who can
make use of their property as collateral. Thus, the concept of preserving ownership
through restrictions on transfers can no longer be justified by present
circumstances.22 This restriction on encumbrance and alienation is too onerous to
the patentee and hinders the effective utilization of these lands by preventing
transfers and movements of lands in land market.23
Three (3) significant new legislations have been enacted under these new policies:
A. Restrictions on Public Lands Disposed under Republic Act No. 477 was
removed under Presidential Decree Nos. 967 (1976) and 1304 (1978)

Section 8 of R.A. No. 477 (1950, disposition of government lands known as

NAFCO property) prohibits encumbrances or alienation from the date of the
award of the land for a term of 10 years and such transfer shall be considered
null and void. Section 2 of P.D. No. 967 (1976) removes said restriction by
allowing the awardee to sell, cede, transfer or convey his rights and interest on
the land to any interested party. P.D. No. 1304 (1978) further liberalizes the
property ownership of awardees by confining, ratifying and validating transfers
that were made prior to the enactment of the new policy.
B. Presidential Decree No. 2004 (1985)

In 1952, R.A. No. 730 was enacted to allow the sale without public auction of
public lands for residential purpose to Filipino citizens who are not the owners
of a home lot in the municipality or city where they reside and who have in
good faith established his/her residence on a parcel of the public land of the
Republic of the Philippines which is not needed for the public service, provided
that the area of the land is not more than 1,000 square meters. The law is
intended to promote titling of public lands occupied and used for residential
purposes by removing the auction required under Section 67 of C.A. No. 141.
Just like homestead and free patent, Section 2 of R.A. No. 730 however,
prohibits the alienation or encumbrancing of patents issued under the law for a
term of 10 years from the date of the issuance of such patent neither will it
become liable to the satisfaction of any debt contracted prior to the expiration
of said period. No transfer or alienation made after the said period of 10 years
and within 15 years from the issuance of such patent, except those made by
virtue of the right of succession, shall be valid unless duly authorized by the
Secretary of Agriculture and Natural Resources and the transferee or vendee
is a Filipino citizen. Every conveyance made shall be subject to repurchase by
the original purchaser or his legal heirs within a period of five (5) years from

22
See “Whereas Clause” of P.D. No. 967
23
See “Whereas Clause” of P.D. No. 2004

14
 the date of conveyance. Any contract or agreement made or executed in
violation of this section shall be void ab initio.24
Presidential Decree No. 2004 amended this Section to remove the restrictions.
Section 2 of the law provides that the lands acquired under the provisions of
this Act shall not be subject to any restrictions against encumbrance or
alienation before and after the issuance of the patents thereon.
C. Republic Act No. 10023 (2010)

Congress passed R.A. No. 10023 in 2010 that extends the issuance of free
patents to residential lands. Following P.D. Nos. 967, 1304, and 2004, patents
issued under R.A. No. 10023 do not have restrictions on transfers and
encumbrances. Section 5 of R.A. No. 10023 states:
Section 5. Removal of Restrictions - The restrictions regarding
encumbrances, conveyances, transfers or dispositions imposed in
Section 118, 119, 121 and 123 of Chapter XII, Title VI of C.A. No.
141 as amended, shall not apply to patents issued under this Act.
D. Liberal Interpretations of Section 117 & 118 by the Court in the 1970s

At the same time, starting in the 1970s, the court started to strike down the
absolutist view on the right of repurchase. The court has ruled that the
exercise of the right to repurchase a land acquired through patent or grant
must be consistent with the noble intent of the Public Land Act of providing
patentee of a home and a land to cultivate, otherwise, such right could not be
exercised.25 The court invalidated the right of repurchase when the motive of
the patentee is for speculation and profit,26 and when the patentee was no
longer living on the property when he sold the same and that the property was
no longer agricultural at the time of the sale, but was a residential and
commercial lot in the midst of many subdivisions.27 However, the patentee,
his/her widow/er or legal heirs should not be allowed to take advantage of the
statutory policy of the law to enable them to recover the land only to dispose
of it again to amass a hefty profit for him/herself.28

IV. Negative Effects of the Restrictions

The policy behind the restrictions imposed on lands covered by patents was made
to address the problems existing in the early 1900s when the Philippines was still a
predominantly agricultural society. The initial effort of public land disposition
addresses the restlessness of the people cause by landlessness that causes
turmoil, colonial revolt and war. The Public Land Act provides the mechanism to
give farm lands and settlement to destitute citizens. The original intention of the
restrictions on the grants, adopting the American concept, is to ensure that the
patentee will be given a new lease of life and will be protected from his/her prior
misfortunes by making the land exempt from prior debts.

24 Ab initio is a Latin term meaning "from the beginning".

25
Simeon v. Peña, GR No. L-29049, December 29, 1970; Benzonan vs CA, 97998, January 27, 1992
26
Vargas and Vargas vs. Court of Appeals, GR No. L-35666, June 29, 1979.
27
Santana and Panganiban vs. Mariñas, GR No. L-35537, December 27, 1979.
28
Bajenting, et al. vs. Bañes, et al., GR No. 166190, September 20, 2006.

15
 The restriction however was further expanded by law to include an outright
prohibition on transfers for five (5) years and another five (5) years as right of
redemption or repurchase from the time of the sale. The aim of the policy is to
preserve ownership to the family of the patentee by tying them to the land. This
policy of restricting transfers may be valid during the agricultural economy of the
post-colonial era but would be hard to justify at present time. The negative effects of
these restrictions can be summarized as follows:
A. Interference to Property Rights

The right to dispose of one’s property constitutes a traditional and

fundamental aspect of the right of property. This right entitles the owner to
enter into a legal relationship with another person, regardless of the form
which this relationship takes: sale, rental, usufruct. This transferability may be
regarded as an essential condition of economic effectiveness and justice.29
The right to transfer property is so fundamental that courts invalidate some
attempts by private contract to restrict the right to transfer. Not only is this
right a basic attribute of private dominion over a thing, it is also important to
society because the freedom to transfer is essential to wealth-producing
market transactions.
The owner of the land has the requisite knowledge to decide about transfer
because he/she is in the best position to value the land best for him/herself in
accordance with his/her needs. The owners will generally have a socially
desirable incentive to decide whether to transfer an ownership right because
he/she will lose the benefit of his/her right to land if and only if he/she decides
to transfer it, and will gain from whatever is given in the transfer. Under a free
market regime, the restrictive provision negates the economic fundamental of
marginal productivity, where people of higher marginal productivity are
induced to acquire lands with agents of lower marginal productivity.30

In layman’s words, when the land owner decides to sell the land, it may be
presumed that the land does not provide sufficient economic return for the
owner to continue to hold to it. The buyer of the land on the other hand would
like to acquire the land because he/she thinks that he can make the land
more productive, enough for him/her to make the purchase and enjoy
economic gain from the trade as he/she introduce more input and
development after acquisition. The existence of the right of repurchase
creates uncertainty as to the security of the new buyer and thus, delays
development for five years.
B. Proliferation of an Informal Market and Denial of Access to Capital

The existence of the restrictions prevents the patentee from formally

transacting the land in the formal market where the prohibition is most
effective due to the formal conveyancing and registration requirement of the
sale. However, the prohibition does not prevent the patentee from disposing
the land in the informal market where the formal requirement is not strictly
followed.

29
Laurent Sermet, Professeur, University o la union The European Convention on Human Rights and Property Rights, Human
Rights Files, No. 11 Revision, Council of Europe, Council of Europe Publishing, ISBN 92-871-3722-6, (1998), p. 19.
3030
LAMP 2 Report on Free Patent Amendments, February 2007, p. 4.

16
 There is no study on the extent of this informal market on free patent and
homestead. However, a study by the Center for Peasant Education Services
on the similarly restricted Department of Agrarian Reform (DAR)-issued
Emancipation Patent (EP) and Certificate Land Ownership Award (CLOA)
shows that sixty percent (60%) of the emancipation patent/certificate of land
ownership award (EP/CLOA) holders have sold their rights or mortgaged their
properties. The transfer of rights to awarded lands to persons other than the
bonafide beneficiary is evident despite the similar legal prohibition under R.A.
6657. Based on the micro studies conducted by the University of the
Philippines at Los Baños in 2000 and 2007, there has been a continuing trend
on the transfer of awarded lands. In 2000, around 8% of the agrarian reform
beneficiaries (ARB) have disposed of their lands. Roughly 10% of these ARBs
sold their lands and nearly 8% mortgaged their properties. In 2007, about 7%
have disposed of their awarded lands, 23% of these ARBs sold their lands
and 12% mortgaged their properties. During the same year, 21% of the ARB
respondents have transferred their original rights, but mainly to their legitimate
heirs and/or relatives. The study also noted that 4% have been transferred to
individuals unrelated to the original beneficiary. There are factors conducive
to this circumstance. The EP/CLOA holder has no access to capital for use to
acquire modern farm inputs to increase productivity of the land because
he/she cannot use the EP/CLOA as collateral. Because of this legal
restriction, the ARB is forced to mortgage or seek assistance from informal
suppliers of credit. It also fuels the underground economy, which
unfortunately puts the seller in a vulnerable position to accept a lower price.31
On the other hand, the owner is also deprived of converting an asset into
cash. This results in an economic burden on the free patent holder, who
unlike other title holders, can sell their lands when needed. This approach of
the State, assuming it is in a better position to know what is best for the free
patent holder, should be changed in the light of present economic conditions.
C. Diminution of the Indefeasibility of Torrens Title

The original titles issued by LRA through judicial decree (decreed property) do
not have the restrictions like that of homestead and free patents (patented
property). Decreed and patented property are both registered under the
Torrens system of land registration under Presidential Decree No. 1529, but
because of the restrictions on patent, patented properties are considered as
lower in value as compared to decreed properties. Ownership of patented
lands could not be claimed as ownership in fee simple that fully characterize
an indefeasible title. Land buyers tend to look down on patented lands.
Banks generally refuse patented lands for use as collateral because in case of
foreclosure, the landowner's right of repurchase is extended from the normal
one (1) year to five (5) years. Thus, the bank is forced to hold on to the
property for a longer period while waiting for the right of repurchase under
Section 119 to expire.

31
LAMP 2 Report on Free Patent Amendments, February 2007, p. 21.

17
 V. Impact of the Removal of Restriction to the Economy
The private formal credit suppliers welcome the lifting of this provision. It allows
their institutions to increase their lending portfolio to the small farmers who are the
main beneficiaries of the Free Patent. While it is not automatic for landholders to
use their land as collateral for credit, especially from formal credit suppliers, the
lifting of the provision is enough to widen the options for the Free Patent
landholders to get lower cost of credit, who for the moment are mostly dependent
on the informal suppliers of credit. If removed, the loan value is expected to be
higher. A higher loan value makes more cash available to the patent holder, who
can use it for an economic activity. Poverty alleviation has a better chance of
success with viable capital.
A. Potential Capital Release to the Economy (Dead Capital)

Table 1 shows the data of agricultural free patent issuance for the last five (5)
years. The data accounts for the affected Agricultural Free Patent titles that
will be released to the land market (5 years restriction on sale of Free Patent).
NCR has no data because it has no agricultural land to speak of. A total of
542,010 free patents covering 432,926 hectares are at the moment prohibited
from being sold by patent holders.
Table 2 shows the estimated affected Agricultural Free Patent titles that will
be released to the land market and will be subjected to five (5) years rights of
patentee to repurchase. A total of 2,659,129 free patents covering 3,592,575
hectares have been issued from 1980 to 2014.

18
 Table 1. Agricultural Free Patent Data for the Last Five (5) Years (2010-2014)

Region 2010 2011 2012 2013 2014

Number Hectare Number Hectare Number Hectare Number Hectare Number Hectare
Philippines 101,936 91,600 115,631 92,146 120,847 97,979 104,478 80,340 99,118 70,861
NCR - -
CAR 10,213 4,822 10,125 4,865 11,274 4,668 9,962 4,736 9,466 4,301
I 7,918 2,262 11,981 3,772 12,518 3,720 11,248 3,549 10,343 3,102
II 8,055 8,010 5,201 5,752 5,616 5,897 5,100 5,435 5,075 5,230
III 5,272 4,002 6,494 5,002 6,075 3,667 5,323 2,488 4,698 2,046
IVA 7,950 7,001 7,028 6,209 6,867 6,720 6,389 4,265 5,797 4,236
IVB 6,719 5,645 7,807 7,536 5,729 6,517 5,333 7,149 4,926 6,404
V 3,740 4,691 3,482 4,394 5,021 5,307 4,624 5,779 4,706 5,286
VI 4,250 4,177 5,307 5,122 7,813 6,858 7,209 6,106 6,420 5,187
VII 8,230 4,448 21,968 10,079 21,834 10,388 20,041 7,900 17,899 5,854
VIII 12,500 10,043 12,510 10,117 12,650 10,363 4,978 3,152 8,500 4,654
IX 2,284 2,970 1,624 2,165 2,679 3,451 4,866 4,981 4,722 4,366
X 4,010 4,711 2,941 3,561 3,563 4,059 3,202 3,446 3,240 3,380
XI 6,382 6,799 5,485 5,289 5,455 4,353 4,984 2,860 4,153 3,199
XII 5,447 12,533 5,177 10,316 5,216 12,716 3,307 11,261 1,983 6,409
CARAGA 8,966 9,486 8,501 7,967 8,537 9,296 7,912 7,233 7,190 7,207
Source: DENR, 2014

19
Table 2. Agricultural Free Patent Issued from 1980 to Present

YEAR PATENTS ISSUED

No. Area (ha.)
1980 91,440 207,719
1981 134,935 295,154
1982 74,002 168,106
1983 66,392 151,149
1984 67,371 153,043
1985 66,300 150,610
1986 112,215 205,568
1987 61,354 163,815
1988 62,234 166,163
1989 16,521 42,459
1990 43,503 111,803
1991 47,292 49,033
1992 45,766 23,088
1993 32,031 34,932
1994 116,548 122,265
1995 132,120 116,441
1996 117,757 97,735
1997 99,717 82,503
1998 84,021 82,096
1999 73,999 47,669
2000 2,463 1,536
2001 2,458 4,499
2002 81,939 89,885
2003 98,486 130,489
2004 111,264 127,530
2005 100,891 106,912
2006 117,506 119,119
2007 126,423 126,518
2008 113,042 108,443
2009 113,504 101,606
2010 107,618 94,905
2011 115,631 92,146
2012 120,847 97,979
2013 104,478 80,340
2014 99,118 70,861
Total 2,961,186 3,824,119

20
 Following the methodology used in the NSCB-PEENRA State of the
Philippine Land and Soil Resources study 32 , the estimated mean zonal
value33 of agricultural land in the Philippines is at PhP89.39 per square meter.
Given this, the value of agricultural land/asset restricted by virtue of the five
year restriction is at PhP386.97 Billion and the value of agricultural land/asset
restricted by reason of the right to repurchase is estimated at PhP 1.82
Trillion. Thus total value of dead capital is estimated at PhP 2.20 Trillion.
Table 3. Value of Dead Capital

a. Computed Mean Price per hectare at 2014 89.39 per sqm

b. Restricted real property asset by virtue of five year 432,926 hectares

restriction on sale (2010-2014)

c. Restricted real property by reason of the right to 3,387,888 hectares

repurchase (1980-2009)

d. Value of real property asset (5 year restriction on sale)34 PHP 386,971,108,135.95

e. Value of real property asset (restricted by right to PHP1,817,059,849,920.00

repurchase)35

f. Total value (dead capital) PHP 2,204,052,401,320.00

Note however that zonal values are used for tax purposes and may not
necessarily reflect the true market value of the land, thus the value computed
may be considered as a conservative estimate.
B. Transfer of Property (Free Market) is a Tool that Promotes Best Use

On a macro perspective, no adverse effect to the economy is expected to

occur. The issuance of the FP to the remaining untitled lands will ensure a
stable functioning of the land markets. It should be noted, however, that the
completion of the land titling is just one of the important steps to promote an
active functioning of the formal property markets. The other endogenous
factors will have to be in place to be able to realize the expected benefits.
These include, among other things, (i) the unified institutional structure for
land titling and registration and (ii) tempering of taxes to be borne by the
individuals when transferring the properties. For instance, for as long as the
transfer tax is prohibitive, the functioning of the land markets tends to shift
away from the formal to informal property sector.

32
Published in 2003 by the Philippine Economic-Environmental & Natural Resources Accounting (PEENRA) of the
National Statistical Coordination Board
33
Zonal value of agricultural land taken from the 19 Revenue District Offices of the Bureau of Internal Revenue,
collected and computed to derive the national mean value.
34
d=axb
35
e = (a x c) x 60% (estimate of real properties in the market); Basis of which is the study on the similarly restricted
DAR-issued EP and CLOA which shows that sixty percent (60%) of the EP/CLOA (EP/CLOA) holders have sold their
rights or mortgaged their properties.

21
 The households, i.e. free patent holders and other potential land owners
would be the primary beneficiaries of the land titling. The analysis of the
potential impact of each amendment shows a convergence of the effects in
terms of security of tenure, increase collateral and transaction demand. On
the assumption that the markets operate without restriction, the over-all
welfare of the beneficiaries is likely to improve.36

VI. Scope of Private Lands with Agricultural Free Patent Titles

To have an idea of how large is the area covered by agricultural free patents, Table 4
shows the total number of area and parcels of lands with agricultural free patents
issued from 1910 until 2014.
Table 4. Area and Number of Parcels
Period Number of Parcels Area in Hectares
Pre-Martial Law 784,875 3,914,727
(1910-1972)
Martial Law (1973-1980) 854,725 1,941,630
After Martial Law (1981- 409,000 918,062
1985)
Corazon Aquino 357,060 744,654
Administration (1986-1992)
Ramos Administration 550,783 489,069
(1992-1998)
Estrada Administration 139,698 113,383
(1998-2000)
Arroyo Administration 395,038 459,315
(2001-2010)
Benigno Aquino III 440,074 341,326
Administration (2011-2014)
Total 3,931,253 8,922,166
Source: DENR, 2014

There are 3.93 million parcels, covering 8.92 million hectares of agricultural lands,
which have already been issued free patents in a span of 105 years.
In contrast, in the last 10 years, there are 9,906 original certificates of title issued by
LRA. Compared with the number of patents issued thru administrative titling, the low
numbers are noticeable. This may be due to the tedious and expensive processes
needed to be done by an applicant to have his/her property titled, as compared to the
administrative means of titling. Table 5 shows the 10-year data of decrees issued
from 2003 to 2013.

36 36
LAMP 2 Report on Free Patent Amendments, February 2007

22
Table 5. Decrees Issued in the Last Ten (10) Years
2000
1761
1800
1600
1400 1325

1200 1051
975
1000 892
784
800 677 678
611 569 583
600
400
200
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

No. of Issued Decrees by LRA

Source: Land Registration Authority, 2014

VII. Conclusion
This paper closely looked at the reasons why restrictions were imposed on patents
and other public land grants. The ultimate objective of course is to provide home and
decent living for the poor and to create a class of agricultural small landholders. The
State wanted to look after the underprivileged and ensure that benefits of owning a
land be accorded to them, thus, putting safeguard on transactions being done with
the land to ensure that the beneficiaries get to keep their lands. However, we can
never assume uniformity for everyone, as others may be more entrepreneurial and
may want to utilize the title of their land as a means to create capital.
The progression of current policies towards the removal of restrictions on public land
grants shows recognition of the disadvantage of restrictions for owners on the full
enjoyment and utilization of their property. By relaxing and enhancing the restrictive
policies on land ownership, it would be easier for title holders to enter the land market
and transact formally. Due to its restrictive features, agricultural free patents are not
as attractive in the market, creating instability and fear, such as losing out the land to
its previous owner after investing labor and capital and enhancing productivity of the
land bought. Only a small number of banks accept the agricultural free patent as
collateral due to the restrictions connected to it. Following the loosening up of
policies, the most recent with RA 10023, the patent instantly becomes a negotiable
instrument with no strings attached. The owner is left with the choice of what to do
with the property taking into consideration his/her needs and goals.
Restrictive policies limit the movement of agricultural free patent holders in a land
market. Restrictions impose high transaction costs and prevent the land going to the
highest and best use. Removing these restrictions will enhance transactions within
the land market. Undervaluation of lands due to informal transactions will be avoided.
The removal of the restrictions on sale and repurchase will free up an estimated
amount of PHP2.20 Trillion, which is almost equivalent to the budget of the whole
country for one fiscal year. Imagine the significant amount of capital which can be
circulated in the economy with this amount. The more exchanges, buying and selling,
the more vibrant the land market is, and so is the economy.
23