Civil Law, 2019 Bar — Question B.18-c

ESSAY

In light of a new business venture, Mr. A entered into a lease contract with Mr. B involving one of the latter's warehouses. One day, Mr. B, who was then encountering financial difficulties, approached Mr. A and sought for a loan, which Mr. A readily granted to him. In order to secure the loan obligation, Mr. B mortgaged the leased warehouse in favor of Mr. A. In addition, Mr. B executed a promissory note in favor of A, wherein prior demand was waived by him. When Mr. B defaulted on his loan obligation, Mr. A simply stopped paying rentals due to Mr. B on the ground that legal compensation had already set in up to the concurrent amount. Furthermore, since there was still a balance due on the promissory note, Mr. A foreclosed the real estate mortgage over Mr. B's property, without any prior demand furnished to Mr. B. Aggrieved, Mr. B opposed the foreclosure due to the lack of prior demand, contending that the waiver of prior demand was stipulated in the promissory note and not in the mortgage instrument. Mr. B likewise argued that when Mr. A invoked legal compensation between the unpaid rentals and the loan arrearages, it amounted to a novation that resulted in the extinguishment of the loan contract between them. As such, the real estate mortgage, being a mere accessory contract to the principal loan, was necessarily extinguished. (c) Is Mr. B's claim of novation correct? Explain. (2%)

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