#2046 - The Equity Of Redemption - Land Law

The Equity of Redemption

Rules protecting the mortgagor:

1. Right to Redeem

• Equity gives right to pay off loan and terminate mortgage by the successful repaying of the mortgage debt.

  • Re Sir Thomas Spencer Wells [1933]:

    • CoA: Any agreement which stipulates that there will be no right of redemption does not exist in equity

      • And any attempt to fetter the agreement to redemption with anything other than the payment of money is null and void.

  • However, it can be defeated by the mortgagee (lender) exercising the right of foreclosure or right to sale before redemption occurs.

2. Clogs and fetters on the right to redeem are not allowed

• Postponement of the right to redeem

  • Parties will often stipulate that a mortgage can only be paid off after a certain amount of time – normally so the lender gains more interest off the mortgage

    • Will also be used to try and enforce solus tie clauses – those which force the mortgagor retailers to only sell their mortgagees products.

  • Smith: court will generally accept postponements that have been freely bargained

    • Knightsbridge Estates Trust Ltd v Byrne [1939]: C bargained to repay debt of 310,000 by eighty half-yearly payments over 40 years. D refused to allow deviation from repayment plan.

      • Greene MR:

        • Argument is that though a postponement of the right to redeem is permitted, the length of time this is postponed must be reasonable

          • But the court should not be able to tell business men whether what they have negotiated is reasonable or not

        • Postponement per se it not objectionable

          • And it cannot be made objectionable by the presence in the mortgage deed of other provisions,

            • unless the totality is sufficient to enable the Court to say that the contract is oppressive or unconscionable.

  • But are less keen to accept postponements which deprive the lessee of the benefit of the lease:

    • Fairclough v Swan Brewery Co Ltd [1912]: F mortgaged hotel lease which S said could not be paid back except in instalments over a long time. Only 6 weeks would remain on lease after all instalments made.

      • Lord Macnaghten:

        • Court will not allow the right of redemption in any way to be hampered in that which the parties intended to be a security

          • Letter of bargain shows that mortgage is meant to be irredeemable, because F = no practical benefit from the redemption as the lease will almost have expired

            • Thus, this mortgage is void.

    • Smith: is far from clear that result justified – mortgagor still retains possession of land

      • And modern view that mortgage = security arrangement = more that mortgagor challenging refusal to accept repayment

        • Not that mortgagor is losing right to benefit of land

        • Should rules be different for short leases than for fee simples?

2. Options to purchase land will be struck down

• Samuel v Jarrah Timber [1904]: M borrowed money with a clause stipulating that L had the option to purchase a 40% stock. M signalled intent to pay off the loan, at which point L exercised his option to buy.

  • Lord Lindley:

    • Any bargain which has the effect of preventing a mortgagor getting his property after redeeming it is invalid,

      • and is inconsistent with the transaction being a mortgage

• It might be different depending on what the option to purchase is...

  • Kreglinger v New Patagonia Meat Company [1914]:

    • Lord Parker:

      • Suppose A agrees to give B an option for one year to purchase a property for 10,000.

        • And in consideration of such option B agrees to lend A 1000 to be charged on the property without interest,

          • and be repayable at the expiration or earlier exercise of the option.

      • There is no inconsistency or repugnancy between the provisions of this transaction

        • It would have been very different if A had conveyed the property to B with a proviso that on payment of the 1000 there should be a re-conveyance,

          • and the deed had then provided for the year's option.

      • There, If the mortgagor pays the moneys secured by the specified date the mortgagee comes under a contractual liability to re-convey,

        • and if he does re-convey he re-conveys his whole interest in the mortgaged property, thus destroying his option.

          • The option, therefore, is inconsistent with and repugnant to the proviso for re-conveyance,

            • It may, therefore, be rejected.

• The key is whether the option to purchase is a separate agreement (with separate consideration) or it is part of the mortgage

  • Jones v Morgan [2001]: M borrowed money from L but failed to repay anything. M then agreed to alter terms so that L would give extra time in return for a half share of the estate.

    • Chadwick LJ:

      • There is a rule that a mortgagee cannot as a term of the mortgage

        • enter into a contract to purchase, or stipulate for an option to purchase, any part of or interest in the mortgaged property;

          • as it is inconsistent with the mortgage transaction

      • Thus it is essential, in any case to which the rule is said to apply, to consider whether or not the transaction is, in substance, a mortgage

      • It seems to me impossible to escape the conclusion that a stipulation, agreed as a term of the mortgage,

        • that the mortgagee shall have a share or interest in the mortgaged property,

          • is inconsistent with that requirement.

  • Warnborough v Garmite [2003]:

    • Jonathan Parker LJ (Refers only to Lord Phillips being disparaging about clog rule in Jones, not Chadwick LJ)

      • The mere fact that, contemporaneously with the grant of a mortgage over his property,

        • the mortgagor grants the mortgagee an option to purchase the property

          • does no more than raise the question whether the rule against ‘clogs’ applies: it does not begin to answer that question.

      • As has been said over and over again in the authorities, in order to answer that question the court has to look at the ‘substance’ of the transaction in question:

        • in other words, to inquire as to the true nature of the bargain which the parties have made.

          • To do that, the court examines all the circumstances, with the assistance of oral evidence if necessary.

      • It seems to me that where the option to purchase which is sought to be challenged as a ‘clog’

        • is granted against the background of a sale of the property by the grantee of the option to the grantor for a price which is to be left outstanding on mortgage,

          • there must be a very strong likelihood that the substance of the transaction is one of sale and purchase and not one of mortgage

• However, just because the dodgy agreement comes after the agreement for mortgage doesn’t mean it’s not part of the original mortgage agreement

  • Jones v Morgan [2001]:

    • Chadwick LJ:

      • It’s right to reject the principle that a mortgagee could never take an interest in the mortgaged property

        • by an agreement made after the mortgage had been granted.

      • But it’s not correct to say that there are no circumstances in which the principle which prevents a mortgagee

        • from stipulating for an interest in the mortgaged property at the time of the mortgage

          • could have application to stipulation agreed subsequently.

      • The question, in each case, is whether the arrangement made after the mortgage has been granted is

        • “in substance and in fact subsequent to and independent of the original bargain”

        • In this case, it was throughout the intention in the mortgage that X would get a share – and the 1997 agreement effected those intentions.

    • Pill LJ (dis):

      • The 1997 agreement was a new bargain in different circumstances.

3. Collateral benefits generally

• Kreglinger v New Patagonia Meat Company [1914]:

  • Viscount Haldane LC:

    • Collateral clauses should only render a contract invalid

      • when it turns out to have formed part of the terms of the mortgage

      • and to have really cut down a true right of redemption.

    • These collateral clauses can be benefits which are contained in the same document but are independent from the mortgage agreement.

  • Lord Mersey:

    • Clog and fetter rule has been compared to an unruly dog which is prone to wander where it ought not

    • Now, whether a transaction is or is not such a mortgage is a question of intention;

      • These words of the agreement show that the obligation to sell sheepskins was to endure in any event until August, 1915.

      • That was the plain intention of both parties to the agreement,

        • and the only effect of applying to the contract the equitable doctrine against clogging the right to redeem

          • would be to defeat that intention and to enable one of the parties to inflict an injustice on the other.

• Must the benefit end after redemption?

  • Santley v Wilde [1899]: X mortgaged her theatre for 2000 over five years with an agreement to give 1/3 profits of underleases (10 years) to Y.

    • Lindley MR:

      • A provision inserted to prevent redemption on payment of the debt for which the security was given

        • is what is meant by a clog or fetter on the equity of redemption and is therefore void.

      • However, if the bargain made with collateral benefits given in consideration for the loan being granted

        • And these do not make redemption impossible

          • Then these aren’t clogs and fetters.

  • Noakes v Rice [1902]:

    • Lord Macnaghten:

      • Redemption is of the very nature and essence of a mortgage, as mortgages are regarded in equity.

        • Thus, when money secured by mortgage of land is paid off,

          • land itself must be as free as if it had never been subject of the security.

      • Is contrary to principle that a mortgagee should stipulate with his mortgagor that after full payment

        • he should continue to receive other benefits.

  • Bradley v Carritt [1903]: Y agreed, in return for...