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MortgageAn equitable mortgage may arise out of two situations:  The parties intended to create a legal mortgage but there has been a failure to comply with the necessary formalities of a deed. If the contract has complied with s2. LP(MP)A 1989 and can be forced by specific performance, then followi...

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Mortgage An equitable mortgage may arise out of two situations:  The parties intended to create a legal mortgage but there has been a failure to comply with the necessary formalities of a deed. If the contract has complied with s2. LP(MP)A 1989 and can be forced by specific performance, then following the maxim ‘Equity treats “as done that which ought to be done” and Walsh v Lonsdale, this contract for a mortgage will be enforceable in equity; or  The parties have a contract to create a legal mortgage. The contract must fulfill the requirement under s2. LP(MP)A 1989, and following Walsh v Lonsdale if the court is able to grant specific performance as a remedy then the equity will treat this mortgage as an equitable one. To create an equitable mortgage after 26 September 1989, a written document will be required, signed by both parties, contracting to create or actually creating the mortgage. Thus after 26 September 1989:  A legal mortgage must be by deed: o Requirements of a deed are found in s1 LP(MP)A 1989; and  An equitable mortgage must be by a written document. This document will not be a deed, but must fulfill the requirements under s2 LP(MP)A 1989, i.e.: o In writing; o Be signed by both parties; and o Include all the terms of the mortgage. Mortgages of Equitable interests Where the mortgagor has only an equitable interest, for example a life interest under a strict settlement, then it is not possible to grant a legal interest. The method of creating a mortgage for this type of trust is based on pre-1926 rules on assignment of the whole equitable interest to the mortgagee, on the proviso that when the mortgage has been repaid the interest will be retransferred to the mortgagor. The requirements for such transfer must comply with s53(1) (c)LPA1925 which require the transfer to be made in writing or by will. Protecting an Equitable Mortgage If the mortgagor’s land is unregistered title an equitable mortgage would need to be registered as a Class C (iii) general equitable charge. This would only apply where the mortgagee does not take the title deeds to the property mortgaged. Where there is an equitable mortgage and the mortgagee takes the title deeds there is no requirement to register the land charge. Where a defective mortgage has been created, i.e. the formalities of a deed have not been complied with, to protect this mortgage it will have to be registered as an estate contract Class C (iv) land charge.

(I) POSITION OF MORTGAGOR Right to Redeem At common law, if the mortgagee did not pay on the contractual date, the mortgagor at one time forfeited the land to the mortgagee and could still be sued in contract for the repayment of the debt. Accordingly the legal right to redeem was very limited. Although at common law payment under a mortgage is due six months after the date of the mortgage, equity allows redemption of the mortgage for a long time after that date. The mortgagor has a right to unencumber his land by making the payment due the terms of the mortgage. In practice, almost all modern residential mortgages involve payment by instalments over a period of years. The mortgagor’s right of redemption is inviolable and any provision which prevents him from eventually redeeming his property is void as a ‘clog’or ‘fetter’ on redemption,

although the mortgage survive, ‘Once a mortgage, always a mortgage’ – Seton v Slade, so a transaction which is in substance a mortgage may be redeemed by repayment. Thus a provision giving the mortgagee an option to purchase the mortgaged property is generally void. Lord Lindley said “This doctrine . . means that no contract between a mortgagor and a mortgagee made at the time of the mortgage and as part of the mortgage transaction, or, in other words, as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security. Any bargain which has that effect is invalid, and is inconsistent with the transaction being a mortgage.” Samuel v Jarrah Timber (1904) The appellant loaned £5000 to the respondent taking security of a £30,000 mortgage debenture stock which would allow him to purchase any part of the stock at 40 per cent within twelve months. The company sought to repay the advance within the period of twelve months, whereupon the appellant claimed to purchase the whole of the stock at the agreed price. The company brought a redemption action, seeking a declaration that the option was void. Held: The appeal failed. The company was entitled to the declaration. Lord Halsbury and Lord MacNaghten reached that conclusion with reluctance. If a court determined that a transaction was truly a mortgage, a court will strike down any term of the loan which prevents the mortgagor from getting back the property secured on repaying what was due to the mortgagee. A mortgage may not contain a clause that conferred on the mortgagee an option to buy the mortgaged property. This (option of purchase) may be made avail to the mortgagee if such option was granted some time after the mortgage, for this gives the mortgagor a chance to refuse an unfair agreement once he has received his loan: Lewis v Frank Love Ltd. Reeves v Lisle (1902) In 1896 the plaintiffs agreed to lend £5,000 to the defendant to be secured by a ship mortgage (executed later), requiring that if at any time during the period of two years the plaintiffs should elect to enter into partnership with the defendant, they would relieve the defendant of liability for payment of the mortgage money, and would transfer the ship, free of the mortgage, so that it could form part of the capital of the partnership. The plaintiffs did not go into partnership, but nor was the loan repaid. A further mortgage was executed, as additional security, in June 1898. In July they made a further agreement, which, after referring to the existing mortgages, the fact that the monies were outstanding and a request from the defendant for further time for payment, gave the plaintiffs a right, for five years, to enter into partnership with the defendant, in which case the same consequences would follow as had been agreed in the April 1896 agreement. In February 1900 the plaintiffs sought to exercise the right to enter into partnership with the defendant. The defendant resisted, on the basis that the right granted by the July 1898 agreement was in the nature of a clog on the right to redeem the mortgage made in June of that year. The House was asked whether the mortgage of June 1898 and the agreement of July 1898 were, in reality, one and the same transaction. Held: It said no. The parties to a mortgage may, by a separate, independent transaction validly agree to give the mortgagee an option over the mortgaged property, and thus may have the effect of depriving the mortgagor of his right to redeem. Lord Lindley said: ‘In point of fact, the real transaction was not taking a mortgage security for 5000 or getting a better security than they had. The real transaction [in July 1898] was that the mortgagees were bargaining for a share in the partnership on certain terms. An option to purchase which was granted to a mortgaged 10 days after the mortgage was made was held valid since it was a transaction separate from the original mortgage transaction. Jones v Morgan (2002) (contrary to Lewis v Frank Love) The claimant appealed against an order refusing him enforcement an agreement for the purchase of a one half share in a property even such agreement was made 3 years after the initial creation of mortgage. The judge had found the agreement to be unconscionable.

Held: The appeal succeeded. The new agreement amounted to a complete reconstruction of the debt arrangements, rather than being a separate transaction. The judge had wrongly attributed to the claimant an understanding of the amendments to the standard document for which there had been no evidence given. The doctrine that a mortgagee could not extract, under his charge, any collateral contract to purchase or stipulate for an option to purchase, any part of an interest in the mortgaged property, survived in English law but, that doctrine, against allowing anything to act as a clog on the equity of redemption, no longer serves a useful purpose in English law, and would be better if excised. As to the former rule against a clog on the equity of a redemption, Lord Chadwick summarised the principles: ‘(i) 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; (ii) the foundation of the rule is that a contract to purchase, or an option to purchase, any part of or interest in the mortgaged property, is repugnant to or inconsistent with the transaction of mortgage of which it forms part, and so must be rejected; (iii) the reason why the contract or option to purchase is repugnant to or inconsistent with the mortgage transaction is that it cannot stand with the contractual proviso for redemption or with the equitable right to redeem – the proviso for redemption (and, where the contractual date for redemption is past, the equitable right to redeem) requires the mortgagee to re-convey the mortgaged property to the mortgagor in the state in which it had been conveyed to him at the time of the mortgage; and (iv) 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 transaction of mortgage.’ Warnborough Ltd v Garmite Ltd (2006) The transaction was essentially in two parts: o First, an agreement for the sale by W of certain leasehold property to G at a price of £130,000 payable by instalments over 12 years and secured by way of legal charge on the property. o Second, an option for W to repurchase the property if the principal sum outstanding was not less than £65,000 and any payments covenanted to be made by G were in arrears for 35 days. Initially, G was unable to pay the monthly instalments and after W exercised the option, G paid off the arrears and by agreement the position was restored with a second option. G again fell behind and W exercised the second option. G claimed, amongst other things, that the option was unenforceable as a clog on the equity of redemption. Held: The Court made it clear that the mere fact that an option to purchase property is granted by the mortgagor to the mortgagee at the same time as the mortgage is granted does not mean that it is a ‘clog’; it is necessary for the court to look at the true nature of the bargain made by the parties. It was clear that the view of the Court of Appeal was that the transactional documents pointed to the substance of the transaction as being one of sale and purchase and not one of mortgage, so that on that basis, the rule against clogs would not apply. He then referred to the arguments and evidence in the case and concluded that in the circumstances as a whole, the provisional view of the Court of Appeal should be confirmed. Clog #1: Postponement of Mortgagor’s right to redemption The right to redeem may be postponed unless redemption becomes illusory or the term is oppressive. The equitable right to redeem arises only once the contractual, legal date for redemption has passed. There is no general right to equity to redeem earlier. Any undue postponement on the mortgagor’s right to redeem thereafter will not be enforceable. (Jones v Morgan) When the right to redeem may be postponed the mortgagor is not permitted to repay the principal before the time stipulated in the mortgage deed; provided the postponement is not for an unreasonable length of time given the other terms (especially the interest rate) and is not unconscionable nor oppressive to the nature of a mortgage.

Fairclough v Swan Brewery Postponement of the date of redemption is rather more serious when one is concerned with a mortgage of leasehold property, because a lease is inherently of finite duration and therefore a wasting asset. In this case, the residue of a leasehold term of 20 years was mortgaged; the agreement being that the mortgage was not to be redeemed until a date 6 six weeks before the lease was to end. 3 years later the mortgagor sought to redeem early and the court upheld his right to do so. In this case, had the postponement been valid, the mortgagor would on redemption, have recovered an estate which he was nearly valueless and very different in character from the property mortgaged. Accordingly, in the case of leases, postponement of contractual date for redemption is likely to be rather more objectionable, even where the mortgage is a commercial bargain made between business. In Knightsbridge Estates Trust v Byrne, A company had mortgaged its freehold property to an insurance company on terms that the mortgage would be repaid over 40 years. Later the mortgagor wished to redeem the mortgage before that period had expired, but the mortgagee objected. The court held that the term postponing redemption for 40 years was valid. The agreement was a commercial one made by businessmen and the mortgage property was a fee simple. Due to the great duration of the freehold estate, the company would recover an estate of equivalent worth when it did redeem the mortgage. Therefore, the postponement term was enforceable since the parties were commercial and of equal bargaining power. Clog #2: Collateral advantage for mortgagees A mortgage may contain terms which give the mortgagee some advantages in addition to his security. As long as such collateral advantages are neither unconscionable nor in restraint of trade, or they are not extortionate under the Consumer Credit Act 1974, they are enforceable if designed to cease with the redemption. Where they are designed to persist beyond redemption, the position is less clear, but the courts have showed an increasing willingness to uphold such advantages as independent of or collateral to the mortgage agreement (Kreglinger), as long as they do not render the right of redemption illusory. Permanent fetters remain invalid: Noakes v Rice. If the court however finds that the mortgage and the advantage form part of the same transaction, it may construe the agreement as in substance more than a mere mortgage and therefore not affected by the equitable rule that redemption should be free from condition.

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Unfair Restriction of Redemption

Bradley v Carritt (1903) The holder of the majority of shares of a company mortgaged his shares as security for an advance of money and at the same time covenanted that he would always thereafter use his best endeavors to secure that the mortgagee should be employed as a broker for the sale of the company's teas and that, in the event of any of such teas being sold otherwise than through the mortgagee, the mortgagor should pay to the mortgagee the commission which the mortgagee would have earned if the teas had been sold through him. The mortgage was paid off and the company changed its broker. The quondam mortgagee brought an action against the mortgagor for breach of the covenant. Held: The House of Lords held by a majority of three to two, reversing the Court of Appeal, that the covenant was invalid because, although it did not operate in rem or as a charge on the shares, its effect was permanently to fetter the mortgagor in the free enjoyment and disposition of the shares. The true ground of the decision was that the covenant was repugnant to the contractual as well as the equitable right of the mortgagor on redemption to get his property back intact.

As this case it was held that, as the shares themselves remained tied by a restriction which prevented free dealings with them, the mortgagor did not get back his property intact, hence the proviso becomes void as soon as the mortgage was paid off. Biggs v Hoddinott Mortgage that “would not be repaid within less than 5 years”  during continuance of security they would deal exclusively. Held: Terms specifically framed so that it ceases on redemption = valid. Noakes v Rice (1902) The contract contained a covenant that the mortgagor, who was a publican, would continue to buy all its beer from mortgagee even after the redemption of a mortgage. The mortgage stipulated that trade tie was to continue for entire 26 years whether mortgage repaid or not. Held: The covenant was not enforceable after redemption of the charge. When the money secured by a mortgage of land is paid off, the land itself and the owner of the land in the use and enjoyment of it must be as free and unfettered to all intents and purposes as if the land had never been made the subject of the security. Trade tie was a clog  when mortgage paid off, land must be free for all intents and purposes as if it had never been the subject of security. The court was influenced by the lack of equality of bargaining power between the parties. Kreglinger v The New Patagonian Meat and Cold Storage Company (1914) The appellant woolbrokers had lent the respondent £10,000 with a floating charge over its undertaking. The loan agreement provided that, for five years, the appellants would have 1first refusal over all sheepskins sold by the company. The company paid off the loan, but the appellants claimed that they were entitled to continue to exercise their right of first refusal. (Separate agreement VALID Wool company lent money to meat preserver with a security over meat’s company. M could repay the loan at any time, but W could not demand payment w/i 5 yrs. In the same document – M only sells wool to W. M repays in 2.5yrs, W enforces tie.) Held: It was held that this agreement was collateral advantage to the mortgage and was in fact a condition precedent to the wool-brokers entering into the mortgage in the first place; in other words, the wool-brokers would not have lent the money to the meat sellers unless the meat sellers agreed to provide these sheepskins. Further, the parties were both commercial parties and therefore the provision was not a clog on the equity of redemption. The right of first refusal not part of the mortgage transaction; but was a collateral contract entered into as a condition of the company obtaining the loan. The appellants could therefore entitled to enforce it. Whilst courts are loathe to interfere with freedom of contract, they will intervene where evidence showed that terms imposed by a mortgagee are unconscious. To do so, the courts will consider both the form and substance of the transaction. Trade tie was a separate agreement in substance even though one agreement in form. If a trade tie is a separate agreement, it will be valid beyond redemption. Whether a transaction is a separate agreement depends on substance not form. This was a collateral bargain, not a mortgage – the option (over M’s company) was a precondition for entering into loan.  trade tie valid and enforceable over 5 years. Lord Parker: “There is now no rule in equity which precludes a mortgage…from stipulating for any collateral advantage, provided such advantage is not either (1) unfair and unconscionable, or (2) in the nature of a penalty clogging the equity of redemption, or (3) inconsistent with or repugnant to the contractual and equitable right to redeem.” 1

It (ROFR) is a contractual right that gives its holder the option to enter a business transaction with the owner of something; unlike Right of First Offer (ROFO), in that the ROFO merely obliges the owner to undergo exclusive good faith negotiations with the rights holder before negotiating with other parties. A ROFR is an option to enter a transaction on exact or approximate transaction terms. A ROFO is merely an agreement to negotiate.

Nevertheless in Kregliner it was held that although the advantage continued after the date of redemption it did not restrict the right of the mortgagor to redeem, indeed the collateral advantage was seen as being a preliminary and separable condition of the loan. The reason for the House of Lords in differentiating between this case and the former cases (Bradly v Carrit, Noakes v Rice) was also due to the particular facts Noakes v Rice in particular would have meant that the publican would have been tied to the brewery (the mortgagee) for the 26 year duration of the lease and long after the ...