MORTGAGES

Clogs on the equity of redemption

Jones v Morgan [2002] Lloyd's Rep Bank 323, CA.

The Morgan brothers overreached themselves financially in the planned conversion of a farmhouse into a nursing home. Mr Jones, a neighbour and retired investment banker, agreed a substantial loan at 15% interest with a legal charge over the farm and a covenant that he would get a 50% interest in any company set up to run the business. Three years later, in 1997, with the plans for a nursing home collapsing and no interest paid on the mortgage, the parties agreed for a sale of the farmland, all of which would go towards paying off the debt and interest but the shortfall was over £50,000. J served a notice exercising his power of sale. This led to a written agreement to secure the balance owing on the retained land and a transfer of the beneficial interest of one half share in the property. In 1998, the mortgage was redeemed but J sought specific performance of the agreement to transfer a one half share of the property.

It was held as follows:

1. (Reversing the judge below) The 1997 agreement was not unconscionable. One party had to impose objectionable terms in a morally reprehensible manner. The fact that J knew that M wrongly believed that J was under an obligation to reinvest the proceeds of sale was not enough on its own to find morally reprehensible conduct. M had been advised by a solicitor throughout the transaction. It was not self-evident that a competent solicitor would have advised his client not to enter into the 1997 agreement.

2. The judge had been right to find that the 1997 agreement was not vitiated by duress. The notice exercising the power of sale was not illegitimate or improper.

3. (2-1, Pill LJ dissenting) The clause requiring a transfer of a half interest was a clog on the equity of redemption and void. A mortgagee could not as a term of the mortgage enter into a contract to purchase any part of the mortgaged property. The clause in the 1997 agreement was repugnant to the right to redeem as the property must be restored in the state in which it was when the mortgagor parted with the security. A subsequent agreement could stipulate for an interest in the mortgaged property but the question in each case was whether the arrangement was in substance subsequent to and independent of the original bargain. In this case, the 1997 agreement was not independent.

Lord Phillips MR, though agreeing with the detailed judgement of Chadwick LJ, described the doctrine of clog on the equity as 'an appendix to our law which no longer serves a useful purpose and would be better excised'. That is unlikely to happen. It remains a vital factor to bear in mind in complex commercial negotiations and in any case of lending which is not by banks and finance houses on standard terms.

"Butterworths Property Law Service Bulletin" February 2003