## Facts

- Harbel Oil Co. obtained a 20-year ground lease on vacant Phoenix property to build and operate a gasoline service station.
- The Steeles agreed to loan Harbel $10,000 for construction, repayable in monthly installments with interest; Harbel would fund any excess costs.
- As part of a single financing arrangement, the parties executed four related documents: (1) an assignment of the ground lease to the Steeles for a term tied to repayment, (2) a sublease back to Harbel for the same term, (3) a conditional sales and loan agreement covering station equipment, and (4) a products purchase contract.
- The sublease stated that upon Harbel’s default the Steeles could terminate and recover possession as in forcible detainer; the equipment agreement allowed the Steeles, upon default, to take possession and retain payments as liquidated damages.
- Harbel defaulted on payment obligations under the sublease and equipment agreement; Texas Independent Oil Co. (successor to the Steeles’ business) served written notice of default and election to terminate.
- Harbel voluntarily surrendered possession; Texas took possession, made improvements, and later subleased the station to Blakely Oil.
- Harbel later demanded an accounting and sought to pay the debt in full to redeem its leasehold and equipment; Texas refused to account or restore possession.
- Harbel sued for a declaration that the transaction was a real and chattel mortgage, an accounting, and equitable redemption.

## Issues

1. Whether the lease assignment, sublease, equipment agreement, and related contract, construed together, constituted a mortgage given as security for the $10,000 loan.
2. If the transaction was a mortgage, whether contractual forfeiture and termination provisions could cut off Harbel’s equity of redemption without foreclosure and accounting.

## Decision

- The Arizona Supreme Court reversed the judgment for defendants.
- The court held the instruments, taken together and judged by their purpose, created an equitable mortgage securing the loan rather than independent transactions effecting a forfeiture.
- The court held provisions attempting to terminate Harbel’s interest and retain payments upon default could not bar the mortgagor’s equity of redemption.
- The case was remanded for proceedings consistent with treating the arrangement as a mortgage, including an accounting and an opportunity for Harbel to redeem by paying the amount due.

## Legal Principles

- Courts determine whether a transaction is a mortgage by its substance and the parties’ intent to secure a debt, not by the labels used in the documents.
- An absolute transfer or assignment coupled with an agreement allowing the debtor to regain the property upon payment is treated in equity as a mortgage when intended as security.
- Multiple instruments executed as parts of one financing arrangement are construed together to determine the transaction’s true character.
- A mortgagor’s equity of redemption cannot be waived or defeated at the inception of the mortgage by forfeiture, liquidated-damages, or termination provisions; the right may be barred only through foreclosure or equivalent procedures recognized by law.
- When the debtor tenders performance and seeks an accounting, the mortgagee must account and permit redemption rather than rely on self-executing forfeiture language.

## Conclusion

The court classified the parties’ integrated lease-assignment/leaseback and equipment-security arrangement as an equitable mortgage and ruled that default-based forfeiture provisions could not eliminate the borrower’s right to an accounting and redemption, requiring reversal and remand for mortgage-based relief.


Harbel Oil Co. v. Steele, 318 P.2d 359 (Ariz. 1957)