Lewis v Love [1961] 1 WLR 261

Facts

  • The case involved a transaction where the plaintiff sold property to the defendant and, as part of the same arrangement, leased it back with an option to repurchase.
  • The plaintiff argued that the transaction was not a genuine sale, but a mortgage in disguise, alleging that the terms unfairly restricted the right to redeem the property.
  • The defendant contended that it was a straightforward sale-leaseback with an independent option to repurchase.
  • The court examined terms such as the fixed price for repurchase, the nature of the rental payments, and the overall commercial context to determine the transaction’s true character.

Issues

  1. Whether the sale-leaseback arrangement constituted a genuine sale or was, in substance, a disguised mortgage.
  2. Whether the terms of the agreement, specifically the option to repurchase, amounted to a clog on the equity of redemption.

Decision

  • The Court of Appeal held that the arrangement was not a true sale but a disguised mortgage.
  • It found that the option to repurchase at a fixed price equated to a right of redemption and that any provision operating as a clog on the equity of redemption was void.
  • The transaction was therefore subject to the equitable principle that prevents devices undermining a mortgagor’s right to redeem their property.

Legal Principles

  • The substance, not the form, of a transaction determines whether it is a mortgage and therefore subject to the equity of redemption.
  • Any term in a mortgage transaction that imposes an unreasonable restriction or renders redemption effectively impossible will be treated as a void clog on the equity of redemption.
  • Sale-leaseback arrangements can be scrutinized to reveal their true character, and an option to repurchase may indicate the presence of a disguised mortgage.
  • A transaction labeled as a sale cannot avoid equitable principles if, in commercial reality, it functions as a mortgage.
  • The judgment reinforces the importance of distinguishing genuine sales from disguised mortgages and affirms that equity intervenes to safeguard the mortgagor’s right to redeem.

Conclusion

Lewis v Love [1961] 1 WLR 261 established that courts look beyond the formal labels of a sale-leaseback arrangement to its substance; if the transaction is, in effect, a mortgage with terms that restrict redemption, it amounts to a void clog on the equity of redemption. The case affirms that equity will prevent any device used to frustrate the mortgagor’s ability to reclaim property upon repayment, and remains an important reference for distinguishing between genuine sales and disguised mortgages.

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