Mortgages/security devices - Right to redeem and clogging the equity of redemption

Learning Outcomes

This article examines the mortgagor's right to redeem property subject to a mortgage, both before and after foreclosure. It differentiates between the equity of redemption and the statutory right of redemption and explains the doctrine prohibiting the "clogging" of the equity of redemption. After studying this material, you will be able to identify the types of redemption rights available to a mortgagor and analyze attempts by mortgagees to restrict or eliminate these rights, which is essential for answering MBE questions on mortgage law.

MBE Syllabus

For the MBE, you are expected to understand the rights associated with redeeming property after mortgage default. This requires knowledge of:

• The nature and operation of the equity of redemption.
• The requirements for exercising the equity of redemption.
• The doctrine against "clogging" the equity of redemption and common examples of clogging.
• The distinction between the equity of redemption and the statutory right of redemption.
• The general characteristics of the statutory right of redemption (where applicable).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. The common law right allowing a mortgagor to reclaim title and prevent foreclosure by paying the debt after default but before the foreclosure sale is known as:
   1. Statutory right of redemption
   2. Equity of redemption
   3. Right of first refusal
   4. Right of entry
2. Which of the following provisions, if included in the original mortgage agreement, would most likely be considered an invalid attempt to "clog" the equity of redemption?
   1. An acceleration clause permitting the lender to demand full payment upon default.
   2. A provision requiring the mortgagor to waive the equity of redemption if they default.
   3. A due-on-sale clause requiring loan repayment if the property is sold.
   4. A clause requiring the mortgagor to pay late fees on missed payments.
3. Statutory rights of redemption typically allow a mortgagor to redeem the property:
   1. At any time before default by paying the outstanding loan balance.
   2. Only before the foreclosure sale by paying the outstanding loan balance.
   3. For a fixed period after the foreclosure sale by paying the foreclosure sale price.
   4. Only if the mortgagee agrees to the redemption after the foreclosure sale.

Introduction

When a mortgagor defaults on a loan secured by a mortgage, the mortgagee (lender) typically has the right to foreclose on the property. However, the law provides the mortgagor (borrower) with rights to reclaim the property, known as the rights of redemption. There are two distinct rights: the equity of redemption, which exists before the foreclosure sale, and the statutory right of redemption, which exists after the foreclosure sale in some jurisdictions. Courts are protective of the equity of redemption and will invalidate provisions in the original mortgage agreement that attempt to waive or restrict this right – a concept known as "clogging" the equity of redemption.

Key Term: Equity of Redemption The common law right of a mortgagor, or their successor in interest, to prevent foreclosure by paying the full amount of the mortgage debt, plus accrued interest and costs, after default but before the foreclosure sale occurs.

The Equity of Redemption

This right arises automatically under common law the moment a mortgage is created. It allows a borrower who has defaulted on the loan to reclaim clear title to the property by paying the full outstanding debt, including accrued interest and any legitimate costs incurred by the lender due to the default, before the foreclosure sale takes place.

• Exercise: To exercise the equity of redemption, the mortgagor must pay the full amount due. If the mortgage contains an acceleration clause (which most do), allowing the lender to demand immediate payment of the entire outstanding loan balance upon default, the mortgagor must pay the entire accelerated balance, not just the missed payments.
• Waiver: A fundamental principle is that the equity of redemption cannot be waived in the mortgage instrument itself or in a contemporaneous agreement. This is often expressed by the maxim "once a mortgage, always a mortgage." Any such attempt is deemed void as against public policy. However, the mortgagor can validly waive the right after the mortgage has been created, for separate consideration, provided the transaction is fair (e.g., conveying the property via a deed in lieu of foreclosure).

Clogging the Equity of Redemption

Courts vigilantly protect the mortgagor's equity of redemption and will invalidate attempts by the mortgagee to limit or obstruct this right within the initial mortgage agreement. This principle is known as the prohibition against "clogging" the equity of redemption.

Key Term: Clogging the Equity of Redemption Any provision included in the mortgage instrument or created contemporaneously with it that has the effect of preventing the mortgagor from getting the property back after paying off the loan or that otherwise restricts the right to redeem.

Examples of provisions that courts typically find to be invalid clogging include:

• Waiver Clauses: Provisions where the mortgagor purports to waive the right to redeem upon default.
• Excessive Redemption Costs: Imposing unduly high fees or penalties for redemption beyond the legitimate debt, interest, and costs.
• Collateral Advantage: Provisions giving the mortgagee some collateral advantage beyond repayment of the debt (e.g., an option to purchase the mortgaged property granted at the time of the mortgage, unrelated to the loan itself). Courts view these with suspicion as they can effectively prevent redemption if the property value increases significantly.
• Disguised Mortgages: Transactions structured as absolute sales with an option to repurchase, where the reality is a loan secured by property. Courts may treat these as equitable mortgages, preserving the grantor's redemption rights.

Worked Example 1.1

Mortgagor borrows $200,000 from Mortgagee, secured by a mortgage on Blackacre. The mortgage agreement includes a clause stating, "In the event of default, Mortgagor waives all right to redeem Blackacre." Mortgagor defaults. Before the foreclosure sale, Mortgagor tenders the full$200,000 plus interest and costs to Mortgagee. Mortgagee refuses, citing the waiver clause. Can Mortgagor compel redemption?

Answer: Yes. The clause attempting to waive the equity of redemption at the time the mortgage was created is an invalid attempt to "clog" the equity of redemption. Such clauses are void as against public policy. Mortgagor retains the right to redeem by paying the full debt before the foreclosure sale.

Worked Example 1.2

Borrower needs funds and "sells" Whiteacre, worth $150,000, to Lender for$50,000 via an absolute deed. Contemporaneously, Lender grants Borrower an option to repurchase Whiteacre within one year for $60,000. Borrower fails to repurchase within the year. Lender claims full ownership. Borrower argues the transaction was a disguised mortgage and seeks to redeem. What result?

Answer: A court is likely to construe this as an equitable mortgage, given the significant disparity between the property's value ($150,000) and the "sale" price ($50,000), and the presence of the repurchase option tied closely to repayment terms ($50k +$10k interest/fee). If deemed a mortgage, the option to repurchase within one year acts as an invalid attempt to limit the redemption period, "clogging" Borrower's equity of redemption. Borrower would have the right to redeem by paying the debt before foreclosure.

The Statutory Right of Redemption

Distinct from the equity of redemption, about half the states provide a statutory right of redemption. This right arises after the foreclosure sale has occurred and allows the mortgagor (and sometimes junior lienholders) to redeem the property from the purchaser at the foreclosure sale.

Key Term: Statutory Right of Redemption A right established by state statute allowing a mortgagor (and sometimes junior lienholders) to regain title to property after a foreclosure sale by paying the foreclosure sale price (plus interest and costs) within a specified period.

• Timing: Operates after the foreclosure sale, typically for a fixed period (e.g., six months to a year). The equity of redemption ends at the foreclosure sale; the statutory right begins.
• Redemption Price: The amount required is usually the foreclosure sale price, not the original mortgage debt amount. Interest and costs may also be added.
• Effect: If exercised, it nullifies the foreclosure sale, and title is restored to the redeeming party (usually the mortgagor).
• Availability: Not available in all states. Where it exists, its terms are strictly governed by the specific state statute.

Exam Warning

Be careful to distinguish between the equity of redemption (common law right, exists before foreclosure sale, payment of full debt) and the statutory right of redemption (statutory right, exists after foreclosure sale in some states, payment of foreclosure sale price). MBE questions often test this distinction. An attempt to waive the equity of redemption in the mortgage is clogging; statutory rights can sometimes be waived, depending on the statute.

Key Point Checklist

This article has covered the following key knowledge points:

• The Equity of Redemption is the mortgagor's common law right to pay the full mortgage debt (plus interest/costs) after default but before a valid foreclosure sale to reclaim the property.
• This right cannot be waived in the mortgage instrument itself (“clogging” is prohibited).
• Clogging the equity of redemption involves attempts within the mortgage or contemporaneous agreements to restrict or eliminate the right to redeem.
• Examples of clogging include waivers, unduly burdensome conditions, or certain collateral advantages given to the mortgagee.
• The Statutory Right of Redemption is a distinct right existing after the foreclosure sale in some states, allowing redemption by paying the foreclosure sale price within a statutory period.
• The two redemption rights differ in timing (pre- vs. post-foreclosure) and redemption amount (debt vs. sale price).

Key Terms and Concepts

• Equity of Redemption
• Clogging the Equity of Redemption
• Statutory Right of Redemption