Facts
- Samuel advanced a loan to Jarrah Timber and Wood Paving Corporation Ltd, secured by a debenture stock mortgage.
- The mortgage agreement contained an option permitting Samuel to purchase the mortgaged property at a fixed price within a specific period.
- Samuel attempted to exercise the purchase option; Jarrah Timber challenged its validity, claiming it was a clog on the equity of redemption.
- The dispute proceeded to the House of Lords to determine the enforceability of the option.
Issues
- Whether the option to purchase the mortgaged property granted to the lender as part of the mortgage agreement constituted a clog on the equity of redemption.
- Whether such an option was void as an impermissible restriction on the borrower's right to redeem the mortgaged property.
Decision
- The House of Lords unanimously held the option to purchase was void as it constituted a clog on the equity of redemption.
- The court determined that the option, despite being framed as a separate contractual term, was part of the mortgage transaction and fell within equitable scrutiny.
- The judgment clarified that any term interfering with the borrower’s ability to redeem the property after repayment is impermissible.
Legal Principles
- The equity of redemption allows borrowers the right to reclaim mortgaged property upon loan repayment.
- A "clog on the equity of redemption" refers to any condition in a mortgage that restricts this right.
- Terms in a mortgage agreement—inextricably linked to the mortgage—which prevent or unduly restrict redemption, including options to purchase granted to the lender, are void.
- Equity will not permit enforcement of oppressive mortgage terms that undermine the right to redeem.
Conclusion
The House of Lords confirmed that an option to purchase granted to a lender within a mortgage transaction is void as a clog on the equity of redemption, reinforcing equitable protection of borrowers against oppressive contractual terms in mortgage agreements.