Law Sessions With Jennifer Housen’s Podcast

When Mortgages Go Wrong: Understanding Clogs, Fetters, and Redemption Rights

Subscriber Episode • • Jennifer Housen • Season 9 • Episode 3

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Mortgage law balances protecting borrowers from unfair restrictions while giving lenders security for their advances through established principles around the equity of redemption.

• Courts strike down unconscionable terms like excessive interest rates shown in City Land Properties (57% interest rate)
• The test for unconscionability examines whether a "sensible, well-advised person" would accept the terms
• Any attempt to exclude redemption rights is automatically void and unenforceable
• "Collateral advantages" like tied-house agreements for pubs or petroleum stations face scrutiny as potential clogs
• Modern courts apply both mortgage doctrine and restraint of trade principles to evaluate these arrangements
• Lenders have three main remedies: suing for money due, exercising power of sale, or foreclosure
• Power of sale arises when contractual redemption date passes but becomes exercisable only after specific triggers
• Lenders must take reasonable care to obtain the best price reasonably available when selling property
• The landmark Cookmere Brick case established that lenders can prioritize their interests in timing a sale


💡⚖️ Let’s learn the law together—one session at a time!

Speaker 1:

Welcome back to this third segment of Land Law Mortgages. Now, before the break we were considering clogs and fetters on the equity of redemption. Now, if you remember what I mentioned earlier, the point is that there is a contractual date to redeem the mortgage by, of course, putting some kind of restriction on it. So the cases mentioned before City Land Properties and Dabra is a case where we see the issue relating to the lending rate balloon into something like 57%. Now the court said that of course that is unconscionable and, as such, the court set that aside. So the question is are you looking at something that will basically restrict the ability for the mortgagor to redeem the mortgage or to redeem now? Then if we look at that in contrast, say, to the multi-service book binding case uh, multi-service and martin. There the court asked the question was the advan was advantage taken of a young, inexperienced or ignorant person to introduce a term which no sensible, well-advised person would have accepted? And that is the point, really, because the court will strike it down if it is a situation where somebody who had looked at this properly would not have taken that on board. But that is not to say, of course, that if a situation between savvy business people, for example, the courts will not strike it down, for example in the case where it was there for 40 years because the court said look, you bargained long and hard for it and as such they would leave it alone. So when the courts are looking at unconscionability, they look at the relevant bargaining positions of the parties, as it is relevant, but it will not necessarily be a deciding factor. It will simply be relevant.

Speaker 1:

Now we have seen that there have been attempts to exclude the right to redeem, the right to redeem. But the effect of including a clause in the document which purports to exclude the right to redeem will be void and unenforceable by the mortgagee. In addition, any burdens imposed by the mortgage on the mortgage property that may continue after the date of redemption are regarded as unfavorable. Now what we're going to look at here now are what we call sort of collateral advantage. Now, equity says first of all that there should be no clogs or fetters, restrictions, and we know that. And so in Samuel and Gerard, timber and Wood Paving, we see the courts saying that such practices were invalid and, of course, inconsistent with the transaction being a mortgage. But when you consider, for example, collateral advantages, as well as oppressive and unconscionable terms. We've looked at the unconscionable terms, for example, in city land and also in multi-service book bindings. But when we look at collateral advantage and unconscionable terms, we see a slight variance there.

Speaker 1:

At times there may be a mortgage in respect of a business where there would be a tie-in. So looking at the collateral advantage now, then sometimes it may be a situation where you have a business where, hand in hand with having the business, it may be that the mortgagee also has some other service relative to the business. So there may be a time, for example, if the mortgage property was a brewery, there would be a time-in for the mortgagor to buy its products, and now this, of course, was known as a soulless agreement. Now again, for those outside the UK, it may be a little bit of a puzzling situation for you. So I'll try and quickly just clear that up. When, for example, in the UK, you have a pub, a typical English pub, you tend to find that pubs are what are called tied houses or they can be free houses. Now, tied houses is when they are tied to a particular brewery, free houses, of course, when you own independently. But this is a crude explanation here, but it stands nonetheless, and the idea is, let's say, you have a brewery like Swan Brewery to which you're tied, swan Brewery may very well advance the monies for the mortgage, but it means that because they've put you in place as the publican, as the landlord, it means that you now not only have to pay the mortgage payments to them, but also take their beer for a period.

Speaker 1:

Now, that's what I'm talking about in respect of solace agreements. More recently, we see these types of agreements in relation to garages, where the mortgagee has sought to tie in the mortgagor to the purchase of petrol and other petroleum products from the mortgagee. So, for example, you see a, let's say, you take on a Shell garage, for example, so a petrol station, and you then have to buy the petrol, the gas, from Shell. Well, if it is that Shell is the mortgagee, they've given you the monies in order to ensure that you carry out their franchise, as it were. It may very well be that there is a soulless agreement for you to buy the products from them.

Speaker 1:

Well, the traditional approach was to distinguish between cases where the collateral advantage would continue for as long as the mortgage continued and those which endured for a longer period. So is it, albeit, for example, shall loan due the money for 10 years, should they have a soulless agreement that went beyond 10 years, for example? Well, in Noakes and Rice in 1902, the mortgagor of a public house, a pub or a bar, as you may know, it agreed with the mortgagee that he would purchase the mortgagee's beer for the duration of his lease of the property. This was held to be invalid and was said to be a clog on the equity of redemption. I want you to contrast this, though, with the current approach that the courts will take Now. In the case of Biggs and Hodinot in 1898, the mortgage would not be redeemed for a period of five years, during which time the mortgagor would buy only the mortgagee's products. It was held that the postponement of the right to redeem for five years was acceptable and the soulless agreement was valid, and in that case it was not held to be a clog or fetter on the equity of redemption. Now, in the recent case, of course, of Esso Petroleum and Harper, in 1968, the House of Lords said that any restriction on trade contained in a mortgage deed are also subject to the general common law rules as to restraint of trade. So it is possible to avoid an agreement by showing that it is excessive under the common law rules. At common law, it is possible to sever the part of the mortgage deed which is bad, as an excessive restraint on trade is what the courts say.

Speaker 1:

Now then, what if the mortgagor defaults? What are the mortgagee's remedies? Well, let's consider that for a moment. What are the mortgagee's remedies on such a default? Well, let's start with a legal mortgage. Well, if there is a default, you can sue for the money due. This is a contract, albeit we might call it a mortgage. It is a contract, so you could sue for the money's due if, for example, persons have failed. Now it's a contractual remedy. It's the most straightforward, as there is a contract between the parties. Now, as soon as the date of payment has passed, the mortgagee may sue for the sum owed and is normally entitled to a payment order for the full amount outstanding. Now I want to pause for effect there, because, again, remember I say that generally six months is the contractual date for you to pay it off. So if it is that you're behind, the bank could legitimately ask for all of its money. Now, this is not practical, of course, because if you did have the money to pay the arrears, or rather you didn't have the money to pay the arrears. How are you going to pay off the rest of the mortgage? How are you going to pay off the rest of the mortgage?

Speaker 1:

The second thing, of course, that the mortgagee can do is to exercise a power of sale. Now, first of all, let's consider what is a power of sale. Well, regardless of any express provisions, section 101 of the Law of Property Act 1925 provides that a power of sale, that is, a power to sell the property, arises and is implied when a mortgage is made by deed. Now, this power rises as soon as the contractual date for redemption has passed and the mortgage money is due and is in arrears, and there is no contrary provision in the mortgage deed which precludes the power of sale. The case for that proposition is 20th Central Banking and Wilkinson in 1977.

Speaker 1:

Now, it is vital for you to distinguish when the power of sale arises and when the power becomes exercisable. Exercisable comes under section 103. Now, a power is exercisable in one of three circumstances, and they are these the first is that notice requiring payment has been served on the mortgagor and the default has continued for three months. After that, or two, there is interest payable and there is at least two months in arrears or there is some breach of the covenant in the mortgage deed other than the covenant to pay. Now I will pause there so that we can get the flavor of it in terms of trying to understand it. What all of this means is that Section 101 says that a mortgagee will have a power of sale. Now the power of sale, it says, arises once the contractual date has passed, rather arises once the contractual date has passed.

Speaker 1:

Now I want you to follow me here because it is important to understand that the power of sale arises after the contractual date has passed. So, as I say, let's assume it's in the contract, it's six months usually. So you started in June, six months usually. So you started in June. After six months we're looking at the contractual data as passed. But you've been paying your mortgage, fine. But let's say, by April of the following year you are in arrears, you haven't paid your mortgage.

Speaker 1:

Well, in order for the bank to exercise the power of sale, the first thing that you will have to look at is whether or not the power arose, so it can't arise before the contractual date. Once it's arisen, then you look to see if one, you are three months in arrears, or principal and interest, that is, two, at least two months interest is in arrears, or there is some other covenant breach. For example, let's say there's a covenant for you not to rent out the property, and you have, but it must be something else. That is the understanding of section 101 and 103. Now these provisions in effect give the mortgagee a power of sale of the property should the mortgagee be in serious default, and the result is that the mortgagee receives such money as is owed if the sale proceeds from the sale proceeds.

Speaker 1:

Now what about how the sale is done by the mortgagee? What are his obligations? Can he come in and just sell the property for what you owe him? Well, unfortunately, not necessarily, or fortunately, as the case may be, looking at a negative equity situation, for example, you have to be careful how you approach it. Now, a mortgagee can sell either by auction or by private treaty.

Speaker 1:

Now, important case in this area, of course, is Cookmere Brick and Mutual Finance Limited. It was held in that case that in deciding when to sell, the mortgagee is entitled to consult his own interests to the total exclusion of the mortgagor's interests. Thus he can sell it at a time when the market for the type of property which is the subject of the mortgage is depressed, to take reasonable care to obtain the true market value of the mortgage property and, having decided to sell at a particular time, in ensuring that the sale is conducted in a way where he discharges any duty he owes. Now, a mortgagee owes a duty of care to the mortgagor to take reasonable care to obtain the best price that could be reasonably obtainable at the time, and so, even if the price is low, he has satisfied the cook-me-a-brick rule. Let's put that into context.

Speaker 1:

What I'm saying here is that the mortgagee is concerned about his situation. However, the point must not be lost that he still owes a duty of care to the mortgagor, but that duty is just to get the best price. But best price is what he would get at auction. So if it is that you are still owing, let's say, a hundred thousand, and the mortgagee only gets 90, well, that's irrelevant if that is the best price. So if the mortgagee fails to obtain the best price, he will have to account for the difference and, of course, if he says, well, it's a depressed market, then so be the case. What we will look at after the break, then, is a continuation of, of course, the mortgagee's rights, and we will then conclude on that. In that regard,