Property Law UK

Composite transactions

Agreement for the sale and purchase of property

Warnborough Ltd v Garmite Ltd[2006] EWHC 10 (Ch); [2006] 03 EG 121 (CS)
Ch D (Richard Sheldon QC)
12 January 2006

Summary

In this case, the headnote of which reads like a compendium of terms lifted from Megarry & Wade, the High Court had to consider whether an agreement for the sale and purchase of property was in substance a mortgage and was rendered unenforceable as a clog on the equity of redemption.

Facts

The transaction was essentially in two parts:

Initially, G was unable to pay the monthly instalments and after W exercised the option, G paid off the arrears and by agreement the position was restored with a second option. G again fell behind and W exercised the second option. G claimed, amongst other things, that the option was unenforceable as a clog on the equity of redemption.

The proceedings took a rather circuitous route to trial. G initially applied for summary judgment against W. The master dismissed the application. Mr N Davidson QC allowed Gs appeal. W appealed to the Court of Appeal. The leading judgment was given by Jonathan Parker LJ ([2003] EWCA Civ 1544. After reviewing the authorities, he concluded that whether the options were clogs could only be resolved at trial. This was now the trial.

Decision

The judge (Richard Sheldon QC, sitting as a deputy judge of the High Court) commented on the authorities cited by Jonathan Parker LJ: Samuel v Jarrah [1904] AC 323; Davies v Chamberlain [1909] TLR 26 Dec; Kreglinger v New Patagonia Meat [1914] AC 25 and Lewis v Frank Love [1961] 1 All ER 446, and cited this passage from his judgment:

" ..the mere fact that, contemporaneously with the grant of a mortgage over his property, the mortgagor grants the mortgagee an option to purchase the property does no more than raise the question whether the rule against clogs applies: it does not begin to answer that question. As has been said over and over again in the authorities, in order to answer that question the court has to look at the substance of the transaction in question: in other words, to inquire as to the true nature of the bargain which the parties have made. To do that, the court examines all the circumstances, with the assistance of oral evidence if necessary."He also cited other passages from the judgment from which it was clear that the view of the Court of Appeal was that the transactional documents pointed to the substance of the transaction as being one of sale and purchase and not one of mortgage, so that on that basis, the rule against clogs would not apply. He then referred to the arguments and evidence in the case and concluded that in the circumstances as a whole, the provisional view of the Court of Appeal should be confirmed.

A number of other arguments were pursued at trial; estoppel, that the conditions for the exercise of the option had not been satisfied, and that the option was in the nature of a penalty. Ultimately, judgment was given for W.

Overall character of the transaction

Brighton and Hove City Council v Audus
[2009] EWHC 340 (Ch)

Summary

In considering whether a composite transaction is liable to be set aside as involving a clog on the equity of redemption, the court will look at the overall character of the transaction and identify whether it is something other than a mortgage.

Facts

In December 1988 B purchased a property by way of long lease from the Council under the right to buy provisions in the Housing Act 1985. B couldn’t fund the purchase, and entered into an arrangement with their nephew, A, whereby he would provide the purchase price; that B would be able to live in the house rent free for the rest of their lives; that A would not charge any interest; and that upon the death of B the property would vest in A.

The parties, with legal advice, entered into two charges. The first charged the property with repayment of the discounted purchase price. The second reflected the agreement reached, and which purported to charge the property in addition with any increase in the base value of the property.

In January 2008, the Council charged the property to secure the repayment of residential care home fees under s22 Health and Social Services and Social Security Adjudications Act 1983.

The Council acknowledged the validity of the first charge taken by A, but challenged the validity of the second and sought rectification of the register so as effectively to achieve priority over it. It argued that the second charge was a clog on B’s equity of redemption, and/or that it was repugnant to B’s right to redeem and/or was otherwise unfair and unconscionable.

Held

On the law, Morgan J directed himself in accordance with the essential requirements of a mortgage, including the equitable right to redeem and the allied concept that there should be no clog on the equity of redemption (per the House of Lords in Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25. The relevant rules were three-fold:

The judge reviewed the development of the case law, including the more recent decisions of Welsh Development Agency v Export Finance Co Ltd [1992] BCC 270; Lavin v Johnson [2002] EWCA Civ 1138 and Dutton v Davis [2006] EWCA Civ 694.

In accordance with Warnborough Limited v Garmite Limited [2003] EWCA Civ 1544 where there is a composite transaction which includes as one of its elements a genuine mortgage, it is open to the court to assess the overall character of the transaction and identify the character as being other than that of a mortgage.

On the facts, the transaction went beyond a mere security transaction. A was not entering into an ordinary loan with B. In substance, A was intended to become the legal owner of the property, but his rights were to be postponed to the rights of B to live in the property for their lives. The transaction was “something more complex” to use the words of Lord Parker in Kreglinger. Accordingly A’s charges were valid and had priority to the Council’s statutory charge.

Comment

Although this case involves some murky and at first sight academic issues about the nature of the equitable right to redeem and the allied restriction on clogs, it does in fact raise an important point about the essential characteristics of a valid mortgage, particularly in the context of ‘questionable family transactions’. Morgan J has provided a helpful and up to date review of the law and principles – something which is not easily discernible from the textbooks.

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