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.
The transaction was essentially in two parts:First, an agreement for the sale by W of certain leasehold property to G at a price of £130,000 payable by instalments over 12 years and secured by way of legal charge on the property. Second, an option for W to repurchase the property if the principal sum outstanding was not less than £65,000 and any payments covenanted to be made by G were in arrears for 35 days. 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.
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.
Warnborough Ltd v Garmite Ltd[2006] EWHC 10 (Ch); [2006] 03 EG 121 (CS)
Ch D (Richard Sheldon QC)
12 January 2006
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