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Is a mortgagor permitted to redeem the security by payment of the debt?, by Eugene Duhovnikoff BA/LLB

1. Introduction

The common law rule which was laid down by Kreglinger v New Patagonia Meat and Cold Storage Co Ltd[1] states that a mortgagor must be permitted to redeem the security by payment of the debt. Subsequently this rule was incorporated into the New Zealand law in Bannerman Brydone Folster & Company v Murray [2]. It was later confirmed by Property Law Act 1952, s 81(2). Currently it is confirmed by the Property Law Act 2007, s 97(2).

 

Although the purpose of redemption of a security for a loan is to allow a mortgagor to redeem the security by payment of the debt the Kreglinger’s rule also generally allows a mortgagee to additionally benefit from the mortgage by way of collateral advantage.[3] A collateral advantage is a stipulation that, being a term of mortgage, secures to the mortgagee some advantage in addition to repayment of the loan with interest.[4] There are three exceptions to this rule. These exceptions were mentioned by Lord Parker in the passage at para 61 and can be best described as follows: a mortgagor will not be permitted to benefit from a collateral advantage if:[5]

 

  1. A collateral advantage is inconsolable and has been imposed in a morally reprehensible manner;
  2. Where it has been imposed as a penalty intended to deter redemption or early redemption; and
  3. Where it is directly incompatible with the right to redeem.

 

2. Substantive discussion

 

a) Previous Research

The modern application of the Kreglinger’s rule was already explained and discussed in dept by Peter Devonshire in 1997 and by Lindy Willmott and Bill Duncan in their joint article in 2002.

Whereas in 1997 Peter Devonshire concludes that the 'clogs principle' was not entirely redundant[6] Willmott and Duncan conclude that it is redundant and that the recent Australian case law that any argument of a mortgagor based upon the existence of a clog on the equity of redemption is merely of secondary or tertiary importance after statutory or equitable remedies based upon unconscionable conduct have been pursued.[7] In my view two strongest arguments that support the later view are:

 

1. “Over recent decades, principles of unconscionability have been expanding. Principles of unconscionability may now be relevant even in the absence of special disability”.[8] Willmott and Duncan particularly rely on Westfield Holdings Ltd v Australian Capital Television[9]where relief on the grounds of unconscionability was considered by the Supreme Court of New South Wales in the context of a multi-million dollar business dealing between two large corporations. The authors further state that:[10]

Given the increased flexibility of this equitable doctrine, it is submitted that the interests of justice and the protection of borrowers can be accommodated in a much more principled way than can occur under concepts difficulty to apply and rules that come within the ambit of the doctrine against clogging the equity of redemption.

 

2.The authors also state that a blanket operation of the doctrine may result in provisions being struck down although they have been negotiated between parties of equal bargaining power, and truly represented their best interests (at least at the time the provisions were negotiated).

 

 

b) Author’s thoughts:

i) Legislature All three academics agree that under the modern conditions the provisions of various land law legislation such as Property Law Act 2007, s 97(2) and consumer protection legislation such as Credit Contracts and Consumer Finance Act 2003 Parts 2 and 5 (ss 117-130) and Credit Contracts Act 1981 Part 1[11] will duplicate and limit the scope of the rule’s application. For example In Cambridge Clothing Co Ltd v Simpson[12] the requirement to pay interest for a period subsequent to the date of repayment of a mortgage was found oppressive. In deciding whether to intervene and re-open the parties’ contract the Auckland’s High Court while drawing on the earlier case law[13] simply looked at the statutory requirements, the relevant commercial practice and also parties’ business acumen and the overall relationship between the parties[14] without referring to the second head of Kreglinger’s rule. Therefore under the modern conditions the statutory provisions may sufficiently protect a mortgagee’s collateral interest as well as protecting a vulnerable mortgagor.

 

 

Alternative view

Interpretation Act 1999, s 5 states that a statute is to be interpreted according to its purpose as well as its text. I have not studied a credit contract law and do not really know the history behind The Credit Contracts and Consumer Finance Act 2003 and preceding legislation. It might be the case that the real purpose of those acts differs from the purpose of Lord Parker’s passage. This passage shows that Lord Parker was protective not only a mortgagor’s (the borrower’s) interests by of a mortgagee’s (the lender’s) interest. In that respect the consumer protection legislation may be one sided.

 

 

ii) Contract law

Apart from constituting a charge on land, a mortgage agreement is a contract.

All contracts are to be construed according to the parties’ objective intention.[15] The parties’ intent is inferred from the contract’s language within its factual and legal setting. The Courts will not disturb the parties’ autonomy of contract.[16] In other words the courts are not there to save parties from bad bargains.

Kreglinger’s rule which stipulates when a court will not unnecessarily restrain the parties’ freedom of contract is in conflict with the general rule of contract law which holds parties to their bargain.[17] Given various statutory and equitable protections in an unequal bargaining situation as well as a mortgage becoming a statutory charge[18] may declass the importance of Kreglinger’s in favor of the parties’ freedom of contract. For example in Kerr v Ducey[19]a transferee of a mortgagee purported to add a judgment debt to a mortgage as a collateral advantage. The case was decided by referring to terms of the contract and what they meant objectively or in other words to its true construction:[20]

On the true construction of the mortgage the words "moneys . . . which the. . . Mortgagor. . . hereafter may become liable to pay to the Bank" did not clearly stipulate that the mortgage was intended to cover pre-existing third party indebtedness and accordingly the defendant was not entitled by virtue of the mortgage contract to include the judgment debt in the amount required to redeem the mortgage.

The fact that the High Court did not proceed by deciding whether an addition of a pre-existing third party debt was or was not an unfair or unreasonable collateral advantage under the first head of the Kreglinger’s rule shows that under the modern conditions the scope of this rule is also restricted by the doctrine of true construction.

 

iii) Deficiencies in modern concept

It is arguable that modern courts can achieve the Kreglinger’s rule purpose by means other than relying on the rule itself. However relying on the rule in the modern concept may create three interrelated problems.

 

 

iv) Mechanical Application

We should not look at Lord Parker’s passage out of its context. The entire purpose of the rule was to confirm that a mortgagor must be permitted to redeem the security by payment of the debt and to state that unless “If a collateral advantage not affects the property mortgaged or the right to redeem it”[21] such an advantage should not be struck down. This method calls for treating a collateral advantage separate from an underlying mortgage transaction. Coming back to Peter Devonshire’s article a situation demonstrated by Harper v Joblin[22] where a guarantor to a bank obtained an option to purchase the mortgaged property within a 19 months period. Striking down such an option as a clog on redemption “strips a guarantor of the sole benefit of an agreement structured to accommodate the mortgagor’s business plans”.[23]In today’s reality a collateral advantage and a mortgage transaction are neatly interrelated and whereas if looked in isolation a collateral advantage may look unconscionable it might not be the case if viewed as part of one complex transaction.

 

 

v) Classification issues

“The principle against a clogging in equity does not apply to a term which is, in substance a transaction separate and independent from the mortgage”[24]Thus the court must determine the real nature of a contract as being a contract of mortgage as a prerequisite to applying this rule.[25] Collateral advantages today contain sums which are much larger than in 1914 when Lord Parker delivered his judgement. Parties who deal with such large monetary sums are large commercial corporations. For example in Westfield Holdings Ltd v Australian Capital Television[26] a collateral advantage was no less than eleven million dollars. A possibility of a loosing such an advantage, negotiating which was probably a result of the time and energy consuming negotiation might well send a shock wave which might create a chilling effect on various business communities. Businesses might be reluctant to lend to each other because they would feel that any collateral advantage they get will be struck down a clog on redemption. In my opinion this might be the reason why Young J held that:[27]

"In my view, in 1992, the rule (allowing a court to invalidate any transaction where a mortgagee obtains a collateral advantage or seeks to purchase a mortgage property) only applies where the mortgagee obtains a collateral advantage which in all the circumstances is either unfair or unconscionable. ..the principle does not extend to invalidate automatically cases in which the mortgagee has obtained the right to purchase the whole or part of the mortgaged property in certain circumstances or has obtained a collateral advantage where the circumstances show there has been no unfairness or unconscionable conduct."

In today’s recession climate any chilling effect on commerce is even more undesirable.

 

 

vi) Lack of flexibility.

According to a classical view if a mortgagee stipulates for an option to purchase the security, that prima facie this option will be considered to be inconsistent with both the contractual and equitable right of redemption under the third heading of the Lord Parker’s passage. However if a contract’s nature is something other than mortgage then such a stipulation will not be struck down. Moreover if the collateral stipulation is unconscionable the Court will not be able to use the first head of the rule because the entire rule only deals with collateral advantages that relate to mortgage type transactions. In this regard a general doctrine of unconscionability doctrine is more flexible and can be applied to any case. I think this is one of the reasons why all three academics suggest incorporating the rule into the general doctrine of unconscionability.[28]Such logic is also found in case law. For example in Commercial Bank of Australia Ltd v Amadio[29]where Deane J cautioned against ‘cataloguing’ the adverse circumstances which may constitute special disability for the purposes of the principles relating to relief against unconscionable conduct.

 

3. Conclusion

On the one hand, under the modern conditions the New Zealand and Australian Courts resolved legal disputes that related to collateral advantage by means other than the passage quoted by Lord Parker. Current statutory matrixes as well as general contractual doctrines make it possible to do without the rule. The rule created by Lord Parker’s passage was severely criticized by both the judiciary and the academics for its narrowness. A general doctrine of unconscionablilty is generally preferred. If applied mechanically the rule created by Lord Parker’s passage may result in injustice and large financial losses to the parties. Furthermore in the complexity of today’s commercial world makes it uncertain when the rule does or does not apply. On the other hand, a general unconscionability doctrine is concerned with the conduct of a stronger party which seeks to enforce, or obtain the benefit of, a dealing with a person under a special disability in such circumstances where it is not consistent with equity or good conscience that a stronger party should do so.[30] It seeks to remedy the same fault as Lord Paker’s passage. In my submission the rule laid down by Lord Paker’s passage should be incorporated into this wider doctrine.

 

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[1] [1914] AC 25(HL).

[2] [1972] NZLR 411 (CA).

[3] [1914] AC 25 (HC) at [61].

[4] GW Hinde, NR Cambell & P Twist Principles of Real Property Law (Lexis Nexis NZ, Auckland, 2007) at [15.048].

[5] A Berg “Clogs on the equity of Redemption- or Changing and Unruly Dog” [2002] JBL335 at 357.

[6] P Devonshire “The Modern Application of the Rule Against Clogs on the Equity of Redemption” (1997) 5 Australian Property Law Journal at 21, 36-37.

[7] Lindy Willmott and Bill Duncan “Clogging the Equity of Redemption: An Outmoded Concept?” (2002) 2 No 1 QUTLJJ at 35, 35-36.

[8]Ibid.

[9] (1992) 32 NSWLR 194 (SC).

[10] (2002) 2 No 1 QUTLJJ at 35 at 51.

[11] As iindicated by Property Law Act 2007, s 100.

[12] [1988] 2 NZLR 340 (HC).

[13] Italia Holdings (Properties) Ltd v Londsale Holdings (Auckland) Ltd [1984] 2 NZLR 1 (CA) at 15 -16.

[14] [1988] 2 NZLR 340 (HC) at 348-349.

[15] Tamplin v James (1880) 15 Ch D 215 (CA).

[16] Farley v Skinner [2002] 2 AC 732 at [21].

[17] Ibid.

[18] See:Property Law Act 1952, ss 93-95.Although the Importance of a mortgage should not be disregarded. A mortgage of the fee simple secures to the mortgagee the mortgagor’s interest in any minerals owned by him or her, the soil and surface of the mortgaged land, the trees and timber on the land, unless specifically excepted, and the benefit of any easements appurtenant to the land.

[19] [1994] 1 NZLR 577 (HC).

[20] Ibid, 585.

[21] Thus supporting a minority view from Bradley v Carritt [1903] A.C 253 (HL), 279 per Lord Lindley.

[22][1916] NZLR 895 (CA).

[23]Peter 34 [24] [2002] JBL335 at 357. [25]

Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323 (HL), 360. [26] (1992) 32 NSWLR 194 (SC).

[27] Ibid 202- 203.

[28]Peter 35,

[29] (1983) 151 CLR 447 (HC), 474.

[30] Ibid.

 

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