Sale of property — Purchase price secured by charge in favour of vendor — Option to repurchase in event of default — Claim to exercise option — Whether unenforceable as “clog on equity of redemption” — Whether penalty clause or provision for forfeiture — Claim allowed
The claimant owned the headlease of a vacant commercial property that was proving difficult to let. A contract was eventually concluded to sell the remaining term of 47 years to the defendant for £130,000. Upon completion, the purchase price was left outstanding, secured by a charge on the property. The charge provided for repayment by monthly instalments of principal and interest. On the same day as it granted the charge, the defendant also granted the claimant an option to repurchase the property for £130,000. The option was exercisable only if a principal sum of at least £65,000 was outstanding and if payments under the charge were in arrears and remained unpaid for 35 days.
The defendant fell into arrears. The parties entered into a further agreement by which the original option was replaced by another in similar terms, but referring also to an additional £15,000 secured by a further charge.
The defendant again fell into arrears, and the claimant sought to exercise the option. The defendant contended, inter alia, that: (i) the option was unenforceable, as it was a “clog on the equity of redemption”; and (ii) it was in the nature of a penalty or provision for forfeiture, and the court should grant relief from forfeiture. Summary judgment was given to the defendant on the first ground. On appeal, the Court of Appeal held that the application of the rule against “clogs” depended not simply upon whether there was a simultaneous grant of a mortgage and an option to purchase in favour of the mortgagee, but, instead, upon the substance of the transaction, which, in the instant case, seemed to be one of sale and purchase rather than one of mortgage.
Held: The claim was allowed.
1. Considering the circumstances as a whole, the provisional view expressed by the Court of Appeal was correct. The substance of the transaction was that of a sale and purchase. The option formed part of the sale package, was a term of the contract of sale and purchase, and was not referable wholly or mainly to the provision of the charge. The claimant’s position as the seller was crucial to that conclusion. The purpose of the option was to ensure that the claimant would not lose the property if the defendant defaulted. The £65,000 condition, namely one-half of the purchase price, was intended to ensure that, should the defendant default while that sum was outstanding, any increase in the value of the property would benefit the claimant, whereas, once one-half of the purchase price had been paid, any such increase would benefit the defendant. Accordingly, the option was not unenforceable as a “clog”.
2. Provisions of the type contained in the option could operate as a means of forfeiture, in the limited sense that the defendant’s interest in the property was to be transferred to the claimant upon the option being exercised. However, there were no grounds for relief from forfeiture in the instant case. In particular, it could not be said that the object of the option was essentially to secure the payment of money; the option was a condition of the sale and purchase, with the object, in the event of the conditions for exercise being satisfied, of restoring the property to the claimant to deal with as owner. Moreover, the latter purpose was not one that could be achieved by way of the court granting relief from forfeiture: Shiloh Spinners Ltd v Harding (No 1) [1973] AC 691 applied. Nor did the option have the features of a penalty clause. On its exercise, the defendant would recover the price it had paid. The increase in value of the property was irrelevant, since the question of whether a clause was a penalty clause was to be judged as at the time of contracting, not at the time of breach: Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 applied; Jobson v Johnson [1989] 1 WLR 1026 distinguished.
Michael Gadd (instructed by TWM Solicitors LLP) appeared for the claimant; Philip Galway-Cooper (instructed by Baron Grey) appeared for the defendant.
Sally Dobson, barrister
