Mortgage in favour of appellant secured over respondents’ land – Parties subsequently entering into agreement that respondents would transfer part of mortgaged property to appellant – Mortgage repaid in full – Whether agreement unenforceable as clog on equity of redemption in mortgage transaction
The respondents, together with their four other surviving siblings, held, as beneficial tenants in common, West Hall Farm, Aberthaw, South Glamorgan. The property consisted of a farmhouse, outbuildings and a substantial amount of farmland. One of the respondents, W, entered into a contract with a construction company to convert the farmhouse and outbuildings into a nursing home. However, by 1994 he was unable to make the payments due under that contract and work ceased. The appellant, a friend of W’s, agreed to lend W £105,000 secured over the property by legal charge dated 7 June 1994. In August 1994 the appellant lent a further £10,000 upon the security of the legal charge.
By mid 1997 W had decided to abandon the nursing-home project and convert the property into residential flats. To raise capital, W negotiated the sale of 40 acres of farmland, which had been included the 1994 legal charge, to a neighbouring farmer for £125,000. In November 1997 the parties entered into an agreement stating, inter alia, that: (i) the appellant agreed to release the farmland that was to be sold; and (ii) upon completion of the sale of the farmland, the respondents would transfer a one-half share or interest in the legal estates and proceeds of sale until the sale of the retained property (clause 2). After deduction of agents’ fees and legal costs, the balance of the purchase price for the farmland was paid to the appellant.
The appellant subsequently brought proceedings seeking the outstanding balance due under the 1994 charge. In September 1998, the respondents paid the appellant £55,000 on account of the outstanding balance. However, the appellant claimed that despite the payment of the debt in full, he was still entitled to the benefit of a one-half share or interest in the retained property. To that end, he sought specific performance of clause 2.
The judge, applying Alec Lobb Garages Ltd v Total Oil Great Britain Ltd [1983] 1 WLR 87, dismissed the claim for specific performance and set aside clause 2 on the ground that the bargain made by the 1997 agreement was harsh and unconscionable. The appellant appealed. The respondents sought to uphold the judge’s order and to raise the additional grounds that the agreement was procured by economic duress and that clause 2 constituted a clog on the equity of redemption and was therefore unenforceable.
Held: The appeal was dismissed by a majority.
1. On the evidence it had not been open to the judge to find that the appellant was guilty of morally reprehensible conduct and conclude that the bargain was harsh and unconscionable: Multiservice Bookbinding Ltd v Marden [1979] Ch 84 and Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 considered. Furthermore, on the facts found by the judge, the respondents had failed to establish either of the elements necessary for a defence of duress: Pao On v Lau Yiu Long [1980] AC 614 considered.
2. However, the principle that prevents a mortgagee from stipulating an interest in the mortgaged property at the time of the mortgage did apply in the circumstances of the instant case, notwithstanding that the stipulation was contained in the 1997 agreement rather than in the 1994 mortgage. That was because: (i) it was artificial to regard the 1997 agreement as being, in substance, independent of the 1994 mortgage transaction; and (ii) the 1997 agreement constituted a variation of the contractual terms upon which the respondents were entitled to redeem the mortgaged property. Accordingly, clause 2 was repugnant to the mortgage transaction into which the parties had entered and the judge’s order dismissing the claim for specific performance was to be upheld: G&C Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25 applied.
Milwyn Jarman QC (instructed by Hugh James Ford Simey, of Cardiff) appeared for the appellant; Anthony Tanney (instructed by Clarke Willmott & Clarke, of Bristol) appeared for the respondents.
Thomas Elliott, barrister