Purchase of properties — Purchase price left outstanding but secured by charge — Purchaser granting option to repurchase to appellant vendor — Whether option void as clog on equity of redemption — Appeal allowed
In 1996, the respondent purchased two leasehold properties from the appellant. Instead of paying the purchase price of £130,000, it executed a legal charge securing the whole sum and providing for payment by monthly instalments of principal and interest. On the same date, the respondent granted to the appellant an option to repurchase the property for £130,000 in certain events, one of which was that the principal sum outstanding under the charge was not less than £65,000. In the event of the appellant exercising the option, it was to have the right to set off, against its obligation to pay the £130,000, the whole of the sum outstanding under the charge. The effect would be that, apart from interest paid by the respondent under the charge, the parties would be restored to their original positions. A second option, replacing the first, with slight variations, was agreed in 1999.
In August 2001, the appellant purported to exercise the second option. The respondent disputed its right to do so, and the appellant brought proceedings seeking specific performance. The respondent applied, under CPR 24.2, for summary judgment in its favour on the ground that the second option was unenforceable as a clog on its equity of redemption, being an objectionable restriction on its rights as a borrower that had mortgaged its property as security for a debt. Its application was initially refused by a master, but was allowed on appeal. The judge held, on the basis of the bare transaction documents, that both the first and second options were clearly “clogs” and were void. The appellant appealed.
Held: The appeal was allowed.
The mere fact that, contemporaneously with the grant of a mortgage over its property, the mortgagor granted to the mortgagee an option to purchase the property simply raised the question of whether the rule against clogs applied. In order to answer that question, it was necessary to look at the substance of the transaction and the true nature of the bargain that the parties had made. Where the option to purchase that was sought to be challenged as a “clog” had been granted against the background of a sale of the property by the grantee of the option, as owner of the property, to the grantor, for a price that was to be left outstanding on mortgage, there was a very strong possibility that, on an examination of all the circumstances, the court would find that the substance of the transaction was one of sale and purchase and not one of mortgage. If limited to the consideration of the bare transaction documents, that seemed to be the provisional conclusion to which they pointed. The judge had erred in concluding that he could determine the substance of the transaction by looking only at those documents, which, indeed, prima facie pointed to the opposite conclusion from that which he had in fact reached. The clog issue was one that could be resolved only at trial. The master’s decision to dismiss the respondent’s application would accordingly be restored: Samuel v Jarrah Timber & Wood Paving Corp Ltd [1904] AC 323, Davies v Chamberlain (1909) 26 TLR 138, Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25 and Lewis v Frank Love Ltd [1961] 1 All ER 446 considered.
Paul Teverson (instructed by Triggs Wilkinson Mann, of Guildford) appeared for the appellant; Philip Galway-Cooper (instructed by Baron Grey, of Twickenham) appeared for the respondent.
Sally Dobson, barrister
