It is inherent in the concept of a mortgage that the borrower should be able to discharge the security. Consequently, the courts will not countenance arrangements that constitute a “clog” on a borrower’s equity of redemption. However, this has not put paid to creative methods of financing property acquisitions.
The litigation in Brighton and Hove City Council v Audus [2009] EWHC 340 (Ch); [2009] PLSCS 71 concerned a family arrangement designed to enable an elderly couple to exercise their right to buy their flat at a discount and to live in the flat, rent free, for the rest of their lives. Their nephew advanced the entirety of the purchase price and subsequently paid all the outgoings on the property. His investment was secured by two separate documents, both of which were described as legal charges. The first document secured the price paid for the flat. The second document secured the value of any capital appreciation in the flat. Both were registered against the title to the property.
It is inherent in the concept of a mortgage that the borrower should be able to discharge the security. Consequently, the courts will not countenance arrangements that constitute a “clog” on a borrower’s equity of redemption. However, this has not put paid to creative methods of financing property acquisitions.
The litigation in Brighton and Hove City Council v Audus [2009] EWHC 340 (Ch); [2009] PLSCS 71 concerned a family arrangement designed to enable an elderly couple to exercise their right to buy their flat at a discount and to live in the flat, rent free, for the rest of their lives. Their nephew advanced the entirety of the purchase price and subsequently paid all the outgoings on the property. His investment was secured by two separate documents, both of which were described as legal charges. The first document secured the price paid for the flat. The second document secured the value of any capital appreciation in the flat. Both were registered against the title to the property.
Following the death of her husband, the local authority took the aunt into residential care, and subsequently registered a charge against the property (which took effect as a third legal charge) under the Health and Social Services and Social Security Adjudications Act 1983 to cover the cost of her care. The local authority accepted that the first charge was valid, but challenged the validity of the second charge on the ground that it constituted a clog on the proprietor’s equity of redemption.
The High Court agreed that, if the transaction protected by the charges was indeed a security transaction, then the borrower’s right of redemption was illusory. However, it is an established principle that equity will look to the substance, rather than the form of, a transaction to decide whether the underlying transaction is in truth a security transaction: see Warnborough Ltd v Garmite Ltd [2003] EWCA Civ 1544.
The parties had structured the transaction as a security transaction to avoid a “disposal” that would have enabled the local authority to recover all or part of the discount allowed against the purchase price of the flat. However, the parties had agreed that the nephew would buy and own the flat, and that his rights would be postponed so that his uncle and aunt could live in the flat during their lives. Consequently, the transaction was not in substance a loan, or a security for a loan.
The judge dismissed the local authority’s claim, but obviously doubted the wisdom of documenting the transaction in this way, especially as there are other methods of recording arrangements like this that might have been more suitable. This case shows that practitioners would be well advised to steer clear of structuring transactions in such a way that it could be argued that there is a clog on the equity of the redemption. Contractual terms that prevent a mortgage from being redeemed are void, and the parties will therefore run the risk of expensive and lengthy litigation.
Allyson Colby is a property law consultant
