A mortgagor retains the right to redeem the mortgage in equity even if it is in default of its obligations under the mortgage and loses the contractual right to redeem.
In the decision of Sun North Investments Pty Ltd as trustee v Dale & Anor  QSC 44 the Supreme Court of Queensland provides a useful analysis of a mortgagor’s fundamental right of redemption.
The Borrower, Sun North Investments Pty Ltd, granted a call option to the lender under which the lender had the right to acquire certain shares owned by the borrower. This call option was entered into as part of a commercial arrangement for a loan of $500,000. The loan was not repaid on time due to difficulties experienced by the borrower following the global financial crisis. Therefore the lender exercised the call option. Following this, the loan was repaid in full five days later.
However, the lender maintained an entitlement to proceed with the purchase of the shares under the call option. At the time, the shares were worth about $5 million at an option purchase price under the deed of $2 million. Accordingly, it was extremely beneficial for the lender to exercise the call option.
The borrower argued that the option to purchase the shares was void as a ‘clog on the equity of redemption’. Alternatively, the borrower said that the court should refuse to enforce the option because it constituted a penalty giving rise to a windfall gain disproportionate to any likely loss flowing from the late payment of the loan (also, the loan had been repaid in full).
The lender argued that the option was a separate transaction from the loan agreement. And therefore it could not be considered a clog on the equity of redemption or a penalty. The lender further argued that the modern approach of Australian courts is to hold that collateral advantages like the option should not be read down in the absence of unconscionability.
What is a clog on the equity of redemption?
It is a fundamental principle of mortgage law that a mortgagor has a right to discharge the mortgage in payment of the debt or performance of the obligations for which security was given. The right of redemption can also arise under contract provided the mortgagor is not in default.
However, even if the mortgagor does not repay a loan on time and therefore loses the contractual right to redeem the mortgage, there remains an equitable right of redemption. This equity of redemption can be enforced despite a failure to redeem by the repayment date. The mortgagor has until the point when the mortgagee’s power of sale has been exercised. Or until a court has made an order for foreclosure. Generally speaking, conduct which hampers redemption after the contractual date for redemption has passed is not permitted. Instead equity will grant relief to the mortgagor by allowing redemption.
The Supreme Court found that the call option was void under the principles of equitable redemption discussed above.
The court did not accept that the mortgage and option agreements were independent transactions. Instead the Court assessed both as a matter of substance rather than form. In doing so, the court looked to the underlying nature of the transactions to determine whether they were part of the one transaction.
It was plain from the evidence that the parties had intended for both documents to be executed contemporaneously. Also, the fact that the loan was conditional upon the provision of the option supported the conclusion that the option deed was part of one all-encompassing transaction.
The Supreme Court followed traditional lines of case authority. And so the fundamental rule remains that equity will grant relief so as to allow redemption. This overrides any conduct that has the effect of hampering redemption after the contractual date for redemption has passed.
This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.