• In Jones v Morgan, the Court of Appeal affirmed the point of law that is in determining whether a right forms part of the mortgage transaction/ bargain, the courts will look to the entirety of the transaction, not just its form.

Facts of the case:

  • D sought financing to develop a piece of land.
  • He entered into an agreement with C for a loan and a mortgage over the land.
  • D provided assurances to C that C would obtain a share in the mortgaged land, however this was not contracted until 1997, through a refinancing agreement.
  • C then sought to enforce this option, and D argued that this option was a clog on the equity of redemption; he wouldn’t be able to redeem the mortgage if C owned a share in the land.

Issue in the case

  • The issue in the case was whether the agreement as to option to own a share in the land was a clog on the equity of redemption.
  • In order to answer the question, the courts needed to decide whether the contractual agreement in 1997 relating to the option to own a share in the land formed part of the original mortgage transaction. If it did, then it would be a clog on the equity of redemption.

Court of Appeal held:

  • The CA stated that it did form part of the original transaction upon an inspection of the entire substance of the agreement. Because of this, it was a clog on the equity of redemption.

Chadwick LJ:

  • [65] “The principle repeatedly affirmed in the authorities to which I have referred is that, upon redemption, the mortgagor’s estate is to be restored to him in the state in which it was when he parted with it as security. Applying the principle to the position as it is following the 1925 Act, the requirement is that, upon cesser of the mortgage term, the mortgagor’s freehold interest is unencumbered by any interest created as a term of the mortgage. It seems to me impossible to escape the conclusion that a stipulation, agreed as a term of the mortgage, that the mortgagee shall have a share or interest in the mortgaged property, is inconsistent with that requirement.”
  • [71] “In my view the principle which prevents a mortgagee from stipulating for an interest in the mortgaged property at the time of the mortgage does have application in the circumstances of the present case, notwithstanding that the stipulation was contained in the 1997 agreement rather than in the 1994 mortgage. There are two reasons which lead me to that conclusion. First, it seems to me artificial to regard the 1997 agreement as being, in substance, independent of the 1994 mortgage transaction…”
  • [72] “Second, the 1997 agreement constituted a variation of the contractual terms upon which the respondents were entitled to redeem the mortgaged property. Prior to that agreement, the position was that they were entitled to redeem the mortgage upon payment off of the whole of the principal and interest then secured. On redemption they would get back the whole of the mortgaged property free from any incumbrance created by or at the time of the mortgage. The effect of the 1997 agreement was that they were entitled to redeem part of the mortgaged property”