• In the case of Kreglinger v New Patagonia Meat [1914] AC 25, it was established that the collateral advantage of a pre-emption right can continue to operate once a debt has been repaid. This is as long as it is not unreasonable, it does not act as a penalty clogging equity of redemption, and is not repugnant to the redemption right.

Facts of Kreglinger v New Patagonia Meat [1914] AC 25

  • A loan was secured as a floating charge by the Kreglinger, a firm of woolbrokers, over meat preservation company New Patagonia Meat
  • Under the terms of this mortgage, the mortgagee had the right of first refusal on sheepskin as the mortgagor had promised to sell to no one by the lender for 5 years
  • This was regardless of when the loan had been repaid
  • The loan had been paid off, and the lenders exercised their option of pre-emption without regard of the loan repayment

Issues in Kreglinger v New Patagonia Meat [1914] AC 25

  • Did the repayment of the loan affect the lender’s pre-emption right to first refusal of the sheepskin products?

Held by the House of Lords

  • Court of Appeal decision reversed. The pre-emption right (the option to purchase) was independent of the mortgage, and therefore held to be a valid contractual right.

Lord Chancellor Viscount Haldane

Looking to the past case of Bradley v Carritt [1903], Viscount Haldane LC did not believe it to “be taken as authoritatively laying down that the mere circumstance that after redemption the property redeemed may not, as the result of some bargain made at the time of the mortgage, be in the same condition as it was before that time, is conclusive against the validity of that bargain.” [42]

  • Speaking further on the previous decision, Viscount Haldane LC agreed with dissenting Lord Lindley whose language suggested “to treat the application of such a rule as a question in which the Courts must not lose sight of the dominating principle underlying the reasons which originally influenced the terms of the rule, reasons which have, in certain cases, become modified as public policy has changed.” [44]

Lord Parker

There is no rule in equity that allows a mortgage to preclude a pre-emption right, “provided such collateral advantage is not either (1.) unfair and unconscionable, or (2.) in the nature of a penalty clogging the equity of redemption, or (3.) inconsistent with or repugnant to the contractual and equitable right to redeem.” [61]

Looking at the facts, Lord Parker was unconvinced the terms agreed to by the parties, in respect to the sheepskin, were intended to be within the mortgage agreement:

  • “The only possible way of deciding whether a transaction is a mortgage within any such rule or maxim is by reference to the intention of the parties. It never was intended by the parties that if the defendant company exercised their right to pay off the loan they should get rid of the option.” [61]