Kreglinger v New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25

A firm of woolbrokers advanced money to a meat company secured by a floating charge. The commercial arrangements also gave the lenders a right of first refusal over sheepskins for five years. That period was intended to continue even if the loan was repaid earlier. After repayment, the borrower argued that the lenders’ continued purchasing advantage was incompatible with the equity of redemption. The dispute concerned whether the supply arrangement was an impermissible clog attached to the security or a valid collateral commercial benefit which could survive discharge of the debt.

Did repayment of the secured loan extinguish the lender’s continuing pre-emption right, or was that commercial advantage compatible with the borrower’s right to redeem?

The House of Lords upheld the collateral purchasing right. Repayment of the loan did not necessarily terminate an independent commercial advantage which the parties intended to continue for its agreed period. The court considered whether the arrangement was unfair or unconscionable, operated as a penalty or clog, or was inconsistent with the right to redeem. The sheepskin arrangement was not invalid merely because it had been negotiated alongside the secured advance. The decision therefore rejected a mechanical rule against all post-redemption benefits while preserving scrutiny of their substance. It did not permit a lender to retain part of the mortgaged property itself whenever the document called that a collateral benefit.

A collateral commercial advantage may survive repayment if it is not unconscionable, penal or inconsistent with redemption. Its connection with the mortgage is not alone fatal; the court must examine the bargain’s substance and effect on recovery of the security.

Kreglinger distinguishes a permissible ongoing commercial arrangement from a term depriving the borrower of redeemable ownership. Compare options over the secured asset in Jones v Morgan and Lewis v Love. The fact that a commercial benefit survives repayment does not itself establish an invalid clog. Equally, the parties’ agreement cannot validate a term genuinely inconsistent with redemption. An answer should examine the collateral advantage’s content and effect rather than apply a rule based solely on its duration.