Warnborough Ltd v Garmite Ltd [2003] EWCA Civ 1544

Key point

  • The court has to look at the substance of the agreement whether an option is part of the mortgage transaction

Facts

  • In 1996,
    • W sold land to G on credit, with W given a charge on the land
    • G gave W the first option to repurchase the land for the original sale price
  • In 1999,
    • W exercised the first option, but the repurchase was never completed
    • A new agreement was made, under which a second option to purchase the land was granted
  • In 2001 W exercised the second option, G disputed its right to do so

Held (Court of Appeal)

  • The second option was not void as a clog on equity of redemption
  • The option was part of the sale rather than the mortgage

Jonathan Parker LJ

When is an option a clog on equity of redemption?

  • It had been laid down in Samuel v Jarrah that an option to purchase mortgaged property are a clog and thus void but that it was obscure
  • The mere fact that contemporaneously with the grant of a mortgage over his property the mortgagor grants the mortgagee an option does not more than raise the question whether the rule against clogs applies
  • The court has to look at the substance of the transaction to inquire the true nature of the bargain, which requires examining all the circumstances including oral evidence
  • Where the option that is challenged as a ‘clog’ is granted against the background of a sale there would be a strong likelihood that the substance of the transaction would be held to be one of sale and purchase rather than one of mortgage

Present case

  • Based on the transaction documents, the transaction was sale and purchase rather than a mortgage
  • To describe the sale as incidental to the loan based on the transaction documents seems to turn the transaction completely on its head