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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Warnborough Ltd. v Garmite Ltd. [2003] EWCA Civ 1544 (05 November 2003) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2003/1544.html Cite as: [2003] EWCA Civ 1544

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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT
CHANCERY DIVISION (Mr Nicholas Davidson QC
Sitting as a deputy High Court Judge)

		Royal Courts of Justice Strand, London, WC2A 2LL
		5-11-2003

Lord Justice Jonathan Parker :

INTRODUCTION

1. The issue on this appeal is whether an option to purchase real property is unenforceable on the ground that it is, in the archaic – and arcane – language of the old courts of Chancery, 'a clog on the equity of redemption' of the grantor of the option in circumstances where, at the same time as the grant of the option, the grantee sold the property to the grantor leaving the purchase price outstanding as a loan secured on the property. For present purposes, the expression 'clog on the equity of redemption' means an objectionable restriction on the rights of a borrower who has mortgaged his property as security for the debt. The issue arises in the context of an application for summary judgment made under Part 24.2 of the Civil Procedure Rules by Garmite Ltd ("Garmite") (the grantor/mortgagor and the defendant in the action) against Warnborough Ltd ("Warnborough") (the grantee/mortgagee and the claimant in the action).
2. The appellant in this court is Warnborough. It appeals, by way of a second appeal, against an order made on 22 January 2003 by Mr Nicholas Davidson QC, sitting as a deputy High Court Judge in the Chancery Division, allowing Garmite's appeal against an order made on 2 August 2002 by Master Bowman dismissing Garmite's application. I granted permission for a second appeal on 20 March 2003.
3. By its application, Garmite also sought summary judgment on a counterclaim brought by it under Part 20 of the Civil Procedure Rules, but the deputy judge refused that relief. There is no cross-appeal by Garmite against that refusal.
4. In the action, Warnborough seeks specific performance of a contract for the sale of two leasehold properties in Southampton, consequent on the exercise by Warnborough on 6 August 2001 of an option granted to it by Garmite to purchase the properties for £130,000. For reasons which will become apparent, this option has been referred to throughout as 'the Second Option', and I will so refer to it in this judgment. The two properties in question are 31 and 32 Canute Rd, and 157 Albert Road, but since they are registered at H.M Land Registry under a single title I will refer to them hereafter as "the Property". Garmite contends (among other things) that the Second Option is unenforceable since it constitutes a 'clog'.

THE FACTUAL BACKGROUND

5. The Second Option was a product of earlier dealings which had taken place between Warnborough and Garmite affecting the Property.
6. On 30 August 1996 Warnborough, the then registered proprietor of the Property, sold it to Garmite for £130,000. By agreement the entire purchase price was left outstanding, secured on the Property by a Legal Charge dated 30 August 1996 ("the Original Charge"). The Original Charge provided for repayment by monthly instalments consisting of principal and interest.
7. Also on 30 August 1996, Garmite granted Warnborough an option ("the First Option") to repurchase the Property for £130,000. The First Option was exercisable only if certain conditions were satisfied, one of which was that the principal sum currently outstanding under the Original Charge was not less than £65,000. The First Option gave Warnborough the right to set off the whole of the sum currently outstanding on the security of the Original Charge against its obligation to pay the purchase price of £130,000. In effect, therefore, leaving aside interest paid by Garmite under the Original Charge, on completion of the purchase consequent upon the exercise of the First Option the parties would be restored to their original positions. Warnborough would once again own the Property, and Garmite would have been repaid (in the form of the balance of the purchase price on the repurchase, after allowing for set off) the amount which it had paid towards the purchase price on the original purchase.
8. On 27 July 1999 Warnborough exercised the First Option. It is common ground that as at that date the conditions for its exercise were satisfied.
9. In the event, however, the repurchase was never completed. Instead, on 2 November 1999 Warnborough and Garmite entered into a written agreement ("the 1999 Agreement"), the substantial effect of which was to put the parties back in the position they were in before the First Option was exercised, albeit at a price payable by Garmite.
10. The 1999 Agreement recites that on Warnborough's exercise of the First Option Garmite became bound to sell and W bound to purchase the Property at the option price of £130,00. It goes on to provide for the assignment by Warnborough to Garmite of all Warnborough's rights under the First Option for a consideration consisting of (a) £15,000 (which Garmite could, at its election, either pay in cash or retain as a loan secured on the Property by a further Legal Charge); (b) a sum of £629.80 to cover Warnborough's legal costs of exercising the First Option; and (c) the grant by Garmite of the Second Option.
11. Completion of the 1999 Agreement took place forthwith. In the event, Garmite elected to retain the £15,000 as a loan, and it accordingly executed a further legal charge ("the Supplemental Charge"). The Supplemental Charge is dated 2 November 1999. The Second Option is also dated 2 November 1999. It is in the same terms as the First Option, save only that it varies the condition in the First Option referred to above by providing that in calculating whether the amount outstanding under the Original Charge is not less than £65,000 the sum secured by the Supplemental Charge shall be brought into account.
12. On 6 August 2001 Warnborough exercised the Second Option. Garmite disputed its entitlement to do so (not, at that stage, on grounds of 'clog'). On 29 October 2001 Warnborough commenced the present action.

THE PROCEDURAL BACKGROUND

13. By its Particulars of Claim Warnborough contends that it was entitled to exercise the Second Option and that Garmite is in breach of the contract for sale which resulted from that exercise. It seeks an order for specific performance of that contract, further or alternatively damages. By Garmite's Defence as originally served, the only pleaded defences to Warnborough's claim were (1) that Warnborough had repeatedly assured Garmite that all agreements between them were entered into on the basis that Warnborough would not enforce the payment obligations of Garmite under the Original Charge, the First Option or the Second Option, and that Garmite had relied on those assurances in making payments late; (2) that Warnborough, having allowed arrears of principal and interest to build up, had assured Garmite that it would take no further action without affording Garmite the opportunity to correct its default on payment by Garmite of some £6,500 towards the arrears, and that the stipulated sum had been duly paid; and (3) that Warnborough was estopped from relying on its exercise of the Second Option.
14. Annexed to the Particulars of Claim are copies of the Original Charge, the 1999 Agreement, the Supplemental Charge, the Second Option and the notices exercising the Second Option. For some reason a copy of the First Option is not annexed to the Particulars of Claim, but a copy of it has been included in the material before the court.
15. On 13 June 2002 Garmite issued an application notice seeking (1) permission to re-amend its Defence and to add a Part 20 claim, (2) the striking out of the action, alternatively summary judgment against Warnborough on its claim, and (3) summary judgment on Garmite's Part 20 claim.
16. By his order dated 24 July 2002 Master Bowman granted permission to make the proposed re-amendments and to add the Part 20 claim. He adjourned the remainder of the application.
17. By its Re-amended Defence Garmite contended for the first time that both the First Option and the Second Option were unenforceable as constituting 'clogs'. The Re-amended Defence also pleads (by paragraph 5D) that Warnborough misrepresented its right to exercise the First Option, and (by paragraph 5E) that in reliance on such misrepresentation, further or alternatively acting under a fundamental mutual mistake (i.e. that the First Option was enforceable), Garmite "was obliged (but not in circumstances amounting to duress)" to execute the Second Option and the Supplemental Charge. By paragraph 5G it is alleged that there was a total failure of consideration in relation to the Supplemental Charge, and/or that Warnborough was unjustly enriched. By its Part 20 Claim Garmite seeks restitutionary relief in the form of declarations that the First Option, the Second Option and the Supplemental Charge are void and of no effect and that the Original Charge continues to subsist. The Part 20 Claim is not material for present purposes, and I shall accordingly make no further reference to it.
18. The adjourned hearing took place before Master Bowman on 30 July 2002. The argument, both before the Master and before the judge, and also in this court, has focused almost exclusively on the 'clog' issue.
19. Master Bowman delivered judgment on 2 August 2002. He concluded that only after a full investigation of the facts at trial could the court conclude that either the First Option or the Second Option was unenforceable on the ground that it constituted a 'clog'. Accordingly by his order dated 2 August 2002 he dismissed the remainder of Garmite's application. He refused permission to appeal.
20. On 16 August 2002 Garmite applied to the High Court for permission to appeal. Permission was initially refused by Patten J on the papers, but on Garmite's renewed application at an oral hearing on 30 August 2002 Patten J granted permission.
21. Allowing Garmite's appeal, the deputy judge concluded that both the First Option and the Second Option were clearly 'clogs'. He accordingly declared that they were void and of no effect.
22. We were informed by counsel in the course of argument that, after the hearing before the Master but before the appeal hearing before the deputy judge, Warnborough served a Defence to Garmite's Part 20 claim. However, that Reply was not before the deputy judge, nor is it before us. We were also informed that prior to the appeal hearing before the deputy judge, and with the consent of Warnborough, Garmite further amended its Defence to include an allegation that it would be unconscionable to permit Warnborough to enforce the Second Option, on the basis that the Property has allegedly tripled in value partly as a consequence of works of refurbishment and improvement carried out by Garmite.
23. Lastly, so far as the procedural history is concerned, I should record that at the commencement of the appeal Mr Philip Galway-Cooper (who appears for Garmite) placed before us an undated Respondent's Notice inviting us to affirm the decision of the deputy judge on the basis that the Second Option was a 'clog', and (as a new point) that the First Option and the Second Option would constitute penalties if enforced.

THE EVIDENCE

24. Neither party has filed any witness statements. Thus, the evidence presently before the court on Garmite's application consists only of the Particulars of Claim (and the documents annexed to it) and the Re-amended Defence. The allegations in the Particulars of Claim and in the Re-amended Defence are duly verified by statements of truth as required by Part 22.1(a) of the Civil Procedure Rules.

THE MASTER'S JUDGMENT

25. In the course of his full and careful judgment, Master Bowman conducted a detailed review of the authorities relevant to the 'clog' issue, including the judgment of Lord Haldane LC in Kreglinger v. New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25. Then, after summarising the parties' submissions, he continued as follows (in paragraphs 30 to 35 of his judgment):

"30. I have dealt with the submissions of the parties and of the law in rather greater detail than I had either contemplated or thought reasonable in relation to an application under Part 3 and Part 24 of the CPR which occupied no more than two hours of court time, or possibly rather more. I have to consider primarily, under the jurisdiction of Part 24, whether I could possibly conclude that the claimant has no real prospect of succeeding in its claim. I have read portions from the judgment of Lord Haldane [in Kreglinger] with some care, because they demonstrate the sort of careful consideration of the facts, if necessary supported by oral evidence, before the court could conclude that this transaction is one of mortgage. There was no evidence in support of the application, and there was no evidence in reply.

31. As I have said, leave to make the amendments which have precipitated this application were made at the same time as the application. The claimant has not had the opportunity to plead to the amended document, and the court has not had the opportunity to consider precisely why, in carefully pleaded terms, it is asserted that there is a defence to the counterclaim, notwithstanding the claims. I have considered the submissions which I have briefly, and no doubt inadequately, summarised on behalf of the claimant. The sort of contentions which are made are not, in my view, appropriate for resolution on a summary judgment application such as this.

32. In those circumstances I do not think I can property entertain this application, and I shall accordingly dismiss it. I do so because I consider that it is only after a full investigation of the facts that the court could possibly reach the conclusion, in what was a commercial transaction, that unconscionable behaviour or a clog had been imposed.

33. The principle of the clog on the equity of redemption has been the subject of some consideration and I believe review, albeit without result, by the Law Commission. There is plainly a great deal of difference between what counsel for the defendant referred to as a common form mortgage (and he placed this transaction in that category) and a commercial transaction such as this which plainly arose initially from a contract of sale or contract for the assignment of the long leasehold interest in the property.

34. It would have been more appropriate, in my view, had the defendant bided his time, awaited the receipt of a pleading in response to the amended defence and Part 20 claim, and sought directions at the case management conference which would then have ensued, in relation to the proper, efficient and expeditious disposal of this issue. That might well have been accommodated by the hearing of [a] preliminary issue in relation at least to the clog point, but with proper relevant discovery on either side, and where appropriate, the exchange of witness statements. As matters stand at present, the court is quite simply not in position to reach any other conclusion than that, on the basis of the showing of the claimant so far, it has a real prospect of defending the counterclaim, whether in relation to the clog, misrepresentation or absence of consideration point.

35. In those circumstances I shall dismiss the application. ...."

THE DEPUTY JUDGE'S JUDGMENT

26. The Deputy Judge approached the 'clog' issue on the basis that (as he put it in paragraph 27 of his judgment) "the substance of the transaction needs to be looked at". Adopting that approach, he nevertheless concluded (in paragraph 33 of his judgment) that, with one exception, no further evidence was needed, since Warnborough's arguments on the 'clog' issue "do not depend on some factual investigation". The exception related to the circumstances in which the £15,000 payable by Garmite under the 1999 Agreement came to be left outstanding, secured by Supplemental Charge. However, the Deputy Judge considered (in paragraph 35 of his judgment) that the allegation in paragraph 5E of the Re-amended Defence to which I referred earlier (and which the Deputy Judge unfortunately misquoted), being verified by a statement of truth, should be "accepted and acted upon". Apparently overlooking the fact that, on the documentary material before him, the allegation was as yet unanswered on the pleadings, the deputy judge observed:

"There is nothing from the Claimant's side which gives a basis for supposing that this version of events is anything other than correct."

27. Having accepted the 'evidence' in paragraph 5E of the Re-amended Defence as to the circumstances in which the Supplemental Charge came to be executed, the deputy judge proceeded to address the 'clog' issue by reference merely to the transaction documents which I identified earlier.
28. Somewhat surprisingly (to my mind at least) the deputy judge turned first to the allegation that the Second Option constituted a 'clog'. He concluded (in paragraph 37 of his judgment) that it did, on the footing that, applying the doctrine as set out in the authorities, it was "repugnant to the mortgage". He then turned (in paragraph 39 of his judgment) to the First Option, saying simply:

"The second argument which was raised by the Defendant was that the first option was a clog on the equity of redemption. In my judgment, that step of the argument is a step which can be taken and accepted and [the first option] was [a] clog on the equity of redemption."

THE ARGUMENTS IN THIS COURT

29. We invited Mr Galway-Cooper to address us first.
30. As to the First Option, Mr Galway-Cooper submits that on 30 August 1996 the parties entered into three simultaneous transactions, viz. the sale of the Property by Warnborough to Garmite for £130,000, the provision of a loan of £130,000 by Warnborough to Garmite on the security of the Original Charge, and the purported grant of the First Option. He submits that the situation in the instant case is no different from a situation in which a third party mortgagee in possession of mortgaged property sells the property to a buyer on terms that the whole of the purchase price is to remain outstanding, secured on the property. He submits that in that case as in this, the sale is incidental to the loan.
31. He points out that both in his mortgagee in possession example and in the instant case the loan could have been obtained from a third party lender. Accordingly, he submits, there is no basis for disapplying the centuries old rule that an option agreement entered into at the same time as a mortgage is a clog on the equity of redemption and accordingly unenforceable. He asks rhetorically: Where should the line be drawn? Would the borrower's position be different if only part of the purchase price were financed by a loan?
32. Mr Galway-Cooper reminds us that if the First Option is unenforceable Warnborough is left not without remedy, since it can recover the balance of the original purchase price by enforcing the Original Charge: a step which it has at no stage sought to take.
33. He submits that the facts of the instant case are to be distinguished from the facts in Kreglinger, where a right of pre-emption granted to a mortgagee to purchase the mortgagor's products at market value was held not to constitute a 'clog'. He points out that in the instant case the price of £130,000 payable under the First Option represents (on the allegations in the Re-re-amended Defence) approximately one third of the current market value of the Property.
34. Mr Galway-Cooper also referred us to Law Commission Report 204 (Transfer of Land – Land Mortgages), published in November 1991, and to Law Commission Working Paper 99 (Land Mortgages), published in 1986, which refer to the 'clogs' rule and make recommendations designed to clarify and rationalise the law in that area. He relies in particular on the description of the 'clogs' rule in the Working Paper (paragraph 3.33) as "inflexible".
35. As to the Second Option, Mr Galway-Cooper submits firstly that if the First Option is unenforceable, then the Second Option, which derives from it, must similarly be unenforceable since Warnborough had no rights under the First Option on which the 1999 Agreement could bite. Alternatively, he submits that in such circumstances the Second Option must be voidable for mistake: the mistake being that (as evidenced by the recital in the 1999 Agreement to which I referred earlier: see paragraph 10 above) the parties entered into the 1999 Agreement in the belief that the First Option was enforceable. In any event, he submits, the Second Option is also a 'clog' for broadly the same reasons as apply to the First Option.
36. In the further alternative, Mr Galway-Cooper went so far as to invite us, notwithstanding that this is a second appeal and that issues of unconscionability and penalties were not before the Master or the Deputy Judge, to give summary judgment against Warnborough on the grounds raised in Garmite's Respondent's Notice (see paragraph 23 above).
37. Mr Paul Teverson (for Warnborough), in his written skeleton argument, accepts that a mortgagee cannot, as a term of the mortgage, stipulate for an option to purchase the mortgaged property. However, he submits that so far as the First Option is concerned it was a term of the bargain between Warnborough as vendor and Garmite as purchaser that the entire purchase price should be left outstanding secured on the Property, and that Warnborough should have an option to repurchase the Property if certain specified conditions were met. He submits that it is of the greatest significance that Warnborough was selling its own property, and that the deputy judge appears to have attached no weight to this factor.
38. He submits, relying on Kreglinger, that the correct characterisation of the transaction is critical; and that, in the words of Lord Haldane LC in that case (quoted in paragraph 54 below), the transaction in the instant case cannot be characterised as "one of mortgage simply".
39. Mr Teverson also relies on Davies v. Chamberlain (1909) 26 TLR 138 as an authority on facts similar in all material respects to the facts of the instant case where the 'clog' rule was held not to apply.
40. As to the Second Option, Mr Teverson submits that the 1999 Agreement plainly represented a compromise between Warnborough and Garmite as to their respective rights and obligations consequent upon Warnborough having exercised the First Option. Setting the Second Option in that context, he submits that it is wrong to characterise the 1999 Agreement as in substance a transaction of mortgage.
41. In any event, Mr Teverson submits, the deputy judge erred in principle in giving summary judgment in favour of Garmite, for the reasons which the Master gave when dismissing Garmite's application.

THE RELEVANT AUTHORITIES

42. As long ago as the beginning of the last century, the origins and rationale of the principle that an option to purchase mortgaged property granted at the same time as the mortgage constitutes a 'clog' on the borrower's equity of redemption and is accordingly unenforceable were already regarded by the House of Lords as obscure.
43. In Samuel v. Jarrah [1904] AC 323 a company borrowed money on the security of its debenture stock. At the same time, it granted the lender an option to purchase the debenture stock at 40 per cent within 12 months. The House of Lords, affirming the decision of Kekewich J at first instance and of the Court of Appeal, held that the option was void on the ground that it was a 'clog'.
44. In a short judgment, the Earl of Halsbury LC said this (at p.325):

"My Lords, I regret that the state of the authorities leaves me no alternative other than to affirm the decision of Kekewich J and the Court of Appeal. A perfectly fair bargain made between two parties to it, each of whom was quite sensible of what they were doing, is not to be performed because at the same time a mortgage arrangement was made between them. If a day had intervened between the two parts of the arrangement, the part of the bargain which the appellant claims to be performed would have been perfectly good and capable of being enforced; but a line of authorities going back for more than a century has decided that such an arrangement as that which was here arrived at is contrary to a principle of equity, the sense or reason of which I am not able to appreciate, and very reluctantly I am compelled to acquiesce in the judgments appealed from." (Emphasis supplied.)

45. In the same case, Lord Macnaghten said (at p.326):

"In the Court of Appeal the question was treated as governed by the principle .... that on redemption the mortgagor is entitled to have the thing mortgaged restored to him unaffected by any condition or stipulation which formed part of the mortgage transaction. That principle is, I think, perfectly sound. But, in my opinion, the question here depends rather upon the rule that a mortgagee is not allowed at the time of the loan to enter into a contract for the purchase of the mortgaged property.

The latter rule is, I think, founded on sentiment rather than on principle. It seems to have had its origin in the desire of the Court of Chancery to protect embarrassed landowners from imposition and oppression. And it was invented, I should suppose, in order to obviate the necessity of inquiry and investigation in cases where suspicion may be probable and proof difficult."

46. Lord Macnaghten went on to quote from the judgment of Lord Henley in Vernon v. Bethell (1761) 2 Eden 113, where Lord Henley said this:

"And therefore I take it to be an established rule that a mortgagee can never provide at the time of making the loan for any event or condition on which the equity of redemption shall be discharged and the conveyance absolute. And there is great reason and justice in this rule, for necessitous men are not, truly speaking, free men, but to answer a present exigency will submit to any term that the crafty may impose upon them".

47. Lord Macnaghten continued:

"This doctrine, described by Lord Henley as an established rule nearly 150 years ago, has never, so far as I can discover, been departed from since or questioned in any reported case. It is, I believe, universally accepted by text-writers of authority. Speaking for myself, I should not be sorry if your Lordships could see your way to modify it so as to prevent its being used as a means of evading a fair bargain come to between persons dealing at arms' length and negotiating on equal terms. The directors of a trading company in search of financial assistance are certainly in a very different position from that of an impecunious landowner in the toils of a craft money-lender. At the same time, I quite feel the difficulty of interfering with any rule that has prevailed so long, and I am not prepared to differ from the conclusion at which the Court of Appeal has arrived."

48. Lord Lindley, after reciting the terms of the agreement between the parties (which included the making of the loan and the granting of the option) continued as follows (at p.328):

"The first question is, What is the true nature of this agreement? Is it a mortgage with an option to purchase, or is it a conditional sale? Or is it an agreement giving [the claimant] an option to hold the debenture stock as a mortgage or as a purchase? It appears to me to be clearly a mortgage with an option to purchase. A loan of £5,000 on security was what the [defendant] wanted, and what [the claimant] agreed to let the [defendant] have on terms. They were not bargaining for anything else. .... The transaction was in my opinion a mortgage, plus, amongst other things, an option to purchase, which if exercised by the mortgagee would put an end to the mortgagor's right to redeem – i.e. it would prevent him getting back his mortgaged property."

49. Later in his judgment, after referring to earlier authorities, Lord Lindley said (at p.329):

"But these decisions .... emphatically recognise the old doctrine, "Once a mortgage always a mortgage," which is too well settled to be open to controversy. .... It applies to all mortgage transactions. The doctrine "Once a mortgage always a mortgage means that no contract between a mortgagor and a mortgagee made at the time of the mortgage and as part of the mortgage transaction, or, in other words, as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security. Any bargain which has that effect is invalid, and is inconsistent with the transaction being a mortgage." (Emphasis supplied.)

50. The following comments can, I think, fairly be made on the above extracts from the judgments of their Lordships in Samuel v. Jarrah. In the first place, none of their Lordships expressed any enthusiasm for the rule, at least in its application to an option to purchase entered into contemporaneously with a mortgage; and Lords Halsbury and Macnaghten viewed it with positive distaste, in so far as it operated to strike down a fair commercial bargain freely negotiated on equal terms between parties who knew what they were doing. Secondly, both Lord Macnaghten and Lord Lindley regarded the relevant question as being whether or not the option fell to be characterised as a term of the loan: i.e. in the words of Lord Lindley, "What is the true nature of [the] agreement?" Thirdly, both their Lordships treated that question as primarily one of fact.
51. In Davies v. Chamberlain, decided in 1909, there was an agreement for the sale of land which the parties considered to be ripe for profitable working. It was agreed that part of the purchase price would be left outstanding for a period of five years. It was further agreed that the vendor would have the option of contributing one third of the capital of any company which the parties might form for the working of the land, and that in the event of the purchaser failing to grant that option within two years after completion of the sale the purchaser would pay the vendor an additional £5,000. The purchase was completed and a company was formed for the purpose of working the land. However, the purchaser failed to give the vendor an opportunity to contribute to its capital. The vendor claimed the additional £5,000 under the agreement. The purchaser contended that the option term constituted a 'clog' and was accordingly unenforceable, and hence that he was not liable to pay the additional £5000.
52. The Court of Appeal, affirming the decision of Pickford J at first instance, held that the option term was not a 'clog' on the ground that in substance it formed part of the agreement to purchase. In a short judgment, with which Fletcher Moulton and Farwell LJJ agreed, Cozens-Hardy MR said (and I quote from the report at p.139):

".... that he had had to consider more than once the question of clogging the equity of redemption, but that doctrine entirely depended on its being a bargain by the mortgagee in his relation as mortgagee towards the mortgagor, and it had nothing to do with a bargain which a vendor made in dealing with his own property. .... On the agreement it was impossible to say that this bargain to pay £5,000 was a term of the mortgage." (Emphasis supplied.)

53. Davies v. Chamberlain is thus an example of a case in which, on an examination of the transaction, it was held that the true nature of the agreement was that of sale and purchase, and that the option was not to be characterised as a term of the mortgage.
54. The next relevant authority is Kreglinger, the facts of which I summarised earlier (see paragraph 33 above). In that case, Viscount Haldane LC (at p.35) identified the origin of the jurisdiction as being "merely a special application of a more general power to relieve against penalties and to mould them into mere securities". He continued:

"My Lords, this was the origin of the jurisdiction which we are now considering, and it is important to bear that origin in mind. For the end to accomplish which the jurisdiction has evolved ought to govern and limit its exercise by equity judges. That end has always been to ascertain, by parol evidence if need be, the real nature and substance of the transaction, and if it turned out to be in truth one of mortgage simply, to place it on that footing. It was, in ordinary cases, only where there was conduct which the Court of Chancery regarded as unconscientious that it interfered with freedom of contract. .... The equity judges looked, not at what was technically the form, but at what was really the substance of transactions, and confined the application of their rules to cases in which they thought that in its substance the transaction was oppressive." (Emphasis supplied.)

55. Later in his judgment Lord Haldane returned to this theme, saying (at pp.36-40):

"The principle was thus in early days limited in its application to the accomplishment of the end which was held to justify interference of equity with freedom of contract. It did not go further. .... [I]t did not apply to cases which were only apparently or technically within it but in reality something more than cases of mortgage. .... [I]t is inconsistent with the objects for which they were established that these rules should crystallize into technical language so rigid that the letter can defeat the underlying spirit and purpose. Their application must correspond with the practical necessities of the time. .... [T]he question in the present case is whether the right to redeem has been interfered with. And this must ... depend on the answer to a question which is primarily one of fact. What was the true character of the transaction? .... The question is not one of form but of substance, and it can be answered in each case only by looking at all the circumstances, and not by mere reliance on some abstract principle, or upon the dicta which have fallen obiter from judges in other and different cases. .... For each case forms a real precedent only in so far as it affirms a principle, the relevancy of which in other cases turns on the true character of the particular transaction, and to that extent on circumstances. .... What is vital in the appeal now under consideration is to classify accurately the transaction between the parties." (Emphasis supplied.)

56. I should perhaps record that in concluding that the stipulation for the option of pre-emption in Kreglinger did not form part of the mortgage transaction, Lord Haldane laid considerable emphasis on the fact that the security in question was a floating charge, a factor which is not, of course, present in the instant case.
57. Lord Mersey, in the course of his judgment (at p.46), famously compared the rule with:

".... an unruly dog, which, if not securely chained to its own kennel, is prone to wander into places where it ought not to be."

58. He concluded that to introduce the rule into the case:

".... would give effect to no equity and would defeat justice."

59. Lord Parker of Waddington began his judgment by recording that the defendant respondents had been unable to state any intelligible principle underlying the alleged equity. He regarded it as "somewhat startling" that:

".... the court should be asked in the exercise of its equitable jurisdiction to assist in so inequitable a proceeding as the repudiation of a fair and reasonable bargain ..."

60. Lord Parker continued (at p.47):

"[E]quity has always looked to the real intention of the parties, to be gathered not only from the terms of the particular instrument but from all the circumstances of the transaction, and has always admitted parol evidence in cases where the real intention was in doubt." (Emphasis supplied.)

61. Later in his judgment, echoing Lords Macnaghten and Lindley in Samuel v Jarrah, Lord Parker stated the rule in the following terms (at p.48):

"The equity which arises on failure to exercise the contractual right [of redemption] cannot be fettered or clogged by any stipulation contained in the mortgage or entered into as part of the mortgage transaction."

62. After pointing out that in mortgages in common form an option to purchase is inconsistent with and repugnant to the right to redeem on payment of the secured debt, Lord Parker contrasted that situation with one where A grants B an option for one year to purchase a property at a specified price, and in consideration B makes an interest-free loan to A, secured on the property and repayable at the expiration or earlier exercise of the option, saying (at p52):

"I cannot myself see that there is any inconsistency or repugnancy between the provisions of this perfectly simple and straightforward transaction."

63. Referring to the maxims 'Once a mortgage always a mortgage', and 'A mortgage cannot be made irredeemable', Lord Parker said (at p.53):

"Such maxims, however convenient, afford little assistance where the Court has to deal with a new or doubtful case. They obviously beg the question, always of great importance, whether the particular transaction which the court has to consider is, in fact, a mortgage or not, and if they be acted on without a careful consideration of the equitable considerations on which they are based, can only, like Bacon's idols of the market place, lead to misconception and error."

64. (For the benefit of those who, like myself, can boast only a passing acquaintance with the works of Francis Bacon, it may be helpful to explain that in using the expression 'Idols of the Market Place' Bacon was referring to fallacies which result from a confusing use of words or descriptions.)
65. At p.60 of his judgment, referring to Samuel v. Jarrah, Lord Parker said this:

"As I have already said, I think the rule depends on the inconsistency or repugnancy involved in any such provision. If once you come to the conclusion that the parties intended that the property should be reconveyed on payment off of the moneys secured any provision which would prevent this must be rejected as inconsistent with and repugnant to the true intention. But, on the other hand, if you once come to the conclusion that this was not the real intention of the parties, then the transaction is not one of mortgage at all."

66. Lord Parker continued:

"My Lords, after the most careful consideration of the authorities I think it is open to this House to hold, and I invite your Lordships to hold, that there is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of the loan or otherwise, from stipulating for any collateral advantage, provided that such collateral advantage is not either (1) unfair and unconscionable, (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."

67. Lord Parker concluded that the option in question did not fall within any of those categories and was accordingly enforceable.
68. Lord Atkinson agreed with Lords Haldane and Parker.
69. Thus, in Kreglinger their Lordships adopted the same approach as that of Lords Macnaghten and Lindley in Samuel v. Jarrah in addressing the question whether the relevant transaction was in substance one of mortgage, and in answering that question by reference to the parties' intentions as gathered from all the circumstances.
70. In Lewis v. Frank Love Ltd [1961] 1 All ER 446, Plowman J reviewed the authorities and held that the transaction in question in that case was in substance a mortgage. He accordingly held that the option was unenforceable.
71. The final authority I should mention is Jones v. Morgan [2001] EWCA Civ 995 (CA). I mention it only to record the observation of Lord Phillips MR (in paragraph 86) that:

".... the doctrine of a clog on the equity of redemption is, so it seems to me, an appendix to our law which no longer serves a useful purpose and would be better excised."

CONCLUSIONS

72. In the light of the authorities to which I have referred, it has to be accepted that the "unruly dog" is still alive (although one might perhaps reasonably expect its venerable age to inhibit it from straying too far or too often from its kennel); and that however desirable an appendectomy might be thought to be, no such relieving operation has as yet been carried out. Indeed, Mr Teverson did not seek to contend otherwise.
73. That said, it is in my judgment glaringly clear from the authorities that the mere fact that, contemporaneously with the grant of a mortgage over his property, the mortgagor grants the mortgagee an option to purchase the property does no more than raise the question whether the rule against 'clogs' applies: it does not begin to answer that question. As has been said over and over again in the authorities, in order to answer that question the court has to look at the 'substance' of the transaction in question: in other words, to inquire as to the true nature of the bargain which the parties have made. To do that, the court examines all the circumstances, with the assistance of oral evidence if necessary.
74. Against that background of authority, I return to the instant case.
75. In relation to the First Option, Garmite invites the court to conclude, by reference only to the bare transaction documents, that if the action went to trial the court would be bound to conclude that the First Option is a 'clog'. With all respect to the deputy judge, that seems to me to be an invitation which the court cannot possibly accept, for the reasons expressed so cogently by the Master in his judgment. Indeed, as I ventured to suggest in argument, it seems to me that if any party were in a position to seek to summary judgment by reference only to the transaction documents it would be Warnborough and not Garmite.
76. Although it would clearly not be appropriate to attempt to lay down any absolute rule, it does seem to me that where the option to purchase which is sought to be challenged as a 'clog' is granted against the background of a sale of the property by the grantee of the option, as owner of the property, to the grantor for a price which is to be left outstanding on mortgage, there must be a very strong likelihood that, on an examination of all the circumstances, the court will conclude, as it did in Davies v. Chamberlain, that the substance of the transaction is one of sale and purchase and not one of mortgage. At all events, if one is limited to a consideration of only the bare transaction documents (as we have been) that seems to me to be the provisional conclusion to which they point. On the face of the transaction documents (and leaving aside any other factor) to describe the sale as 'incidental' to the loan seems to me, with respect to Mr Galway-Cooper, to turn the transaction completely on its head.
77. Nor do I derive any assistance from Mr Galway-Cooper's suggested analogy with a sale by a vendor as mortgagee, where the sale price is left outstanding on mortgage. That would be a different case; and if one thing is clear on the authorities it is that each case must turn on its own facts. The question to be asked in each case is: What was the true nature of the transaction?
78. Equally, I do not find Mr Galway-Cooper's reference to the Law Commission papers helpful. As to the description of the 'clogs' rule as "inflexible", even if it be the case (and it is not necessary to decide the point) that there is no inherent discretion in the courts to disapply the rule where the circumstances of a particular case are such as to attract its application, the first step in each case is to determine whether those circumstances exist.
79. On the authorities, the deputy judge was plainly right to approach the 'clog' issue on the footing that "the substance of the transaction needs to be looked at" (see paragraph 27 of his judgment). However he was in my judgment plainly wrong to conclude that he could determine the substance of the transaction by looking only at the transaction documents. Indeed, as I have said, the transaction documents, considered on their own, seem to me to point, albeit prima facie, to the opposite conclusion to that which the deputy judge reached. Plainly the 'clog' issue in relation to the First Option is one which can only be resolved at trial.
80. As to the Second Option, it seems to me that its enforceability or otherwise will in all probability depend on whether the First Option was itself enforceable. If the First Option was enforceable (as the parties clearly thought when they entered into the 1999 Agreement), then the likelihood must be that the Second Option, which was granted as part of a compromise negotiated by the parties arising out of Warnborough's exercise of the First Option, will similarly be enforceable. If, on the other hand, the First Option was for any reason unenforceable, then I can see strong arguments for saying that the Second Option is unenforceable too.
81. As to whether the Second Option was itself a 'clog', I repeat what I have said about the First Option. This is an issue which cannot possibly be resolved on a summary judgment application.
82. Finally, I have no hesitation in rejecting Mr Galway-Cooper's application for summary judgment on the grounds set out in the Respondent's Notice. In the first place, the 'penalty' issue was not raised below. In the second place, if there is any substance in the issue it will have to go to trial.
83. I would therefore allow Warnborough's appeal and restore the Master's order dismissing Garmites's application.

Lord Justice Judge:

84. I agree.

Lord Justice Simon Brown:

85. I also agree.