Equity of redemption

The equity of redemption refers to the right of a mortgagor to redeem his or her property once the debt secured by the mortgage has been discharged.

Overview

Historically, a mortgagor (the borrower) and a mortgagee (the lender) executed a conveyance of legal title to the property in favour of the mortgagee as security for the loan. If the loan was repaid, then the mortgagee would return the property; if the loan was not repaid, then the mortgagee would keep the property in satisfaction of the debt. The equity of redemption was the right to petition the courts of equity to compel the mortgagee to transfer the property back to the mortgagor once the secured obligation had been performed.[1] Today, most mortgages are granted by statutory charge rather than by a formal conveyance, although theoretically there is usually nothing to stop two parties from executing a mortgage in the more traditional manner.[2][3]

Traditionally, the courts have been astute to ensure that the mortgagee did not introduce any artificial stipulations into the contractual arrangements to impede a mortgagor's ability to satisfy obligations and reclaim the property. Such impediments are "clogs" on the equity of redemption, and the courts of equity were particularly astute[4] in striking down any provision which was, or in later cases, which may be, a clog.

Where collateral is pledged in prime brokerage transactions, it is common for the broker to rehypothecate the collateral. Concerns remained, however, that because the rehypothecation might theoretically mean that the lender could lose title to the collateral, and thereby possibly be unable to reconvey it to the primary customer, it was speculated that such rehypothecation is possibly unlawful.

The tide has for some years now turned against striking down every clause in a mortgage document that might conceivably impede the right to redeem.[5]

The equity of redemption is itself recognised as a separate species of property, and can be bought, sold or even itself mortgaged by the holder.

Historically the equity of redemption would naturally expire upon the mortgagor breaching the terms of repayment. However, in modern times, extinguishing the equity of redemption (and leaving the mortgagee with absolute title to the property) ordinarily requires a court order in most jurisdictions. For both legal and practical reasons, the use of foreclosure as a remedy has fallen into disuse.[6] Even where a mortgagee seeks an order for foreclosure from the courts, the courts will frequently order judicial sale of the property instead.

See also

Notes
  1. See Santley v Wilde [1899] 2 Ch 474
  2. Some countries have limited the grant of traditional mortgages by statute in some circumstances. For example, in England and Wales a mortgage of land may only be made by way of statutory charge or demise for a term of years absolute (a lease), see sections 85-86 of the Law of Property Act 1925
  3. and only by way of statutory charge in cases of registered land, see section 23 of the Land Registration Act 2002
  4. See Jones v Morgan [2001] EWCA Civ 995 at para 50.
  5. The tide began to turn in Biggs v Hoddinott [1898] 2 Ch 307, where it was held that, in a brewery mortgage case, a covenant to take beer from the mortgagee limited to the continuance of the security did not clog the equity of redemption, it being generally realised that an extreme response to perceived clogs undermined the commercial arrangements of the parties.
  6. Foreclosure used to be a mortgagee’s primary remedy, but "it is now rarely sought or granted." see Palk v Mortgage Services Funding plc [1993] Ch 330 at 336
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