Jones v Morgan & Anor

A mortgagee cannot, as a term of a mortgage transaction, obtain a proprietary share or purchase right which prevents the mortgagor recovering the property unencumbered on redemption. The court must consider the substance of the arrangements. A stipulation made after the original mortgage may still be an invalid clog if it is a variation, rearrangement or refinancing of that mortgage, rather than a genuinely separate and independent commercial bargain.

Relief for an unconscionable bargain requires morally culpable exploitation of a serious disadvantage. Economic duress requires both practical compulsion and illegitimate pressure; ordinary commercial pressure is insufficient.

The appellant had lent money to the respondents on the security of a 1994 legal charge over West Hall Farm. In 1997, the parties agreed that the appellant would release farmland from the charge so that it could be sold. The respondents also agreed, in clause 2, to transfer to him a one-half interest in the retained property.

The High Court dismissed the appellant's claim for specific performance and set aside clause 2 as a harsh and unconscionable bargain. The judge rejected duress and rejected the argument that clause 2 was a clog on the equity of redemption. The appellant appealed. The respondents relied additionally on duress and, with permission, on the clog point.

The central issue was whether clause 2 was unenforceable because it formed part, in substance, of the mortgage transaction.

1. Appeal dismissed by a majority. Chadwick LJ, with whom Lord Phillips MR agreed on the decisive issue, held that clause 2 was an unenforceable clog on the equity of redemption. Pill LJ dissented on that issue and would have allowed the appeal.

2. The court rejected the respondents’ unconscionability defence. Relief requires a serious disadvantage, morally culpable exploitation by the stronger party, and an oppressive transaction. There was no evidence that the appellant appreciated an error by the respondents’ solicitor when the draft agreement was altered. Nor could the court infer that the respondents lacked appropriate legal advice. The bargain may have been improvident, but this did not establish morally reprehensible conduct.

3. The court also rejected economic duress. Duress requires coercion of the will and illegitimate pressure. The respondents had practical alternatives, including sale of the property, and there was no evidential basis for treating the appellant’s notice as pressure designed to procure the transfer.

4. Applying Kreglinger, a mortgagee cannot, as a term of a mortgage, obtain an interest in the mortgaged property which survives redemption and prevents the mortgagor recovering the property in its former unencumbered state. The court must determine whether the arrangement is in substance a mortgage transaction. Under the Law of Property Act 1925, the 1994 deed was a legal mortgage in substance equivalent to a mortgage by demise.

5. Clause 2 was not saved merely because it appeared in a 1997 agreement. It implemented the 1994 understanding that the appellant would obtain a share in the development and varied the redemption arrangements by splitting the security between the sold farmland and retained property. In substance it was a refinancing or rearrangement of the mortgage, not an independent collateral bargain. The clause was therefore repugnant to the mortgage transaction and unenforceable. No order was made as to costs.

• Court of Appeal (Civil Division) — Appeal dismissed by a majority: Chadwick LJ and Lord Phillips MR held clause 2 unenforceable as a clog on the equity of redemption; Pill LJ dissented. [2001] EWCA Civ 995
• High Court, Chancery Division, Cardiff District Registry — On 9 March 2000, His Honour Judge Moseley QC dismissed the claim for specific performance and set aside clause 2 as a harsh and unconscionable bargain. The judge rejected the defences of duress and clogging of the equity of redemption.