Warnborough Ltd. v Garmite Ltd.

An option to purchase mortgaged property granted at the same time as security is not automatically a clog on the equity of redemption. The court must determine the substance and true nature of the transaction by examining all the circumstances, using oral evidence where necessary. A sale by the option grantee, as owner, to the grantor, with the price left outstanding on mortgage, strongly suggests a sale and purchase rather than a mortgage, but no absolute rule applies. The issue is therefore fact-sensitive. Bare transaction documents may be insufficient for summary judgment. The clog doctrine remains part of the law despite judicial criticism of its continued usefulness.

Warnborough sold leasehold properties to Garmite for £130,000, leaving the price outstanding under a legal charge. Garmite simultaneously granted Warnborough an option to repurchase. Warnborough later exercised that option, but the repurchase was not completed. A 1999 compromise agreement led to a second option and a supplemental charge, which Warnborough exercised in 2001. Warnborough sought specific performance.

Garmite amended its defence to contend that both options were clogs on the equity of redemption and applied for summary judgment under Part 24.2. Master Bowman dismissed the application, holding that the issue required full factual investigation. The deputy High Court judge allowed Garmite’s appeal and declared both options void. Warnborough brought a second appeal. The central issue was whether the options could be characterised as clogs from the transaction documents alone.

Appeal allowed. Lord Justice Jonathan Parker delivered the leading judgment, with Lord Justice Judge and Lord Justice Simon Brown agreeing.

1. The fact that an option to purchase is granted contemporaneously with a mortgage merely raises the clog question. It does not determine it. The court must examine the substance and true nature of the bargain, considering all the circumstances and using oral evidence if necessary. This approach was supported by Samuel v. Jarrah [1904] AC 323 and Kreglinger v. New Patagonia Meat and Cold Storage Co Ltd [1914] AC 25.
2. Where the option grantee originally owned the property and sold it to the grantor for a price left outstanding on mortgage, there is a strong likelihood that the transaction is one of sale and purchase rather than mortgage. That was the approach in Davies v. Chamberlain (1909) 26 TLR 138. It remained a provisional, fact-sensitive conclusion and no absolute rule could be laid down.
3. The deputy judge was right to say that the substance of the transaction had to be examined, but wrong to decide the issue solely from the transaction documents. The clog issue concerning the First Option could only be resolved at trial. The documents, considered alone, pointed prima facie towards sale and purchase.
4. The enforceability of the Second Option would probably depend on the enforceability of the First Option. If the First Option was enforceable, the Second Option, granted as part of a negotiated compromise, was likely to be enforceable. If not, there were strong arguments against the Second Option. Its alleged status as a clog also required trial.
5. The penalty argument in the Respondent’s Notice could not support summary judgment because it had not been raised below and, if arguable, would itself require trial consideration. The clog doctrine remained operative notwithstanding the observation in Jones v. Morgan [2001] EWCA Civ 995 (CA) that it should be excised.

The deputy judge’s order was set aside and Master Bowman’s order dismissing Garmite’s summary judgment application was restored.

1. Court of Appeal (Civil Division): allowed Warnborough’s second appeal and restored the order dismissing Garmite’s summary judgment application.
2. High Court, Chancery Division: on 22 January 2003, the deputy judge allowed Garmite’s appeal from Master Bowman and declared both options void.
3. Master Bowman: on 2 August 2002, dismissed Garmite’s application, holding that the clog issue required full factual investigation.