Dutton & Anor v Davis & Anor

Whether a transaction documented as a sale with a right to repurchase is a mortgage is determined by construing the operative terms as a whole. The court must study the language used to ascertain the substance of the transaction; there is no single decisive touchstone. Relevant surrounding circumstances may assist interpretation, but matters directed only to sham or undue influence do not alter construction. Financial pressure, continued occupation, an undervalue, payment of costs or stamp duty, and the source of drafting are not independently determinative. A tenancy and options to repurchase may form part of an outright sale, even where the options involve fees, rent conditions and a final expiry.

The appellants transferred Long Mead Farm to the respondents for £250,000. They remained in occupation under an assured short-hold tenancy and were granted two options to repurchase. They later sought to recover the property, asserting that the transaction was in substance a mortgage and that they therefore had an equitable right of redemption.

The Gloucester County Court rejected challenges based on undue influence and sham, and rejected the mortgage characterisation. The appeal concerned the true legal nature of the transaction on the proper construction of the transfer, tenancy and offer letter.

Appeal dismissed. Lord Justice Lloyd gave the judgment, with Lord Justices Thomas and Chadwick agreeing.

1. Equity protects a right of redemption where a transaction is in reality a loan secured by a conveyance. Since the Law of Property Act 1925, however, the legal form of a land mortgage does not generally depend on transfer of the freehold estate. The issue was therefore whether these documents, properly construed, constituted a sale or security.
2. Following Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148, there is no single touchstone for making that determination. The court must examine the operative provisions of the transaction as a whole and ascertain its substance from the language used. The internal route assumes that the parties intended to be bound by the written terms. The external route, such as proving a sham, concerns whether the document represents the parties’ agreement.
3. Surrounding circumstances relevant to interpretation may be considered, but matters directed only to undue influence or sham do not affect the internal construction. Financial pressure was neutral. The role of the solicitor and the provenance of the drafting had no bearing on construction. Continued occupation was consistent with either a mortgage or a tenancy pending repurchase. Payment of the purchaser’s costs and stamp duty was unusual but negotiable, and was not decisive.
4. The transfer, tenancy and option letter, read together, established an outright sale accompanied by limited opportunities to repurchase. The option fees, rent conditions, costs and express expiry of the second option did not convert the transfer into security. Any difficulty in determining how an option might operate if exercised did not alter the nature of the transaction. The approach was consistent with the language-focused reasoning discussed in McIntyre v Crossley Brothers Limited [1895] AC 457 and Lloyds & Scottish Finance Ltd v Cyril Lord Carpet Sales Limited [1992] BCLC 609.
5. The county court judge had referred to some subjective matters of limited relevance and had not expressly mentioned costs and stamp duty. Those matters did not lead him into legal error. He reached the correct conclusion for substantially the right reasons.

• Court of Appeal (Civil Division) — In [2006] EWCA Civ 694, dismissed the appeal.
• Gloucester County Court — His Honour Judge Harington rejected the undue influence, sham and mortgage arguments. That decision was appealed.