Brighton & Hove City Council v Audus

Whether an arrangement is a mortgage depends on its legal substance, not merely the form of the documents or its economic purpose. In assessing a composite transaction, the court must consider the arrangement as a whole, including binding oral terms and any provision alleged to be repugnant to redemption.

The equitable rules protecting the equity of redemption apply only where the transaction is, in substance, a mortgage or security transaction. A transaction may include genuine charges yet be something more complex, such as an acquisition of ownership subject to the former owners’ right to occupy the property for life. Where the mortgage rules do not apply, a collateral provision securing the financier’s entitlement to capital appreciation is not invalid as a clog on redemption.

The Council sought declarations that a supplemental deed executed in 1988 by George and Cecily Bull in favour of Peter Audus was void insofar as it charged their leasehold flat, together with rectification of the register. The Council had later registered a statutory charge under section 22 of the Health and Social Services and Social Security Adjudications Act 1983 in respect of Mrs Bull’s care costs.

Mr Audus had provided the purchase price for the Bulls’ right-to-buy lease. The documents described the arrangement as two legal charges securing repayment of the purchase money and an increase in the flat’s value. Mr Audus contended that the true arrangement gave him ownership, subject to the Bulls’ right to live in the flat for life and his obligation to meet specified outgoings. The central issues were the true substance of the composite arrangement, the application of the equitable rules concerning clogs on redemption, and the priority of the parties’ rights.

1. Disposition. The Council’s action was dismissed. The Court declined to declare the supplemental deed void or to order rectification. The decision did not bind Mrs Bull, who was not a party.
2. The court accepted the evidence that the parties’ oral arrangement did not involve a loan or an obligation on the Bulls to repay the purchase money. Mr Audus was to acquire the flat, subject to the Bulls’ right to occupy it for life and, if he died first, to leave the flat to them.
3. Applying the internal route identified in Welsh Development Agency v Export Finance Co Limited [1992] BCC 270, the court considered both the written documents and the binding oral terms. The substance of the composite transaction was wider than a security transaction. It was an arrangement under which Mr Audus acquired ownership subject to the Bulls’ life interests.
4. The principle in Warnborough Limited v Garmite Limited [2003] EWCA Civ 1544 was binding and applied. The transaction had to be assessed as a whole, including the provision said to be repugnant to redemption. Only if the composite transaction was in substance a mortgage would the court examine whether that provision was invalid as a clog on redemption.
5. The equitable rules stated in Kreglinger v New Patagonia Meat and Cold Storage Company Limited [1914] AC 25 therefore did not apply. The Council could not disregard Mr Audus’s rights under the supplemental deed. Those rights had priority over the Council’s statutory charge, which charged Mrs Bull’s interest rather than the land generally.
6. Obiter, if the arrangement had been a security transaction, the supplemental deed would have been repugnant to the right to redeem, or would have rendered redemption illusory, applying Fairclough v Swan Brewery Co Ltd [1912] AC 565. The judge would not have found the provision unconscionable on the evidence, but would have been minded to recognise a proprietary estoppel if the deed had been void.