A mortgage is a conveyance of land as security for
payment of debt1,
in other words, a loan from the mortgagee (lender) secured by property from the
mortgagor (borrower). A commercial mortgagor is one who secures a loan for
business purposes. Mortgage terms refer to the provisions within a contract
that both parties are expected to adhere to. It could be argued that the law
fails to adequately protect the commercial mortgagor from unfair mortgage
terms, however this depends on what ‘unfair’ is viewed as in regard to
commercial mortgagors. This essay will consider current protections provided
for a commercial mortgagor by law and whether these satisfy the standard of ‘fair’.
Predominately, the mortgagor has 2 main rights which
protect him/her from ‘unfair’ terms. One, contractual right to redeem and, two,
equity of redemption. Equity of redemption is the umbrella term for right to recognise
an equitable right to redeem, prevention or postponement of redemption,
opposing unconscionable terms and collateral advantage terms. The ones which
specifically provide more protection for commercial mortgagors are opposing
collateral advantage terms and unconscionable terms.
In the commercial context, collateral advantage means
in return for the loan the lender will want the mortgage over the property as
well as the borrower to buy their products; known as solus tie.
The long-standing doctrine, before Kreglinger v New Pantagonia2,
was that all collateral advantage terms which favour the mortgagee were invalid
if they continued after the mortgage ended. For instance, in Biggs v Hoddinott the collateral
advantage ended before the mortgage did so the term was not struck out. In
contrast, in Noakes v Rice the term
was deemed as a ‘clog on the equity of redemption’ and held the wool broker
should be free from the ‘tie’, as it continued after the mortgage was repaid.
allows collateral advantage terms to continue after redemption, as long as
they do not go against one of 3 conditions: one, unfair and unconscionable; or
two, in the nature of a penalty clogging the equity of redemption; or three, inconsistent
with or repugnant to the contractual and equitable right to redeem3.
Arguably, this has significantly weakened equity of
redemption. However, this does not mean it is harsh and fails to adequately protect
the commercial mortgagor from unfair terms, as it simply upholds the
contractual obligations freely agreed upon by both parties. To call a normal collateral agreement
unconscionable ‘would shock any business man’ according to Lindley LJ4.
Furthermore, there are other bases on which unfair collateral
advantage terms may be struck out, such as ones imposing unreasonable
restrictions on trade. For example, Esso Petroleum v Harpers Garage concerns
the term; 21 years to buy the lender’s products; being classified as
unreasonable Article 101 The Treaty on the Functioning of the European Union
Another way in which a commercial mortgagor is protected
is through their right to oppose unconscionable terms. The general definition
of an unconscionable term by Browne Wilkinson LJ in Multiservice Book binding v
Marden is that the term must be imposed in a ‘morally reprehensible manner’ and
must be more than merely unreasonable. Factors which are considered when
deciding whether to strike out an unconscionable term are the equality of
bargaining power between the parties, experience of the mortgagor and whether
independent legal advice has been obtained.
If independent legal advice is obtained it will be
harder to prove a term was imposed oppressively and is thus unconscionable5. This is an adequate level
of protection for commercial mortgagors, because the ‘unfair’ terms should have
been recognised through the legal advice.
A segment of the protection of the equity of
redemption is to ensure that a mortgagor should not have an ‘unfair’ term to
pay an excessive rate of interest. Hence, in Cityland v Dabrah the interest
rate of 57% was reduced to 7%. This decision was reached in light of unequal
bargaining power giving rise to unconscionability. However, this case concerned residential
property. In commercial mortgages equality of bargaining power is unlikely to
be an issue.
Jones provides significant importance in regard to classifying
terms which clog the equity of redemption as unfair. In Jones v Morgan, a clause
whereby the lender became entitled to a 50% share of the borrower’s land after
the mortgage had been redeemed, was declared void. It was repugnant to the very nature of the
mortgage. Lord Phillips MR described the doctrine of clogs and fetters as an ‘appendix
to our law which no longer serves a useful purpose’6. Similarly, Lord Mersey
described it as an ‘unruly dog’ which is prone to ‘wander into places where it
ought not to’7.
This doctrine of clogs and fetters unnecessarily restricts mortgagors’ rights and
hence the law has provided protection from clogs and fetters being inputted
into mortgages. Consequently, protecting
the commercial mortgagor from unfair terms.
Depending on what ‘unfair’ is regarded as in relation
to commercial mortgagors, the above principles could be deemed harsh, as it
limits their ability to have ‘unfair unconscionable’ terms struck out. The
standard of a term having to be ‘morally reprehensible’ is high and subjective.
There is an issue on whose standard of morals have to be followed. Hence, the
law fails to adequately protect from unfair terms.
In addition, statutes including the Consumer Credit
Act 2006, and Financial Services and Markets Act 200 provide protection for mortgagors,
but this is limited to domestic mortgagors and thus commercial ones have no
protections under these statues. Clearly identifying the law failing to protect
commercial mortgagors adequately, in comparison to domestic.
As a result, this forces commercial mortgagors to be
cautious and take necessary precautions.
1 Stantley v Wilde 1899 2 Ch 474.
2 G Kreglinger v New Patagonia Meat
and Cold Storage Company Ltd 1914 AC 25.
3 n (2) 61 (Lord Parker).
4 Alison Clarke, Paul
Kohler, ‘Property Law Commentary and Materials’ (1st edn, Cambridge
University Press 2005) 676.
5 Jones v Morgan.
6 Ibid 86.
7n (2) 46.