Mortgages: Equity of Redemption Flashcards
What does the equity of redemption refer to?
A) The lender’s right to increase interest rates
B) The borrower’s right to repay and reclaim the property
C) The automatic transfer of ownership to the lender on default
D) The lender’s right to sell the property at any time
B) The borrower’s right to repay and reclaim the property
Explanation:
The equity of redemption ensures that a mortgage is only security for a loan and that borrowers can redeem their property by repaying in full.
When does the equitable right to redeem a mortgage arise?
A) When the borrower has repaid at least half of the loan
B) When the lender sends a final demand
C) The day after the legal redemption date passes
D) At any time, regardless of contract terms
C) The day after the legal redemption date passes
Explanation:
If a borrower misses the legal redemption date, the equitable right to redeem allows them to repay later and still reclaim the property.
What happens if a mortgage agreement postpones redemption indefinitely?
A) The borrower loses the right to redeem the mortgage
B) The clause is void as a clog on the equity of redemption
C) The postponement clause is always upheld if agreed to
D) The lender automatically owns the property
B) The clause is void as a clog on the equity of redemption
Explanation:
In Toomes v Conset (1745), the courts ruled that a mortgage must always be redeemable and cannot be indefinitely postponed.
A lender includes a clause giving them an option to buy the property. When is this likely to be void?
A) If granted at the same time as the mortgage
B) If the borrower agrees in writing
C) If the lender offers a lower interest rate in return
D) If the borrower is a company rather than an individual
A) If granted at the same time as the mortgage
Explanation:
In Samuel v Jarrah Timber (1904), the courts ruled that an option to purchase in the same mortgage agreement is void because it prevents redemption.
Alice mortgages her leasehold pub to a lender. The mortgage postpones redemption until six weeks before the lease expires. Alice wants to redeem early.
What is the most likely outcome?
A) The postponement will be upheld as Alice agreed to it
B) The court will strike down the clause as it makes redemption worthless
C) Alice must wait until the final six weeks to redeem
D) The lender will automatically own the pub when the lease expires
B) The court will strike down the clause as it makes redemption worthless
Explanation:
In Fairclough v Swan Brewery (1912), a similar clause was declared void because it made redemption meaningless by leaving too little time on the lease.
David mortgages his freehold hotel and agrees to a 40-year postponement before he can redeem. After 10 years, he wants to repay early.
What is the most likely outcome?
A) The court will strike it down as a clog on redemption
B) The lender will automatically extend the postponement if David defaults
C) The postponement will be upheld because the property retains its value
D) David must sell the property to repay the mortgage
C) The postponement will be upheld because the property retains its value
Explanation:
In Knightsbridge Estates v Byrne (1939), a 40-year postponement was upheld because the borrower still got back exactly what was mortgaged, unlike in Fairclough.
Lisa takes out a mortgage from a brewery to buy a pub. The mortgage includes a solus tie, requiring Lisa to buy all alcohol from the lender, even after the loan is repaid.
What is the most likely outcome?
A) The solus tie will always be valid in commercial mortgages
B) Lisa must sell the pub to remove the condition
C) The solus tie will be void as it extends beyond the mortgage term
D) The lender gains ownership of the pub if Lisa defaults
C) The solus tie will be void as it extends beyond the mortgage term
Explanation:
In Noakes v Rice (1902), a solus tie continuing after repayment was declared void. However, in Biggs v Hoddinott (1898), a tie lasting only for the mortgage term was upheld.
Mike is threatened with eviction and agrees to a mortgage with a hidden 38% interest rate. He later challenges the rate as unconscionable.
What is the most likely outcome?
A) The lender will automatically lose all rights under the mortgage
B) Mike must pay the full interest before challenging it
C) The court will reduce the interest rate
D) The court will uphold the interest rate as Mike agreed to it
C) The court will reduce the interest rate
Explanation:
In Cityland v Dabrah (1968), the courts reduced a 38% interest rate to 7% due to the lender’s exploitation of the borrower’s vulnerability.
A company takes out a mortgage where repayments are tied to the Swiss franc. When the exchange rate worsens, payments become much higher than expected. The company claims the term is unconscionable.
What is the most likely outcome?
A) The term will be upheld because the borrower agreed to it
B) The court will reduce the interest rate
C) The lender must renegotiate the contract
D) The mortgage will be completely void
D) The mortgage will be completely void
Explanation:
In Multiservice Bookbinding v Marden (1979), courts ruled that bad bargains are not unconscionable if the borrower understood the risks and had equal bargaining power.
A lender charges a very high penalty interest rate on default, far beyond their actual losses. The borrower challenges it under statutory protections.
What is the most likely outcome?
A) The lender must repay all past interest collected
B) The borrower must accept the rate as agreed
C) The penalty rate will be void if it is excessively high
D) The lender can charge any rate they choose
D) The lender can charge any rate they choose
Emma takes out a mortgage with a hidden term stating that if she defaults, the lender will own the house outright. Emma challenges this term.
What is the most likely outcome?
A) The court will strike down the term as a clog on the equity of redemption
B) The term will be enforced because Emma signed the agreement
C) The lender will automatically repossess the house
D) The mortgage will become a lease instead of a loan agreement
A) The court will strike down the term as a clog on the equity of redemption
Explanation:
A mortgage must always be redeemable. If a clause transfers ownership to the lender, it will be declared void as seen in Toomes v Conset (1745).
Why did equity introduce the equity of redemption principle?
A) To allow lenders to charge unlimited interest rates
B) To ensure a mortgage is only security for a loan, not a transfer of ownership
C) To give borrowers the automatic right to extend their mortgage term
D) To ensure lenders always have an option to purchase the property
B) To ensure a mortgage is only security for a loan, not a transfer of ownership
Explanation:
Before equity intervened, borrowers who missed the legal redemption date lost their property entirely. The equity of redemption ensures borrowers can still repay and reclaim their property.
A lender includes a right to purchase the property in the mortgage agreement. The borrower later challenges this clause.
What is the most likely outcome?
A) The option to purchase is valid if the lender offers a discount
B) The clause is void because it prevents the borrower from redeeming
C) The borrower must sell the property to the lender at market value
D) The lender must obtain court approval before enforcing the clause
B) The clause is void because it prevents the borrower from redeeming
Explanation:
In Samuel v Jarrah Timber (1904), a right to purchase within the mortgage agreement was struck down as a clog on the equity of redemption. A mortgage must not prevent redemption.
James mortgages his commercial property to a lender. The mortgage includes a solus tie requiring James to buy supplies from the lender, even after the mortgage is repaid.
What is the most likely outcome?
A) The solus tie will be valid, as it is part of a commercial contract
B) The solus tie will be void, as it extends beyond the mortgage term
C) James can challenge the solus tie only if he defaults
D) The solus tie will be automatically extended if the loan is refinanced
B) The solus tie will be void, as it extends beyond the mortgage term
Explanation:
A collateral advantage must not last beyond the mortgage term. In Noakes v Rice (1902), a similar solus tie was declared void because it restricted the borrower even after the mortgage was repaid.
David takes out a mortgage at a significantly high interest rate. He later argues that the rate is unconscionable.
What factor is most important in determining if the court will intervene?
A) Whether the borrower understood the terms and had equal bargaining power
B) Whether the lender had financial difficulties and needed the high rate
C) Whether the loan agreement was signed in a solicitor’s office
D) Whether the borrower paid the first few installments on time
A) Whether the borrower understood the terms and had equal bargaining power
Explanation:
Courts only strike down high interest rates if they are imposed in a morally reprehensible way. In Multiservice Bookbinding v Marden (1979), the court upheld a bad bargain because the borrower fully understood the risks.
