Firstly, a commercial mortgage is basically a loan that is made using commercial property as security and collateral for repayment of the money. This will give the mortgagee a right to the property, which may be claimed if the mortgagor defaults in repayment. The lender (ABCwood (CEM)) could force the sale of the factory and recover the amount borrowed from the sale proceeds. The borrower, in this case Eric, can be a partnership, limited company or an incorporated business, so calculation of credit for the business may be more complex than it is with residential mortgages.
As some commercial mortgages can be non-recourse this means in the result of default in the repayment, then the creditor may only take hold of the collateral, and has no additional claim for the remaining deficiency. It will transfer over the legal title to the mortgagee (ABCwood (CEM)) and will prevent the mortgagor (Eric) from being dealt with the mortgaged asset whilst is subject to the mortgage. Legislation has however affected features of a legal mortgage over the land. The creation of a Legal Mortgage is a charge by Deed by the way of Legal Mortgage under the Law of Property Act 1925 S. 87.
Although the title does not transfer to ABCwood (CEM), as it is with a mortgage of other assets, this will form a security interest that will give the mortgagee equivalent rights. Equitable mortgages arise when the formality to produce a legal mortgage is not completed or when the asset being mortgaged is only an equitable interest. Equitable mortgages will only transfer the beneficial interest of the asset to ABCwood (CEM) with legal title remaining with Eric. Although the primary liability is with the business itself, in Eric’s case, he has the repayment liability secured upon his personal assets.
It states that Eric cannot redeem the loan for 35 years at the earliest to determine whether this clause is viable we need to look into the right to redemption, this is the right to pay back the mortgage and in exchange the property is free from the charge (mortgage) upon it. With common law the right to redeem is on one particular day alone and if the Eric did not settle payment on that date they were liable to lose the property to ABCwood (CEM) and then would be liable for the debt. However it is recognised in equity that a common right of redemption was the only principle of the mortgage is that of security for the loan.
Therefore ABCwood (CEM) may not object if Eric redeemed. It is said that the right to redeem a mortgage is inviolable, for example ‘once a mortgage always a mortgage’. The right of redemption can be postponed. As it is disputable that to prevent Eric from being able to redeem the mortgage before a certain time is unreasonable, however in the case of ‘Knightsbridge Estates Trust Ltd v Byrne’ (1939), that the Court of Appeal had held it is not just a question of reasonableness but that of the contractual principles where the agreement was entered into by a party freely for a term to extend the mortgage until a definite date.
It can be argued that it is unreasonable for Eric to be tied into the mortgage so long but that it is not necessarily unfair to have entered the contract with ABCwood (CEM). It ought to be known that a postponement of redemption cannot be allowed when the right to redemption is of a nature that becomes deceptive. Therefore that provision will be void. As in ‘Fairclough v Swan Brewery Co Ltd’ (1912)
In terms of the interest rate and clause for Eric’s business to purchase materials from ABCwood (CEM) it can be seen that the mortgage can have terms that give ABCwood (CEM) particular advantages in addition to the interest with the loan repayment. For example, an oil company may loan money to an owner of a garage by the way of mortgage and in addition to the loan repayments the mortgagor must also agree to purchase petrol and supplies from the oil company.
Any agreements are not voided on the proviso that they are not unfair or unconscionable, whether the terms are unfair and unconscionable is a debatable upon the facts if one of the parties have acted in a morally unacceptable way and can be made void not because of the association with the mortgage but because a contract that is to be used as an engine of oppression will not be allowed in public policy. For example in ‘Cityland and Property (Holdings) Ltd v Dabrah’ (1968). The court varied the terms of the mortgage, as they were unconscionable, the interest was equivalent to 17% per annum
However in the case of ‘Multiservice Bookbinding Ltd v Marden’ (1979) It was seen that a mortgage term is not unconscionable just because it is seen to be unreasonable, the mortgage interest was linked to the value of Swiss Franc, it was poor deal for mortgagor, however not unconscionable. The clauses do not restrict the redemption unfairly, an advantage is gained in these cases where after redemption. In the case of ‘Biggs v Hoddinott’ (1898), the collateral term intended to terminate with the redemption and it was held to be valid by the court.
Similar to Eric’s case, it can be seen in the cases of ‘Noakes & Co Ltd v Rice’ (1902) and ‘Bradley v Carritt’ (1903) that the advantage ABCwood (CEM) have got are proposed to continue after the redemption and as in the above cases the terms were held to be void by the House of Lords. The reasoning for the House of Lords decision in the case was due to particular facts in the case of ‘Noakes v Rice’1902 it was intended that the publican would be tied to the brewery (the mortgagee) for the duration of the lease (26 years) and after the redemption of the mortgage.
If restraint of Trade clauses in mortgages then they are subject to common law rules. In the contract where a term is stated that is unreasonably retaining trade on public policy ground is void, this is provided that it is possible to be severed, if it is not then the whole contract could be made void. The doctrine of restraint of trade in respect of mortgages can apply to the clauses to which the mortgagor (Eric) has required to secure the mortgagee (ABCwood (CEM)) for the loan to be returned.
If the term however is not in the restraint of trade then it remains as valid irrespective of any particular link it can have with a mortgage. It is not void because of its links with the mortgage In regard to the right for ABCwood (CEM) to purchase the factory within the redemption period it must be seen that the Right to Redeem have not been excluded, if any covenants which provide the property to become the mortgagee's unconditionally on the occurrence of a particular event it becomes void.
This includes the options enabling the mortgagee (ABCwood (CEM)) to purchase the mortgaged property. ‘Samuel v Jarrah Timber & Wood Paving Corp’ (1903) In this case there was a purchase option in favour of a mortgagee this was found to be void as it was contained in the mortgage agreement In the case of ‘Reeve v Lisle’ (1902) there was an option to purchase in favour of a mortgagee which can be valid if it is made outside of the mortgage agreement itself and it has been freely entered into and is completely independent of the mortgage.
I would advise Eric that if this clause makes up part of the mortgage contract that it is not enforceable and therefore void. It could be argued that Eric agreed to the loan agreement due to undue influence, this is when a contract is entered into because of pressure. In this case Eric was suffering from economic duress and was subject to pressure from ABCwood (CEM) and he could have cause for action in equity to have the contract set aside on the grounds of undue influence.
This happens where the existing relationship between Eric and ABCwood (CEM) has been abused by ABCwood (CEM) to obtain an unfair advantage over Eric. There are two forms of undue influence these are presumed and actual undue influence. A contract can be rendered voidable where it has been entered into because of undue influence. This enables the person who is influenced (Eric) to ensure that the contract is set aside against ABCwood (CEM) who exposed Eric to the influence.