Professional Documents
Culture Documents
Bonnie McClain
Independent Resear
Prof. Skillern
April 22, 1983
V»vl> M,
The doctrine of the equity of redemption was developed
in England as a Common Law protection against unjust enrich-
ment. The equity of redemption guarantees to the mortgagor
that, prior to foreclosure, upon satisfaction of all obligations
under the mortgage, he may redeem his property in toto. In
other words, when the mortgagor satisfies the mortgage obligation,
he will be in the same position as he was prior to executing
the mortgage.1 This doctrine was originally developed by
the Courts of Equity, which held that it was inequitable for
a good faith mortgagor to be forced to relinquish his land
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reasonable price within a statutory time limit. The two re-
demption doctrines were differentiated in Hummell v. Citizens'
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Building and Loan Association when the court stated, "The
right of redemption after sale on foreclosure is distinct
from the equity of redemption after breach of condition and
before the sale. The former commences only when the latter
ends. One rests on the principles of equity, the other on
the terms of the statute."
Both the equity of redemption and the statutory right
of redemption are important concepts in property law. Because,
a great deal of material has been written on the right of
redemption it will not be examined further in this paper.
However, there has only been a small amount of analysis done
on the equity of redemption. Thus, this paper will focus
exclusively on the equity of redemption in order to better
understand the public policy behind its conception and the
modern problems which arise due to its existance.
Problems arise with the equity of redemption when a mort-
gagee includes agreements in the mortgage that do not concern
the debt itself. These agreements are called "collateral
agreements," and generally include bonuses, options to purchase,
and grants of interests.^ When these agreements are included
in a mortgage, the mortgagor may still owe an obligation to
the mortgagee after paying off the monetary debt represented
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by the mortgage. An example of such an extended debt occurs
when a mortgagor gives a note containing both an option to
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A. Texas Law
two early cases briefly mention the doctrine. Both St. Louis
23 ?
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A. & T.R. Company v. Whitaker and Shelton v. O'Brien
stated that, "the equity of redemption is considered in
itself tantamount to the fee in law." Thus the holder of
the equity of redemption is considered the owner of the
property during the period of redemption, even if legal title
is technically in another.
It was not until the recent case of Crestview v. Foremost
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Insurance Company that a Texas court emphasized again
the equity of redemption. Crestview mentioned the equity
of redemption in reference to the enforceability of a "due on
sale" clause.
In Crestview, Foremost Insurance Company (Foremost) held
a deed of trust on a certain piece of property. The deed of
trust contained a "due on sale" clause, which would become
effective if the mortgagor sold the property without Foremost's
consent. Crestview purchased the property knowing that
there was such a deed of trust and that Foremost had not
approved the sale. Foremost immediately declared the note
due, relying on the clause in the deed of trust. Crestview
filed suit alleging that Foremost had acted inequitably in
several respects, in particular, by including a clause in the
deed of trust which did not relate to debt security.
The court in Crestview stated that:
The ancient and dominant purpose of a
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B. New Jersey
CO-136
The courts have realized that a problem could, arise when a
borrower is able and willing to repay the loan when it is due,
but may be prevented from redeeming his property if the mortgagee
has already exercised the option to purchase the property or
at least has retained the option after repayment.
The Superior Court of New Jersey in Humble Oil Refining
Company v. Doerr 30 held that an option to purchase for
a fixed price, contained in the mortgage, constituted a clog
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on the equity of redemption. In Humble, Doerr was attempting
to expand his service station. He was successful in obtaining
a bank commitment for a $ 20,000 construction loan which would be
secured by a mortgage on the premises. A Humble Oil representitive,
who serviced the present station, told Doerr that Humble
could help him get better loan terms- a $ 35>000 loan at
a lower interest rate and for a longer term. These terms
were to be obtained by leasing the station to Humble at a
rental charge equal to the amount to be charged each month on
the new mortgage. Doerr was then to assign the Humble rental
payments to the bank as additional security. Humble would
then lease the premises back to Doerr at the same rental cost
so that he could continue operating the station.
The sublease gave Humble the option to purchase the
premises "at any time" for $150,000. Before the end of the
lease term Humble told Doerr that it chose to exercise
its option. Doerr refused to perform the option, so Humble
brought suit for specific performance and, in the alternative,
for damages.
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(1) the optionee has a right of first refusal; (2) the optionee
is a joint venturer with the owner-lessor; or (3) the parties
enter into a three party lease.-'
C. Florida
D. Oklahoma
III. Conclusion
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collateral agreement in the mortgage or deed, of trust, there-
fore not offending the equity of redemption.
It may be helpful to evidence in the seperate agreement
that the mortgagor was a sophisticated and experienced
business person or at least that he had been represented by
an attorney during the transaction. If the court can
determine that the parties were at arms length, it may find
that there was no unfair advantage taken by the mortgagee.
An offer of seperate consideration for the collateral
agreement may also be helpful in persuading the court that the
equity of redemption has not been violated. If the mort-
gagee gives the mortgagor added consideration for the collateral
agreement other than the mortgagee's willingness to make a
loan, the court may consider this an indication that the
collateral agreement was seperate from the mortgage agreement.
2. Id. at 125.
5. Id. at 1015.
7. Id.
8. Id.
9. Id.atl29.
10. Id.
12. Id.
16. Id.
20. Id.
24. 285 S.W. 260 (Tex. Comm'n App. 1926, Judgmt adopted).
26. 621 S.W.2d 816 (Tex. Civ. App.- Austin 1981, writ
granted), (appeal taken on other grounds).
29. Id*
38. Id.
90496
3.
44. Id.
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Stat. Ann,. tit. 42, 18 (West 1971).
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