Kreglinger v New Patagonia Meat & Cold Storage Co Ltd

Kreglinger v New Patagonia Meat & Cold Storage Co Ltd [1914] AC 25

Collateral advantages and clogs on the equity of redemption.

Facts

The appellants loaned money to the respondent meat company by way of a floating charge over the company’s assets. One of the terms was that for five years the appellants would have the option of buying sheepskins from the meat company. The company paid off the loan after only two years. The appellants sought to exercise their option for the whole five year period.

Issues

The common law treats a mortgage as a contract and so the right to redeem, or pay off, the loan depends on the contract terms. However, in equity any unfair burdens imposed on the borrower that continue after the date of redemption are treated with disfavour as a ‘clog’ on the equity of redemption. The respondents claimed that the floating charge was the same as a mortgage and that the term amounted to a clog on the equity of redemption.

Decision/Outcome

The House of Lords agreed that the doctrine concerning mortgages also applied to floating charges. The option to buy sheepskins was stipulated to be for five years. The option was not a clog but a collateral advantage which survived after the mortgage was paid off. It was not part of the charge, but a condition precedent to lending the money. Lord Parker said that a collateral advantage would be struck down if it was unfair and unconscionable, a penalty clogging the equity of redemption, or was inconsistent with or repugnant to the right to redeem. The option did not attach to any property and was a commercial agreement negotiated at arms’ length by business people. Therefore, the term was upheld.