When a borrower has granted security to a lender, that borrower has the right to redeem (release) that security once it has paid back the loan secured. This means that the borrower gets the asset over which it granted security back, free from any interests or rights of the lender. Importantly, this right to redeem cannot generally be excluded by the lender – any attempt to do so will usually be unlawful. Whilst this right applies to all types of security, it is usually most significant when a mortgage is involved, as this type of security gives a lender proprietary rights over an asset.
Contractual v Equitable
There are two strands to this right to redeem. Firstly, a borrower has a contractual right to have the security discharged once the loan has been repaid. But what happens if the lender refuses to redeem it on the date stated in the contract? Well, fear not – because of exactly that issue, the courts have developed a back-up right for the borrower, known as an equitable right to redeem.
The significance of this equitable right is that the borrower can normally force the lender to release the asset at any time after the date stated in the contract (subject to a 12 year long-stop date) provided that the debt has been repaid. If there’s no date stated then one will be implied. What’s more, the lender can’t:
exclude this right to redeem;
postpone it to such an extent that exercise of the right is “illusory”; or
state that it will be extinguished after a particular time or event.
Confusingly, the equitable right to redeem is linked to a greater interest in the property known as the equity of redemption (a perfect example of legal hair-splitting!). Although the detail of the distinction is beyond the scope of this blog post, what is relevant is that there cannot be any “clogs” on the borrower’s equity of redemption (and so also not on the equitable right to redeem) – we aren’t talking about wooden shoes here, but rather that a lender cannot include any terms in a mortgage which might prevent the borrower from getting back exactly what it mortgaged once the loan is repaid (and therefore act as a “clog” on the borrower’s right).
What can be a clog can be complex and unclear at times but by way of example, the lender cannot usually include a term in the mortgage itself which gives it an option to purchase the property at a certain price as that option to purchase is at odds with the borrower’s right to redeem (although a separate agreement may be reached).
Who granted the security?
There are few exceptions to the general rule that security must be redeemable but these include that, certain perpetual debentures granted by companies can be irredeemable. Also, where an individual is involved (a consumer), they will always have the right to repay a loan and redeem their security at any time, although they may be charged a fee for doing so.
Fortunately, it is fairly unusual for a borrower to have problems redeeming security once it has repaid a loan. But where problems do arise, the laws of equity (however complicated and archaic at times) are there to help.