The
equity of redemption refers to the right of a mortgagor in
lawLaw is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
to redeem his property once the liability secured by the mortgage has been discharged.
Overview
Historically, a mortgagor (the borrower) and a mortgagee (the lender) executed a conveyance of legal title to the property in favour of the mortgagee as security for the loan. If the loan was repaid, then the mortgagee would return the property; if the loan was not repaid, then the mortgagee would keep the property in satisfaction of the debt. The equity of redemption was the right to petition the
courts of equityA chancery court, equity court or court of equity is a court that is authorized to apply principles of equity, as opposed to law, to cases brought before it.These courts began with petitions to the Lord Chancellor of England...
to compel the mortgagee to transfer the property back to the mortgagor once the secured obligation had been performed. Today, most mortgages are granted by statutory charge rather than by a formal conveyance, although theoretically there is usually nothing to stop two parties executing a mortgage in the more traditional manner.
Traditionally, the courts have been astute to ensure that the mortgagee did not introduce any artificial stipulations into the contractual arrangements to impede a mortgagor's ability to satisfy obligations and reclaim their property. Such impediments are "clogs" on the equity of redemption, and the courts of equity were particularly astute to strike down any provision which was, or in later cases, which might be, a clog.
Where
collateralIn lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
is hypothecated in
prime brokeragePrime brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a netted basis and achieve an absolute return...
transactions, it is quite common for the broker to rehypothecate the collateral, but concerns remained that because the rehypothecation might, theoretically, mean that the lender might lose title to the collateral themselves, and thereby be unable to reconvey it to the primary customer, it was speculated that such rehypothecation might be unlawful.
The tide has for some years now turned against striking down every clause in a mortgage document that might conceivably impede the right to redeem.
The equity of redemption is itself recognised as a separate species of property, and can be bought, sold or even itself mortgaged by the holder.
Historically the equity of redemption would naturally expire upon the mortgagor breaching the terms of repayment. However, in modern times, extinguishing the equity of redemption (and leaving the mortgagee with absolute title to the property) ordinarily requires a court order in most jurisdictions. For both legal and practical reasons, the use of
foreclosureForeclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
as a remedy has fallen into disuse. Even where a mortgagee seeks an order for foreclosure from the courts, the courts will frequently order judicial sale of the property instead.