Legal Definitions - clog on the equity of redemption

A clog on the equity of redemption refers to any term or condition within a mortgage agreement, or a related contract, that unfairly restricts or prevents a borrower from reclaiming their property once they have defaulted on the loan, even if they are willing and able to pay back the full debt plus any legitimate costs. The equity of redemption is a fundamental legal right that allows a borrower to get their property back after a default, as long as they pay off the entire outstanding debt before the property is formally sold through foreclosure. A "clog" attempts to undermine this essential protection for borrowers, and courts generally consider such clauses unenforceable.

Here are some examples to illustrate this concept:

• Example 1: Lender's Option to Purchase upon Default

  Imagine a small business owner takes out a loan secured by their commercial property. The loan agreement includes a clause stating that if the owner defaults on any payment, the lender automatically gains an option to purchase the property for 70% of its market value, regardless of whether the owner later offers to pay off the entire outstanding loan. This option would remain valid for a period even after the default is cured.

  This clause acts as a clog on the equity of redemption because it prevents the business owner from fully exercising their right to reclaim the property. Even if the owner finds the money to repay the loan in full after a default, this specific condition would allow the lender to acquire the property at a discounted price, effectively blocking the owner's fundamental right to get their property back free and clear by simply paying off the debt.

• Example 2: Conversion of Loan to Ownership Stake

  Consider a homeowner who mortgages their house. The mortgage contract contains a provision that, upon any default, the lender automatically converts a portion of the loan into a permanent ownership stake in the property. This means the homeowner could never fully own the house again, even if they paid off the remaining debt and the original loan amount.

  This scenario illustrates a clog on the equity of redemption because it imposes a condition that fundamentally alters the nature of the borrower's ownership right upon default. Instead of allowing the homeowner to redeem their property by paying the debt, the clause forces them to share ownership with the lender indefinitely, thereby preventing them from getting the property back "free from encumbrance" (fully owned by them) after fulfilling their financial obligation.