Real estate loan structures considered “non-traditional” in years past have become commonplace in modern finance. For example, where a conventional mortgage lender’s underwriting requirements include an 80% loan-to-value limitation with a prohibition against subordinate liens on the real estate, borrowers often seek to finance some portion of the remaining 20% component through a mezzanine lender who secures its loan with a lien on the equity interests of the borrowing entity. A more aggressive private lender, unconstrained by such institutional requirements, might seek to hedge the greater risk of a higher loan-to-value transaction with a “dual collateral” package that includes both a mortgage lien on the real estate and a UCC lien on the controlling interest of the borrower. To varying degrees, both implicate an ancient doctrine rooted in English common law known as “clogging the equity of redemption,” as was seen in a recent New York case discussed below.

What Is ‘Clogging’?

One of equity’s long revered maxims—the prohibition against clogging the equity of redemption—rests on the foundational principle, “once a mortgage, always a mortgage.”  See 4 Pomeroy, Equity Jurisprudence (5th ed., 1941), s. 1193 at 568 et seq. More expansively, when a borrower grants a mortgage on its property to a lender as security for a debt, it must always have the right to repay the debt, thereby extinguishing any claim of the lender to the property, and this right cannot be waived or abandoned as part of the initial transaction. Stated as such, the doctrine’s logic appears self-evident and uncontroversial—certainly not something that could have intrusive implications in modern real estate finance. In practice, however, it is not always as simple as it sounds.