In Bank of Cyprus Limited v Menelaou [2015] UKSC 66, the Supreme Court upheld the decision of the Court of Appeal that a lender can rely on subrogation of the unpaid vendor’s lien in cases of unjust enrichment to protect their security when a charge is not registered over the property. As such, lenders have a potential equitable remedy which allows them to seek an order for sale under section 90 of the Law of Property Act 1925 when a charge to secure purchase funds has not been registered.

 

Background

Rush Green Hall was a property owned jointly by Mr and Mrs Menelaou, the parents of the Defendant, with two charges registered over it to secure monies loaned by the Claimant. In 2008, Mr and Mrs Menelaou decided to sell their property and move into a smaller family home, which would be purchased in the name of their daughter, Melissa Menelaou, to be held on trust for her younger siblings. The funding to secure the purchase came from Bank of Cyprus Limited (‘the Bank’) releasing their charges over Rush Green Hall on the condition that they be paid £750,000 from the sale proceeds and have a charge registered over the new property. The charge was registered over the new property when Melissa Menelaou became the registered proprietor, however it transpired that she had not been made aware of the charge - she alleged that she had never signed the charge document and that the contents of the document had been modified by the solicitors acting in the purchase without consulting her. It was accepted by the Bank and by the conveyancing solicitors during the trial that the charge was void. The question before the court was therefore the remedies available for the Bank and how they could protect their position. The Bank claimed that, as the funds used to purchase the property originated from the charges over Rush Green Hall, the law entitled them to be subrogated to the unpaid vendor’s lien as a remedy against Melissa Menelaou’s unjust enrichment, thus enabling them to claim a charge over the property.

 

Unjust Enrichment

Relying significantly on the case of Beneditti v Sawiris [2013] UKSC 50, the Supreme Court held that Melissa Meneloau had, through no deliberate wrongdoing on her own part, been unjustly enriched, having been able to obtain the freehold property free from the intended charge while the Bank lost the protection of its registered charge. While there had been no direct payment of the purchase funds from the Bank to Melissa Menelaou (as there would be in the case of a standard mortgage transaction), both Lord Clarke and Lord Neuberger found that it was enough to show a “sufficient causal connection” between the loss to the Bank and the benefit to Melissa Menelaou.

The matter to be decided, therefore, was what remedy was available to the Bank.

 

Subrogation of the Unpaid Vendor’s Lien

Significant consideration was given to Lord Justice Hoffman’s comments in Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221, in particular the definition of subrogation as an equitable remedy available in cases of unjust enrichment. Lord Neuberger in particular found that subrogation of the unpaid vendor’s lien, a proprietary interest usually reserved for vendors where a conveyance of property has taken effect without the full purchase price having been paid, was the most appropriate remedy in cases such as this, as it would give the Bank a right very similar to the one it was intended they would have, allowing them to seek an order for sale by relying on s.90 Law of Property Act 1925, rather than relying on a power of sale under a valid registered charge.

While a similar view to the above was taken by Lord Clarke, Lord Wilson and Lord Kerr, it is worth noting that while Lord Carnworth agreed that the Bank could rely on subrogation, he reached this conclusion based on different reasoning to the rest of the court, taking the view that the Bank could rely on the traditional rules of subrogation by finding a tracing link between the Bank and the funds used in the purchase of the property.

 

Conclusions

The Supreme Court’s decision in Bank of Cyprus Limited v Menelaou [2015] UKSC 66 will be a welcome one for lenders, providing important protection in situations where a charge is void due to allegations of forgery. In confirming that the Bank could rely on subrogation of the unpaid vendor’s lien to remedy unjust enrichment, the court placed the Bank in as close a position as possible to the position it would have been in had the charge over the new property been correctly registered as intended rather than being placed in the position of an unsecured creditor. While the equitable nature of the remedy does leave a lender’s enforcement options at the discretion of the court rather than being able to seek possession in the usual way, it does provide a lender with the ability to request an order for sale pursuant to section 90 of the Law of Property Act 1925 and thus provides a level of protection for lenders who are unable to rely on a registered charge to secure the loaned purchase funds.