Refinancing agreement – Equitable mortgage – Unjust enrichment – First respondent bank obtaining charge on advancing moneys to discharge mortgage but failing to register it – Appellant obtaining and registering subsequent charge – First respondent then registering charge – County court ruling first respondent entitled to subrogation of earlier charge – Whether appellant unjustly enriched by first respondent’s failure to register charge – Appeal dismissed
The second respondent bankrupt was the registered proprietor of a property in London. The first respondent bank advanced money to him to redeem a registered legal charge over the property in favour of a building society (the Halifax charge). In September 2006, the first respondent received an executed charge (the 2006 charge) that was capable of being registered as a legal charge. However, the first respondent did not register it.
The third respondent registered a further charge in July 2007. A unilateral notice for a charging order in favour of the appellant, in respect of a pending land action, was registered in October 2007, and in April 2008 an equitable charge created by an interim charging order made in March of that year was also registered in its favour.
In April 2009, a unilateral notice in respect of the first respondent’s advance by remortgage was registered in its favour; it subsequently claimed that it was entitled to invoke the remedy of subrogation in respect of the Halifax charge so that it would rank in priority to the appellant’s registered charge. The county court held that the first respondent was entitled to be subrogated to, and registered as, the proprietor of the Halifax charge to the extent of the moneys advanced to discharge it. The appellant appealed.
The issue was whether the enrichment of intermediate secured lenders (in the instant case, the appellant and the third respondent) was unjust in circumstances in which the lender claiming subrogation (the first respondent) expected to receive a first legal charge over the property but did not do so solely because it failed to register the charge under the Land Registration Act 2002.
Held: The appeal was dismissed.
The county court had correctly concluded that the first respondent was entitled to be subrogated to the Halifax charge. The enrichment of the appellant was unjust because the first respondent had funded the repayment of the Halifax charge on the basis that it would obtain a legal charge. Owing to its failure to register under the 2002 Act, it obtained only a subsequent equitable charge. It was irrelevant that the borrower had performed the terms of the bargain between him and the lender. The 2002 Act did not encroach on the principle of unjust enrichment. Any unfair consequences of subrogation could be dealt with by way of a defence founded on a change of position.
A lender that stipulated for a legal charge but obtained only an equitable charge, because it failed to register under the Land Registration Acts, did not obtain all that it had bargained for, that is, a legal charge. Accordingly, subject to the fulfilment of all other relevant requirements, it would be entitled to be subrogated to an earlier legal charge that was discharged with its advance: Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291; [2004] 13 EG 127 (CS) applied; Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648 not followed.
The focus had shifted from facts affecting the conscience of the mortgagor to the justice of the position as between the lender and the party enriched. Further, it was clear that the availability of subrogation did not turn entirely on the existence of an unfulfilled mutual intention or agreement between the party seeking subrogation and the enriched party. Prominence was also to be given to the lender’s intention: Banque Financière de la Cité SA v Parc (Battersea) Ltd [1999] 1 AC 221 applied.
Thus, the factor that rendered the enrichment unjust was the non-fulfilment of the lender’s expectation as to the security forming the basis of its decision to advance funds. The correct approach was not to conduct an inquiry, akin to the process of contractual construction, into whether the precise terms of the bargain between the lender and the borrower had been fulfilled. In considering the question of whether the lender received that for which it had bargained, the bargain was to be interpreted in the wider sense of the envisaged transaction.
Richard Lander (instructed by Chandler Harris LLP) appeared for the appellant; Charlotte Eborall (instructed by Optima Legal Services Ltd) appeared for the respondent; the second and third respondent did not appear and were not represented.
Eileen O’Grady, barrister
