Mortgage – Subrogation – Unjust enrichment – Respondent holding charges over property to secure indebtedness of appellant’s parents – Property sold and part of proceeds used to purchase new property in appellant’s name – Respondent agreeing to release charges in return for fresh charge over new property – Charge proving to be void – Whether appellant unjustly enriched at respondent’s expense – Whether respondent entitled to remedy of subrogation to unpaid vendor’s lien over new property – Appeal dismissed
In 2008, the appellant’s parents sold the family home for £1.9m and purchased another, smaller property for £850,000. As a gift to the appellant, the new property was placed in her name, to be held for the benefit of herself and her two younger siblings. The sale price for the old property was insufficient to discharge the parents’ indebtedness of £2.2m to the respondent bank, which was secured by charges over that property. However, the respondent agreed to release the charges in return for a lump sum payment of £750,000 and a charge over the new property. In due course, the appellant was registered as proprietor of the new property and the respondent’s charge was also registered. However, the appellant was unaware of the charge at that time.
It later emerged that the charge had not been properly executed and was void, since the appellant had not signed it and it had been altered without consulting her. She brought a claim for rectification of the register to remove the charge. By a counterclaim, the respondent asserted that: (i) the respondent was unjustly enriched by the removal of the charge; and (ii) the respondent was therefore entitled, in place of that charge, to be subrogated to an unpaid vendor’s lien for the £850,000 purchase price of the new property, plus interest, since that sum had been paid to the vendor out of funds which effectively originated from the respondent’s release of the charges over the previous property.
By the end of the trial, the respondent had conceded that the charge should be removed and its counterclaim was the only remaining live issue. The counterclaim was dismissed by the judge at first instance but allowed by the Court of Appeal: see [2012] EWHC 1991 (Ch) and [2013] EWCA Civ 814 and 1960. The appellant appealed to the Supreme Court.
Held (Lord Carnwath differing on the reasoning): The appeal was dismissed.
(1) When faced with a claim of unjust enrichment, the court would ask four questions, namely: (i) whether the defendant had been enriched; (ii) whether that enrichment was at the claimant’s expense; (iii) whether the enrichment was unjust; and (iv) whether any defences were available to the defendant: Benedetti v Sawaris [2013] UKSC 50; [2014] AC 938 applied. Those questions were no more than broad headings for ease of exposition and there might be a considerable degree of overlap between the first three.
There had been unjust enrichment in the instant case. The appellant had been enriched either by becoming the owner of the new property, or by becoming the owner free from the charge. That enrichment was at the expense of the respondent and was unjust. The sale of the old property and the purchase of the new property were part of a single scheme, which involved the respondent throughout. The respondent had agreed that, on the sale of the old property, money to which the respondent was absolutely entitled under its charges could remain advanced to the appellant’s parents for the purpose of purchasing the new property, on condition that the respondent was given a specific charge over the new property. The respondent had expected to have a first legal charge over the new property but, as matters had turned out, did not have that security interest. The value of the new property to the appellant was considerably greater than it would have been but for the avoidance of the charge and the respondent was left without the security which was central to the whole arrangement.
It did not matter that the sale proceeds from the old property had not been paid to the respondent and re-advanced for the purpose of purchasing the new property. There was no requirement that the funds to purchase the property should be paid directly by the party alleging unjust enrichment. Pure formalism was to be avoided. Instead, whether a particular enrichment was at the expense of the claimant would depend on whether, on the facts of the case, there was a sufficiently close causal connection, in the sense of a sufficient nexus or link, taking account of commercial and economic reality, between the loss to the claimant and the benefit received by the defendant: Banque Financière de la Cité v Parc (Battersea) Ltd [1999] AC 221; [1998] PLSCS 72, Investment Trust Companies v Revenue and Customs Commissioners [2012] EWHC 458 (Ch); [2012] STC 1150 and TFL Management Services v Lloyds Bank plc [2014] 1 WLR 2006 applied. Where the first three questions were answered in the affirmative, there was no special reason precluding a valid claim by the respondent against the appellant in unjust enrichment; the appellant was not relying on any other defence so as to avoid a finding of unjust enrichment by reference to the fourth question.
It made no difference that the appellant had been unaware of the unjust enrichment at the time and was innocent of any oversight or wrongdoing. She had received the freehold of the new property as a gift from her parents, without herself making any payment, and she could therefore be in no better position than her parents so far as the respondent’s claim was concerned. The fact that the appellant did not know of the circumstances which caused her enrichment to be unjust did not alter the fact that she was unjustly enriched or the extent of her unjust enrichment.
(2) The respondent was entitled to a remedy for the unjust enrichment by being subrogated to the unpaid vendor’s lien. Unjust enrichment was a broad doctrine and the courts should take a flexible approach to the remedies appropriate in a particular case. Subrogation was a remedy for unjust enrichment. On exchange of contracts, a lien in favour of the vendor had arisen by operation of law in respect of the purchase money that had not yet been paid. A party that provided some or all of the purchase money for a purchaser, thereby discharging the obligation to the vendor, could claim the benefit of the unpaid vendor’s lien, even after the lien had been extinguished as between vendor and purchaser. A claim in unjust enrichment did not have to show a property right. The respondent was therefore entitled to a lien over the property, being an equitable interest which it could enforce by sale, so as to reverse what would otherwise be the unjust enrichment of the appellant: Banque Financière and Orakpo v Manson Investments Ltd [1978] AC 95 applied.
(4) Per curiam: There was no reason in principle why the respondent should not also have a personal claim against the appellant in unjust enrichment, subject to the ability of the court to adjust the sum if the quantification would otherwise result in a figure that was unfair or oppressive. There was force in the view that the standard response to unjust enrichment was a monetary restitutionary award in order to reverse the unjust enrichment.
Per Lord Carnwath: The respondent’s claim could be supported by a strict application of the traditional rules of subrogation, without any need to extend them beyond their established limits or rationalise them through the prism of unjust enrichment. There was a clear distinction of principle between a claim to enforce property rights and a claim for unjust enrichment. Subrogation to an unpaid vendor’s lien was a property right. The respondent had a direct interest in the money used to purchase the new property. There was no difficulty in finding the necessary “tracing link” between the respondent’s own money and the money used for the purchase.
Mark Warwick QC and Joseph England (instructed by Jeffrey Green Russell) appeared for the appellant; Philip Rainey QC and Timothy Polli (instructed by Matthew Arnold & Baldwin LLP) appeared for the respondent.
Sally Dobson, barrister
