Sale of property – Equitable charge – Subrogation – Charges being granted over property to secure indebtedness to defendant bank – Property being sold and part of proceeds used to purchase new property in name of claimant – Lender agreeing to release charges in return for fresh charge over new property – Charge proving to be void – Court holding as matter of principle that defendant entitled to order for sale of property – Defendant applying for order for sale – Whether power to realise equitable charges applying – Whether test of proportionality being applicable – Application granted
The claimant’s parents owned a house subject to two legal charges in favour of the defendant bank. They decided to sell it and purchase a smaller property at 2 Great Oak Court, Hunsdon, Hertfordshire in the claimant’s name as a gift on the basis that she would hold the new property for the benefit of herself and her two younger siblings. The defendant agreed to release the charges on the original house subject to payment of part of its indebtedness and the grant of a new legal charge over the new property. The defendant required the charge to be signed by the claimant. A signature purporting to be the claimant’s appeared on the charge but it later emerged that the signature was not hers. The parents’ solicitors altered the charge, naming themselves as the persons subject to the charge instead of the claimant.
When the parents got into financial difficulties, they proposed that the property should be sold. The claimant applied for rectification of the register to remove the charge on the grounds that she had not signed it and that it had been altered without her authority. That claim was upheld. The defendant’s counterclaim against the claimant for a declaration that the defendant was entitled to be subrogated to an unpaid vendor’s lien over the property, and then for an order for sale, failed at trial: see [2012] EWHC 1991 (Ch). The defendant was successful on appeal to the Court of Appeal on the ground that the claimant had been unjustly enriched: see [2013] EWCA Civ 814. However, that court determined only the question of principle, and not whether an order for sale should actually be made. The claimant appealed to the Supreme Court on the question of principle, but the appeal failed: see [2016] EGLR 7. That left the order of the Court of Appeal undisturbed.
The defendant bank applied for an order for the sale of the property which continued to be occupied by the claimant’s parents and their youngest daughter, who was 14. The claimant, who was now 26, and her brother, who was 25, stayed there intermittently.
Held: The application was granted.
(1) An unpaid vendor’s lien was an equitable charge, created by operation of law but having the force of one created consensually by writing, to secure the payment of the purchase price. It therefore fell within the definition of “mortgage” for the purposes of section 205 of the Law of Property Act 1925, which defined “mortgage” to include “any charge or lien on any property for securing money or money’s worth”. The fact that it had characteristics meaning that it did not have the nature of a mortgage in the traditional sense did not matter. Accordingly, the power to realise equitable charges contained in section 90 of the 1925 Act applied to this case. That included the power to appoint a person to convey the land and vest a term of years in the mortgagee to enable him to carry out the sale, as was commonly done in the case of enforcing charging orders.
(2) All the major factors in this case pointed in favour of a sale. The only factor of any real weight against that conclusion was the disruption to the family members and in particular to the youngest daughter of moving their family home. However, on the evidence, that was nothing like as serious as it had been painted and was far outweighed by the countervailing factors that the parents voluntarily created the situation by borrowing or causing to be borrowed the money in question, the defendant was being kept out of its money, its interest took priority in law over that of the claimant and her siblings and its security was no longer sufficient to cover the mounting interest. Article 8 of the European Convention on Human Rights did not require the application of a proportionality test in this case but, given the strength of the factors in the defendant’s favour and the comparative weakness of those against, if it had been necessary for the defendant to pass the test of proportionality, it would have done so with flying colours. Accordingly, the court would order a sale of the property pursuant to section 90 of the 1925 Act.
Mark Warwick QC (instructed by Direct Access) appeared for the claimant; Timothy Polli (instructed by Dentons UKMEA LLP) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Menelaou v Bank of Cyprus UK Ltd.
