The equitable remedy of subrogation allows lenders that have lent money to enable a borrower to discharge a previous charge to step into the shoes of the previous lender to obtain priority over intermediate lenders holding security over the same property. In other words, where lender C advances money that is used to discharge a prior mortgage in favour of lender A, lender C may be entitled to step into the shoes of lender A to take priority over lender B.
Before it can qualify, lenders must satisfy a number of requirements. In particular, it cannot claim subrogation if it was specifically agreed that it would not receive any security, or if it has obtained all the security for which it bargained. However, what happens if a lender fails to register a charge at the Land Registry? Under section 27 of the Land Registration Act 2002, a disposition of a registered estate that must be completed by registration does not operate at law until the relevant registration requirements are met.
Can it be argued that the lender got exactly what it bargained for and was lax because it did not take appropriate steps to perfect its security? In Anfield (UK) Ltd v Bank of
In Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648, the judge remarked that if a lender has failed to obtain security by reason of non-registration under the Land Registration Acts, it will not be entitled to subrogation because it will have obtained exactly what it bargained for – a charge in registrable form.
By contrast, in Cheltenham & Gloucester plc v Appleyard [2004] EWCA 291; [2004] 13 EG 127 (CS), the Court of Appeal took the view that, in circumstances where it bargained for a legal charge, a lender will not have obtained everything it bargained for if it obtains only an equitable charge because of its failure to perfect its security by registration.
The High Court preferred the analysis in Cheltenham & Gloucester. The judge rejected the argument that subrogation would subvert the policy underpining the 2002 Act, and that lenders should be entitled to rely on the position shown on the face of the register. She ruled that if this were correct, it would be difficult to claim subrogation in any case relating to registered land.
In her view, the policy of the 2002 Act does not encroach on the principle of unjust enrichment. She decided that it would be unjust to allow the intermediate lender to be enriched because the bank had funded the repayment of the earlier charge on the basis that it would obtain a legal charge from the borrower.
None the less, the judge warned that claims to subrogation could founder where it would be unfair to allow the claimant to succeed. Consequently, lenders would be well advised to take the appropriate steps to perfect their securities by registration and to regard subrogation as a remedy of last resort.
Allyson Colby is a property law consultant