Subrogation is an equitable remedy against a party who would otherwise be unjustly enriched. It enables a lender who lends money to a borrower so that it can discharge an existing charge to step into the shoes of the pre-existing 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.
In Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66; [2015] PLSCS 310 the Supreme Court was asked whether a bank could be subrogated to an unpaid seller’s lien. In essence, the bank was trying to put itself in a position equivalent to that of the person who sold the property to the current proprietor at the point before the purchase money was paid – because the property should have been charged to it when the property was transferred to the new proprietor, but was not.
The property was bought by the proprietor’s parents – in her name, as a gift, for the whole of the family to live in – using some of the proceeds of sale of their existing property, which was charged to the bank as security for their indebtedness. The bank agreed to release its charges on the parents’ home in return for a lump sum payment from the proceeds of sale and a fresh charge over the newly acquired property to secure the balance due. It transpired that the daughter knew nothing about, and had not signed, the new charge. Consequently, it was invalid.
It was accepted, or so it seems, that the bank would have been home and dry if it had insisted on receiving the proceeds of sale of the existing property and then re-advancing the money needed to purchase the new house, thereby discharging the unpaid seller’s lien. Instead, it allowed the lawyers who were handling the sale and purchase to hold on to some of the proceeds of sale, so that they could be used in connection with the new purchase, and released its existing charges on condition that it obtained a new charge.
Was the fact that the money did not come directly from the bank fatal to its claim? The Supreme Court decided that the arrangements were all part of one scheme that involved the bank throughout, and that the daughter had been unjustly enriched at its expense (albeit not through any fault of hers), leaving the bank without the security that was central to the scheme.
Furthermore, a third party who provides some or all of the purchase money for a buyer, thereby discharging its obligation to the seller, can claim the benefit of the unpaid seller’s lien by subrogation – even though the lien has been extinguished as between the buyer and seller. Therefore, the bank was entitled to a lien on the property in a sum that equalled the amount that was withheld from the proceeds of sale in order to finance the new purchase (but did not have a lien for any additional sums that were still outstanding from its borrowers).
Allyson Colby is a property law consultant
