Intended security after the event (Menelaou v Bank of Cyprus)

Gateley Plc Finance litigation associate John Williams and partner Rob Payne explain the litigious actions between the Menelaou family and the Bank of Cyprus UK, taking into consideration the judicial action taken and the subsequent influence on this area of the law.

Original news

Menelaou v Bank of Cyprus UK Ltd [2016] EWHC 2656 (Ch), [2016] All ER (D) 21 (Nov)

The Chancery Division held, further to earlier proceedings in which the defendant bank had successfully counterclaimed for a declaration that it was entitled to be subrogated to an unpaid vendor’s lien over the claimant’s family home, that the bank was entitled to an order for sale of the property. The court held, among other things, that an unpaid vendor’s lien was an equitable charge and that the power to realise equitable charges contained in section 90 of the Law of Property Act 1925 (LPA 1925) applied.

What was the background to this case?

In Menelaou v Bank of Cyprus UK Ltd, the Supreme Court upheld the Court of Appeal’s ruling that Bank of Cyprus (the Lender), whose intended security over a property was void, was entitled to be subrogated to an unpaid vendor’s lien over the property. It was held that Ms Menelaou (the Buyer) had been unjustly enriched at the Lender’s expense. While the Lender had not advanced the monies for the purchase of the property, it had released security over a property owned by the Buyer’s parents to free up monies to fund the purchase price. The court concluded there was a sufficiently close causal connection between the Lender’s agreement to release its security and the Buyer’s enrichment to find that there had been a transfer of value from the Lender to the Buyer. It was accepted by the Lender that the Buyer held the property on trust for herself and her siblings (the Trust).

What were the legal issues the judge had to decide in this case?

Recently the case came back before the High Court to consider whether the Lender had priority over the Trust’s beneficiaries and the Lender’s application for an order for sale of the property.

While not actually an unpaid vendor, the Court of Appeal had concluded the Lender was subrogated to the rights of the vendor to the extent of the use of the Lender’s funds in the purchase. The High Court reinforced that the Lender was entitled to the same security rights as the holder of an unpaid vendor’s lien, that is a proprietary interest by way of equitable charge in the property affected that has priority over whatever the vendor sells and transfers. Therefore, the unpaid vendor’s lien had priority to the interests of the beneficiaries under the Trust.

What were the main legal arguments put forward?

The Buyer’s residual interest, and the Trust beneficiaries’ interest, was in the equity of redemption (for the purposes of priority the lien is akin to a legal mortgage).

The court then considered which legal regime applied when considering whether to order a sale of the property.

The judge considered the following options:

  • LPA 1925, Pt III
  • section 36 of the Administration of Justice Act 1970 (AJA 1970)
  • section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA 1996), and
  • CPR Rule 73.10C and PD73 para 4.

Counsel for the Buyer also asked the judge to consider the impact of the Human Rights Act 1998 (HRA 1998) and article 8 of the European Convention of Human Rights (ECHR).

What did the judge decide, and why?

The judge held that AJA 1970, s 36 relates to claims for possession under legal mortgages where the mortgagee already has the power of sale. AJA 1970, s 36 did not apply to an order for sale under the lien.

Despite arguments from counsel for the Buyer that TOLATA 1996 applied, the judge determined the Lender did not have ‘an interest in property subject to a trust of land’. The unpaid vendor’s lien was created and existed before the property was subjected to the Trust.

The judge quickly ruled out CPR Rule 73.10C and PD73 para 4, as they relate to enforcement of charging orders. While a charging order is an equitable charge, it is created by an order of the court rather than arising by operation of law.

The judge therefore found that the correct legal regime against which to consider the order for sale application was LPA 1925, s 90. The unpaid vendor’s lien is an equitable charge created by operation of law but having the force of one created consensually in writing. It therefore fell within the definition of ‘mortgage’ in LPA 1925, s 205.

The judge determined that while ECHR, art 8 had some relevance, no individual has an absolute right for ‘respect for…his home’ and interference in that right can be justified ‘if it is in accordance with the law...for the protection of the rights...of others’. The judge was clear that ECHR, art 8 was not incompatible with the long established principles of the unpaid vendor’s lien. It could not be unilaterally relied on to expand the Buyer’s rights.

The Lender’s remedy under LPA 1925, s 90, is equitable, and is therefore at the discretion of the court taking into account all the relevant circumstances of the case, which reinforces the compatibility point.

When proceeding to determine whether to make an order for sale, the judge considered the occupants of the property, specifically a school age occupant (said to have been diagnosed with dyslexia), alternative property and/or schooling arrangements and whether any payments could be made to the Lender.

After reviewing all those factors the judge decided that it would be just to make an order for sale with the only caveat being that possession would be given up during the Christmas school holiday period so as to cause less disruption to the minor living at the property.

To what extent is the judgment helpful in clarifying the law in this area?

This latest decision in these long running proceedings should be welcomed by lenders who often find out their intended security is not what they expected several years after the event. The necessary degree of causal connection between Lender and Buyer had already been clarified in the earlier decisions, but the decision on the priority of the lien against the Trust and the regime to be applied by the court in considering the order for sale is helpful to other lenders who find themselves in this position.

What practical lessons can practitioners take from this case?

The judgment helpfully reinforces that the existence of a separate professional indemnity claim against the solicitors who acted on the original security should not be considered in order for sale proceedings against a Buyer.

A degree of uncertainty will always remain on an order for sale given the remedy is discretionary. It should be acknowledged the factual matrix of this case was at the more extreme end. The equitable charge created by the lien extended to the entire equity in the property and the occupiers had insufficient means to maintain interest payments on the outstanding sum to the Lender.

Further, the evidence advanced on behalf of the occupants was lacking in detail regarding alternate property and/or schooling arrangements. The final section of the judgment is a timely reminder to practitioners of the real risk of the court drawing adverse inferences where a party can give evidence on an important point without difficulty but fails to do so.

John Williams is an associate and Rob Payne is a partner in the finance litigation team for Gateley Plc.

John and Rob specialise in advising banks, building societies and other financial institutions on a wide range of contentious and regulatory matters.

Interviewed by Emily Jones.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Relevant Articles
Area of Interest