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Tim Polli of Tanfield Chambers examines the Supreme Court’s use in an unjust enrichment case of the remedy of subrogation to an unpaid vendor’s lien in Bank of Cyprus UK Ltd v Menelaou.
Bank of Cyprus UK Ltd v Menelaou  UKSC 66,  All ER (D) 38 (Nov)
The appellant’s parents had owned a property over which the respondent bank had two charges totalling £2.2m. When the parents sold that property, they bought a new property in the appellant’s name. The bank released the charges in exchange for a payment of £750,000 of what the parents owed it and a charge over the new property to secure the parents’ remaining debts. However, the charge was not executed properly and the appellant sought its removal from the register. The bank counterclaimed that it should be subrogated to the lien which the vendors of the new property had over the freehold before they were paid. The Supreme Court held that, albeit through no fault of hers, the appellant had been unjustly enriched at the expense of the bank and that, as a remedy, the latter was therefore entitled to the lien on the property.
Subrogation is often employed by a lender in circumstances in which, for some reason, the lender did not have the security that it expected to have for its loan. The disappointed lender may, in some circumstances, be treated as though it had received an assignment of a prior discharged security interest (or even a prior discharged personal claim) or is otherwise entitled to step into the shoes of a prior creditor. There is no assignment—the earlier security or personal right has been discharged in whole or in part—but the disappointed lender is treated as though there has been an assignment of some or all of the rights of the prior creditor.
Traditionally, when a lender claimed subrogation to a prior discharged security, the courts have explained that the lender needed to show that it was its money that discharged the prior security. The lenders are usually able to satisfy that requirement where it has made an advance and it can be shown that the prior security was discharged with its advance.
The instant case is significant because the lender did not make a fresh advance to facilitate the purchase of the property. Instead, the bank agreed to release charges over a previously owned property which the parents were selling on condition that it obtained instead a charge over the new property. The appellant argued that the money with which the prior security (the unpaid vendor’s lien over the new property) was discharged was money which belonged to her parents, as they had been the owners of the previous property, rather than money which belonged to the bank.
For the reasons explained above, there were therefore two key issues and both are important.
The first issue was whether it was, in fact, necessary for the bank to show that the money with which the prior security had been discharged was its money, not the parents’ money. That is particularly important because it could be said to turn on whether subrogation to a prior discharged security is, in fact, a restitutionary remedy to reverse unjust enrichment, as the bank argued, or whether it is, in fact, a proprietary remedy occupying a niche of property and mortgage law. For unjust enrichment lawyers, the case also raised the question as to whether the enrichment of the defendant must be at the claimant’s direct expense (and, if so, what the exceptions to that requirement might be), or whether some more indirect relationship between the benefit and the detriment would suffice.
The second issue was whether, if the bank did have to show a proprietary interest in the money, it was able to do so on the facts. That is important because, somewhat surprisingly, there are few authorities on the nature of the interest, if any, that a mortgage lender enjoys in the proceeds of sale of its security property.
A key authority in the argument was the House of Lords decision in Banque Financière de la Cité v Parc (Battersea) Limited  1 All ER 737. The bank argued that this was a case in which subrogation to a prior, partially discharged security interest—that is, a property interest—was ordered, albeit in an attenuated form, even though the lender in that case had not intended to have any proprietary security and even though there was no suggestion that the money with which the prior security was partially discharged remained the lender’s at the point at which it discharged the prior security. The award of subrogation as a remedy and the attenuation of the property right to which the lender was subrogated were explicable if the basis for the award was unjust enrichment.
On the other hand, the appellant maintained that the Banque Financière case concerned subrogation to a personal right, and that it was not a case of subrogation to a property interest at all. Relying on Boscawen v Bajwa, Abbey National plc v Boscawen  4 All ER 769 in particular, she argued that in order to be subrogated to a proprietary security interest, one needed to be able to trace one’s property into the discharge of that security interest. In argument, that led to consideration of what is meant when it is said, in Boscawen and inFoskett v McKeown  3 All ER 97, that tracing is neither a claim nor a remedy but a process. If references inBoscawen to tracing did not necessarily imply some continuing proprietary interest in the money being traced, then perhaps all that should be required is a sufficiently close connection between the loss to the lender and the discharge of the prior security. Unfortunately, their Lordships’ judgments did not grapple with that issue, although Lord Neuberger questions whether a sharp distinction can satisfactorily be drawn between a process and a remedy.
The Supreme Court decided that subrogation to a prior discharged security was a restitutionary remedy available to reverse unjust enrichment. It was available to the bank whether or not it had a proprietary interest in the proceeds of sale of the property over which it was releasing its security because there was a sufficiently close link between the release of its mortgage over the property being sold and the purchase of the property over which it expected to have, but did not have, a mortgage. In this case, the sale of the first property, involving the release of the bank’s charge, and the purchase of the second property, over which the bank was to have a mortgage, was one overall scheme. There was, therefore, a sufficiently close causal connection between the loss to the bank and the benefit to the appellant.
Lord Carnwath did not agree with the reasoning of the majority. While he agreed with the result—that the bank was subrogated to an unpaid vendor’s lien—he preferred to approach subrogation in the more traditional proprietary sense. He concluded that the bank had a proprietary interest in the proceeds of sale of its security property, and that it could, therefore, trace its money into the discharge of the unpaid vendor’s lien.
For unjust enrichment lawyers, the award of subrogation as a proprietary remedy (irrespective of whether the bank could trace a property interest into the prior discharged security) will probably be regarded as significant. The limits of the availability of that sort of remedy will certainly be tested in the coming years.
The further appeal from Investment Trust Companies (in Liquidation) v Revenue and Customs Commissioners EWCA Civ 82,  All ER (D) 181 (Feb) will perhaps also lead to a closer examination of the issues concerning the degree of directness or proximity of the relationship between the defendant’s enrichment and the expense to the claimant.
Finally, property lawyers will take note of the fact that, while Lord Neuberger chose not to express a concluded view, he was nevertheless inclined to agree with Lord Carnwath’s analysis of the bank’s proprietary interest in the proceeds of sale of the security property (and Lords Wilson and Kerr agreed with Lord Neuberger).
Tim Polli appeared for the bank in this case.
Interviewed by Robert Matthews.
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.
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