The following Banking & Finance Q&A Produced in partnership with Richard Hanke of 3 Verulam Buildings (3VB) provides comprehensive and up to date legal information covering:
When a lender (A) discharges the liability of a borrower to a secured lender (B), A may be entitled to revive and take the benefit of the security formerly held by B, along with any priority enjoyed by that security. This is referred to as being subrogated to that security interest.
Subrogation is frequently sought in the mortgage lending context when there has been some defect in the security acquired by A, or where A failed to obtain any security at all (for example because of a fraud). It is, however, of potential application outside this context.
The predominant modern analysis is that subrogation is available as a remedy for unjust enrichment. The lender must therefore fulfil the usual requirements of such a claim, establishing that:
the borrower has been enriched
the enrichment was unjust (in this context the most common grounds of restitution are failure of consideration or mistake)
the enrichment was at the expense of the lender
This analysis was approved by the Supreme Court in Menelaou v Bank of Cyprus UK Ltd.
Traditionally, however, this remedy has been regarded as a branch of property law. Some commentators therefore continue to argue that a strict property analysis should be required before subrogation should be awarded, or that certain restrictions from that analysis should continue to apply af
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