Lender’s success despite defective security

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The Court of Appeal has held [1] that a lender with defective security over property was entitled, through subrogation, to an unpaid vendor’s lien over that property on the basis that the owner had been unjustly enriched at the lender’s expense.


The Bank of Cyprus UK Limited (the lender) had security over property owned by the Menelaous.  The lender agreed that the Menelaous could sell the property over which it had security and use the proceeds to buy a smaller property for their daughter, in exchange for part repayment of the loan.  The lender would release its security over the Menelaous’ first property (reflecting the part repayment) on the basis that it would obtain a third-party legal mortgage from the daughter over her property to secure the remaining indebtedness.

The lender’s solicitors, however, failed to obtain an enforceable legal mortgage from the daughter and instead registered a charge using the name of one of the Menelaous. The daughter then sought to have the register for the new property rectified to remove the legal mortgage altogether, claiming that she had not signed the requisite documentation and the register had been altered by the lender’s solicitors without her authorisation.  The lender claimed it was entitled to an equitable charge over the daughter’s property arising as a result of subrogation to an unpaid vendor’s lien over that property.

What is subrogation?

Subrogation is not a right or a cause of action per se, but an equitable restitutionary remedy against a party who would otherwise be unjustly enriched. In a typical re-mortgage situation, it enables a later lender to “stand in the shoes” of an earlier lender and to enforce its security as if it had the benefit of the earlier charge.

Prior to this case, however, there was no precedent for how the remedy may apply in circumstances where there is only one lender and it was not purchase monies that had been advanced but rather an agreement to release security.

The decisions

The High Court held that the lender was not entitled to the equitable mortgage. It considered that although the daughter had been unjustly enriched through obtaining a mortgage-free property, this was not at the lender’s expense.  The court reasoned that the fact that the lender had not actually provided the purchase monies for the new properties was fatal to its claim.  As the charge over the Menelaous’ original property remained intact for a month after completion of the purchase of the daughter’s property, there was no transfer of value at completion and, as such, at the time the purchase of the daughter’s property occurred, the lender still had valid security.

The lender appealed on the basis that, had it not agreed to release its security over the Melelaous’ original property, monies from that sale could not be used to purchase the daughter’s property. The Court of Appeal overturned the decision of the High Court.  The Court of Appeal was satisfied that the daughter had been unjustly enriched at the lender’s expense and, therefore, the lender should be granted the remedy of subrogation, so as to make it an equitable chargee of the new property.  Although the charges on the Menelaous’ property had not been released immediately, the lender could not have rescinded its agreement to release the charges and so there was a sufficient causal connection between the agreement to release the charges and the daughter’s enrichment to amount to enrichment at the lender’s expense.

WM Comment

What is particularly interesting about this case is that there are no previous authorities concerning whether a lender is entitled to a remedy of subrogation where the transfer of value arose from an agreement to release a security interest rather than by advancing specific funds. The Court of Appeal, in this instance, found that there is no reason in principle why the remedy should not be available because, looking at the economic reality of the situation, the lender was the source of the money used to discharge the purchase price for the Menelaous’ property.

The decision therefore provides a further potential remedy for lenders when monies are not advanced but rather security released as part of an agreement, although a note of caution should be aired in that the Court of Appeal did comment that difficulties may arise had a later lender gained a charge over the daughter’s property. Perfection of security at the outset should, of course, always thus be paramount.


[1] Menelaou v Bank of Cyprus UK Ltd [2013] EWCA Civ 1960