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Menelaou v Bank of Cyprus: Priority and enforcement

Counting British pounds Print publication

04/01/2017

Following the Supreme Court’s conclusion that an owner was unjustly enriched at the expense of a bank, the High Court has provided first-time authority as to the correct regime for priority and enforcement of an unpaid vendor’s lien.

Walker Morris specialist explains how the loop has been closed in favour of the lender in this important, long-running litigation.

The story so far

The detailed factual and legal background to the Menelaou v Bank of Cyprus litigation is set out in Walker Morris’ earlier briefings [1].  In short, the Bank of Cyprus (the lender) released equity in a house owned by Melissa Menelaou’s (Melissa) parents to enable Melissa to purchase her own home.  The lender’s solicitor failed to register the perfect security that the lender required and Melissa sought removal of the defective charge altogether.  The Supreme Court concluded that Melissa had been unjustly enriched at the lender’s expense and that the lender’s interest was equivalent to the holder of an unpaid vendor’s lien.

Prior to this litigation there had been no authority as to a lender’s remedy where the transfer of value arose from a release of security rather than by advancing mortgage funds. The Supreme Court’s decision provided an additional potential remedy for lenders, but it did not address how that remedy would work in practice.

Closing the loop for the lender: Enforcement and priority

The High Court has now confirmed the correct regime for priority and enforcement of an unpaid vendor’s lien [2].

After considering various possible options [3], the judge found that an unpaid vendor’s lien is an equitable charge which has the force of a mortgage as defined in section 205 of the Law of Property Act 1925 (LPA).  As such:

  • the interest has priority over the owner’s interest in the property; and
  • the equitable remedy under section 90 LPA applies and confers discretion on the court to decide, taking into account all the relevant circumstances of the case, whether to make an order for sale.

In exercising its discretion in this particular case, the court considered the occupants of the property and their circumstances/needs, alternative property arrangements and the fact that payments were not being made to the lender. It decided, on balance, that it was just for an order for sale to be made.  (As an interesting and helpful aside, the judge noted that the existence of a possible professional indemnity claim against solicitors who acted on the defective security was not a factor to be taken into consideration.)

Practical advice for lenders

Lenders will welcome the long-awaited conclusion to this case. As well as reiterating the existence of a remedy in circumstances where a lender has not obtained the required security for a release of equity, the High Court’s decision confirms both that the lender’s equitable charge can take priority and that it can result in an order for sale.

A practical takeaway for lenders, however, is the cautionary note that there will always be some uncertainty in such cases, because the granting of an order will be at the court’s discretion and will depend entirely upon the facts of any individual case.

The better course will always be for lenders to achieve perfect security at the outset of any transaction. Lenders should therefore take care not to advance funds, or to release security, until they have ascertained that adequate security is in place.

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[1] https://www.walkermorris.co.uk/publications/supreme-court-confirms-subrogation-against-third-party-beneficiary/
[2] [2016] EWHC 2656 (Ch)
[3] including: section 36 of the Administration of Justice Act 1970; section 14 of the Trusts of Land and Appointment of Trustees Act 1996; Civil Procedure Rule 73.10C and Practice Direction 73 para 4; and Part III of the Law of Property Act 1925