Subrogation to the unpaid vendor’s lien

In Bank of Cyprus UK Ltd v Menelaou ([2015] UKSC 66) PM and DM sold property which was subject to a charge in favour of Bank of Cyprus UK Ltd (‘the Bank’). They contracted to purchase a new house using the proceeds of sale. The Bank agreed to this on condition that they obtained a first charge over the new house. The purchase of the new house was in the name of PM and DM’s daughter (‘the daughter’). She knew nothing of the arrangement with the Bank or of its involvement. The purchase was completed without the creation of a valid charge in favour of the Bank. The Bank claimed to be entitled to be subrogated to the unpaid vendor’s lien in respect of the new house. The obstacle that it faced was that it could be argued that it was not the source of the funds used to pay for the purchase (the proceeds of sale of the old house had been used).

The Supreme Court was unanimous in finding that the Bank was subrogated to the unpaid vendor’s lien. The majority did so on the basis of unjust enrichment with equitable subrogation as the remedy. Lord Carnwath reached the conclusion on the more straightforward basis that the Bank was beneficially entitled to the proceeds of sale of the old house under a Quistclose trust and so was entitled to step into the shoes of the unpaid vendor. Lord Neuberger relied on unjust enrichment but expressed agreement with Lord Carnwath’s views.

An unjust enrichment claim requires four questions to be answered:

  1. has the defendant been enriched?
  2. was the enrichment at the claimant’s expense?
  3. was the enrichment unjust?
  4. are there any defences available to the defendant?

(Benedetti v Sawiris [2013] UKSC 50).

The daughter had been unjustly enriched at the bank’s expense. This was because ‘the value of the property to [the daughter] was considerably greater than it would have been but for the avoidance of the charge and the Bank was left without the security which was central to the whole arrangement.’ ([24] Lord Clarke). There was a sufficient causal link between the benefit to the daughter and the loss to the Bank ([27] Lord Clarke). Lord Neuberger commented that the daughter’s enrichment was unjust because she had received the house as a gift from her parents and that if she had been a bona fide purchaser for value without notice of the Bank’s rights then it may not have been possible to say that her enrichment was unjust ([70]). Lord Clarke thought that the fact that the daughter was a donee was relevant when considering whether any defences were available to the daughter.

Subrogation to the unpaid vendor’s lien was available as a remedy to reverse the daughter’s unjust enrichment ([49] Lord Clarke). Lord Neuberger thought that it would be ‘hard to identify a more appropriate remedy’ since subrogation would give the Bank a right similar to that which it should have had under the anticipated charge ([79]). Lord Neuberger stressed that the conclusion that the Bank should be subrogated to the unpaid Vendor’s lien needed to be supported by principle ([94]). He thought that the facts that the house could only have been acquired using funds that the Bank could have demanded, that the failure to grant a Charge was the result of the solicitors acting for the Bank and the daughter and that the use of the funds with the Bank’s agreement discharged the unpaid vendor’s lien ([95]).

Lord Neuberger pointed out that the subrogation claim would have been uncontroversial had the Bank insisted on receiving the proceeds of sale of the original house and then making a fresh loan. The fact that they agreed to allow the proceeds of sale to be retained by the solicitors and re-used for the acquisition by the daughter was ‘a small and practical change’. It would be pure formalism if this change were to defeat the Bank’s claim ([99]).

Lord Carnwath thought that the Bank’s subrogation claim could succeed ‘by a strict application of the traditional rules of subrogation, without any need to extend them beyond their traditional limits.’ ([107]). He thought that this was a case where equitable subrogation was available without any need for recourse to the law of unjust enrichment and that there was a distinction to be made between a claim to a property right (subrogation to a vendor’s lien) and one based on unjust enrichment ([108]). He was prepared to accept that subrogation might be an available remedy in an unjust enrichment case but he did not decide the case on the basis of unjust enrichment ([109] – [110]).

In Lord Carnwath’s view, the Bank had to establish that its money had been used towards the purchase price to allow it to be subrogated to the unpaid vendor’s lien ([128]). It must be possible to trace money belonging to the Bank into the money used to pay the purchase price; ‘a sufficient link could not be found in a looser test based on economic reality or simple causation’ ([132]). The Bank did have a sufficient interest in the funds used to pay the purchase price. The Quistclose principle could be applied; the solicitors acting for the daughter and the Bank held the proceeds of sale of the original property for the Bank but had the power to apply it to the purchase of the property on behalf of the daughter ([134] – [139]).  There was no difficulty ‘in finding the necessary “tracing link” between the Bank and the money used to purchase the new property.’

Michael Lower




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