In this recent appeal decision, the Court gave consideration to the relevant principles underpinning subrogation as an equitable remedy for a lender where there has been unjust enrichment at the lender’s expense.
This case involved the transfer of a property, Great Oak Court, to the Claimant. The property was to be purchased by the Claimant and held for the Claimant and her siblings as a gift from their parents. The Claimant’s parents financed the acquisition of Great Oak Court by selling the family home, Rush Green Hall, which had two legal charges secured over it in favor of the Defendant, to the value of £2.2m. A sale price of £1.9m was agreed for Rush Green Hall and these purchase monies would be used to purchase Great Oak Court (£875,000) and release some funds for the Claimant to use as a deposit on another property. The sale price was insufficient to discharge the parents’ indebtedness to the Bank so the Bank agreed to release its charges over Rush Green Hall provided that upon completion, £750,000 of the proceeds of sale were repaid to it and that it be granted a new charge over Great Oak Court. Both sales duly completed in September 2008 and the Bank received £750,000 as agreed, with the Bank’s charge being registered over Great Oak Court.
In 2010, the parents wished to sell Great Oak Court. The Claimant commenced proceedings to remove the Bank’s charge registered against the property, on the basis that she had not signed the legal charge and that the mortgage deed had been altered by the completing solicitors without her authorisation, thus rendering the Bank’s charge void. The Bank counterclaimed, seeking a declaration that it was entitled to an equitable charge arising as a result of subrogation to an unpaid vendor’s lien over Great Oak Court. In essence, the Bank sought to be placed on an equal footing to that of the vendor of Great Oak Court at the point where the purchase monies had not been paid. At that point, the vendor would be able to refuse to convey the title to Great Oak Court, unless the purchase monies were paid to him.
At first instance, the Court rejected the Bank’s counterclaim, on the basis that the monies provided for the purchase of Great Oak Court were not paid by, and did not belong to, the Bank. The Court found that the Claimant had been unjustly enriched but it had not been at the expense of the Bank, as there had been no transfer of value between the parties. The Bank appealed.
The Appeal Court found that there were two issues to be determined, namely:-
1. Accepting that the Claimant had been enriched unjustly, whether the enrichment had been at the Defendant’s expense; and
2. Whether subrogation should be granted to reverse the Claimant’s unjust enrichment.
In relation to the first issue, the Defendant submitted that even though it had no proprietary interest in the monies used to pay for Great Oak Court, had they not agreed to release their two charges over Rush Green Hall, the purchase of Great Oak Court could not have occurred. The Defendant therefore argued that the Court should consider the economic reality, with the effect that there was a sufficiently causal connection between the loss to the Defendant and the unjust enrichment of the Claimant to hold that a transfer of value had occurred. The Court found that it had not been necessary to show that the Defendant had a beneficial interest in the money used to pay for Great Oak Court. The Court further found that there was a sufficiently casual connection between the Defendant’s agreement to part with its estate in Rush Green Hall and the enrichment of the Claimant, to hold that the Claimant had been enriched at the Defendant’s expense.
In relation to the second issue, the Court held that there had been a transfer of value from the Defendant to the Claimant arising out of the Bank’s agreement to receive £750,000, thereby allowing the Claimant’s parents to use the remaining £875,000 for the purchase of Great Oak Court. Thus the economic reality of the situation was that the Defendant was the provider of the money used to discharge the debt. The Court further found that there was no reason in policy or justice why the Defendant should not be entitled to the remedy of subrogation in those circumstances. The Court of Appeal therefore held in favour of the Defendant Bank and found that they were entitled to an equitable charge arising as a result of subrogation to an unpaid vendor’s lien over Great Oak Court.
The Appeal Court confirmed that the Court’s decision at first instance relied incorrectly on the fact that the charges over Rush Green Hall remained in place at the time of the purchase of Great Oak Court. They were willing to look at the economic reality of the situation in circumstances where it was clear that without the Bank’s assistance regarding the charges over Rush Green Hall, the purchase of Great Oak Court would not have been possible. Even though no monies were advanced by the Bank for the purchase of the second property, there was still found to be a sufficiently close causal connection between the Bank’s agreement to part with its estate in the first property and the unjust enrichment of the Claimant in order to prove this element of the claim.
This is a welcome decision for lenders as it shows that subrogation is a valid equitable remedy in this context and demonstrates the Court’s willingness to look at the reality of a transaction rather than a strict interpretation.
For further information, please contact Georgina Squire or the Partner with whom you usually deal.