The Supreme Court has recently extended the doctrine of unjust enrichment. Deciding that the holder of defective security over a property may assert a subrogated unpaid vendor’s lien in circumstances where it has not advanced funds for the purchase of the asset over which it held the defective security.

Introduction

In Menelaou v Bank of Cyprus UK Limited1, a case of unjust enrichment, the Supreme Court held that in circumstances where a lender had discharged perfected security over a property and taken security over another property and the latter security was defective, the appropriate equitable remedy available to the lender is subrogated to an unpaid seller’s lien.

The background

The appellant owned property, (the Property), bought by her parents in 2008 and gifted to her. The respondent bank had two charges, securing the parents’ borrowing, over the previous family home owned by the parents. The bank agreed to release those charges in return for a lump sum payment discharging part of the debt and a fresh charge over the property to secure the remaining indebtedness. This left some money out of the sale proceeds for the purchase of the property. The appellant was registered as the proprietor of the property, with the bank as purported chargee. The appellant became aware of the existence of the charge some two years’ later, discovering that the charge had not been properly executed and was in fact void as she had not signed it and that it had been altered without her knowledge. With defective security, the bank then invoked an ‘unpaid vendor’s lien’, a type of charge which allows a seller of property to retain its rights in the property until all monies have been paid over by the buyer.

This type of lien usually arises during the sale and purchase of real property during the period between exchange of contracts and completion. The bank claimed the lien because the monies used to pay the seller of the property effectively originated from the bank’s release of the charges over the previous property owned by the appellant’s parents, and this sum was intended to be secured on the property. The bank claimed that it was entitled to be subrogated to the unpaid vendor’s lien, and thereby to claim a charge over the property.

At first instance trial, the judge dismissed this claim, on appeal, it was granted by the Court of Appeal.

What happened in Menelaou?

The Supreme Court unanimously (although for different reasons) dismissed the appeal.

  1. The Supreme Court held that whilst the appellant had been enriched, the question was whether she had been enriched at the expense of the bank because if so, that enrichment was unjust. The court found that this enrichment was unjust, because the appellant became the owner of the property following the bank’s agreement to release part of the debt owed by the parents in return for the charge, which was ultimately defective. As a result, the bank suffered loss (both of the money used to pay for the property, and also because of the defective security), whereas the appellant gained, having received the freehold in the property for nothing.
  2. The appropriate remedy is for the bank to be subrogated to an unpaid sellers’ lien. This effectively grants the bank an equitable charge over the property, thereby providing the bank with security.
  3. Lord Neuberger also considered that in the alternative, the bank may have had a proprietary interest in the sum used to purchase the property, and that either the bank or the appellant’s parents were the beneficial owners of that sum.
  4. This decision reinstates the liability of the appellant (notwithstanding the defective security) to repay the sums outstanding to the bank either upon the sale of the property or upon enforcement of the lien by the bank.

HFW perspective

The remedy in this decision is complex and applicable to the facts of the case. What is clear is that the doctrine of unjust enrichment has been further developed and this decision evidences the court’s willingness and flexibility to apply the doctrine when required. It also further demonstrates the inventiveness of the courts to take an established and common concept of the unpaid vendors lien and to combine it with the doctrine of subrogation (where one party is permitted to step into the shoes of another) to reach a just and equitable outcome for the party who has suffered the loss.

This decision is a reminder that if taking security, make sure that:

  1. The value of the security is sufficient to discharge the liability in full; and
  2. The documents creating that security are properly and validly executed.

Failure to do so may lead to costly and time consuming litigation (in this case, seven years since the date of purchase of the property) to rectify the situation.