What happens when you have agreed to provide funds to someone for a specific purpose, such as a bank lending to a purchaser of a property, and in return you have agreed that you can are take security over what that loan is to purchase but, for whatever reason, the security is never taken?
The Victorians had to grapple with this problem and came up with a remedy called “an unpaid vendor’s lien” to help out the party who had made the payment in good faith and who otherwise would have lost out. The theory is that if you provide the monies to enable another party to do something, such as to acquire a property and you do not get the security you bargained for, then you are “subrogated” to the right of the vendor or seller, on the basis that the seller has not been paid.
It had long been the case in English law that a seller who has not been paid the whole of the purchase price as agreed, has a “lien” or a charge on the property he has contracted to sell. The Victorians thought it only fair that the person who provided the monies to enable the purchaser to purchase should automatically be put in a position equivalent to the seller, even though the seller himself had been paid in full. This would mean that that person would have security by operation of the law and without the need for there to be any further agreement between the parties or for this to be documented.
This concept has been developed further in cases throughout the twentieth century. All the reported cases, however, are examples of where the claimant’s money was used to pay off the claim of a creditor. There are other cases where the remedy of unpaid vendor’s lien is applied in factual situations where the claimant has advanced his own money with the expectation that he would obtain security over some property, and is therefore treated as subrogated to the rights of another person who at the relevant time had security over the same property. There has not been a reported case in which the claimant did not advance money of his own but was nevertheless granted the remedy of subrogation. Whether subrogation is available to a claimant who has not advanced his own money has been a matter of some intense academic argument.
The question that came before the Court of Appeal in the recent case of Menelaou v Bank of Cyprus UK Limited  EWCA Civ 1960 is on this point. Judgment was handed down on 2 July 2013. The facts of the case are straightforward. Melissa Menelaou, who was 18 years old at the time, purchased her home with monies provided by her parents which she believed to be a gift from them. Her parents had a property business. In 2008 they were living in a large property at Rush Green Hall which they owned. They were indebted to the bank in the sum of £2.2 million of indebtedness which was secured by two legal charges on Rush Green Hall.
In 2008 Melissa Menelaou’s parents decided to sell Rush Green Hall in order to purchase a smaller property as the family home as well as to provide funds to allow their eldest daughter, Melissa, to purchase her own home. A purchaser for Rush Green Hall was found at a price of £1.9 million, which would have been inadequate to discharge the two mortgagees through the bank. The Bank of Cyprus claims to have agreed with Mr and Mrs Menelaou to take a smaller sum out of the sale proceeds to which they would be entitled to redeem their charges and to pay to Mr and Mrs Menelaou £875,000, which was the purchase price of the home that Melissa Menelaou was to purchase at 2 Great Oak Court. They claim that this had been on the basis that there had been agreed with Mr and Mrs Menelaou that their daughter would execute a legal charge for £875,000 in the bank’s favour on purchase.
However, Melissa Menelaou said in evidence that the purchase of the new home was being brought in her name as a gift for her and her two younger siblings, on the basis that she would hold the property for herself and to them. The bank had instructed its solicitors at the time who undertook to obtain the charge. Their solicitors also dealt with the sale of the Rush Green Hall home, the redemption of the two charges on that property and the grant of the new charge on the home to the bank on the 2 Great Oak property that they were to purchase for Melissa Menelaou. The fly in the ointment was that Melissa Menelaou was not told of the need for a charge either by her parents or the bank’s solicitors and she did not execute the charge which was subsequently registered at the Land Registry.
Melissa Menelaou brought a claim to declare that the legal charge on her home was invalid. The bank claimed that it was her signature on the charge but also counterclaimed that it was entitled to an unpaid vendor’s lien, and so had a charge on the property in any event.
At trial, the bank finally accepted that the legal charge was invalid but continued to argue that they had an unpaid vendor’s lien and so a charge should be placed over Melissa’s home. The judge at first instance in the High Court rejected the premise of the bank’s argument that the monies used to purchase Melissa Menelaou’s home were beneficially owned by the bank. He also rejected the bank’s argument that it had any interest in the proceeds of sale of the Rush Green Hall and accordingly, it did not provide or advance the monies used to pay for Melissa Menelaou’s new home. It had simply agreed to release its existing charges over the old property so that the purchasers paid part of the purchase price to Mr and Mrs Menelaou, who then gifted it on to their daughter to purchase her new home.
The bank appealed to the Court of Appeal and sought to argue that there was a clear link between the bank releasing its existing charges and Melissa Menelaou’s ability to purchase her new home, by utilising part of the purchase price payment made by the purchasers to her parents.
Jeffrey Green Russell acted for Melissa Menelaou in both the High Court and the Court of Appeal and it was argued by Ms Menelaou’s Counsel, Mr Mark Warwick QC, that the remedy of unpaid vendor’s lien, is only granted in defined circumstances by the principled application of rules. All the decided authorities involve claimants who had advanced monies of their own, either directly (or indirectly or through agents) towards the purchase price of another asset, and therefore in the first instance the Judge was right to find as he did.
Indeed, at paragraph 43 of the Judgment of Floyd LJ’s judgment (who gave the leading Judgment in the Court of Appeal) said:
“The unusual feature of the present case is that the Bank provided the value which they transferred by agreeing to release the security interest, rather than by advancing specific funds. No case was cited to us in which a lender had been entitled to a remedy of subrogation when the lender had not advanced funds …
At paragraph 48 of Floyd LJ’s judgment:
“When the Bank gave its undertaking to release its Charges on Rush Green Hall and thus release the purchase monies for the purchase of Great Oak Court, there was as I have held, transfer of value from the Bank to Melissa. Moreover, if one asks Gibson LJ’s question, namely whether it can be properly said that the Bank is “ the provider of the monies used to discharge the debt” the answer in the present case, is that it is. Certainly that is true if one asks whether the Bank is the source of the monies used as a matter of economic reality. I therefore see no reason in principle or justice why the Bank should not be entitled to other remedies of subrogation …”
What we are now left with is, in place of the certainty of whether the claimant had provided the funds, is whether there is a “sufficiently close connection …” (paragraph 42 of Floyd LJ’s judgment) between the claimants agreeing to do something or act to its detriment or prejudice and the enrichment of the other party, to hold that that other party was enriched at the claimant’s expense.
This all sounds reasonable and a sensible incremental development of the law. However, it comes not without problems of its own. There may now be many claimants who say that they did some act, in reliance on which there then follows a transfer of value, between entirely different parties and then that claimant then claims to have a charge or interest in the property, which is as a result of the transfer of value, of those different parties to the defendant who now holds that property.
As Miss Menelaou’s Counsel said in his submissions to the Court of Appeal to seek permission to appeal further to the Supreme Court, the Court of Appeal, by its decision stepped off the:
“… solid Bank of precedent (referring to “the Claimant’s money) and ventured into unknown waters (“transfer of value” and/or “economic reality”).”
Quite where the river will take the law, if it is not reversed by the Supreme Court, is anyone’s guess.