Property Law UK

A Practitioner's Guide

In todays marketplace where re-mortgages are common, lenders are effectively doubly-secured in the event of subsequent default by virtue of subrogation.

What is subrogation?

Subrogation is not a right or a cause of action, but an equitable restitutionary remedy against a party who would otherwise be unjustly enriched.

In a typical re-mortgage situation, it enables the later lender to "stand in the shoes" of the earlier lender and enforce its security as if it had the benefit of the earlier charge.

In short, lender B whose mortgage is used to discharge a prior mortgage in favour of lender A, is subrogated to the rights of lender A. There is a little more to it than that.

When does it apply?

There are three main principles (Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 per Lord Hoffmann at p 234D:

Some examples

Take an example: Mr and Mrs Smith are the joint legal and beneficial owners of a house:

There are 2 main scenarios:

Scenario1

Lender 3 begins standard mortgage possession proceedings against Mr and Mrs Smith for repayment of the balance of £150,000 plus arrears and possession.

Mrs Smith puts in a Defence alleging forgery.

Lender 3 amends Particulars of Claim to seek order for sale (in respect of equitable charge against Mr Smith AND subrogation against both on the basis that Lender 3 stands in the shoes of Lender 2 to the extent of £100,000 plus interest (which will probably be ordered at the lower of the rates charged by Lenders 3 and 2: Eagle Star Insurance Co Ltd v Karasiewicz [2002] EWCA Civ 940) and can seek possession in the normal way.

Lender 3 may also be entitled to subrogation in respect of the discharge of the £20,000 unsecured liabilities (Filby v Mortgage Express (No 2) Ltd [2004] EWCA Civ 759 - discharge of joint account overdraft).

The combination of subrogation and enforcement of the equitable charge should be sufficient to obtain a full recovery.

Scenario 2

Mrs Smith seeks to defend the subrogation claim by alleging undue influence by Mr Smith in obtaining the second Charge.

Lender 3 may have to resort to sub-subrogation and stand in the shoes of Lender 1 to the extent of £50,000 plus interest (UCB Group Ltd v Hedworth [2003] EWCA Civ 1717).

Some important principles

1. Subrogation is a flexible remedy but one which has to be applied in a principled fashion. The principles have been reviewed and summarised most helpfully in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291.

2. The common phrase that the later lender "steps into the shoes" of the earlier lender does not mean that the earlier charge is kept alive. Usually it will be discharged. It means that the later lender has the same rights as if the earlier charge had been kept alive and the benefit of it assigned to the later lender (Banque Financiere, per Lord Hoffmann, p 236F).

3. Subrogation is not based on the agreement or intentions of the parties (Banque Financiere, per Lord Hoffmann, p 234B etc; Cheltenham & Gloucester at para 40). Consequently it is not necessary that it is a condition of the later loan that the earlier loan is discharged, so long as the later lender's money is in fact used to discharge the earlier loan, so that the borrower(s) are thereby enriched at the later lender's expense (Filby para 62).

4. Nor does it matter whether the later lender (or its solicitors) failed to take proper precautions to ensure it obtained a valid security (Banque Financiere, per Lord Hoffmann at p 235E etc, Lord Hutton p 242H etc). Despite the dicta of Walton J in Burston Finance Ltd v Speirway Ltd [1974] 1 WLR 1648 to the effect that a lender who fails to obtain his desired security by reason of non-registration under the Land Registration Acts is not entitled to subrogation because he has obtained everything he bargained for, it has recently been held that the later lender’s carelessness in obtaining the desired security (in the particular case by failing to register the charge) does not, by itself, defeat a claim for subrogation. See Anfield (UK) Ltd v Bank of Scotland Plc [2010] EWHC 2374 (Ch).

5. Subrogation usually only arses where the earlier loan is discharged in full, although it may be possible to obtain subrogation pro tanto (Boscawen v Bajwa [1996] 1 WLR 328).

6. The fact that the later lender obtains some valid security does not prevent him from seeking further security (Banque Financiere, per Lord Hutton p 241C; Cheltenham & Gloucester at para 37).

7. BUT if the later lender obtains all the security he bargained for, he cannot claim subrogation. Nor can subrogation be invoked so as to put the later lender in a better position than that in which he would have been had he obtained all the security he bargained for (Cheltenham & Gloucester, paras 38, 41).

9. Normal equitable defences apply to subrogation (Cheltenham & Gloucester, para 44). Thus the equitable right of subrogation can be overridden by a bona fide purchaser for value of the legal estate without notice (Halifax Plc v Omar [2002] EWCA Civ 121).

10. It is technically possible to exclude the right to subrogation by contract (Fisher & Lightwood's Law of Mortgage, 12th Edn, para 43.8 citing Banque Financiere).

A recent example

Subrogation and unpaid vendor’s lien

Menelaou v Bank of Cyprus Plc
[2012] EWHC 1991 (Ch)

Summary

A mortgage lender was not entitled to subrogation to an unpaid vendor’s lien on the purchase of a replacement property

Facts

Mr and Mrs M arranged to sell property A to purchasers for £1.9M. The property was subject to charges to secure borrowings to the bank in the sum of £2.2M. They proposed to purchase property B for £875,000. One of Mr M’s relatives dealt with the conveyancing. In response to a request to the bank for a redemption statement, the bank stated that upon receipt of £750,000 it would release its charge over property A, subject to taking a legal charge over property B.

On completion, the solicitor remitted £750,000 from the purchase price of property A to the bank, and utilised the balance in the purchase of property B. A month later, the bank executed DS1 forms of discharge in respect of its charges over Property A and took a charge from Mr and Mrs M over property B.

In fact, property B was purchased in the name of Mr and Mrs M’s daughter, D. She subsequently sought rectification of the charges register to remove the bank’s charge on the basis (1) that she had not signed the charge, and (2) that the solicitor had altered the deed by changing the identity of the customer to Mr and Mrs M without her authorisation.

The solicitors accepted liability to the bank for failing to obtain an enforceable charge over property B, subject to credit being given for any sums that the bank was able to recover in mitigation of its loss. The bank claimed to be entitled to an equitable charge by way of subrogation to an unpaid vendor’s lien over property B, on the basis that the purchase price of property B came from funds belonging to the bank. D argued that the funds did not belong to the bank. The bank argued that on the sale of a charged property, the charge transfers to the proceeds of sale by operation of law (Barclays Bank Plc v Buhr [2001] EWCA Civ 1223 applied).

Decision

The bank was not entitled to subrogation. Having regard to the test in Banque Financiere v Parc (Battersea) Ltd [1999] AC 221, the bank could not show that D had been enriched at the expense of the bank. Whilst the bank had suffered a detriment by the release of its charges over property A, and D had attained a benefit by the gratuitous acquisition of property B, there had to be something in the nature of a transfer of value from the bank to D. Here, D acquired her interest in Property B on completion, but the bank only incurred a detriment a month later when it released its charges over property A. Barclays Bank Plc v Buhr was of no assistance. The bank was protected against a defective charge by the solicitor’s undertakings that it received from B.

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