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Subrogation
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: (1) Was D enriched at C’s expense?
(2) Was the enrichment unjust?
(3) Are there any policy reasons to deny C a remedy?
Some examples
Take an example: Mr & 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).
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).
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