Case Comment: Bank of Cyprus UK Ltd v Menelaou  UKSC 66
15 Friday Jan 2016
The Supreme Court recently handed down judgment in Bank of Cyprus UK Ltd v Menelaou  UKSC 66, providing valuable clarification concerning the areas of unjust enrichment and subrogation in particular.
The case deals with unjust enrichment. One of the main issues for the court was whether there was sufficient causality between the loss suffered by the Bank of Cyprus on the one hand, and Melissa Menelaou’s benefit on the other, upon the Bank’s release of security on a property which allowed the subsequent purchase of another property in Ms Menelaou’s name. This was important for the Bank as it wanted to acquire, via subrogation, an unpaid vendor’s lien regarding the property subsequently purchased.
Dismissing the appeal of Ms Menelaou, the proprietor of the new property, the Supreme Court held that there was a sufficient causal connection between the Bank’s loss and Ms Menelaou’s benefit. It was consequently held that Ms Menelaou was unjustly enriched. Addressing this enrichment, the Supreme Court held that the appropriate equitable remedy was for the Bank to be subrogated to the unpaid vendor’s lien.
This case sheds light on the equitable rights of lenders. The facts of the case precluded the Bank from creating a legal right in the property; equity, however, helped the Bank to overcome these deficiencies.
Practically speaking, the facts of the case re-affirm the importance of ensuring that charges are correctly executed. This negates the need to embark on costly litigation aimed at rectifying errors.
In 2008 Ms Menelaou acquired ownership of 2 Great Oak Court, a property which was purchased by her parents as a gift to her. The Bank of Cyprus had two charges (totalling £2.2 million) over the previous family home, which was sold by her parents in order to pay for 2 Great Oak Court. The Bank agreed to release its charges over the previous property in return for a lump payment of £750,000 discharging part of the debt, and a new charge over 2 Great Oak Court to secure the remaining amount owed of £1.45 million. £875,000 was therefore released for the purchase of 2 Great Oak Court.
Ms Menelaou was subsequently registered as the proprietor of 2 Great Oak Court, with the Bank registered as the chargee. Ms Menelaou did not find out about the existence of the charge, however, until two years later in 2010: someone else had signed the charge on her behalf without her knowledge. She subsequently applied to rectify the register. As it was now clear that the Bank’s legal interest in the property had been vitiated, the Bank asserted that it should be subrogated to the unpaid vendor’s lien in relation to the monies (£875,000) that had been owed by Ms Menelaou’s parents to the vendor of the property. The Bank therefore wanted to secure a charge of this amount over the property. The Bank’s counterclaim was dismissed at first instance but granted by the Court of Appeal. This decision was appealed on behalf of Ms Menelaou, and the case was subsequently considered by the Supreme Court.
Lord Clarke focused firstly upon the issue of whether Ms Menelaou was a beneficiary of unjust enrichment. Quoting Benedetti v Sawiris  UKSC 50, Lord Clarke held that the court must ask itself four questions when faced with a claim for unjust enrichment:
“(1) Has the defendant been enriched? (2) Was the enrichment at the claimant’s expense? (3) Was the enrichment unjust? (4) Are there any defences available to the defendant?” (at paragraph 18)
Holding that there was no doubt that Ms Menelaou was enriched, Lord Clarke asserted that the primary question to consider was whether it was at the expense of the bank. The answer to this was ‘plainly yes’:
‘”The Bank was central to the scheme from start to finish. It had two charges on Rush Green Hall which secured indebtedness of about £2.2m. It agreed to release £785,000 for the purchase of Great Oak Court in return for a charge on Great Oak Court. It was thus thanks to the Bank that Melissa became owner of Great Oak Court, but only subject to the charge.” (at paragraph 24)
Following this, it was held that Ms Menelaou was unjustly enriched. With regards to the possibility of any defences, Lord Clarke asserted that there were none. After all, she was not a bona fide purchaser for value; she was a ‘mere donee’.
Lord Clarke went on to opine that subrogation to the unpaid vendor’s lien was the appropriate remedy to be deployed:
“The answer is that the Bank is subrogated to the unpaid seller’s lien. Subrogation (sometimes known in this context as restitutionary subrogation) is available as a remedy in order to reverse what would otherwise be Melissa’s unjust enrichment.” (at paragraph 37)
Lord Neuberger agreed with Lord Clarke, advancing similar arguments in the process.
Elaborating upon the reasoning behind why Ms Menelaou’s enrichment was unjust, Lord Neuberger held that:
“[the answer] lies in the fact that Melissa received the freehold as a gift from her parents. Had she been a bona fide purchaser for full value, it may very well have been impossible to characterise her enrichment as unjust, especially if she had no notice of the Bank’s rights. If she had paid a small sum to her parents for her acquisition, a difficult question might have had to be faced, although, as at present advised, I think that her enrichment would still have been unjust, but the extent of any unjust enrichment would be reduced by the small sum. But she paid nothing, and she therefore cannot, in my view, be in any better position than her parents so far as the Bank’s claim is concerned.” (at paragraph 70)
With regards to the remedy of subrogation to the lien, Lord Neuberger held that it was hard to identify a more appropriate remedy. Subrogation to the lien, it was held, “would accord to the Bank, and impose on Melissa, a right very similar to, although rather less in value than, that which the Bank should have had”. (at paragraph 79) Financial compensation, meanwhile, was deemed to be an unsuitable option:
“It was never intended that the Bank should have any personal claim against Melissa, merely that the freehold which she owned would be charged with the Menelaou parents’ debt to the Bank.” (at paragraph 80)
Lord Carnwath also opted to dismiss Ms Menelaou’s appeal. He arrived at this decision, however, via a ‘strict application of the rules of subrogation’. Quoting Walton J in Burston Finance Ltd v Speirway Ltd  1 WLR 1648 at 1652B-C, the principle of subrogation was outlined as such:
“[W]here A’s money is used to pay off the claim of B, who is a secured creditor, A is entitled to be regarded in equity as having had an assignment to him of B’s rights as a secured creditor. … It finds one of its chief uses in the situation where one person advances money on the understanding that he is to have certain security for the money he has advanced, and, for one reason or another, he does not receive the promised security. In such a case he is nevertheless to be subrogated to the rights of any other person who at the relevant time had any security over the same property and whose debts have been discharged, in whole or in part, by the money so provided by him.” (at paragraph 111)
Lord Carnwath used Millett LJ’s judgment in Boscawen v Bajwa  EWCA Civ 15 as justification for his view that the appeal should be dismissed as there was a clear ‘tracing link’ between the bank and the monies used by Ms Menelaou to purchase the property. ‘Tracing’ was held to be:
“neither a claim nor a remedy but a process . . . . It is the process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received (and, if necessary, which they still retain) can properly be regarded as representing his property.” (at paragraph 124)
Lord Carnwarth went on to state:
“there is no difficulty in this case in finding the necessary “tracing link” between the Bank and the money used to purchase the new property…the Bank’s interest in the purchase money was clear and direct” (at paragraph 140)
The award to the Bank of the proprietary remedy of subrogation is a significant development which will no doubt be noted by those dealing with unjust enrichment claims.