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Dan_Bomsztyk_phThe equitable doctrine of an “unpaid vendor’s lien” states that a vendor retains a right to the transferred property until all of the purchase money has been paid. The rule of “subrogation” applies where one party is permitted to step into the shoes of another and, for instance, when combined with the unpaid vendor’s lien, if a third party were to provide the purchase money for a property it would then have an unpaid vendor’s lien until paid by the real purchaser.

What happens when the third party does not provide the actual funds for the purchase but rather releases security previously charged by the purchaser to them so that the purchaser can then buy a new property? Is this sufficient for the third party to acquire the unpaid vendor’s lien by subrogation? This was the question before the Supreme Court in the present case, which was heard last week.

Facts

Parris and Donna Menelaou owned a property, Rush Green Hall, where they lived together with their three children. The Bank of Cyprus UK Ltd held two legal charges over the property totalling £2.2m. In 2008 a purchaser agreed to buy Rush Green Hall for £1.9m and £190,000 was received as a deposit. Out of that deposit, £87,500 was used to pay a deposit for a new property, Great Oak Court, which was to be held in the name of the Menelaou’s daughter, Melissa. The bank agreed that it would release the charges over Rush Green Hall, thereby allowing the money raised by selling the property to be used to buy the new property, provided that £750,000 of the debt was repaid and a third party legal charge was granted over Great Oak Court.

However, since Great Oak Court was to be owned by Melissa and not the Menelaou parents, a creation of a valid third party legal charge over Great Oak Court required Melissa to sign the charge document. Not only did the charge originally identify Melissa as a “customer of the bank”, which she was not, the charge was signed by Melissa’s brother, Max, who had no proprietary ownership at all and thus no authorisation to create the charge. Additionally, though completion of both the sale of Rush Green Hall and the purchase of Great Oak Court occurred on 12 September 2008, the bank did not return the DS1 forms to release its charges on Rush Green Hall until 13 October, one month later.

By Spring 2010 it was decided that Great Oak Court was to be sold. Melissa challenged that the charge, which had been registered by the bank over Great Oak Court, was invalid: a point which the bank have now conceded. The bank, however, claimed that it was entitled to an equitable charge arising as a result of subrogation of an unpaid vendor’s lien.

The logic of the bank proceeded as follows: the purchase money for Melissa to buy Great Oak Court originated from her parents’ sale of Rush Green Hall. This transaction was only possible because the bank was willing to release their charge over the original property. The conditions of this release included that a third party legal charge would be granted over Great Oak Court and thus effectively it was the bank that had provided the money. Despite its legal security being invalid, the bank believed it should have an equitable charge by subrogation to an unpaid vendor’s lien.

Decision at First Instance

Considering both a narrow approach (based on rules from Buhr & Ors v Barclays Bank Plc [2001] EWCA Civ 1223) and a wider approach (based on Banque Financière De La Cité v. Parc (Battersea) Ltd and Others [1998] UKHL 7), David Donaldson QC, sitting as Deputy High Court Judge, rejected the bank’s claim as he felt the monies in question “were not paid by, and did not belong to, the Bank”, since the money had originated from the purchasers of Rush Green Hall. This meant that though the bank experienced a detriment and Melissa a benefit, since there was no “transfer of value” from the bank to Melissa, Melissa’s benefit could not be said to be at the expense of the bank. Without this connection the bank could not claim the right by subrogation to the unpaid vendor’s lien. David Donaldson QC supported his view by highlighting that the release of the charges did not occur until a month after Great Oak Court had been purchased, thereby demonstrating a disconnect between Melissa’s purchase and the bank’s release. The bank appealed.

Court of Appeal

Dismissing the importance of the chronology of when the charge was released, stating it to be “mere formalism”, all three judges of the Court of Appeal disagreed with David Donaldson QC. Instead, Floyd LJ declared the transfer of value from the bank to Melissa occurred “with the agreement by the bank to give up its interest or estate in Rush Green Hall… The fact that the charges remained in place whilst the bank singed the forms is not significant.”

Floyd LJ cited the case of Bankers Trust Co v Namdar [1997] EGCS 20 in contrast to the present case. There, the security charged to a guarantor had been deemed invalid, and despite the guarantor declaring itself “responsible for the advance of funds” from the lender to the borrower/chargor, since a “guarantee is not an asset of the bank but a continuing obligation assumed by the bank”, the claim for the equitable charge failed. In this case however, argued Floyd LJ, the two charges held over Rush Green Hall were deemed to be an asset and thus there was a “transfer of value” from the bank to Melissa at the time the agreement was made. For the Court of Appeal therefore Melissa’s benefit was clearly at the expense of the bank and thus the bank was granted an unpaid vendor’s lien.

Supreme Court

Having highlighted throughout the case that, “no case was cited [to the judges] in which a lender has been entitled to a remedy of subrogation when that lender had not advanced funds”, Floyd LJ realised that, while justifiable, his judgment was breaking new ground. It will be interesting to see whether the Supreme Court agrees with him and what affect the Court of Appeal’s suggested definitions of ‘value’ and ‘at the expense of’ have on the remedy of a subrogation to an unpaid vendor’s lien.