Subrogation to unpaid vendor's lien
Author: Victoria Sham
Applies to: England and Wales
In the recent case of Bank of Cyprus UK Limited v Menelaou, the Supreme Court showed the flexibility of the equitable remedy of unpaid vendor's lien.
Facts of the case
Mr and Mrs Menelaou owed circa £2.2m to the Bank which was secured by two charges over Rush Green Hall (The Hall). They were proposing to sell The Hall and purchase Great Oak Court (The Court). The sale proceeds of The Hall were not sufficient to discharge the debt outstanding to the Bank and so it was agreed that the Bank would release its security over The Hall, would be repaid £750,000 from the sale proceeds and would take a charge over The Court. The Court was purchased by Mr and Mrs Menelaou's daughter who was unaware of the arrangements with the Bank.
Two years on from the purchase of The Court, the daughter decided to sell the property and discovered that there was a charge registered against the title. She bought a claim against the Bank to remove the charge on the basis that her signature was forged on the charge document and that her consent had not been sought to a subsequent amendment to the charge.
The Bank conceded that the daughter's signature was forged but counterclaimed for the right to be subrogated to the unpaid vendor's lien over The Court.
An unpaid vendor's lien arises when a sale contract for the purchase of a property is entered into. The seller automatically acquires a lien over the property to secure any unpaid purchase monies. A lender who has loaned monies towards all or part of the purchase price can step into the shoes of the seller and acquire the seller's rights to the lien, provided the lender demonstrates that the party which has benefitted has been unjustly enriched at the lender's expense.
The Supreme Court found in favour of the Bank. It held that there was unjust enrichment as the daughter purchased the property free from security to the detriment of the Bank who had released its security over The Hall on the basis that it would be granted security over The Court. Although the Bank did not directly fund the purchase of The Court, the Supreme Court took the view that there was a close link between the release of security over The Hall and the taking of security over The Court which was sufficient to entitle the Bank, by subrogation, to the unpaid vendor's lien. It therefore allowed the Bank an equitable charge over The Court.
The Supreme Court's finding is to be welcomed by lenders and shows an extension of the equitable remedy of the vendor's unpaid lien to cover the situation where purchase monies have not been directly advanced to the person acquiring the property.
The case also serves as a useful reminder to lenders to ensure they take out valid and enforceable security. We recommend the following when taking security:
- where an individual is granting security ensure the security document is validly executed in the presence of a witness. It may also be prudent to insist that the individual obtains independent legal advice and the solicitor giving the advice can witness their signature
- in the case of the company ensure that the requirements as to execution under section 44 of the Companies Act 2006 and the company's articles of association are complied with
- ensure the company provides signed and dated board minutes and shareholder resolutions (if applicable) approving entry into the security
- where there is any amendment to the underlying security document ensure that the person who granted the security is notified and consents to the amendment by way of written confirmation
- in the case of a company ensure that the security is registered at Companies House within 21 days of the date of completion of the security document
Case: Bank of Cyprus UK Limited v Menelaou  3 W.L.R. 1334
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.