Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66

Melissa's parents used proceeds from selling their mortgaged home to buy a property in her name, with the Bank releasing its security on the understanding it would receive a charge over the new property. The charge proved void. The Supreme Court held the Bank could be subrogated to the unpaid vendor's lien to reverse Melissa's unjust enrichment.

Facts

The Menelaou parents owed the Bank of Cyprus UK Ltd approximately £2.2m, secured by two charges over their home, Rush Green Hall. They decided to sell Rush Green Hall for £1.9m and purchase a smaller property, Great Oak Court, for £875,000, in the name of their daughter Melissa (then 18), as a gift to be held for herself and two younger siblings. The Bank agreed to release its charges over Rush Green Hall upon receipt of £750,000, conditional upon obtaining a third party charge over Great Oak Court. The conveyancing was handled by Boulters, a firm in which Mr Menelaou’s sister was senior partner. The charge document was originally prepared in Melissa’s name (purportedly bearing her signature, although she said she had not signed it) and was then altered by a Boulters employee in manuscript to name the Menelaou parents as customer, without consulting Melissa. Melissa was unaware of the charge until 2010. Completion proceeded on 12 September 2008; the Bank’s charges on Rush Green Hall were released on 13 October 2008.

When Melissa discovered the charge in 2010, she sued to have it removed. During trial, Boulters conceded the charge was void, and the Bank accepted this. The Bank then pursued its counterclaim seeking subrogation to the unpaid vendor’s lien over Great Oak Court.

Issues

The principal issues were:

• Whether Melissa was unjustly enriched at the expense of the Bank, applying the four-stage test set out in Benedetti v Sawiris;
• Whether the requirement that the enrichment be ‘at the expense of’ the claimant required a direct transfer of value, or whether a sufficient causal nexus would suffice;
• Whether the appropriate remedy was subrogation to the unpaid vendor’s lien over Great Oak Court, notwithstanding that the Bank’s money had not directly paid off that lien.

Arguments

For Melissa (appellant)

Melissa contended that she was innocent of any wrongdoing, unaware of the proposed charge, and a mere donee. The money used to purchase Great Oak Court belonged to her parents, not the Bank, so there was no transfer of value from the Bank. Subrogation to an unpaid vendor’s lien required that the claimant’s own money be used to pay off the secured creditor; here, the Bank had not advanced funds. The benefit to Melissa accrued on 12 September 2008, while the Bank’s detriment (release of its charges) occurred later.

For the Bank (respondent)

The Bank argued that the sale of Rush Green Hall and the purchase of Great Oak Court formed a single composite scheme in which it was centrally involved throughout. The unjust factor was the mistaken assumption that it would obtain security. To insist on a direct payment from Bank to Melissa would be ‘pure formalism’, echoing Lord Steyn’s observation in Banque Financière. The appropriate remedy was subrogation to the unpaid vendor’s lien.

Judgment

The Supreme Court unanimously dismissed the appeal, upholding the Court of Appeal’s order that the Bank was subrogated to an equitable charge by way of unpaid vendor’s lien over Great Oak Court for £875,000 plus interest.

Lord Clarke’s reasoning (with whom Lord Kerr and Lord Wilson largely agreed)

Lord Clarke applied the four-stage Benedetti v Sawiris test: (1) enrichment, (2) at the claimant’s expense, (3) unjust, (4) absence of defences. Melissa was plainly enriched by receiving Great Oak Court free of the intended charge. The critical question was whether the enrichment was at the Bank’s expense. Lord Clarke rejected the submission that a direct payment was required, holding that the test is whether there is a ‘sufficient causal connection, in the sense of a sufficient nexus or link’ between the loss to the Bank and the benefit to Melissa. The two transactions formed one scheme in which the Bank was central throughout. He endorsed the relevant considerations identified by Henderson J in Investment Trust Companies v Revenue and Customs Comrs, though noting these were not rigid rules.

The unjust factor was the Bank’s mistaken assumption that it would obtain valid security. Melissa, as a donee, could be in no better position than her parents and had no change of position or bona fide purchaser defence. The appropriate remedy was subrogation to the unpaid vendor’s lien, reversing what would otherwise be Melissa’s unjust enrichment.

Lord Neuberger’s reasoning

Lord Neuberger agreed, emphasising that the relevant enrichment was the receipt of the freehold free of the intended charge. He drew support from Lord Oliver’s observations in Abbey National Building Society v Cann that the acquisition of a legal estate funded by a lender, and the corresponding charge, are ‘indissolubly bound together’. He also indicated strong, if provisional, sympathy with the view that the Bank had a proprietary interest in the £875,000 used to purchase Great Oak Court, although it was unnecessary to decide the point.

Lord Carnwath’s reasoning

Lord Carnwath arrived at the same conclusion by a different route. He was unpersuaded by the rationalisation of subrogation through the prism of unjust enrichment, considering the distinction drawn by Lord Millett in Foskett v McKeown between proprietary claims and unjust enrichment claims as important. Relying on Millett LJ’s analysis in Boscawen v Bajwa, he held that a ‘tracing link’ was required between the claimant’s money and the discharge of the relevant security. Applying Twinsectra v Yardley and the Quistclose principle, he found that the proceeds of sale of Rush Green Hall in Boulters’ client account were held subject to a trust in the Bank’s favour, evidenced by the certificate of title and the surrounding arrangements. On that narrower basis, he too would dismiss the appeal.

Implications

The decision confirms that, in unjust enrichment claims, the requirement that the enrichment be ‘at the expense of’ the claimant does not necessitate a direct payment between claimant and defendant. A sufficient causal nexus, viewed in light of the economic and commercial reality of the transaction, may suffice. The Court endorsed the relevant (non-rigid) considerations identified by Henderson J in ITC, including the need for a close causal connection, avoidance of double recovery, avoidance of conflict with contractual arrangements, and confining the remedy to disgorgement.

The case also confirms that subrogation to an unpaid vendor’s lien is an equitable remedy available to reverse unjust enrichment, even where the claimant did not directly pay the vendor, provided there is a sufficient connection between the claimant’s contribution and the discharge of the lien. The judgments, however, reveal continuing divergence as to the conceptual foundations of subrogation: Lord Clarke (and the majority) treat the doctrine as rationalised through unjust enrichment, while Lord Carnwath prefers a more traditional, property-based analysis grounded in tracing.

For lenders, the decision provides reassurance that the failure of intended security through legal or conveyancing error need not be fatal to recovery, provided the substance of the transaction demonstrates that the lender’s contribution enabled the acquisition. For donees of property acquired in such transactions, the decision makes clear that they cannot be in a better position than the donors. The Court left open whether the Bank had any independent personal monetary claim against Melissa, and whether the Bank had a proprietary interest in the proceeds of sale by reason of a Quistclose-style trust or otherwise, indicating these issues await determination on more fully argued facts.

Verdict: Appeal dismissed. The Bank of Cyprus UK Ltd is entitled to be subrogated to an equitable charge by way of unpaid vendor’s lien over Great Oak Court for £875,000 plus interest, in order to reverse Melissa Menelaou’s unjust enrichment at the Bank’s expense.

Source: Bank of Cyprus UK Ltd v Menelaou [2015] UKSC 66