Subrogation to the Unpaid Vendor’s Lien- what is the procedure for obtaining an order for sale?

05 Jan 2017

This article was first published on Practical Law.

A recent decision by Master Matthews in Menalou v Bank of Cyprus UK Limited [2016] EWHC 2656 (Ch), in a characteristically detailed and interesting judgment, reaffirms the author’s long-held view that the appropriate procedure for the a claimant, claiming to be subrogated to the unpaid vendor’s lien, to use is to apply for an order for sale and vesting/appointment orders under s90 Law of Property Act 1925. Section 90 reads as follows:

“90.— Realisation of equitable charges by the court.

(1) Where an order for sale is made by the court in reference to an equitable mortgage on land (not secured by a legal term of years absolute or by a charge by way of legal mortgage) the court may, in favour of a purchaser, make a vesting order conveying the land or may appoint a person to convey the land or create and vest in the mortgagee a legal term of years absolute to enable him to carry out the sale, as the case may require, in like manner as if the mortgage had been created by deed by way of legal mortgage pursuant to this Act, but without prejudice to any incumbrance having priority to the equitable mortgage unless the incumbrancer consents to the sale…”

Subrogation in this context gives rise to an equitable charge (see Cheltenham & Gloucester Plc v Appleyard [2004] EWCA Civ 291; and in relation to subrogation to the unpaid vendor’s lien, Halifax Plc v Omar [2002] EWCA Civ 121). Section 205 LPA 1925 defines 'mortgage' to include 'any charge or lien on any property for securing money or money's worth', and thus s90 applies to equitable charges as well as mortgages and therefore to charges by way of subrogation.

In Menalou the Master was addressed on a wide variety of procedural codes which might be thought to govern the appropriate remedy for such a claimant, including sections 14 and 15 of the Trusts of Land and Appointment of Trustees Act 1996, Part 73 Civil Procedure Rules (which provides the rules for charging orders and the mechanics for an order for sale based on a charging order) and even section 36 Administration of Justice Act 1970 (Court’s powers to suspend, postpone or adjourn a possession claim) and Article 8 European Convention on Human Rights (right to respect for private/family life), as embodied in the Human Rights Act 1998. Unsurprisingly, he considered that:

  1. s36 AJA 1970 was not applicable, being intended to apply only to claims by legal mortgagees for possession (whereas the equitable chargeholder claims an order for sale, an order for possession being a subsidiary part of the remedy);
  2. Part 73 CPR, whilst providing useful guidance, was not directly applicable; and
  3. Nor was TOLATA 1996 applicable. There was a fairly lengthy discussion on this point, but the answer seems fairly straightforward: the enforcing lien-holder is clearly not claiming as a trustee as such, so nor can the claimant claiming using their equitable charge by way of subrogation be a trustee; and neither interest is a beneficial interest under a trust, as such: the unpaid vendor’s lien arises by operation of law as a form of security, between exchange and completion, and subrogation to it arises by further operation of law, and in respect of the whole legal estate: see Rose v Watson (1864) 11 E.R. 1187 and Halifax Plc v Omar [2002] EWCA Civ 121.

As to Article 8 ECHR, to the extent that that is applicable it is, as has been established in numerous prior cases in various legal fields, a qualified right only. The fact that, unlike in the landlord and tenant sector, there had been less Parliamentary involvement in relevant legislation in the light of Article 8 ECHR did not mean that the hundred-year-plus case law history of the unpaid vendor’s lien was somehow overridden by Article 8.

However, as the Master noted at paragraph 33 of his judgment, whilst none of these other regimes is directly applicable to or determinative of the process for the claimant in seeking an order for sale, given that the claim is an equitable one then the factors that emerge in relation to each of related areas of law and procedure can nevertheless be taken into account in considering the application under s90 LPA 1925. 

For an example of a case where a mortgagee had an equitable charge over only one of two beneficial interest in a property, meaning that ss14-15 TOLATA 1996 did apply, see Mortgage Corp v Shaire [2001] CH 743 (in that case, the limited equitable security being caused by the forgery by one co-owner of the other’s signature on the charge). Whilst there is a conceptual distinction between the nature of the equitable security held in Shaire and that in Menalou, it would be surprising if the appropriate factors to be considered by the Court, in deciding whether to order a sale in each type of case, were not similar (though see numbered point 4 below).

Claimants should be careful (as a matter of pleading) to seek an order under the correct and applicable provision under s90 LPA 1925 if the equitable security is over the whole legal estate or under s14 TOLATA 1996 if the equitable security is simply over part of the beneficial interest(s) in the property.  It is conceivable that both provisions might be in play, say where a lender claimant has only an equitable charge over one of two co-owners’ shares (due to forgery by one co-owner of the other’s signature, without the latter’s knowledge) but also has a charge by way of subrogation to a prior charge over the entire legal estate (because it was a remortgage transaction redeeming an earlier charge).

However, whichever of these procedural code(s) applies, the Court will still ultimately be interested in looking at the following sorts of factors in deciding whether to order a sale:

  1. What is the purpose for which the property is owned – commercial or domestic? If the latter, is it a family home and, if so, what children or vulnerable adults reside there? If there are such occupants, when would they be expected to cease residing there, if at all?
  2. What proportion of the value of the property is taken up by the money owed under the security?
  3. By what rate is the secured debt increasing? Are any payments being (or could they be) made towards it and what is the effect of those payments on the amounts owed to the claimant?
  4. Will any surplus (or other assets of the defendants) enable the defendants (and any dependent children or vulnerable adults) to acquire suitable alternative housing? This element is perhaps more important if there are co-owners on whose share of the property the security does not ‘bite’, i.e. as to whether their share of the proceeds of sale will enable them (and dependents) to be rehoused.
  5. Are there any other reasons (i.e. the equitable defences of laches, not ‘coming with clean hands’) not to order the sale?

In Menalou the Master made the order for sale in favour of the bank, apparently having taken into account all relevant considerations including some factors weighing in each direction. However, he was critical about a lack of clear evidence from those resisting the order for sale. This highlights the need for respondents/defendants to an application for an order for sale to come prepared by reference to detailed evidence of value of the property (including expert evidence if necessary; though this was dispensed with in Menalou as the value of the property was agreed between the parties) and as to their means and the circumstances of any occupants.

Of course, there are some commentators who decried the underlying decision of the Supreme Court in Menalou [2015] UKSC 66 [2016] AC 176; but any criticisms (whether valid or not) of that decision should not affect the usefulness of Master Matthews’ judgment in this part of the case.


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