IpsofactoJ.com: International Cases [2002] Part 15 Case 12 [CAEW]


COURT OF APPEAL, ENGLAND & WALES

Coram

El Said Omar

- vs -

Halifax Plc

LORD JUSTICE SIMON BROWN

LORD JUSTICE LAWS

LORD JUSTICE JONATHAN PARKER

20 FEBRUARY 2002


Judgment

Lord Justice Jonathan Parker

INTRODUCTION

  1. This appeal raises the question of the availability of the remedy of subrogation as against an innocent third party purchaser.

  2. The appellants is Mr El Said Omar (the second defendant in the action). He appeals, with permission granted by Chadwick LJ on 4 May 2001, against an order made by HHJ Howarth on 17 January 2001 declaring that the interest of Mrs Maria Garcia as the registered proprietor of a leasehold flat known as Flat 178, Park West, Edgware Rd, London W2, is subject to an equitable charge in favour of Halifax plc (the claimant in the action and the respondent to the appeal), and that such equitable charge ranks ahead and in priority to and free from any interest or other rights of Mr and Mrs Omar or either of them in or in relation to the flat. The order also contains orders for possession and sale.

  3. The background to the dispute which led to the order may be summarised as follows.

  4. Mrs Garcia has at all material times been, and she remains, the registered proprietor of the leasehold title to the flat. In May 1990 an individual calling himself Mr Khan fraudulently applied to the respondent for an advance of £189,000 on a proposed purchase of the flat from Mrs Garcia at a price of £210,000, the advance to be secured by a first legal charge on the flat. The respondent in due course offered an advance of £147,000. The offer was accepted by Mr Khan. The respondent, following its usual practice, instructed Mr Khan’s solicitor, a Mr Rodney Thompson of Messrs Thompsons, to act for it in the transaction. Mr Thompson duly reported on title. In early July 1990 the respondent sent a cheque for the advance to Mr Thompson. On 10 July 1990 contracts were exchanged for the purchase of the flat by a company owned by Mr Khan called Unitbase Ltd at a price of £132,000. Two Transfers were executed by Mrs Garcia, each of which is dated 10 July 1990. One such Transfer is in favour of Unitbase Ltd, and states the purchase consideration to be £132,000. The witness to Mrs Garcia’s signature on this Transfer gives an address in the Philippines. The judge found that this Transfer was stamped some nine months later, in April 1991. The other such Transfer, which has not been stamped, purports to transfer the title to the flat, at the direction of Unitbase Ltd, to Mr Khan. The consideration paid by Unitbase Ltd is stated to be £132,000 but the amount of any consideration paid by Mr Khan to Unitbase Ltd is left blank. The witness to Mrs Garcia’s signature on this Transfer is a solicitor with an address in London. Neither of the Transfers has been registered, nor has any further dealing been entered on the register of the leasehold title to the flat. No legal charge was executed in favour of the respondent, although initially some repayments of the respondent’s loan were made (amounting to £1891.67).

  5. The judge found that the entirety of the purchase price of £132,000 was paid out of the respondent’s advance, and there is no appeal against that finding.

  6. On 2 April 1991, following its discovery of the fraud and of the fact that it did not have a legal charge, the respondent lodged at H.M. Land Registry a caution against dealings with the leasehold title. Shortly thereafter it commenced an action against Mrs Garcia, Unitbase Ltd and Mr Khan, claiming to be entitled by subrogation to an equitable charge over Mrs Garcia’s interest in the flat. The respondent did not join the appellants as defendants in that action, since it was not at that time aware of their interest in the matter.

  7. On 14 December 1993 HHJ Maddocks granted the respondent summary judgment against Mrs Garcia under Order 14 of the former Rules of the Supreme Court, declaring that Mrs Garcia’s leasehold interest in Flat 178 was subject to an equitable charge in favour of the respondent to secure £147,000 (i.e. the full amount of the advance) and ordering that her interest be sold. The order recites that it was made with consent of Mrs Garcia, and that Unitbase Ltd had been dissolved.

  8. At about that time, the respondent learned that Mr and Mrs Omar were in possession of the flat, and that they claimed to be entitled to remain in possession. Accordingly the respondent commenced the present action against Mr and Mrs Omar, claiming a declaration that it is entitled to be subrogated to the rights of Mrs Garcia, and that in consequence it has a lien, alternatively an equitable charge, over the flat for the full amount of its advance (£147,000), and a declaration that its security rights take priority over any rights of Mr and/or Mrs Omar. The respondent also seeks an order for possession and sale of the flat.

  9. The respondent had also been the victim of similar mortgage frauds carried out by Mr Khan, with the assistance of Mr Thompson, relating to Flats 528 and 546 in the same block (not being flats owned by Mrs Garcia). In the action it also claims similar relief in respect of those flats against their respective owners and/or chargees. However, this appeal is concerned only with Mrs Garcia’s flat, Flat 178.

    THE PLEADINGS

  10. By its Re-Re-Amended Particulars of Claim the respondent states (in paragraph 2) that it is not aware of the basis upon which Mr and Mrs Omar claim to be entitled to remain in possession of the flat, but contends that such rights as they may have in relation to the flat do not have priority over the respondent’s security rights. Paragraphs 2S and 2T of the pleading read as follows:

    2S.

    Had Unitbase not been paid then would have been indebted to Miss Garcia for the sum of £132,000 and the lien would have operated in equity as a charge over the property. Since no steps were ever taken to register either Unitbase Limited’s or Mr Khan’s titles to the property neither of them can have received anything more than an equitable interest in the property which would have been subject to Miss Garcia’s lien had she not been paid.

    2T.

    Miss Garcia having been paid off in full Unitbase Limited and/or Mr Khan have been enriched to the extent that

    (i)

    they no longer have any liability to Miss Garcia and

    (ii)

    their respective interests in the property were (subject to the Claimant’s claims herein) freed from Miss Garcia’s lien.

    Such enrichment has been at the expense of the Claimant whose money was used to pay Miss Garcia.

  11. Paragraph 2U of the pleading alleges that the mortgage advance was obtained by fraud, and that any purported sub-sale from Unitbase Limited to Mr Khan was a sham. Paragraph 2V alleges that in all the circumstances the enrichment of Unitbase Limited and/or Mr Khan at the expense of the respondent was unjust.

  12. On that footing, the respondent claims to be subrogated to the rights of Miss Garcia to the full extent of the advance, alternatively to the extent of £132,000, plus (in either case) all payments to the head lessors of the flat by way of rent or service charge, being payments which it would have been entitled to add to its security had the transaction been completed and a legal charge executed in its favour.

  13. By his Re-Amended Defence and Counterclaim, Mr Omar alleges that he has been in possession of the flat since about 19 December 1990. He pleads that on that day Mr Omar contracted with Unitbase Ltd to purchase the leasehold interest in the flat for the sum of £150,000, £50,000 of that sum to be paid by way of deposit by 31 December 1990, with completion to take place on 31 December 1991; that it was a special condition of the contract that on payment of the deposit Unitbase Ltd would grant Mr Omar a 20-year lease of the flat at an annual rental of £2000; that the deposit was duly paid and a 20-year lease granted; and that on or by 31 December 1991 the balance of the purchase price was paid in full. He pleads that by a letter dated 31 December 1990 Thompsons undertook to hand over the Land Certificate on completion together with a Transfer from Mrs Garcia, thereby representing that Unitbase Ltd was itself entitled to be registered as proprietor of the leasehold title with a good an unencumbered title, and that there had been no dealings with the flat which would prevent Mr Omar from acquiring a good and unencumbered title on completion of his purchase from Unitbase Ltd. He further pleads that Unitbase Ltd and Mr Khan had themselves made representations to the same effect before contracts were exchanged.

  14. In paragraph 15 of the pleading Mr Omar pleads that he relied on those representations in paying the balance of the purchase price, and that on such payment he obtained a Transfer of the flat executed by Unitbase Ltd and dated 31 December 1991, which Transfer has been duly stamped. In paragraph 16 he pleads that in breach of their undertaking Thompsons failed to deliver up on completion either the Land Certificate or a Transfer by Mrs Garcia. In paragraph 17 it is alleged that Mr Omar learned of the respondent’s claims to an interest in the flat (I take that to mean that he learned of such claims for the first time) when, in March 1992, he attempted to register his purchase and was prevented from so doing by the caution against dealings which the respondent had lodged almost a year earlier, on 2 April 1991.

  15. In paragraph 24 of the pleading it is pleaded that in the premises Mr Omar is entitled to an equitable charge over the flat to secure the £150,000 purchase money which he paid. Paragraph 25 pleads that his equitable charge has priority over any equitable interest of the respondent in the flat by reason of the fraud, alternatively the negligence, of Thompsons as the respondent’s solicitors and by the failure of the respondent to take any step to protect its interest in the flat prior to Mr Omar contracting to purchase it from Unitbase Ltd.

  16. By his Counterclaim, Mr Omar repeats his Defence and seeks a declaration that Mr Omar’s equitable interest in the flat has priority over any rights therein of the respondent.

  17. By its Reply, the respondent joins issue on the Defence and expressly puts Mr Omar to proof of the alleged transactions between Unitbase Ltd and Mr Omar, and of the allegations made in support of the contention that any equitable interest to which Mr Omar may be entitled takes priority over the respondent’s equitable interest.

    THE JUDGMENT OF HHJ HOWARTH

  18. As mentioned earlier, the trial related not only to Mrs Garcia’s flat (Flat 178) but also to two other flats in the same block in respect of which similar relief was claimed. For the purposes of this appeal it is unnecessary to refer to those parts of the judgment which relate exclusively to the other two flats.

  19. After reciting the undisputed facts relating to the fraud practised on the respondent in resepct of Flat 178, the judge turned to the position of Mr Omar, saying this (at pp.8A-9B):

    Thereafter one gets complications in that on 19th December 1990 there is apparently a contract for sale from Unitbase Limited to Mr Omar for £150,000 with a deposit of £50,000 which is to be paid by 31st December and the balance of the purchase price by 31st December 1991. There is a 20-year lease also apparently on that date in relation to flat 178 where the lessee is Mr Omar, which grants a term of 20 years from 19 December 1990 at a yearly rent of £2,000, and Unitbase are the lessors, Mr Omar the lessee. Mr Omar says he went into occupation of the property in December 1990. On 31st December 1990 Thompsons write to Mr Omar saying that they hold the original land certificate which shows Mrs Garcia as the proprietor and also a transfer sealed by her in favour of Unitbase Limited, and it refers to possession having been granted, to a deposit of £50,000 having been paid, and undertakes for the land certificate to be delivered on payment of the balance of the purchase money by 31st December of the following year, 1991.

    ....

    It can be seen in each of these three cases that the Halifax sent the mortgage money to Thompsons and they have paid the money due under the contract to the head vendors. In each case no charge in favour of the Halifax has either been executed or registered. No transfer has ever been executed in favour of any sub-purchaser or fully executed. Nothing of any of these transactions has ever been registered at the Land Registry. The Halifax seeks declarations that they are subrogated .... to the unpaid vendor’s [lien] held by .... Mrs Garcia.

  20. The judge then turned to the subject of subrogation, and referred to the decisions of the Court of Appeal in Boscawen v. Bajwa [1996] 1 WLR 328 and of the House of Lords in Banque Financiere de la Cite v. Parc (Battersea) Ltd [1999] AC 221 (“the BFC Case”) – to both of which authorities further reference will be made later in this judgment – commenting that, applying those authorities, the Halifax could establish a right to be subrogated if three requirements were established. He continued (at pp.9F-10D):

    What then are the three requirements? If the Halifax can establish the same three requirements in each of the three cases it seems to me that they have a right to be subrogated .... to the unpaid vendor’s [lien] held by .... Mrs Garcia. The three requirements are these. Firstly, that the Halifax must be able to show that its money was used to discharge either the mortgage debt or to pay off the purchase price to the vendor and/or sub-vendor; secondly, that the Halifax, in releasing its money to Thompsons, intended that this money was to be used only to discharge the purchase price for the property, including within that, very obviously, part of the purchase price required to free the property from any encumbrance by way of charge, in other words to pay off the charge; and, thirdly, that the Halifax had always made a bargain whereby it would become a secured creditor once full completion of the transaction had taken place.

    In regard to those requirements there is really no difficulty in the Halifax satisfying the second and third requirements. The contest and the difficulties arise in regard to the issue of tracing them, and one goes through the history of tracing and deals with them in each transaction in turn.

  21. Having addressed the same issue in relation to the other two flats, the judge turned once again to Flat 178, expressing his conclusion in the following terms (at p.13F-G):

    There is certainly no evidence to indicate that the £132,000 came from any money supplied by any other institution. It seems to me that, on the balance of probabilities, the evidence indicates that it must have come from the Halifax, and I so find. The Halifax are, therefore, it seems to me, entitled to be subrogated in regard to all three transactions.

  22. The judge then went on to consider how far that lien extended, and concluded that it could not extend beyond the £132,000 purchase price plus expenses and interest. He then turned to the question of priority as between competing equitable interests, on the footing that Mr Omar had an equitable interest in the flat. He addressed the question of priority as follows (at p.17B-G):

    What about flat 178? The rights of both the Halifax and Mr Omar are equitable, and the normal rule is that the first in time is the first in priority, and there is no doubt that the Halifax is the first in time. It is alleged by Mr Omar that the Halifax have lost their priority, and one goes to the Re-Amended Defence and Counterclaim at paragraph 25 in particular .... and I read that: ‘The Second Defendant’s rights [that is, Mr Omar] in the property as set out above has or have priority over any equitable interest in the property or rights in respect of the property, if any, which is denied, is/are postponed to the interest of the Second Defendant by reason of the aforesaid negligence and frauds of the Claimant’s solicitors, Thompsons, and by the failure of the Claimant to take any steps to protect its claim to such an interest or rights, whether by lodging a caution at H.M. Land Registry against the registered title of the property or otherwise howsoever at any time prior to the Second Defendant contracting to purchase the same’.

  23. As to that plea, the judge said this (at pp.17G-18B):

    It seems to me that negligence and fraud by Thompsons can be of no help at all to Mr Omar. Mr Thompson was busy defrauding his own client, the Halifax. He was joining with Mr Khan to do just that .... His fraudulent acts were not within the scope of his engagement by the Halifax. They were deliberately in breach of it and in breach of the trust which he undertook. I do not see how they can be attributed to the Halifax in any way. It thus boils down, it seems to me, to inaction on the part of the Halifax leading to a failure to register a caution until after 19th December, in other words in April of 1991.

  24. At this point in the judgment, the judge addressed the general credibility of Mr Omar’s oral evidence as to the alleged transaction with Unitbase Ltd, and expressed considerable doubt as to the reliability of that evidence. As I understand it, the judge referred to this evidence in order to discover whether Mr Omar suffered any prejudice by reason of the respondent’s suggested inaction. At all events, the judge referred in this connection to Mr Omar’s evidence that he visited Thompsons on a number of occasions prior to exchange of contracts with Unitbase Ltd on 19 December 1990. In relation to that evidence, the judge said this (at pp.19G-20F):

    Why should I accept that these visits, if they did take place, took place prior to 19the December 1990? I see no good reason to make that assumption. What documents did Mr Omar see? He says on the first visit he saw the transfer from Mrs Garcia to Unitbase Limited and probably the office copy entries in the name of Mrs Garcia. On the second visit he apparently collected a form from Mr Thompson which enabled him to make a search of the Land Registry in Harrow, where he spoke to a man on the counter, paid his fee and saw on a computer screen what the entries in respect of his title were but received no document back of any sort and what document he went away with he returned to Mr Thompson and it has disappeared, as has much of Mr Thompson’s paperwork, into a place where it can no longer be found. And he says then that the third visit was when the contract of lease were [sic] granted. No documents have been produced from the Land Registry, as I say, and when he gave his oral evidence it was clear that Mr Omar’s recollection of events, now over 10 years ago in some cases, was no longer good; not at all surprising. .... It seems to me that this visit to the Land Registry is wholly unconvincing. I do not accept at all the story of that visit and, even if it is true, I do not think there has been negligence of the sort required in this case to result in the postponement of the Halifax’s equitable rights to those of Mr Omar.

  25. The judge then referred to the relevant principles governing priority as between competing equitable interests as stated in Snell’s Principles of Equity, and posed the question whether the respondent had been guilty of “gross negligence or inequitable conduct” such as would deprive it of the priority which it would otherwise enjoy by reason of the fact that its equitable interest was first in time. Addressing this question, the judge reviewed the evidence, commenting that there was no evidence that the respondent was aware prior to 1991 of the fraud, or of the fact that it had not obtained a legal charge over the flat. He concluded his judgment as follows (at p.22G-H):

    Thus, it seems to me that, for these reasons, there is no inequitable conduct here, no gross negligence of the requisite kind which will result in Mr Omar acquiring priority over the Halifax, and in those circumstances Mr Omar’s claim to priority fails. The general rule of the first equitable interest in time having priority over the later one will apply in the case of flat 178 and the Halifax are thus entitled to priority over Mr Omar.

    THE ISSUE ON THIS APPEAL

  26. By ground 1 of their grounds of appeal, the appellants challenge the judge’s finding that the £132,000 paid to Mrs Garcia came from the respondent’s advance. This ground of appeal was subsequently abandoned. By ground 2 the appellants contend that the judge was in error in concluding that the respondent was entitled to be subrogated to Mrs Garcia’s unpaid vendor’s lien. Ground 3 is based on a false premise as to the judge’s findings of fact, and was not proceeded with. Ground 4 asserts that the judge ought to have found that the 20-year lease purportedly granted to Mr Omar by Unitbase Ltd was a legal interest. That ground has subsequently been abandoned. Ground 5 repeated ground 4 (since abandoned). As an alternative, it sought to resurrect the case advanced unsuccessfully by the appellants before the judge that the respondent’s equitable interest did not take priority over Mr Omar’s equitable interest because of the respondent’s gross negligence in failing to take steps to protect their interest. This too was subsequently abandoned. As a further alternative, ground 5 makes the general assertion that “the circumstances were such as to constitute an exception to the rule that an earlier equitable interest takes priority over a later one”.

  27. In summary, therefore, the grounds of appeal (in so far as they have not been abandoned) raise an issue as to the availability of the remedy of subrogation on the facts of the instant case, and the associated issue of priority as between competing equitable interests.

  28. In his written and oral argument, however, Mr Hill-Smith (for the appellants) has narrowed the issues further. His sole contention on this appeal is that the judge found (if not expressly, then impliedly) that Mr Omar was a bona fide purchaser for value of an equitable interest in the flat without notice of the respondent’s prior equitable interest, and that on the principles applicable to claims of unjust enrichment that finding affords the appellants a complete defence. This, however, was not an issue which was raised before the judge. As already indicated, the issue below was whether, as alleged by the appellants in paragraph 25 of their Re-Amended Defence and Counterclaim, the respondent’s equitable interest was postponed to the appellants’ equitable interest by reason of the fraud or negligence of Thompsons and of the failure of the respondent to take any steps to protect its interest prior to Mr Omar contracting to purchase the flat from Unitbase Ltd. We nevertheless allowed Mr Hill-Smith to argue the point, but on the footing (which seems to me, and I think also to my Lords, to be plainly correct) that the judge made no finding that Mr Omar was in fact a bona fide purchaser of the flat for value and without notice of the respondent’s prior equitable interest: on the contrary, the judge’s conclusion, as I read his judgment, is that even if Mr Omar was an innocent third party purchaser – in other words, assuming in Mr Omar’s favour that he was an innocent third party purchaser – he would still take subject to the respondent’s equitable interest. In the light of that conclusion, it was not necessary for the judge to address the many issues of fact which would have to be resolved before he could make any such finding as is suggested by the appellants.

  29. It follows that, should Mr Hill-Smith succeed in persuading us that a “bona fide purchaser” defence (if available on the facts) would defeat the respondent’s claim, the case would have to be remitted to the judge to determine whether the defence was available on the facts: in other words, to make the findings of fact which it was previously unnecessary for him to make given that the only issue as to priority before him was the issue raised in paragraph 25 of the appellants’ Re-Amended Defence and Counterclaim (see above) and given his resolution of that issue in favour of the respondent.

  30. Accordingly, the appeal has proceeded on the assumption that Mr Omar is, as he asserts, an innocent third party purchaser, but on the footing that if we conclude that he would, on that assumption, have a complete defence to the respondent’s claim, the case will have to be remitted to the judge.

  31. Thus the stark issue which arises on this appeal is whether the remedy of subrogation is available at the suit of an innocent lender against an innocent third party purchaser of an equitable interest in the property (it being common ground that had Mr Omar acquired the legal title to the flat, he could defeat the respondent’s claim by establishing that he acquired it in good faith, for value, and without notice of the respondent’s prior equity).

    THE PRINCIPAL AUTHORITIES

  32. Since much of the argument addressed to us on this appeal centred on the two authorities referred to by the judge, viz. the Court of Appeal decision in Boscawen v. Bajwa and the House of Lords decision in the BFC Case, it is convenient, before turning to the arguments, to consider these authorities.

    Boscawen v. Bajwa

  33. The facts in Boscawen v. Bajwa were, in summary, as follows. Abbey National Building Society made an advance for the purchase of a property, to be secured by a first legal charge. The purchase fell through, but not before the purchaser’s solicitors had transferred the moneys advanced by the Abbey National to the solicitors acting for the vendor (Mr Bajwa). The effect of this payment was to leave only a small balance of the purchase price outstanding. Mr Bajwa’s solicitors in turn applied those moneys in redeeming a subsisting charge on the property in favour of the Halifax Building Society. Judgment creditors of the vendor subsequently obtained a charging order over the property, and sought to enforce the charging order against Mr Bajwa and the Abbey National. The Abbey National counter-claimed that it was entitled to be subrogated to the rights of the Halifax., and that it was thereby entitled to a charge on the property which took priority over the charge created by the charging order.

  34. At first instance, Mr Edward Nugee QC (sitting as a Deputy High Court judge) declared that the Abbey National was entitled to be subrogated to the rights of the Halifax, in priority to any interest of the judgment creditors. The judgment creditors appealed unsuccessfully to the Court of Appeal.

  35. At p.330H of his judgment (with which Waite and Stuart-Smith LJJ agreed) Millett LJ formulated the issue which arose for decision as being:

    .... whether, at the time when the appellants obtained the charging order, Mr Bajwa was entitled to the freehold interest in the property free from encumbrances, or whether his interest in the property was subject to a charge in equity by way of subrogation in favour of the Abbey National.

  36. The issue, therefore, was as to the respective rights in the property of the Abbey National on the one hand and the judgment creditors on the other: and in particular as to whether, at the time when the appellants obtained their charging order, the property was subject to a subsisting equitable charge in favour of the Abbey National. The case was not argued on the basis that the Abbey National was subrogated to Mr Bajwa’s unpaid vendor’s lien (the effect of which would have been to limit Mr Bajwa’s interest in the property – and hence the interest subject to the charging order – to his lien in respect of the small outstanding balance of the purchase price). Rather, it was argued on the basis that Mr Bajwa remained at all times solely and beneficially entitled to the property, subject only to such interest, if any, as the Abbey National could establish by way of subrogation (see Millett LJ’s judgment at 332H). The Abbey National contended that, on the figures, since the whole of the advance had been used to discharge the existing mortgage, Mr Bajwa was left with no interest in the flat to which the charging order could attach. The primary contention of the judgment creditors is summarised by Millett LJ at p.333D of his judgment, as follows:

    The appellants’ primary submission, however, is that the deputy judge made an impermissible aggregation of two different equitable doctrines. Even if the Abbey National’s money could be traced to the Halifax, they submit, it was then lost. Money used to pay off a debt ceases to be traceable; it merely extinguishes the debt. The Halifax’s charge was discharged. Nothing of it remained. No traceable assets were received in exchange for the Abbey National’s money; and accordingly, its tracing claim must fail.

    Then it is submitted that the deputy judge was in error in attempting to supply the absence of a tracing remedy by invoking the doctrine of subrogation. Subrogation is concerned with the assignment by operation of law of a third party’s rights (which may or may not be proprietary rights). It is based on intention, actual or inferred. In order to succeed in its claim to be subrogated to the Halifax’s charge, it is submitted, the Abbey National must show that it intended to keep the Halifax’s charge alive for its own benefit pending its replacement by an effective charge in its favour. But the Abbey National had no such intention. It intended the Halifax’s charge to be discharged on completion, not kept alive. It never intended to be a secured creditor of Mr Bajwa. If completion took place, it was to be a secured creditor of the purchasers ....

  37. Addressing this submission, Millett LJ commented (at p.334C) that it betrayed:

    .... a confusion of thought which arises from the admittedly misleading terminology which is traditionally used in the context of equitable claims for restitution.

  38. Millett LJ went on to explain that tracing is neither a claim nor a remedy but a process, which must generally be followed by a claimant whose claim is based on the retention by him of a beneficial interest in property which came into the hands of the defendant. Millett LJ continued (at p.334E-F):

    Unless he can prove this, he cannot (in the traditional language of equity) raise an equity against the defendant or (in the modern language of restitution) show that the defendant’s unjust enrichment was at his expense.

  39. Later, after stressing the variety of proprietary remedies available to a court of equity, Millett LJ said this (at p.335A-F):

    If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant’s land has been enhanced by the use of the plaintiff’s money. And if the plaintiff’s money has been used to discharge a mortgage on the defendant’s land, then the court may achieve a similar result by treating the land as subject to a charge by way of subrogation in favour of the plaintiff.

    Subrogation, therefore, is a remedy, not a cause of action.... It is available in a wide variety of different factual situations in which it is required in order to reverse the defendant’s unjust enrichment. Equity lawyers speak of a right of subrogation, or of an equity of subrogatoin, but this merely reflects the fact that it is not a remedy which the court has a general discretion to impose wherever it thinks it just to do so. The equity arises in circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. .... Once the equity is established the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation ....

  40. Turning to the facts of the case, Millett LJ concluded (at 339H) that the Abbey National’s intention must be taken to have been to keep the Halifax’s charge alive for the benefit of the Abbey National pending completion, and that that was sufficient to bring the doctrine of subrogation into play.

  41. Millett LJ went on to refer to consider a passage from the judgment of the Court of Appeal in Re Diplock [1948] Ch 465, 549-550, on which the judgment creditors had placed much reliance. With reference to the claim of the next of kin in Re Diplock to be subrogated to the extent of their contribution to the discharge of a subsisting security, Millett LJ commented that it was unclear to him why the Court of Appeal in that case had considered it relevant that the balance of the moneys required to discharge the security had come from another source. Millett LJ continued (at p.341A-B):

    Nor is it clear to me why [as the Court of Appeal in Re Diplock had suggested] insoluble problems would arise in a case where there had been fresh charges on the properties in the meantime. The next of kin would obtain a charge by subrogation with the same priority as the charge which had been redeemed except that it would not enjoy the paramountcy of the legal estate. A subsequent incumbrancer who obtained a legal estate for value without notice of the interest of the next of kin would take free from it. It is not necessary to decide whether a subsequent incumbrancer who took an equitable charge only would take free from the interest of the next of kin; the question has not yet arisen for decision, but it is not insoluble.

  42. Finally, for present purposes, I note the following passage from Millett LJ’s judgment (at p.342C-D):

    Nor, in my judgment, is there any justification for the proposition that the Abbey National’s right to be subrogated to the Halifax’s charge did not arise until the court made the necessary order. The order merely satisfied a pre-existing equity. The Abbey National’s equity arose from the conduct of the parties. It arose at the very moment that the Halifax’s charge was discharged, in whole or in part, with the Abbey National’s money. It arose because, having regard to the circumstances in which the Halifax’s charge was discharged, it would have been unconscionable for Mr Bajwa to assert that it had been discharged for his benefit. At law, Mr Bajwa became the owner of an unencumbered freehold interest in the property; but he never did, even for an instant, in equity.

    The BFC Case

  43. The facts in the BFC Case were, in summary, as follows. The first defendant, Parc (Battersea) Ltd (“Parc”), a member of a group of companies called the Omni Group (“the Group”), obtained a loan from a bank (“RTB”) secured by a first legal charge over development land owned by Parc. The land was also subject to a second charge in favour of another company in the Group called Omnicorp Overseas Ltd (“OOL”) to secure another debt. The Group negotiated a refinancing of the loan from RTB with Banque Financiere de la Cite (“BFC”), a Swiss Bank. It was decided that, in order to avoid incurring a disclosure obligation under Swiss banking regulations, the loan by BFC to Parc should be made through an intermediary, a Mr Herzig (“H”), the general manager of the holding company of the Group. It is important for present purposes to note that BFC’s loan was not, and was not intended to be, secured by any charge over land. Instead, BFC obtained a “postponement letter”, written on the notepaper of the holding company of the Group and signed by H, which stated that companies in the Group would not demand payment of loans made to BFC until BFC’s loan had been repaid in full. BFC also took an assignment from H of a promissory note issued by Parc. Neither Parc nor OOL was aware of the “postponement letter”, and in the event it was held by the judge at first instance, by the Court of Appeal and by the House of Lords (albeit the reasoning of the judge and of the House of Lords differed from that of the Court of Appeal) that it was not binding on either OOL or Parc. BFC’s loan was duly applied, together with other moneys, in discharging RTB’s first charge. The Group subsequently collapsed and Parc became insolvent. BFC obtained judgment against Parc on the promissory note. OOL also obtained judgment against Parc in respect of the debt secured by its charge, contending that its security took priority over the rights of BFC as an unsecured creditor. BFC sought to rely on the postponement letter to claim priority over OOL’s charge.

  44. The judge at first instance held that although the postponement letter was not binding on OOL, it nevertheless knew enough to permit a presumption of mutual intention which was necessary to activate the remedy of subrogation so as to prevent OOL being unjustly enriched at BFC’s expense. The Court of Appeal reversed that decision, holding that subrogation was not available since the effect of it would be to place BFC in the position of a secured creditor, and as such in a better position than that for which it had bargained. The House of Lords (Lords Steyn, Griffiths, Hoffmann, Clyde and Hutton) unanimously allowed BFC’s appeal.

  45. Before I turn to the speeches themselves, it is, I think, worth stressing at this stage the distinction between the BFC Case and Boscawen v. Bajwa in that whereas in Boscawen v. Bajwa the Abbey National had contracted for a charge by way of security, in the BFC Case BFC had not done so. Its only “security” was the postponement letter, which could at best have been binding only on companies in the Group. However, BFC’s case (at first instance and in the Court of Appeal) was that it was nevertheless entitled to step into the shoes of RTB as chargee and to be treated as entitled to a property right in the form of an equitable charge taking priority over OOL’s charge and giving rise to proprietary remedies (a position which would, as already noted, have placed it in a better position than that for which it had contracted). Indeed, it was this very feature of BFC’s case which the Court of Appeal held to be fatal to its claim to subrogation.

  46. In the House of Lords, however, BFC modified its case by restricting the relief sought to a restitutionary remedy against OOL alone. Having summarised the facts, Lord Steyn refers to this change of approach by BFC in the following passage in his speech (at p226F-G):

    My Lords, both the judge and Morritt LJ invoked the vocabulary of unjust enrichment or restitution. Nevertheless both courts ultimately treated the question at stake as being whether BFC is entitled to be subrogated to the rights of RTB. On the present appeal counsel adopted a similar approach. That position may have seemed natural at a stage when BFC apparently claimed to be entitled to step in the shoes of RTB as chargee with the usual proprietary remedies. On appeal to your Lordships’ House counsel for BFC attenuated his submission by making clear that BFC only seeks a restitutionary remedy against OOL. In these circumstances it seems sensible to consider directly whether the grant of the remedy would be consistent with established principles of unjust enrichment.

  47. Lord Steyn then proceeded to consider the relevant principles, on the footing that the law relating to unjust enrichment is an independent source of rights and obligations, in addition to those arising under the law of contract or tort. He continued (at p.227A):

    Four questions arise. (1) Has OOL benefited or been enriched? (2) Was the enrichment at the expense of BFC? (3) Was the enrichment unjust? (4) Are there any defences?

  48. In addressing the third of those questions, Lord Steyn regarded the fact that but for BFC’s mistaken belief that it was protected in respect of intra-Group indebtedness it would not have made the loan as constituting what he described (at p.227E) as “a principled ground for granting a restitutionary remedy”. He also pointed out (at p.227G) that “restitution is not a fault-based remedy”.

  49. Referring to the judgments of the Court of Appeal, Lord Steyn said (at p.228C-E):

    The Court of Appeal considered that subrogation if allowed would place BFC in a better position than if the postponement letter had been binding on Parc and OOL. The Court of Appeal considered the matter from the point of view of BFC seeking to step into the shoes of RTB as chargee. But it has now been made clear that BFC merely seeks the reversal of OOL’s unjust enrichment at the expense of BFC. BFC merely asserts restitutionary rights against OOL. In the circumstances conceptual difficulties about the remedy sought by BFC disappear.

  50. Lord Steyn concluded his speech as follows (at p.228C-E):

    In my view, on an application of established principles of unjust enrichment BFC are entitled to succeed against OOL. But, if it were necessary to do so, I would reach the same conclusion in terms of the principles of subrogation. It would admittedly not be the usual case of subrogation to security rights in rem and in personam. The purpose of giving the relief would be dictated by the particular form of the security, involving rights in personam against companies in the group, which BFC mistakenly thought it was obtaining. It is true that no decided case directly in point has been found. But distinguished writers have shown that the place of subrogation on the map of the law of obligations is by and large within the now sizeable corner marked out for restitution .... And there can be no conceptual impediment to the remedy of subrogation being allowed not in respect of both rights in rem and rights in personam but only in respect of rights in personam.

  51. For these reasons, as well as the reasons contained in the speech of my noble and learned friend, Lord Hoffmann, I would allow the appeal.”

  52. Lord Griffiths agreed with Lord Hoffmann.

  53. Lord Hoffmann, after summarising the facts and referring to the decisions below, turned to the doctrine of subrogation, and distinguished cases in which subrogation is, in effect, a contractual arrangement for the transfer of rights based on the common intention of the parties. He continued (at pp.231G-232C):

    But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. The fact that contractual subrogation and subrogation to prevent unjust enrichment both involve transfers of rights or something resembling transfers of rights should not be allowed to obscure the fact that one is dealing with radically different institutions. One is part of the law of contract, and the other part of the law of restitution ....

    In this case there was plainly no common intention as between OOL, the party enriched, and BFC, the party deprived. OOL had no knowledge of the postponement letter or reason to believe that the advance to Parc of the money provided by BFC was otherwise than unsecured. But why should this necessarily exclude subrogation as a restitutionary remedy? I shall refer to five authorities which in my view demonstrate the contrary.

  54. Lord Hoffmann then referred to three cases (Chetwynd v. Allen [1899] 1 Ch 353, Butler v. Rice [1910] 2 Ch 277, and Ghana Commercial Bank v. Chandiram [1960] AC 732) in each of which subrogation had been granted in circumstances where there was found to be no common intention, as between the party enriched and the party deprived, that subrogation should occur, and in each of which the court had described the security to which the claimant sought to be subrogated as having been “kept alive” for the benefit of the claimant.

  55. The fourth the five authorities to which Lord Hoffmann referred in this context is Paul v. Speirway Ltd [1976] Ch 220, a decision of Oliver J. In that case, Oliver J found that the advance in question was intended to be an unsecured loan, and he held that that fact precluded any question of the lender being subrogated to the security which had been discharged by the application of the advance. Lord Hoffmann described the species of subrogation which the lender had sought (unsuccessfully) in that case as “subrogation to security”, as distinct from “subrogation to a mere debt” (see p.233E-F).

  56. The last of the five cases referred to by Lord Hoffmann in this context was Boscawen v. Bajwa. Lord Hoffmann described Millett LJ’s analysis of the remedy of subrogation in that case as “valuable and illuminating” (see p.233F).

  57. Lord Hoffmann continued (at pp.234B-235B):

    These cases seem to me to show that it is a mistake to regard the availability of subrogation as a remedy to prevent unjust enrichment as turning entirely upon the question of intention, whether common or unilateral. Such an analysis has inevitably to be propped up by presumptions which can verge upon outright fictions, more appropriate to a less developed legal system than we now have. I would venture to suggest that the reason why intention has played so prominent a part in the earlier cases is because of the influence of cases on contractual subrogation. But I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff’s expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy ....

    This does not of course mean that questions of intention may not be highly relevant to the question of whether or not enrichment has been unjust. I would certainly not wish to question the proposition of Oliver J in Paul v. Speirway .... that, as against a borrower, subrogation to security will not be available where the transaction was intended merely to create an unsecured loan....

    In this case, I think that in the absence of subrogation OOL would be enriched at BFC’s expense, and that prima facie such enrichment would be unjust. [BFC] advanced DM30m upon the mistaken assumption that it was obtaining a postponement letter which would be effective to give it priority over any intra-group indebtedness. It would not otherwise have done so. On the construction of the letter adopted by Robert Walker J, namely that [the holding company] was purporting to contract on behalf of all companies in the [Group], the payment was made under a mistake as to [the holding company’s] authority. On the construction adopted by the Court of Appeal the mistake was as to the power of [the holding company] to ensure that other group companies would postpone their claims. For my part, I prefer the construction adopted by the judge. But I do not think that for present purposes it matters much which view one takes. In either case, BFC failed to obtain that priority over intra-group indebtedness which was an essential part of the transaction under which it paid the money .... The result of the transaction is that BFC’s DM30m has been used to reduce the debt secured by RTB’s first charge and that this reduction will, by reason of OOL’s second charge, enure wholly to the latter’s advantage.

  58. Lord Hoffmann then turned to the various factors relied on by the Court of Appeal in concluding that subrogation was not available in that case. For present purposes, it is only necessary to refer to one such factor, viz. the proposition that subrogation would place BFC in a better position than it had bargained for, in that it would result in BFC having security rights (subrogation to security). As to that, Lord Hoffmann said this (at pp.236C-237B):

    This brings me to the fifth reason relied upon by the Court of Appeal and what I regard as the main question in the case, namely the fact that “keeping the charge alive” for the benefit of BFC would give it more than it was entitled to expect. The transaction contemplated that BFC would be an unsecured creditor of Parc; “keeping the charge alive” would give it the benefit of a first charge. This makes it necessary, as I earlier foreshadowed, to examine more closely what is involved in subrogation to a security.

    In my view, the phrase “keeping the charge alive” needs to be handled with some care. It is not a literal truth but rather a metaphor or analogy.... In a case in which the whole of the secured debt is repaid, the charge is not kept alive at all. It is discharged and ceases to exist. In a case like the present, in which part of the secured debt is repaid, the charge remains alive only to secure the remainder of the debt for the benefit of the original chargee. Nothing can affect his rights and there is no question of competition between him and the party claiming subrogation. It is important to remember that, as Millett LJ pointed out in Boscawen v. Bajwa ...., subrogation is not a right or a cause of action but an equitable remedy against a party who would otherwise be unjustly enriched. It is a means by which the court regulates the legal relationships between a plaintiff and a defendant or defendants in order to prevent unjust enrichment. When judges say that the charge is “kept alive” for the benefit of the plaintiff, what they mean is that his legal relations with a defendant who would otherwise be unjustly enriched are regulated as if the benefit of the charge had been assigned to him. It does not by any means follow that the plaintiff must for all purposes be treated as an actual assignee of the benefit of the charge and, in particular, that he would be so treated in relation to someone who would not be unjustly enriched.

    This, I interpose, is the real reason why there is no “conceptual problem” about treating BFC as subrogated to part of the RTB secured debt. The equitable remedy is available only against OOL, which is the only party who would be unjustly enriched. As between RTB and BFC subrogation has no part to play. RTB is entitled to its security and BFC is no more than an unsecured creditor. The same is true as between BFC and any secured or unsecured creditor of Parc other than the members of the [Group]. The transaction contemplated that as against non-group creditors, BFC would incur no more than an unsecured liability, evidenced by the promissory note issued to [H] and assigned by him to BFC. As against such creditors, therefore, the remedy of subrogation is not available. Nor is it available against Parc itself, so as to give BFC the rights of sale, foreclosure etc. which would normally follow from BFC being treated as if it were an assignee of the RTB charge.

    It follows that subrogation as against OOL, which is all the BFC claims in the action, would not give it more than it bargained for. All that would happen is that OOL would be prevented from being able to enrich itself to the extent that BFC’s money paid off the RTB charge. This is fully within the scope of the equitable remedy ....

  59. Lord Clyde, agreeing with Lord Hoffmann, identified the object of the remedy of subrogation as being “to effect a fair and just balance between the rights and interests of the parties concerned” (saee p.237G). He continued:

    The claim which the appellants have eventually come to make is not for a share in the charge which had been effected over the [land] in favour of RTB, so as to give them a preference over all creditors of Parc, but only a personal right to rank in priority to OOL, effective only as between RTB and OOL, and open to be defeated by any further transactions by Parc, which in the event have not occurred. I would have had difficulty in accepting that the appellants would be entitled to have even a pro tanto right to the charge in circumstances where they did not intend to obtain any such security, indeed such a provision had been deliberately considered and deleted from the documentation. The more modest claim which they now make, however, seems to me to have been made out. The difference between these two positions, which to my mind is critical in the case, can readily be obscured by the use of the term “subrogation”.

  60. Lord Hutton, referring to a submission made by counsel for OOL to the effect that in granting BFC the remedy of subrogation the court would in effect be creating new rights, which the court had no jurisdiction to do, said this (at p.245F-H):

    In my opinion this submission is invalid because it fails to take account of the consideration that the doctrine of subrogation applies in a variety of different circumstances where the defendant has been unjustly enriched at the expense of the plaintiff, and where equity considers that it would be unconscionable for the defendant to retain that enrichment. In such a case, as Goff and Jones say, the remedy is fashioned to the facts of the particular case.

    THE ARGUMENTS ON THIS APPEAL

  61. Mr Hill-Smith accepts that, as against Unitbase Ltd and/or Mr Khan, the respondent would have a clear right to be subrogated to Mrs Garcia’s rights as an unpaid vendor; in other words that, as against Unitbase Ltd and/or Mr Khan, the Halifax is entitled to be regarded in equity as having a charge over the leasehold title to the flat to the extent of £132,000, with the usual proprietary rights to appoint a receiver and to seek an order sale. He also accepts that that right is transmissible (i.e. capable of assignment) and that it is capable of binding a subsequent holder of an equitable interest in the flat. He further accepts that had Mrs Garcia remained unpaid, Mr Omar would take subject to her unpaid vendor’s lien (in effect, an equitable charge). However, he submits that as between the Halifax and Mr Omar (and on the assumption, referred to earlier, that Mr Omar is an innocent third party purchaser) subrogation is not available.

  62. Citing the BFC Case, and relying especially on the speeches of Lord Steyn and Lord Hoffmann, Mr Hill-Smith stresses the flexibility of the doctrine of subrogation, and warns against treating the remedy as if it effected an actual transfer or assignment of a subsisting right. He submits that in the context of unjust enrichment the courts have recognised a defence of “bona fide purchaser”, akin to the defence of “change of position” identified by the House of Lords in Lipkin Gorman v. Karpnale [1991] 2 AC 548 (see in particular Lord Goff at pp.578E-580C). He further submits that there is no reason in principle why the law of unjust enrichment should import a distinction between legal and equitable interests which was developed historically as part of the law of real property. He submits that it is unnecessary to import such a distinction into the developing law of restitution. He further submits that even the rules relating to priority as between competing equitable interests are subject to a number of difficult exceptions, and that it is undesirable to import these rules into the law of unjust enrichment. Why, he asks rhetorically, should a purchaser of a legal interest be protected, but not a purchaser of an equitable one?

  63. Turning to the facts of the instant case, and addressing the four questions posed by Lord Steyn in the BFC Case in the passage from his speech quoted earlier – Lord Hoffmann compressed them into three questions – Mr Hill-Smith submits that there is no basis for saying that Mr Omar has been enriched at the expense of the respondent. He submits that had Mrs Garcia not been paid she would not have executed a Transfer of her interest, with the consequence that Unitbase Ltd would have had no interest to sell, and Mr Omar would not have come into the picture at all. Similarly, the only consequence of the respondent having paid Mrs Garcia (he submits) is that Mr Omar has been presented with an opportunity to purchase the flat which would not otherwise have arisen. Accordingly, submits Mr Hill-Smith, as between the respondent and Mr Omar there has been no unjust enrichment and accordingly there is no basis for the grant of the remedy of subrogation. Far from Mr Omar having been unjustly enriched, he submits, subrogation would unjustly deprive him of that which he has purchased.

  64. Mr Zelin (for the respondent) submits that Mr Hill-Smith’s approach to the issue of subrogation is fundamentally flawed. He submits that rather than starting with the remedy and working backwards to see whether the remedy should be granted, the correct (and principled) approach is to start by examining the facts and identifying any rights which the claimant may have relevant to his claim. Only when that stage in the process has been completed should the court address the questions: Should the remedy of subrogation be granted, and if so what form should it take?

  65. Turning to the BFC Case, Mr Zelin submits that there is a crucial distinction between that case and the instant case – as there was between that case and Boscawen v. Bajwa – in that whereas both in the instant case and in Boscawen v. Bajwa the claim to subrogation is based on the existence of a property right in the form of a right to be treated in equity as if it were a chargee of the property, in the BFC Case that was not the basis on which the remedy of subrogation was granted, nor did the remedy granted in the BFC Case have the effect of conferring any property right. On the contrary, for reasons explained by Lord Hoffmann the remedy in the BFC Case merely conferred on BFC a personal right as against OOL.

  66. Mr Zelin submits, therefore, that the instant case is, for all practical purposes, on all fours with Boscawen v. Bajwa, in that what the court is faced with in the instant case are competing property rights, the issue being as to the relative priority of those rights.

  67. Mr Zelin submits that in a case involving property rights the remedy of subrogation, on a true analysis, effects an equitable transfer or assignment of existing security rights. But in any event, he submits, even if there is no actual transfer or assignment of an existing right, the effect of subrogation is to place the claimant in the same position as if there had been.

  68. On the issue of priority between competing property rights, Mr Zelin submits that in the instant case (and on the assumption that Mr Omar is an innocent third party purchaser) there is no reason to displace the rule that as between competing equitable interests the first in time prevails. He reminds us of the general principle that a transferor cannot confer on his transferee a better title to that which is transferred than he himself enjoys. In this connection, he referred us to a passage in the judgment of Lord Westbury, Lord Chancellor, in Phillips v. Phillips (1861) 4 D F & J 208, at p.215, where he set out what he described as “elementary principles” governing priority as between competing equitable interests. Lord Westbury begins his exposition of the relevant principles by saying:

    I take it to be a clear proposition that every conveyance of an equitable interest is an innocent conveyance, that is to say, the grant of a person in equity passes only that which he is justly entitled to and no more.

  69. Accordingly, submits Mr Zelin, on well-settled principles the respondent’s right to be subrogated takes priority over Mr Omar’s (assumed) equitable interest.

    CONCLUSIONS

  70. In my judgment, the key to the decision in the instant case lies in the distinction, emphasised by Lord Hoffmann in the BFC Case in the passages from his speech quoted earlier (see in particular p.233E-F), between on the one hand subrogation to a security (as in Boscawen v. Bajwa) and on the other hand subrogation merely to the indebtedness itself (what Lord Hoffmann described as a “mere debt”). The former category includes rights in rem; the latter is limited to rights in personam. The instant case falls within the former category; the BFC Case falls within the latter. In the instant case, the respondent claims to be subrogated to the security rights of Mrs Garcia as an unpaid vendor. In the BFC Case a similar claim by BFC to be subrogated to the security rights of RTB failed in the Court of Appeal and would also have failed in the House of Lords on the ground that to regard BFC in equity as standing in the shoes of RTB as chargee would be to place it in a better position than that for which it had contracted and that a restitutionary remedy which would have that effect was accordingly inappropriate. BFC succeeded in the House of Lords on the more limited claim (referred to by Lord Steyn at p.226G as an “attenuated” submission) to be subrogated to RTB not in its capacity as chargee (with accompanying proprietary rights and remedies) but merely in its capacity as debtor having priority over OOL. As Lord Hoffmann makes clear, the remedy granted in the BFC Case gave BFC no more than rights in personam against OOL: in so doing, the remedy directly reflected and matched the attenuation of BFC’s claim to which Lord Steyn referred.

  71. In the BFC Case the House of Lords fashioned the restitutionary remedy of subrogation to meet a situation in which (on the case presented by BFC in the House of Lords) property rights were not in issue. It did so by the application of the wider doctrine of unjust enrichment, so as to confer personal rights (as opposed to property rights) on a claimant who had been unjustly deprived as against a defendant who had been unjustly enriched. The instant case, on the other hand, does not require the remedy of subrogation to be fashioned in that special way. In my judgment, the instant case is a straightforward case involving property rights, calling into play well-settled principles.

  72. In Tham Building Society [1902] 1 Ch 1 CA, a building society unknowingly took a mortgage from an infant to secure an advance for the purchase of land. Following the execution of the mortgage, the building society made further advances on the security of it. When it discovered that the mortgagor was an infant, it took possession of the land and expended money in building houses on it. On the mortgagor attaining her majority, she brought an action against the building society claiming that the charge was void and seeking possession and the delivery up of the title deeds. The judge at first instance dismissed the action, on the ground that the purchase and the mortgage formed in substance one transaction, and that the mortgagor could not repudiate one part of it (the mortgage) while retaining the benefit of the other (the purchase). The Court of Appeal held that the purchase and the mortgage were two different transactions, and that the mortgage was void. However, it went on to hold that the building society was entitled to a lien on the land to the extent of the purchase money which they had paid to the vendor on the mortgagor’s behalf. The mortgagor appealed unsuccessfully to the House of Lords.

  73. In Court of Appeal, Vaughan Williams LJ said this, in relation to subrogation (at pp.9-10):

    I thought during argument that the only security which the building society held for the £250 which they had paid for purchase-money was a lien upon and a right to retain the title-deeds and conveyance until the money had been repaid; but I am satisfied now, after discussing the matter with my brethren, that the society, having paid off the vendor, have a right to the remedies of the vendor – have a right, that is, to enforce the vendor’s lien. It is true that the society were not the vendors, but, having paid off the vendor, the society, as against the purchaser, stand in the place of the vendor.

  74. Romer LJ (at p.13) agreed with Vaughan Williams LJ that “the society was, at the date of completion, entitled to a charge for the limited sum mentioned above”, i.e. the £250.

  75. In the House of Lords, only the Earl of Halsbury LC and Lord Shand found it necessary to refer to the remedy of subrogation granted by the Court of Appeal. The Earl of Halsbury said merely (at p.10) that it seemed to him that there was:

    .... no answer to the judgment of the Court of Appeal which affirms the subrogated right of the society to be repaid the money which they, standing in the shoes of the vendor, have a right to claim as a lien upon the property conveyed.

  76. Lord Shand agreed (also at p.10) that:

    .... while the society will take the benefit of that payment in succeeding to the vendor’s lien, they cannot maintain what remains of their case.

  77. In Burston Finance Ltd v. Speirway Ltd [1974] 1 WLR 1648, the plaintiff finance company provided the defendant with funds to enable it to purchase properties, on terms that the loan was secured by a first legal charge over the properties and that no second charges should be created over the properties without the plaintiff’s prior consent in writing. The contract for sale did not exclude the vendor’s lien for the purchase money. On completion, the defendant provided the plaintiff with an “all moneys” legal charge. The defendant was duly registered at the Land Registry as proprietor of the properties, and the charge was also registered. However, the charge was not registered in addition at at the Companies Registry, with the result that by virtue of section 95(1) of the Companies Act 1948 it was void as against a liquidator. Subsequently the defendant went into creditors’ voluntary liquidation and the liquidator took the point that the charge was void as against him. The plaintiff claimed that it was entitled by subrogation to a lien or charge on the properties to secure the repayment of the loan. Walton J held that although between the time when the properties were transferred and the time when the charge was handed over the plaintiff was entitled to be regarded in equity as an assignee of the lien which the vendor would have had if the plaintiff’s moneys had not been applied in paying the purchase price, nevertheless by taking the legal charge they had lost the benefit of that lien. He accordingly dismissed the plaintiff’s claim.

  78. I note in passing, as an irrelevant detail, that counsel for the successful defendant were Mr Millett QC (as he then was) leading Mr Hoffmann (as he then was).

  79. In the course of his judgment Walton J said this with reference to the doctrine of subrogation (at p.1652):

    What is the basis of the doctrine of subrogation? It is simply that, where 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. There are other cases of subrogation where B is not secured, but the ordinary and typical example is as I have stated. 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, but of course only to the extent to which his money has, in fact, discharged their claims.

    This formulation was not, I think, seriously in issue between the parties to this summons.

  80. In my judgment, the correctness of that statement of the law by Walton J is not in any way affected by the reasoning or the decision of the House of Lords in the BFC Case. As Walton J makes clear, he is addressing the “ordinary and typical” case where the claimant seeks to be subrogated to security rights: in other words, a case within the Boscawen v. Bajwa category, into which category the instant case also falls.

  81. In such a case, the remedy of subrogation gives effect to a property right which already exists in equity: i.e. the right to be regarded as chargee of the property in question. As Millet LJ said in Boscawen v. Bajwa (at p.335E):

    Once the equity is established, the court satisfies it by declaring that the property in question is subject to a charge by way of subrogation ....

  82. See also p.342C, where Millett LJ said:

    The order merely satisfied a pre-existing equity.

  83. On that approach, the issue in the instant case becomes a straightforward issue of priority as between competing equitable interests in real property. So formulated, the issue is, on authority, capable of only one answer, viz. that where the equities are equal (as they must be assumed to be in the instant case) the earlier in time will prevail (see Snell’s Equity, 30th edition, at para 4-38).

  84. I add for completeness that although in his written skeleton argument Mr Hill-Smith advanced an argument that if it came to a question of priorities the equity of the respondent should be regarded as, in effect, a “mere equity” not susceptible of conferring priority over a subsequent purchaser of an equitable interest without notice, he did not develop that argument in his oral submissions. In my judgment he was right not to do so, since the argument is a bad one. As the authorities to which I have referred make clear, a claimant who is subrogated to a security right is treated in equity as if had that security: thus in a case such as the instant case, where the security takes the form of an unpaid vendor’s lien, he is, as the judge correctly concluded, an equitable chargee to the extent that his money was used to pay the purchase price for the property.

    RESULT

  85. I accordingly conclude that both the approach and the conclusion of Judge Howarth were correct, and that this appeal should be dismissed.

    Lord Justice Laws

  86. I agree.

    Lord Justice Simon Brown

  87. I also agree


Representations

Mr Geoffrey Zelin (instructed by DLA) for the claimant/respondent.

Mr Alexander Hill-Smith (instructed by The Sethi Partnership) for the defendants/appellants.


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