Lender’s success despite defective security

The Court of Appeal has held that a lender with defective security over property was entitled, through subrogation, to an unpaid vendor’s lien over that property on the basis that the owner had been unjustly enriched at the lender’s expense.

The Bank of Cyprus UK (the lender) had security over property owned by the parents of the respondent (Menelaou). The lender agreed that the parents could sell the property over which it had security and use the proceeds to buy a smaller property for their daughter, in exchange for part repayment of the loan. The lender would release its security over the first property (reflecting the part repayment) on the basis that it would obtain a third-party legal mortgage from the daughter over her property to secure the remaining indebtedness.

The lender’s solicitors, however, failed to obtain an enforceable legal mortgage from the daughter and instead registered a charge using the name of one of the parents. The daughter then sought to have the register for the new property rectified to remove the legal mortgage altogether, claiming that she had not signed the requisite documentation and the register had been altered by the lender’s solicitors without her authorisation. The lender claimed it was entitled to an equitable charge over the daughter’s property arising as a result of subrogation to an unpaid vendor’s lien over that property…

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