Mortgage Express v Loi & Anor

Where a lender’s advance discharges an earlier security affecting an interest which was not effectively charged to the new lender, subrogation may prevent the owner of that interest being unjustly enriched. The lender is subrogated only to the extent of the earlier security attributable to that interest and the relevant share of the owner’s interest. Separate freehold and leasehold titles do not merge merely because they are held by the same owners. Merger depends on intention, normally assessed when the titles are acquired, and a later change requires positive evidence. Maintaining separate Land Registry titles and separate charges is strong evidence against merger.

Mortgage Express advanced money to the first defendant, secured by a charge over the freehold title to a property. The property also comprised a separately registered leasehold title, jointly owned by both defendants, which was not effectively charged to Mortgage Express. The advance discharged an earlier TMB mortgage secured over both titles.

Following default, the property was sold. The proceeds attributable to the leasehold interest were divided equally between Mrs Loi and Mortgage Express under an order of District Judge Dowding. Mortgage Express applied to vary that order, arguing that the titles had merged or, alternatively, that it was entitled to subrogation to TMB’s security.

1. Merger. The court refused to declare that the freehold and leasehold titles had merged. Although merger is governed by the parties’ intention, the titles were acquired and maintained separately in 2002 and were separately charged to TMB. Those matters strongly indicated that there was no intention to merge them at acquisition.
2. A later change of intention required positive evidence. The documents relating to the 2004 remortgage were ambiguous. The transfer executed by Mrs Loi concerned only the freehold title, and the evidence did not establish whether she intended to transfer or merge her leasehold interest. The court therefore refused to vary the order on the merger ground.
3. Subrogation. Applying the principles reviewed in Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291, Mortgage Express was entitled to be subrogated to the discharged TMB security over the leasehold interest. Without that relief, Mrs Loi would have been unjustly enriched by receiving the value of her leasehold interest free from a security discharged with Mortgage Express’s funds.
4. The amount recoverable was not the whole of the leasehold proceeds or the whole TMB debt. The TMB debt first had to be apportioned between the freehold and leasehold interests by reference to their relative values. The leasehold element then had to be divided between Mr and Mrs Loi’s shares. Mortgage Express was entitled to Mrs Loi’s half of the amount attributable to the leasehold interest.
5. The objection based on Burston Finance v Spierway [1974] 1 WLR 164 did not apply. That case concerned security which was valid when granted but later became invalid through non-compliance with registration formalities. Here, the intended security over the leasehold interest was wholly invalid from inception. Laches also did not bar the claim because Mortgage Express only recently learned the facts giving rise to subrogation.
6. The order of District Judge Dowding was varied to provide for payment to Mortgage Express of the calculated amount. The balance remained held for Mrs Loi. A costs order against Mrs Loi was refused.

First-instance decision. The judgment describes an earlier order by District Judge Dowding dividing the leasehold sale proceeds equally between Mrs Loi and Mortgage Express. That order was varied to give effect to Mortgage Express’s subrogated entitlement.