Bank of Cyprus UK Limited v Menelaou

This appeal concerned whether the bank was entitled to equitable relief by way of subrogation to an unpaid vendor’s lien after a purchase of land was completed using sale proceeds which passed through the vendor/purchaser solicitors’ client account. The Supreme Court analysed the claim as one in unjust enrichment, adopting the four-step approach from Benedetti v Sawiris: enrichment, at the claimant’s expense, unjustness, and defences. The court held that Melissa had been enriched because she obtained the property free of the intended charge, that enrichment was at the Bank’s expense because the whole scheme (sale of Rush Green Hall and purchase of Great Oak Court) involved the Bank’s agreement to release proceeds only on condition of substitute security, and that the enrichment was unjust. No available defence was made out. As a remedy the court allowed subrogation to the unpaid vendor’s lien as an appropriate equitable means to reverse the unjust enrichment; several judges emphasised that traditional tracing/subrogation rules or a proprietary interest in the sale proceeds could also support the result but left some of those issues open for another case.

The appellant, Melissa Menelaou, was the named purchaser of Great Oak Court in September 2008. The Menelaou parents sold Rush Green Hall, the sale proceeds passed through their solicitors Boulter & Co, and a substantial part of the proceeds was used to purchase Great Oak Court in Melissa’s name. The Bank of Cyprus held two prior charges over Rush Green Hall and agreed to release part of those charges to allow the purchase, on the express understanding that it would receive a charge over Great Oak Court. A defective charge was registered in Melissa’s name without her knowledge; Boulters subsequently admitted altering documents and conceded liability to the Bank. Melissa issued proceedings seeking removal of the Bank’s charge; the Bank counterclaimed for subrogation to an unpaid vendor’s lien.

Procedural history: at first instance the judge dismissed the Bank’s counterclaim ([2012] EWHC 1991 (Ch)). The Court of Appeal allowed the Bank’s appeal ([2013] EWCA Civ 1960; reported [2014] 1 WLR 854) and declared that the Bank was entitled to subrogation to an equitable charge over Great Oak Court. Melissa appealed to the Supreme Court.

Issues framed by the Supreme Court: (i) whether the defendant (Melissa) had been enriched, (ii) whether that enrichment was at the expense of the Bank, (iii) whether the enrichment was unjust, (iv) whether any defences applied, and (v) if unjust enrichment was established, whether subrogation to the unpaid vendor’s lien was an appropriate remedy and/or whether the Bank had any proprietary interest or tracing link in the sale proceeds.

Court’s reasoning and outcome: the majority treated the case as one of unjust enrichment and answered the four questions in the Bank’s favour. The court found a sufficient causal nexus between the Bank’s agreement and the benefit to Melissa: the sale of Rush Green Hall and the purchase of Great Oak Court were parts of one scheme in which the Bank’s release of proceeds was conditional on receiving substitute security. The enrichment (receipt of the freehold unencumbered) was unjust because Melissa received it as a gift and in no better position than her parents; no change of position or good‑faith purchaser defence was available. As to remedies, the court held that subrogation to the unpaid vendor’s lien was an appropriate equitable remedy to reverse the unjust enrichment; several members of the court also accepted that the Bank might have a proprietary interest in the sale proceeds or that conventional tracing principles supported the result, but left some of those subsidiary questions open. The appeal was dismissed and the Court of Appeal’s order reinstating an equitable charge in favour of the Bank was upheld.

The appeal is dismissed. The Supreme Court held that Melissa was unjustly enriched at the Bank’s expense because the sale of Rush Green Hall and the purchase of Great Oak Court formed a single commercial scheme in which the Bank released funds only on condition of receiving substitute security. No defence was established. The equitable remedy of subrogation to the unpaid vendor’s lien is appropriate to reverse the unjust enrichment; several justices observed that the result could also be supported by tracing or by a proprietary interest in the proceeds, but those questions were left for another case.

First instance: trial before David Donaldson QC, Chancery Division, judgment dismissing the Bank's counterclaim ([2012] EWHC 1991 (Ch)). Court of Appeal: allowed the Bank's appeal and declared entitlement to subrogation ([2013] EWCA Civ 1960; reported [2014] 1 WLR 854). Supreme Court: appeal dismissed ([2015] UKSC 66).