Mortgagees' rights of subrogation

United Kingdom

In Karasiewicz & Anr v Eagle Star Insurance Co Ltd, decided on 25 April 2002 the Court of Appeal examined the circumstances in which an unsecured lender may gain security rights through subrogation.  In this instance the decision was in favour of the lender and relied on the House of Lords decision in Banque Financiere.

Facts

Mr K granted Berkeley Bridging Plc (“Berkeley”) a mortgage over his matrimonial home.  The property was registered in Mr K’s sole name but held beneficially with Mrs K in equal shares.  At the time the Berkeley charge was granted, Mrs K was not in occupation.  The charge, therefore, bound her beneficial interest because she did not at that time have an overriding interest within the meaning of section 70(1)(g) of the Land Registration Act 1925 (the “Act”).

Subsequently, Mr and Mrs K obtained a loan from Eagle Star Insurance Co Ltd (“Eagle Star”), secured on the property.  Most of the sum advanced by Eagle Star was used to repay Berkeley.   By the date of the Eagle Star charge, Mrs K was in occupation and, accordingly, she had an overriding interest pursuant to section 70(1)(g) of the Act.  Although Eagle Star had requested Mrs K’s consent to the charge as a spouse in occupation, the necessary form of consent was never executed.  Consequently, it was held that the wife was not bound by the Eagle Star charge. 

Mr K later moved out of the home leaving his wife in occupation.  After a default on the mortgage payments, Eagle Star successfully applied for an order for possession on the basis of subrogated rights of the Berkeley charge.  Mrs K appealed on the grounds that Eagle Star should not have expected to have the benefit of security (as they failed to arrange for the consent form to be exercised) and that it was unjust for them to obtain a remedy by subrogation.

Decision

The Court of Appeal dismissed the appeal and held that the first instance court had correctly followed the principles set out in Banque Financiere.  The doctrine of subrogation, in simple terms, is that where A’s money is used to pay off B’s claim, where B is a secured creditor, A is entitled to be regarded in equity as having had an assignment of B’s rights as a secured creditor.  

The decision in Banque Financiere set out threefold test as follows:

1)       Would the borrower be enriched at the lender’s expense if there was no subrogation;

2)       Would such enrichment be unjust; and

3)       Were there were nonetheless reasons of policy for denying the remedy of subrogation.

It was held that Mrs K would be unjustly enriched at Eagle Star’s expense if Eagle Star was not allowed to obtain a remedy by subrogation and Mrs K was entitled to receive her share of the proceeds of sale free of the Berkeley charge.  Further, there was no policy reason for denying subrogation.   The court recognised that subrogation would not be appropriate relief in all cases: for example, where there had been a waiver of security, where the parties had agreed not to take any security or where it was clear that the lender intended to advance monies on an unsecured basis.  Apart from those exceptional situations, however, the remedy of subrogation should generally be available.

For further information, please contact Janet Currier at janet.currier@cms-cmck.com or on +44 (0)20 7367 2326