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Subrogation

A Practitioner's Guide

In todays marketplace where re-mortgages are common, lenders are effectively doubly-secured in the event of subsequent default by virtue of subrogation.

What is subrogation?

Subrogation is not a right or a cause of action, but an equitable restitutionary remedy against a party who would otherwise be unjustly enriched.

In a typical re-mortgage situation, it enables the later lender to "stand in the shoes" of the earlier lender and enforce its security as if it had the benefit of the earlier charge.

In short, lender B whose mortgage is used to discharge a prior mortgage in favour of lender A, is subrogated to the rights of lender A. There is a little more to it than that.


When does it apply?

There are three main principles (Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 per Lord Hoffmann at p 234D:
    (1) Was D enriched at C's expense?
    (2) Was the enrichment unjust?
    (3) Are there any policy reasons to deny C a remedy?

Some examples

Take an example: Mr and Mrs Smith are the joint legal and beneficial owners of a house:



There are 2 main scenarios:

Scenario1

  • Lender 3 begins standard mortgage possession proceedings against Mr and Mrs Smith for repayment of the balance of £150,000 plus arrears and possession.
  • Mrs Smith puts in a Defence alleging forgery.
  • Lender 3 amends Particulars of Claim to seek order for sale (in respect of equitable charge against Mr Smith AND subrogation against both on the basis that Lender 3 stands in the shoes of Lender 2 to the extent of £100,000 plus interest (which will probably be ordered at the lower of the rates charged by Lenders 3 and 2: Eagle Star Insurance Co Ltd v Karasiewicz [2002] EWCA Civ 940) and can seek possession in the normal way.
  • Lender 3 may also be entitled to subrogation in respect of the discharge of the £20,000 unsecured liabilities (Filby v Mortgage Express (No 2) Ltd [2004] EWCA Civ 759 - discharge of joint account overdraft).
  • The combination of subrogation and enforcement of the equitable charge sho ... THIS IS AN EXTRACT OF THE FULL TEXT. TO GET THE FULL TEXT, SEE BELOW

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