The Unpaid Vendor’s Lien: When? What? How?

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The unpaid vendor’s lien is a rarely-seen and little-understood creature of property law.  In his recent judgment in Menelaou v Bank of Cyprus [2016] EWHC 2656 (Ch), Master Matthews considered how to enforce such a lien.  This is, therefore, an opportune time to review when the unpaid vendor’s lien arises, what it is, and how it is enforced. 

A Quick Introduction to Menelaou v Bank of Cyprus

In Menelaou v Bank of Cyprus, Mr and Mrs Menelaou were borrowers of the Bank of Cyprus, and had granted the bank charges over their family home, Rush Green Hall.  Their borrowing was large and Rush Green Hall was in negative equity.  Mr Menelaou reached an agreement with the bank that Rush Green Hall would be sold and that a new house, Great Oak Court, would be purchased in the name of their daughter, Melissa.  The bank agreed on condition that Melissa gave the bank a charge over Great Oak Court to secure her parents’ borrowing.  Melissa knew nothing of this arrangement;  she had been told by her parents that Great Oak Court was being given to her outright, to hold on trust for her and her younger siblings.  The sale and associated purchase completed and the Bank registered its charge over Great Oak Court. 

A short while later, Melissa discovered the bank’s charge and sought its removal on the grounds that she had never signed any charge and it was therefore void.  During the trial, it was conceded that the charge was void. 

The Bank claimed to be subrogated to the unpaid vendor’s lien over Great Oak Court, and that issue was finally determined in the bank’s favour by the Supreme Court in Menelaou v Bank of Cyprus [2016] AC 176.  The bank sought to enforce the lien to which it was subrogated by sale of the property.  The issues before Master Matthews were whether and, if so, how the lien to which the bank was subrogated should be enforced.  In order to decide those issues, however, the Master had to consider the nature of an unpaid vendor’s lien. 

When does the Unpaid Vendor’s Lien Arise? 

The leading authority on the nature of the unpaid vendor’s lien remains Barclays Bank Plc. v Estates & Commercial Ltd [1997] 1 WLR 415 (CA).  In his judgment, at 419H to 420B, Millett LJ explained that an unpaid vendor’s lien arises by operation of law upon the making of a binding contract for the sale of land – unless and to the extent that the terms of the contract itself are inconsistent with the existence of the lien.  The lien constitutes the vendor’s security for the purchase price and entitles the vendor to remain in possession of the property being sold until payment is made.  The lien is discharged on completion, but only if and to the extent that the purchase price is paid by the buyer.  Even if the sale completes and the property is conveyed outright to the purchaser, the lien survives in equity for the benefit of the vendor to secure the payment of any part of the purchase money which in fact remains unpaid.  That is so even if the conveyance contains an express receipt for the full amount of the purchase money. 

What is an Unpaid Vendor’s Lien? 

It is clear that the unpaid vendor’s lien is a proprietary interest in the nature of a charge.  Lord Clarke in the Supreme Court in Menelaou had commented that Bank was “entitled to a lien on the property, which is in principle an equitable interest which it can enforce by sale” (at [49]).  In an earlier subrogation case, Halifax v Omar [2002] 2 P&CR 26, Jonathan-Parker LJ, at paragraph 61, described the equitable unpaid vendor’s lien as “in effect, an equitable charge”.  Master Matthews further noted that Cozens-Hardy LJ in Re Stucley [1906] 1 Ch 67 (in which the Court of Appeal held that the unpaid vendor’s lien applied to personalty as to realty) explained (at 83) that: “Now, it is quite settled that a vendor’s lien is not a mere personal equity, and that it really creates a charge upon and an interest in the property sold, in the same manner as if that charge had been created by writing.

However, it is also clear that the lien is not a mortgage.  A mortgage constitutes security for a debt;  a mortgagee realising its security must account to those interested in the equity of redemption for the surplus proceeds of sale, following repayment of the secured debt.  As Master Matthews pointed out at paragraph [17] of his judgment, that is not so of the unpaid vendor’s lien:  “…where an unpaid vendor sells the property, a second time, for more than on the first sale, he has no obligation to account to the defaulting first purchaser for the excess: see Ex parte Hunter (1801) 6 Ves Jun 94, 97, per Lord Eldon.” 

How is the Lien Enforced? 

In Menelaou, Master Matthews accepted the bank’s submissions that the lien to which the bank was subrogated was a proprietary interest which attached to the legal estate of the property being sold and that the lien therefore took priority over the interest of the purchaser and all derivative interests.  What the purchaser receives is an interest already subject to the lien.  Master Matthews explained the position (at [21]) as follows: 

The unpaid vendor’s lien has priority over whatever it is that the vendor sells and transfers.  It “comes off the top”, so to speak.  What the purchaser / transferee receives is whatever is left. It is as if the vendor is selling the freehold out of which a leasehold has already been granted.  The purchaser simply never gets that.  As Mr Polli put it, the purchaser takes only that which, if the lien were a mortgage, would be the equity of redemption.  What is made subject to the trust is only whatever the Claimant receives.

That was important in Menelaou because it necessarily followed that the lien to which the bank was subrogated took priority over the interests of Melissa and her younger siblings. 

The unpaid vendor’s lien does not entitle the vendor to sell the property as of right.  Master Matthews accepted, however, that the vendor was entitled to seek an order that the property be sold. 

How should the Court approach an application for an Order for Sale to enforce the lien? 

Master Matthews then considered how an application for an order for sale to enforce an unpaid vendor’s lien should be treated by the Court.  The bank sought an order pursuant to section 90 of the Law of Property Act 1925 (‘LPA 1925’) and Master Matthews concluded that it was correct to do so.  At [24], he explained as follows: 

As appears from what I have already said, an unpaid vendor’s lien is an equitable charge, created by operation of law but having the force of one created consensually by writing, to secure the payment of the purchase price.  It therefore falls within the definition of ‘mortgage’ for the purposes of the Law of Property Act 1925, s 205 of which defines ‘mortgage’ to include ‘any charge or lien on any property for securing money or money’s worth’.  The fact that, as Lord Eldon observed, it has characteristics meaning that it does not have the nature of a mortgage in the traditional sense does not matter.  This means that the power to realise equitable charges contained in s 90 of the 1925 Act applies to this case.  That includes power to appoint a person to convey the land and vest a term of years in the ‘mortgagee’ to enable him to carry out the sale, as is commonly done in the case of enforcing charging orders.

Section 90 does not prescribe the way that the Court should exercise its jurisdiction, however, and so the Master turned to consider how the Court should approach the exercise of its discretion. 

The Trusts of Land and Appointment of Trustees Act 1996 (‘TLATA 1996’) did not apply because, first, the bank was not a trustee of any of the land comprised in Great Oak Court;  and, second, the bank did not have “an interest in property subject to a trust of land” within the meaning of section 14 of the 1996 Act.  The bank’s interest attached to the legal estate in priority to the trust by which Melissa held Great Oak Court for herself and her younger siblings.  It followed that Court was not required by section 15 of TLATA 1996 to consider the specific matters listed therein. 

The Administration of Justice Act 1973 did not apply because bank was not seeking an order for possession of the property.  The bank was seeking an order for sale. 

The Master turned to consider the extent to which the Human Rights Act 1998 might apply.  Relying on McDonald v McDonald [2016] 3 WLR 45, he observed that the lien arose out of the arrangements made voluntarily by Melissa and the vendor of Great Oak Court, and could have been excluded if the parties had so agreed by their contract.  He concluded that, just as in McDonald, it was not open to Melissa to argue that her rights under article 8 of the ECHR could justify a different order from that which is mandated by the contractual relationship between her and the bank.  Further and in any event, the Master explained (at [32]) that: 

The lien is imposed as the simplest and most efficient way to protect the rights of the vendor, and responds to the most basic of a layman’s morality: if you buy something in the market, but do not pay the price that you agreed to, you cannot expect to retain it.  Moreover, the ‘home’ acquired by the purchase of the Property is in fact a flawed asset, because it is always subject to the lien.  In my judgment you cannot acquire a home of certain legal dimensions, and then rely unilaterally on Art 8 to expand them.  The cases show that rights of possession arising from express grants of tenancies and mortgages are not incompatible with Art 8.  Notwithstanding the lack of parliamentary intervention, I see no reason here to suppose that the remedy of an order for sale to vindicate an unpaid vendor’s lien arising on a consensual purchase is so incompatible either.

But what then should the Court consider when determining whether to make an order pursuant to section 90 LPA 1925 to enforce the lien?  The Master concluded that, in the exercise of its discretion, the Court would have to consider all the circumstances of the case: 

As it seems to me, with the exception of s 90 of the 1925 Act, there is no legislative code in point in relation to the lien.  Yet the remedies available to the unpaid vendor in right of the lien, being essentially at the discretion of the court, will not be awarded unless the court considers it just to do so.  It is an equitable remedy.  And, in so considering, the court will take into account all the relevant circumstances of the case.  That will take into account practically everything that any of the statutory regimes might have required to be taken into account anyway.  I therefore turn to consider those circumstances.

How did the Court approach the exercise of its Discretion? 

Although section 14 of TLATA 1996 did not apply to the bank’s application, the approach that Master Matthews took to the various factual circumstances was very similar to the approach that is taken on applications to which section 14 does apply. 

The Master considered the circumstances of Melissa’s younger sister, Ella-Mae, a minor who lived with the family at Great Oak Court and who was studying for her GCSEs.  The Master observed that there was no particular reason to believe that she would have to move schools if Great Oak Court was sold;  nor that, even if she had to move schools, the change involved would constitute a factor of particular gravity. 

The Master considered that it was a “striking feature” of the case that Melissa and her family appeared to have made “no efforts whatever to identify a suitable alternative property, or to demonstrate that no such property exists.

Finally, the Master considered the interests of the bank.  He considered that an unpaid vendor ought to be entitled to come first;  but that as the Bank was merely subrogated to the unpaid vendor’s lien – and was not actually an unpaid vendor – it should be considered as a secured lender rather than as an unpaid vendor.  Nevertheless, the bank was kept out of its money.  The monthly payments that Melissa offered to make were insufficient to meet in full the monthly interest on the total sum secured by the lien, which total sum already approximated to the full value of Great Oak Court.  Save to the extent that Great Oak Court might increase in value, the bank would, therefore, be unsecured for the interest that might fall due during any further period of delay.  This was, noted the Master, “a powerful consideration” (citing the observation of Peter Gibson LJ in Bank of Ireland Home Mortgages Ltd v Bell [2001] 2 FLR 809, a charging order case). 

Taking all the circumstances of the case into account, the Master concluded that Great Oak Court should be sold. 

Master Matthews’ judgment in Menelaou draws together and summarises the nature and effect of an unpaid vendor’s lien in a way that is particularly useful and accessible.  It is also, the only – or the only recent – authority that considers in any detail how such a lien may be enforced and the factors which the Court should take into account when considering such enforcement. 

 

For more information about the issues raised in this article, please contact Tim Polli, who represented the successful bank.