Real property: dissolution, disclaimer and subrogation

A co-debtor who subsequently discharges a relevant debt in full is entitled to be subrogated to the security held by the creditor over the other co-debtor’s property. Where the other co-debtor is a dissolved company and the Crown has disclaimed the property, the co-debtor who has discharged the debt is entitled to an assignment of the security by virtue of subrogation or pursuant to section 5 of the Mercantile Law Amendment Act 1856. In Leon v Kensington Mortgage Company Ltd and another [2023] EWHC 121 (Ch) the claimant was the owner of or controlled a company known as Frinton Ltd. In 2002, Frinton and the claimant obtained a loan with GE Money Mortgages Ltd. The claimant and GE were co debtors under the terms of the loan. The loan was secured by way of a legal mortgage against a property on Flanders Road, London W4.  The second defendant council was the freehold owner of a flat situated at Westbourne Terrace, London W2. In 2007, the leasehold interest in the flat was assigned to Frinton. Subsequently, Frinton, the claimant and GE entered into a deed of substituted security. By virtue of the deed the lease was substituted as security for the mortgage of the Flanders Road property. The claimant had no interest in the lease, but he remained bound by the mortgage conditions. Flanders was dissolved in 2009. The lease vested in the Crown, but was disclaimed. An order was subsequently made in the Court of Appeal vesting the property comprised in the lease in the first defendant. In 2016, GE transferred the charge over the lease to the first defendant. The claimant, suspecting that the first defendant was to going to sell the property comprised in the lease applied for a declaration that on redemption of the mortgage, the first defendant, by virtue of subrogation or pursuant to section 5, was bound to transfer him the lease. The High Court agreed. The High Court observed that section 5 permitted a surety or co-debtor who discharged a liability the right to the assignment of all securities held by the creditor. Following the dissolution of Frinton and the disclaimer, the claimant was not a co-debtor with Frinton and did not have any enforceable rights against Frinton. The second defendant, however, retained security for the loan. Both escheat and disclaimer do not end the proprietary rights of third parties who hold derivative interests, the second defendant’s security, despite Frinton’s dissolution, could properly be regarded as an ongoing security. The claimant had a right of subrogation in equity and, pursuant to a purposive reading of section 5, if he discharged the relevant debt that was the subject of the security held by the first defendant notwithstanding Frinton’s dissolution. The claimant would also be entitled to the assignment of the security held – namely, the charge and the lease.  Elizabeth Dwomoh is a barrister at Lamb Chambers