Mortgage fraud and indefeasibility of title – “Indefeasibility for what?”
Section 42(1) of the Real Property Act 1900 (“Act”) states that:
“Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded …”.
The effect of section 42 of the Act is to confer indefeasibility of title on a mortgagee upon registration of a mortgage, however, the cases of:
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Perpetual Trustees Victoria Limited v Tsai [2004] 12 BPR 22, 281
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Printy v Provident Capital Limited & Anor [2007] NSW SC 287
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Permanent Custodians v Yazgi & Anor [2007] NSW SC 279
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Chandra & Anor v Perpetual Trustees Victoria Ltd & Ors [2007] NSW SC 694
have considered that, notwithstanding that registration confers indefeasibility on a mortgagee, there still remains the question “indefeasibility for what?”[1], especially in circumstances where a mortgagor is successful in establishing that s/he did not sign either the mortgage or the corresponding loan agreement.
The cases highlight the importance of considering the terms of the particular mortgage in order to determine the effect of its registration and what indefeasibility is thereby conferred. Printy (which involved both a first ranking and a second ranking mortgage) said that the effect of the two registered mortgages depended upon their construction and each mortgage called for discrete consideration [2].
In respect of:
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the first mortgage the court noted that:
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the loan agreement was not incorporated in the mortgage and, accordingly, the concept of indefeasibility did not extend to the loan agreement;
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there was no expression in the mortgage memorandum quantifying any debt owed by the mortgagor to the mortgagee;
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the memorandum contemplated the execution of a ‘related agreement’ but that there was no agreement because the loan agreement had been entered into by a fraudster and could not be regarded as an agreement which ‘related to’ the mortgagor; and
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the court said that it was open to the mortgagee to fashion the mortgage obligations so as to make the mortgagor liable for his own conduct as well as the dishonest conduct of others, however the clearest possible expression would be needed to achieve this effect [3].
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the second mortgage: unlike the memorandum incorporated into the first mortgage, the memorandum identified the principal sum advanced and an obligation to pay it with interest. This was a distinction of fundamental importance and it entitled the mortgagee to recover compensation from the Torrens Assurance Fund. In the ‘old fashioned’ form of mortgage, there was a statement of the principal sum lent and an acknowledgement that the money had been lent. Accordingly, the production of the mortgage itself was prima facie evidence of the existence of the debt.
Tsai was an interlocutory application on appeal where the mortgage document appeared to have been forged. The mortgage did not contain a statement of the principal sum or its payment, but there was a separate loan agreement.
In Printy, Tsai was considered as authority for the proposition that the indefeasibility of title provisions of the Act do not entitle a mortgagee to recover under a registered mortgage where the obligation to make payment does not arise under the mortgage but under a separate loan agreement and where that loan agreement was forged. Where the mortgage obliged the mortgagor to pay the secured money but there was a need to look to a collateral agreement, which was forged, in order to determine the mortgagor’s obligations, that forged document could not found any relevant security entitlement.
In the case of Chandra, the forged mortgage did not specify what debt it secured. The amount owing and the repayment terms were set out in a chain of provisions contained in collateral documents that had also been forged. Bryson AJ affirmed the Tsai principle that despite the principles of indefeasibility, an ‘all monies’ mortgage purporting to secure an obligation to pay arising from a forged loan agreement, may not secure anything.
On the same day that the judgment in Printy was handed down, the Supreme Court also handed down the decision in Yazgi.
In Yazgi, the mortgage schedule specifically stated that the mortgage debt included all moneys actually or contingently owing under the loan agreement, so although it was accepted that signatures of Mrs Yazgi on the loan agreement and the mortgage were fraudulent, the mortgage conferred an indefeasible interest on the mortgagee in all of the moneys owing under the loan agreement. The mortgagee (and its agents) had no knowledge of the forgery and so was found to have not acted dishonestly, and therefore not fraudulently, in registering the mortgage.
On Appeal, The NSW Court of Appeal held that due to the inconsistencies in the definition of “Mortgage Debt” in the schedule and the mortgage memorandum, the all money provisions in the mortgage only secured the mortgage debt owing by Mr Yazgi. Accordingly, the court of appeal ordered that Mrs Yazgi was entitled to a discharge of the mortgage in so far as it affected her interests in the land.
Conclusion
In view of the Court of Appeal’s decision in Yazgi, mortgagees should ensure that the documentation in particular the mortgage records the details of the loan being advanced. Alternatively, if a loan is secured by a mortgage and it is documented by way of separate loan agreement and the mortgage does not:
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state the quantum of the loan; or
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refers back to the loan agreement, and
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the signatures on the document have been forged
it is likely that it will not be able to rely upon the principle of indefeasibility of title arising from the registration of its mortgage.
Each case will obviously be a question of risk assessment and the simple answer may be for mortgagees to revert to the old practice of having mortgages executed either in front of a solicitor or one of their staff.
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1 Printy v Provident Capital Limited & Anor [2007] NSW SC 287, paragraph 9
2 Ibid, paragraph 15
3 Ibid, paragraph 40 (vii)
NSW State Budget 2007
Individuals holding residential property will be the main beneficiaries of changes to state taxes as part of the 2007 NSW State Budget. The proposed changes set out in the State Revenue and Other Legislation Amendment (Budget) Bill 2007 are summarised below.
Early abolition of mortgage duty
The previously announced date of abolition for mortgage duty of 1 January 2011 has been brought forward one and a half years to 1 July 2009.
Additional mortgage duty concessions for residential property
Two additional mortgage duty concessions have been introduced for residential property both for owner occupiers and investors.
Owner occupiers
Individuals who borrow for purposes related to owner occupied housing will be exempt from mortgage duty with effect from 1 September 2007. Relevant purposes which will qualify for the concession include financing an acquisition, construction or renovation of a residence or residential land as well as refinancing existing borrowings for those purposes.
The concept of 'residence' for the purposes of this concession extends to a private dwelling house that is 'intended to be used' as a place of residence by the borrowers. There is no test in the Bill but presumably a qualification test similar to the first home owners grant will be used to determine whether the residence was 'intended' to be used as such.
Investors
Individuals who borrow for purposes related to 'investment housing' will be exempt from mortgage duty with effect from 1 July 2008. Investment housing is any private dwelling house that is used, or intended to be used or sold for investment or business purposes. Importantly, the provisions as currently drafted apply to individuals only and do not apply to properties held through other entities such as family trusts.
Land tax reduction
The land tax rate has been reduced from 1.7% to 1.6% from the 2008 land tax year (ie in relation to land holdings as at midnight on 31 December 2007). This reduction applies generally and is not confined to individuals.
If you would like more information, please contact one of our National Banking & Finance partners listed on the right hand side of the screen.
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