Indefeasibility for what?¹

The modern approach of having mortgages secure obligations owed under a separate agreement is fraught and risks losing the benefits of Torrens title indefeasibility.

Since the introduction of the Consumer Credit Code many lenders have tended to not include personal covenants to pay a specific debt in their mortgages. Rather they include terms that refer to debts identified in separate loan agreements. This was a departure from the ancient practice of the mortgage largely containing all the terms of the loan.

The weakness of this approach has been brought home to some unfortunate lenders, in a number of cases over the last decade, who have become the victims of fraud on the part of their borrowers.

The usual scenario is that the security property is in the name of husband and wife. One of the owners fraudulently forges the other’s signature on the loan and mortgage documents. When the loan goes into default and the lender attempts to enforce the mortgage they are met with justified howls from the innocent owner.

The courts have consistently held that the mortgage, and all the powers contained in it, is indefeasible. This is because of the principle of title by registration under our Torrens system. However, the question has been put on a number of occasions recently – indefeasibility for what?

While the cases have considered different contractual terms, there is an underlying principle that has emerged and has now been repeated and clearly expressed in Perpetual Trustees Victoria Ltd v. English & anor [2009] NSWAC 478. The courts have found that the innocent party is not liable for the loan – they didn’t know about it and certainly didn’t sign up for it. Accordingly, where the mortgage secures the amount referenced to the fraudulent loan agreement (which is in a separate document), the mortgage, in effect, secures nothing. There is no debt owing and the power of sale cannot be invoked! Nor can any claim be made on the assurance fund.

A remedy is available. The cases are also saying that if the obligation to pay a specified debt (say the loan amount plus interest and costs) is recorded in the registered mortgage then that will at least allow the lender to enforce the mortgage against the land for that amount, even though they could not recover any shortfall from the innocent owner.

While this may seem an odd result, it seems to be clear that where a mortgage expressly states the amount of the debt, even if the mortgage is a forgery, then the mortgagee’s power of sale may be invoked. Quantifying the debt marks out and limits the extent of the mortgagee’s interest and therefore acquires indefeasibility on registration.

All lenders taking security over land should review their mortgage documents to ensure they take full advantage of the indefeasibility provisions and avoid the potential losses that may flow from the ever present threat of fraud.

Hadyn Oriti
horiti@dohlaw.com.au
+61 2 6583 0449
4 November 2009

¹Question posed by Campbell J in Small v. Tomassetti [2001] NSWSC 1112 and often repeated recently