Background

Indefeasibility of the title is the basis for New Zealand's Torrens system of land registration. A central register of land title holdings is maintained by the state. This register is deemed to reflect accurately the current facts about title so that it is unnecessary to go beyond it to establish ownership. The person whose name is recorded on the register holds guaranteed title to the property in all but the most exceptional circumstances. Person who are deprived of land, or any interest or estate in land, by any error, omission, or misdescription of any entry in the register may bring an action against the Crown for the recovery of damages. However, they are barred from bringing an action for possession or for the recovery of that land, estate or interest.

Two different forms of mortgage are used in New Zealand. "Fixed sum" mortgages specify the principal sum secured and include all of the terms and conditions of the associated loan in the security document, which is registered. The more commonly used "all obligations" mortgage identifies the mortgaged property and records that the mortgage secures all money which the mortgagor may owe to the mortgagee now, or in the future, for any reason. In the latter case, the terms of any loans appear in separate loan agreements, which are not registered.

Until recently it was unclear whether the principle of indefeasibility of title extended beyond the registered memorandum of an "all obligations" mortgage to an unregistered loan agreement recording the debt which it secures. In Westpac Banking Corporation v Clark (unreported CA172/06, 5 September 2008) the Court of Appeal decided in a preliminary case that such collateral documents are not indefeasible, unless they are sufficiently incorporated into the registered memorandum.

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Facts

The case concerned a sophisticated fraudster who assumed the identity of an unsuspecting property owner, Ms Fenech. In exchange for a loan of $184,000 by Westpac, the fraudster executed an "all obligations" mortgage over Ms Fenech's property. Mr Clark, the solicitor acting for the fraudster, was unaware of the deception. He undertook to lodge Westpac's mortgage for registration promptly. Westpac advanced the loan funds to the fraudster in reliance on Mr Clark's undertaking. Mr Clark did not attempt to register the mortgage for two months. By that time the fraud had been discovered and registration was refused. Westpac sought summary judgment against Mr Clark for causing it loss by breaching his undertaking to lodge the mortgage for registration promptly.
Mr Clark contended that the mortgage would have been ineffective even if he had registered it. He argued that, because the unregistered loan agreement was void, the registered charge would not have secured anything. Consequently, Westpac would have suffered loss, even if he had registered the mortgage immediately.
Westpac submitted that it did not matter that the terms of the loan agreement were contained in a separate, forged and unregistered document. It argued that the covenant to pay and the definition of ‘secured money' in the mortgage was sufficiently tied to the loan agreement, which was incorporated into the registered mortgage. In these circumstances it would be artificial to isolate the unregistered loan agreement from the registered mortgage, particularly as the loan agreement itself was not able to be registered.

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Decision

Registration of a mortgage confers indefeasibility of title on a mortgagee. It validates the terms and conditions which delimit or qualify the estate or interest in the mortgaged land. The Court recognised that it was theoretically possible for the terms and conditions recorded in an unregistered loan agreement to be incorporated into a registered mortgage instrument but held that a mere reference to a document would not suffice for this purpose. The term "loan agreement" had been widely used throughout Westpac's mortgage and the accompanying memorandum, but none of these references were held to have expressly incorporated the terms of the forged loan agreement. Furthermore, "loan agreement" was defined as being an agreement relating to "money lent to you" and "secured money" meant money which "you [the mortgagor] (whether alone or with one or more others) owe to Westpac now or in the future". The Court interpreted the meaning of the word "you" in this context as confined to the mortgagor or registered proprietor and declined to extend its meaning to include "anyone purporting to be you", such as a fraudster.
Even though the registered proprietor would have been subject to a personal covenant to pay Westpac under the registered mortgage, she would not have been obliged to repay the debt advanced under the forged loan agreement. The debt was held to be independent of the charge created by the mortgage and did not become indefeasible when the charge was registered. Once the loan agreement was exposed as a forgery, any obligations under it were void and unenforceable. In contrast, if Westpac had used a "fixed sum" mortgage, which specifically stated the amount for which the land stood charged, the amount would have been secured by registration up to the value of the land. Counsel for Westpac submitted that the principles of indefeasibility should apply equally to the different forms of mortgage, but the Court considered that any extension of the indefeasibility provisions should be made by Parliament.
Since the loan agreement was not rendered indefeasible, Westpac would have suffered loss even if Mr Clark had registered the mortgage promptly. His delay in doing so was therefore not a cause of the loss. The case will now return to the High Court to be argued in full.

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Discussion

The Court of Appeal's decision has far-reaching consequences for lenders because of the widespread use of all obligation securities. The Court warned that it is unlikely that other "all obligations" mortgages, as currently drafted in New Zealand, would incorporate the terms of the separate loan agreements. Thus, if a mortgagee advances money under a forged "all obligations" mortgage without notice of the fraud, it will only receive indefeasible title to the charge itself. The protection of indefeasibility will not extend to protect the recovery of a debt, which it has advanced under a separate loan agreement. In other words, the mortgage is perfect, but it secures nothing. Conversely, a "fixed sum" mortgage that specifies the principal sum and includes all of the terms and conditions in one document can be enforced, forgery or no forgery, as the incorporation problems that are endemic to "all obligations" mortgages do not arise.

The New Zealand Law Commission is currently reviewing the legislation which governs indefeasibility in New Zealand. The problems involved with recovering debts advanced under fraudulently registered "all obligations" mortgages may be dealt with as part of this exercise. In the interim, it is suggested that lenders could better protect themselves by rewording their "all obligations" mortgage documents. To ensure that the loan agreement is sufficiently incorporated it is prudent to expressly state the amount which is being contemporaneously advanced, as well as securing all future obligations. Any definition of "secured money" used in the mortgage documents should also extend beyond the money advanced by the mortgagee to the registered proprietor, to include any money advanced to any other person who is executing the mortgage as a sufficiently broad definition may help to protect the lender if the person executing the mortgage is not the registered proprietor.

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