Background

Indefeasibility of title is the basis of New Zealand’s Torrens system of land registration. The state maintains a central register of land title holdings, which is deemed to be an accurate reflection of the facts about title; thus, it is unnecessary to go beyond the register to establish ownership. The person named in the register holds guaranteed title to the property in all but the most exceptional circumstances. A person deprived of land (or any interest or estate therein) by error, omission or incorrect description of an entry in the register may bring an action against the state to recover damages, but is barred from bringing an action for possession or for recovery of the 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 common 'all-obligations' mortgage identifies the mortgaged property and records that the mortgage secures all money which the mortgagor may owe to the mortgagee at the time or in future, for any reason. In the case of all-obligations mortgages, the terms of the loans appear in separate, unregistered loan agreements. 

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 that it secured. In Westpac Banking Corporation v Clark(1) the Court of Appeal decided in a preliminary case that such collateral documents are not indefeasible unless they are sufficiently incorporated in the registered memorandum.

Facts

The case concerned a sophisticated fraudster who assumed the identity of an unsuspecting property owner, Ms Fenech. In exchange for a loan of NZ$184,000 by Westpac, the fraudster executed an all-obligations mortgage over Fenech’s property. Mr Clark, the solicitor acting for the fraudster, was unaware of the deception and undertook to lodge Westpac’s mortgage for registration promptly. Westpac advanced the loan funds to the fraudster in reliance on Clark’s undertaking. 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 Clark for causing it loss by breaching his undertaking to lodge the mortgage for registration promptly.

Clark contended that the mortgage would have been ineffective even if he had registered it, arguing that as the unregistered loan agreement was void, the registered charge would have secured nothing. 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.

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 recognized that it was 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 will not suffice. The term "loan agreement" had been widely used throughout Westpac’s mortgage and the accompanying memorandum, but none of these references was held to have expressly incorporated the terms of the forged loan agreement. Furthermore, the term "loan agreement" was defined as being an agreement relating to "money lent to you" and "secured money", which in turn meant money which "you [the mortgagor] (whether alone or with one or more others) owe to Westpac now or in... future". The court interpreted the meaning of the word 'you' in this context as being confined to the mortgagor or registered proprietor; it declined to extend its meaning to "anyone purporting to be you", such as a fraudster.

Although 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, all 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 Clark had registered the mortgage promptly. Therefore, his delay was not a cause of the loss. The case will return to the High Court to be argued in full.

Comment

The Court of Appeal’s decision has far-reaching consequences for lenders because of the widespread use of all-obligations securities. The court warned that it is unlikely that other all-obligations mortgages (as drafted at present in New Zealand) will 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 receive indefeasible title only to the charge itself. The protection of indefeasibility will not extend to protect the recovery of a debt that it has advanced under a separate loan agreement - the mortgage is perfected, 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 - whether or not it is a forgery - as the incorporation problems that are endemic to all-obligations mortgages do not arise. 

The Law Commission is reviewing the legislation which governs indefeasibility in New Zealand. The problems involved in recovering debts advanced under fraudulently registered all-obligations mortgages may be dealt with as part of this exercise. Meanwhile, lenders may be able to protect themselves by rewording their all-obligations mortgage documents. In order to ensure that a loan agreement is sufficiently incorporated, it is prudent to state the express amount being advanced at the time, as well as securing all future obligations. The definition of 'secured money' in the mortgage documents should extend beyond the money advanced by the mortgagee to the registered proprietor to include money advanced to any other person who is executing the mortgage. A sufficiently broad definition may help to protect the lender if the person executing the mortgage is not the registered proprietor.