Indefeasibility of forged mortgages in QLD a qualified win for the registered mortgagee

A copy of this Alert has been published in the October 2008 issue of the Australian Law Journal (p.673).

In brief

The Qld Supreme Court decision in Royalene Pty Ltd v Registrar of Titles & Ors (2008) QSC 64 (7 April 2008) involving a forged mortgage registered in 2004, appears to be a win for the registered mortgagee. The decision however must be viewed in light of subsequent amendments made to the Land Title Act 1994 (Qld) (LTA) to reduce the incidence of identity fraud.

The facts

In Royalene the registered owner was an individual who was the innocent victim of identity fraud. The loan was fraudulently obtained by a third party who falsely signed the mortgage which was registered in 2004. The purpose of the loan, in so far as the fraudster was involved, seems to have been for business purposes, although this is only briefly referred to in the judgment.

There was no fraud by the mortgagee or by its agents within the meaning of the LTA.

The registered owner sought the removal of the registered mortgage from the title. As a fallback position, they also brought proceedings against the State of Queensland seeking compensation under the insurance provisions of the LTA in the event the court determined the mortgage was enforceable against the land.

The actual wording of the registered mortgage was crucial to the outcome of the case.

In Royalene in Item 5 of the Form 1 mortgage the amount of $60,000 was specified and expressly identified as ”the moneys hereby secured”.

In the mortgage it was stated “the mortgagor shall pay to the mortgagee the moneys hereby secured plus any moneys appearing in this mortgage, on demand…” There was also an acknowledgement in the mortgage to pay interest at a specified rate.

Upon registration of the mortgage, a statutory charge comes into existence. The mortgage operates as a charge to secure repayment of the monies secured by the mortgage.

The decision

The question was asked by the court: “What moneys does this mortgage secure?”

As the mortgage itself expressly identified $60,000 as ”the moneys hereby secured”, the court said the $60,000 was secured by the mortgage. It did not matter that the registered owner did not receive the actual payment of the $60,000, fraudulently obtained by a third party fraudster.

The express provisions concerning the charging of interest were also secured by the mortgage, subject to the satisfaction of the factual events identified in the interest clauses.

The decision is consistent with the NSW decision in Small v Tomassetti (2001) 12 BPR 22,253 where the forged mortgage was enforceable as the mortgage was expressly stated to be security for a particular sum.

In Royalene compensation orders were made in favour of the innocent registered owner under the insurance scheme to enable the registered owner to redeem the mortgage.

Relevance for mortgagees

The decision appears to provide comfort to lenders who have adopted the drafting approach outlined in Tomassetti.

It is important to note that the particular mortgage in Royalene was not what is commonly referred to as an “all monies” mortgage. It was a mortgage for a particular sum, a specified amount of $60,000.

The issues relating to the NSW decision of Perpetual Trustees Victoria Ltd v Tsai (2004) NSWSC 745 and later NSW decisions regarding “all monies” mortgages and a separate loan document were not mentioned in the Royalene decision. The Tsai issues were not relevant to the case.

The good news in Royalene for the mortgagee (with some qualifications) is that specifying a particular sum in the mortgage will enable the mortgage to be enforceable against the land for that particular sum. An appropriately drafted clause to secure interest will also be enforceable against the land under the mortgage.

The clauses considered in Tomassetti are a good starting point.

The first potential qualification is the issue that was not discussed in the Royalene judgment, namely the effect of section 38(1) of the Consumer Credit Code (QLD) (CCC) that states a mortgage is not enforceable unless it is signed by the mortgagor.

In Royalene the mortgage was considered to be an unregulated mortgage and accordingly the CCC was not applicable to the mortgage. The interaction between the CCC and the indefeasibility provisions of the LTA may need to be clarified by a further decision of the court.

The second more significant qualification is the statutory amendments made to the LTA commencing on 6 February 2006 to reduce the incidence of identity fraud.

To gain the benefits of indefeasibility under section 184 of the LTA in respect of a forged mortgage where there is no fraud by the mortgagee or its agent the mortgagee must now comply with the additional requirements of section 11A of the LTA to confirm the identity of the mortgagor before the mortgage is lodged for registration. Where a transferee of a mortgage is involved the transferee must comply with section 11B of the LTA before the transfer of mortgage is lodged for registration.

What it all means

The advisable approach for a lender in addition to following prudent lending practice in seeking to guard against the risk of identity fraud is to adopt the Tomassetti approach in drafting the mortgage.

There is now an overarching requirement that the mortgagee also comply with sections 11A and 11B of the LTA as applicable, otherwise from the mortgagee’s perspective all the good drafting in the registered mortgage will be for naught.

For more information regarding the information in this article, please contact Graham Roberts, Partner on (07) 3231 2404.