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Newsletter - August 2007
 
Lenders Beware: What does your mortgage secure?
 
In an important recent Australian case, the decision casts doubt over the protection a mortgage confers under the Torrens Title system in the case of identity fraud. In Chandra v Perpetual Trustees Victoria Limited [2007] NSWSC 694 ("Chandra"), the NSW Supreme Court held that whilst the lender had a registered mortgage, "no debt was secured".
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As a result, First American are recommending that lenders operating under Torrens systems review their standard form of 'all monies' mortgage to consider whether the wording is sufficient to secure the amount of money advanced against the land. This may be overcome by inserting standard wording referencing the principle sum advanced as being the amount secured by the mortgage.
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The facts of the Chandra case were that a fraudster obtained a loan advance of $750,000 secured by way of mortgage, following a successful application for a duplicate Certificate of Title, which he then used to perpetrate an identity fraud. The lender subsequently registered its mortgage before the fraud was discovered.
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The case involved a number of different claims and First Title (a subsidiary of First American Title Insurance Company) ran the proceedings on behalf of the insured lender.
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The Court acknowledged that because the Insured's mortgage was registered, it had the benefit of the indefeasibility provisions of the Real Property Act 1900 and that clearly the charge of debt on the security property is an estate or interest in land, but a personal covenant to repay is not.
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However, the Court then looked at how the mortgage operated to charge any monetary obligation upon the land - the mortgage being "indefeasibility for what?". The subject mortgage was an 'all monies' mortgage which did not refer to any sum on the face of the mortgage form. It referred to a memorandum of common provisions, which in turn referred to a 'Secured Agreement' (being the loan agreement) and the 'Secured Money' (which definition included, in substance, all amounts owing by the mortgagors under the Secured Agreement).
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The Court ultimately found that based on the construction of the wording of the mortgage, as the registered owners had not signed the Secured Agreement, there was no debt owing by them that could be secured by the mortgage.
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It seems clear from this that the position the Court has taken, at least in New South Wales, is that if a mortgagee chooses to take security which, as a matter of construction, depends on the existence of a debt which does not in fact or law exist and is not otherwise deemed to exist and to be secured against the land, then the mortgagee ought not in principle prevail. The position is arguably different if the mortgage does not depend on the existence of a debt. If properly construed, the mortgage secures an amount of money, regardless of whether or not a debt exists in fact and law eg. where it is explicitly deemed to be an amount secured (the "old fashioned" form of mortgage), then it would appear the Court will accept that the principle of indefeasibility confers on the mortgagee rights of security against the land.
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Title Insurance
 
First American insures lenders against identity fraud and pays all legal defence costs as well as any losses incurred where a mortgage is challenged in a variety of circumstances.
 

 
For further information on how title insurance can reduce risks to lenders, please contact us.