The recent Court of Appeal decision of Westpac Banking Corporation v Clark (Unreported, CA 172/06, [5 September 2008]) goes some way to answering a technical but important issue on indefeasibility with significant ramifications for corporate lenders in New Zealand.

Background

The case involved a fraudster forging identity documents and entering into a loan agreement and mortgage with Westpac recording a debt secured by an 'all obligations' mortgage. The all obligations mortgage was over a property not owned by the fraudster, deceiving both Westpac and the solicitor acting for both parties.

The solicitor provided a solicitor's certificate and undertaking to Westpac that he would register the mortgage promptly. However, the solicitor only attempted to register the mortgage nine weeks after the loan was advanced by Westpac, in breach of his undertaking. The Registrar refused to register the mortgage as Westpac had by that stage notified the Registrar of the suspected fraud. Westpac sought summary judgment against the solicitor for causing it loss by the delay in registering the mortgage.

The Court accepted that, had the solicitor registered the mortgage promptly, Westpac would have had an indefeasible title and thus an enforceable security. However, the main issue under consideration was what exactly the mortgage security, if registered, would have secured. It was argued by the solicitor that, even if he had registered the mortgage it would have secured nothing, as the true registered proprietor of the property owed nothing to Westpac - the loan agreement was entered into with the fraudster and would not have the benefit of indefeasibility.

For the purposes of this argument, it was relevant that the mortgage under consideration was an all obligations mortgage. The Court noted that the loan agreement entered into with the fraudster was not expressly referred to in the mortgage, although it was one of a class of documents coming within the definition of 'Loan Agreement' in the mortgage. Also, the mortgage did not in any place expressly incorporate all of the terms of the relevant loan agreement. More importantly, however, the Court noted that the Loan Agreement was defined as an agreement relating to 'money lent to you'. In this context, 'you' meant the registered proprietor of the land, not the fraudster. It did not refer to 'money lent to you or anyone purporting to be you'.

For these reasons, the Court held that the terms of the forged loan agreement were not incorporated into the mortgage and therefore would not have been payable under the mortgage, had the mortgage been registered promptly. The Court noted that all obligations mortgages, as currently drafted in New Zealand, are unlikely to incorporate the terms of separate loan agreements.

Implications

The Court suggested that it may be possible to change the existing standard wording in all obligations mortgages so that it is clear that they incorporate at least the terms of the particular loan agreements signed at the same time as the mortgage, which would have assisted in this case. Lenders should look to amend the terms of their all obligations mortgages to specifically incorporate the terms of all agreements intended to be secured by the mortgage.

Leave to the Supreme Court has been granted with the Appeal due to be heard in March 2009.

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