“Hands off” lenders most likely to be affected
Situations that may be seen to be “manifestly unjust” do not arise particularly often under the current Land Transfer Act 1952 (the Act) so, in our view, the new power has likely been introduced to align with increased consumer protection measures in the consumer credit area, along with new anti-money laundering requirements.
This new power is most likely to affect lenders who take a more “hands-off” approach when it comes to taking security over land, for example, lenders who currently undertake minimal due diligence or otherwise are not strict in their due diligence investigations. The main steps lenders can take to protect themselves from a cancellation order will be implementing robust due diligence and identify verification processes and ensuring those processes are complied with before any loan documents are signed.
The scenarios below illustrate how the proposed changes to the indefeasibility rules may affect lenders.
Scenario One: Current position with registered mortgages under the Act
Under the Act, once a person’s interest is registered, that person will have an indefeasible title, even if the instrument under which the interest was registered is void or voidable. The only exception is in the case of fraud, that is, where the lender had actual knowledge of the fraudulent conduct at the time its interest was registered on the title.
The following example shows how the current indefeasibility rules work in practice.
Mr and Mrs Smith are the joint owners of their family home.
The Smiths want to borrow money using their home as security. The lender gives the Smiths a copy of the loan agreement, but Mrs Smith decides that there is too much risk and does not sign it. Mr Smith, however, desperately needs the money, so he forges his wife’s signature on the loan agreement and supporting security documents.
The lender is satisfied that Mr and Mrs Smith have duly signed the relevant documents and deposits the funds into their account. The lender then registers a mortgage over the Smiths’ property as security for the loan.
When Mr Smith falls behind on the mortgage repayments, the lender decides to sell the property at a mortgagee sale. At this point Mrs Smith learns that her husband forged her signature. Mrs Smith argues that the lender has no right to sell the property because she never signed the loan agreement.
While Mrs Smith’s claim is understandable, it does not reflect the current legal position under the Act: when the lender’s mortgage was registered, the lender acquired an indefeasible interest in the property, even though the signature on the loan agreement was forged. The lender therefore has a prima facie right to retain its mortgage and sell the property by way of mortgagee sale.
Scenario Two: Proposed new position for registered mortgages under the Bill
The Bill states that a person who has been deprived of an interest in land by registration of a fraudulent instrument may apply to the Court for an order cancelling that registration, regardless of whether the interest holder had actual knowledge of the fraud.
The Court can only make such an order if it is satisfied that it would be manifestly unjust for the interest holder to remain the registered owner of the interest, and the injustice cannot be properly addressed by compensation or damages.
If we apply the new rules to the previous scenario, the outcome for Mrs Smith might look quite different.
Under the proposed new scheme, Mrs Smith could apply to the Court for an order cancelling the lender’s registered mortgage. To achieve this, Mrs Smith would need to satisfy the Court that it would be manifestly unjust for the lender’s mortgage to remain in place.
We expect a body of case law will develop to provide guidance as to what is “manifestly unjust”. For these purposes, the fact that Mrs Smith’s signature was forged will not be decisive, but it will be a material consideration for the Court.
Other factors the Court might look at include:
– whether the lender failed to comply with its statutory obligations, for example, its customer due diligence under the Anti-Money Laundering and Counter-Financing of Terrorism Act 2009;
– the fact that the lender failed to take reasonable steps to verify Mrs Smith’s signature;
– whether Mrs Smith has resided at the property for a long-time, made material improvements, or has a special relationship with the property;
– the conduct of the lender in relation to the acquisition of the mortgage. For example, whether the lender had sufficient knowledge about the possibility of fraud or whether the lender has acted reasonably, fairly and in good faith; and
– any other circumstances that the Court thinks fit.
In the above scenario, the Court may decide to cancel the lender’s mortgage on the grounds that it would be manifestly unjust for it to remain in place. This will depend on how much weight the Court places on each of the above circumstances and, ultimately, whether the Court thinks cancellation is the appropriate remedy.
The Bill is currently before the Committee of the whole house, where it is being reviewed and debated. If the Bill passes its third reading in the near future, the changes are likely to come into effect from mid-2018.
If you would like to know more about the proposed changes, please contact one of our experts.
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