Mortgage certification case

Banner Image #1

In Perebo Pty Ltd v Wayville Residential Investments Pty Ltd & Ors [2019] SASC 35, the South Australian Supreme Court commented on a certification made by the solicitor for a mortgagee on lodgment of a mortgage. The mortgage was enforceable despite the solicitor inaccurately certifying that the mortgagee held a copy of the mortgage granted by the mortgagor.

Background

The plaintiff loaned money to the defendants pursuant to a number of loan agreements and obtained the registration of mortgages over various properties to secure the loans. The defendants defaulted on the loans, and as a result, the plaintiff sought possession of the mortgaged properties.

The mortgage contained a certification signed by the plaintiff’s solicitor which included the following:

The Mortgagee, or the Prescribed Person, is reasonably satisfied that the Mortgagee it represents:

(a) Has taken reasonable steps to verify the identity of the mortgagor; and

(b) Holds a mortgage granted by the mortgagor on the same terms as this Registry Instrument or Document.

The above certification is set out in Schedule 3 of the Participation Rules and is required to be made by subscribers to an electronic lodgment network operator (ELNO) electronically lodging mortgages on behalf of mortgagees all over Australia, including in NSW.

Part (b) of the certification is complemented by section 128 of the Real Property Act 1886 (South Australian RPA), which relevantly provides that:

(5) The Registrar-General may register a mortgage lodged for registration in the Land Titles Registration Office that is executed solely by the mortgagee-

(a) if the Registrar-General is satisfied that a mortgage on the same terms as the mortgage lodged for registration (the corresponding mortgage) has been executed by the mortgagor and the mortgagee as required under subsection (1) and retained by the mortgagee; and

(b) in a case where the mortgagee is not an ADI – if certification required under section 273(1) in relation to the mortgage has been provided –

(i) by a legal practitioner or a registered conveyancer; or

(ii) if the Registrar General has given written approval for another person to provide the certification – by that person.

Section 273(1) of the South Australian RPA prevents the Registrar-General from registering a dealing unless the required certification has been provided.

Although there were loan agreements between the plaintiff and the defendants, the mortgagee did not hold a mortgage granted by the defendant mortgagor in the exact same terms as the registered mortgage. The certification provided by the plaintiff mortgagee’s solicitor was therefore inaccurate.

Arguments

The defendants contended that the registered mortgage was not valid and effective to secure the loans because it did not comply with the South Australian RPA and should not have been registered.

The plaintiff admitted that it did not comply with section 128(1), (2), (5) and (6)(a) of the South Australian RPA and that the mortgage should not have been registered. However, as the mortgage was in fact registered, the plaintiff argued that its interest as mortgagee was indefeasible and that the mortgage was enforceable against the plaintiff.

The plaintiff also pleaded a right in personam for breach of fiduciary duty, claiming that in lodging the mortgage the mortgagee’s solicitor was purporting to act as attorney for the defendant.

Outcome

The Court held that once the plaintiff registered the mortgage, the defendants’ properties became encumbered in favour of the plaintiff irrespective of whether the mortgage document was void. The plaintiff’s non-compliance with the South Australian RPA and the inaccurateness of the certification did not invalidate the registered mortgage or render it unenforceable.

The outcome would have been different had the non-compliance fallen within one of the statutory exceptions to indefeasibility contained in section 69 of the South Australian RPA, such as fraud. In the present case, there was no suggestion that the mortgage had been registered fraudulently, with the Court finding that the conduct of the mortgagee’s solicitor rose no higher than a failure to take care in drafting and settling the mortgage documents.

Regarding the purported breach of fiduciary duty, the Court found the plea to be misconceived. The mortgage was lodged on behalf of the mortgagee under a client authorisation. There was no reliance on any power of attorney granted by the defendant. The solicitor acted only for the mortgagee.

Important takeaway for NSW practitioners – make sure you properly certify documents

As in South Australia, the NSW Registrar General is entitled to rely upon the certification of a subscriber to an ELNO that a mortgagee holds a mortgage granted by the mortgagor in the same terms as the instrument that is lodged. If in fact the certification is inaccurate, the instrument registered pursuant to the certification is not necessarily invalidated. Of course, the instrument will be invalidated if it is fraudulent or falls within one of the other exceptions to indefeasibility. By giving an incorrect certification, the mortgagee (or the mortgagee’s representative such as a solicitor) risks facing disciplinary action from its regulator, or risks facing suspension or termination as a subscriber to an ELNO.