Forgery of a mortgage by a co-owner, limits to indefeasibility

The Court of Appeal has provided welcome clarification of the principles to be applied where one co-owner of a property forges the signature of the other on a mortgage.

There has been a degree of confusion in the recent caselaw, and injustice in the results, which Justice Sackville decision, with whom Allsopp P and Campbell JA concurred, in Perpetual Trustees Victoria Limited v English & Anor [2010] NSWCA 32, addresses. As the court acknowledged, “the authorities have not always been entirely consistent in their approach to the enforceability of forged mortgages against the innocent registered proprietor whose signature has been forged, at least where the forger is a joint registered proprietor”.

The decision began by noting that although the principles of indefeasibility are firmly established there has been ongoing contention over the question of what exactly is  acquired by indefeasibility. This ‘further question’ acknowledges that the construction of the mortgage might be such that although the mortgage is indefeasible the land it is not charged with the debt. His Honour singled out ‘all moneys clauses’ in particular as being particularly vulnerable in this regard due to their reliance on instruments extraneous to the register:

These “all moneys” clauses require reference not only to the mortgage instrument itself, but to other documents which themselves may be forged. The irony is that as lenders draft ever-wider clauses they make themselves more vulnerable to the effects of forgery. This is because all moneys clauses may depend for their effectiveness on the validity of antecedent instruments that have not been, and indeed cannot be registered under the Torrens system .

His Honour confirmed that in all these cases the result depends upon the construction of the security documents involved. The Mortgage in this case did not expressly refer to any debt or instrument it purported to secure. Rather it relied upon the following definitions:

‘Secured Agreement’ means: any present or future agreement between me or us, or any one of us, and you which I acknowledge in writing to be an agreement secured by the Mortgage,

The extraneous instrument which was said to enliven these covenants was a loan offer containing a clause which stated:

To accept this Offer You and, if there is more than one person all of You, must sign and return to the Lender’s solicitors the original copy of this Offer so that it is received by the Lender’s solicitors or settlement agent within 21 days of the date of the Offer.”

The court found that because the wife’s signature was forged. The express statement in the offer, that it was capable of acceptance only if all the persons to whom the offer was made signed the acceptance, was never complied with. Accordingly, no enforceable agreement ever came into force between the Perpetual and the husband and wife, or even between the Perpetual and the husband. This had the consequence that the definition of “Secured Agreement” in the mortgage was not satisfied. There was no ‘present agreement’ between the Perpetual and the husband and wife, or between the Perpetual and the mortgagor, at the time the mortgage was executed.

The Court of Appeal agreed with the trial judge up to this point. Simpson J had reluctantly found that Perpetual was even unable to recover its advance from the husband’s share in the property, other than as an unsecured creditor (the husband having been made bankrupt in the meantime). However the Court of Appeal disagreed that the husband’s share of the property could so easily escape. In addition to admissions made by the husband the court held:

It is hardly to be supposed that the perpetrator of a forgery should be able to escape liability to a Perpetual on the ground that the forgery rendered the mortgage documentation void or otherwise ineffective. It is for this reason that where a mortgage is purportedly executed by both spouses, but the signature of one has been forged by the other, Perpetual obtains an equitable mortgage enforceable against the interest of the forger.

His Honour noted that this principle rests on two independent bases. First, the courts imply an agreement between the forger and the Perpetual for the forger to mortgage his or her interest as security for the loan provided by the Perpetual. Secondly, an estoppel arises from the representation made by the forger, that his spouse’s signature is genuine. Accordingly Perpetual was granted leave (which it had sought) to amend its statement of claim to rely on this principle.

His Honour hinted at a possible oversight by Perpetual’s lawyers in framing their case . This being that the advance of $536,000 was used by the husband, in part, to discharge a pre-existing first mortgage of $250,000. Presumably, some claim against the wife could have been made in respect of any benefit she may have obtained from the discharge of that mortgage.

The court also took the opportunity to ‘throw an anchor ahead’ by considering the effect of a like forgery on a transfer of mortgage. The conclusion reached was that if a registered mortgage, upon its proper construction, does not secure an “obligation” created by an antecedent void instrument, it is unlikely that the transferee of the mortgage would be in a better position than the transferor to enforce the mortgage against an innocent joint registered proprietor. 

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