Relying on a Power of Attorney (POA) executed by the mortgagor (the borrower granting the mortgage) when lending money on mortgages in Australia carries significant risks for lenders. These risks primarily stem from potential invalidity or unenforceability of the POA, which can lead to the mortgage being set aside or rendered partially unenforceable. Australian law, governed by state-specific legislation such as the Powers of Attorney Act 2003 (NSW) or equivalents in other jurisdictions (e.g., Powers of Attorney Act 1998 (Qld)), and the supplementing common law, emphasizes protections for vulnerable principals (the person granting the POA).
Courts have frequently intervened in transactions where POAs are abused or improperly relied upon, applying equitable principles or statutory safeguards. For this reason Bransgroves Lawyers will not act on transactions where there is a power of attorney used, except under very exceptional circumstances. Our starting position is that if the principal is compos mentis then they should be executing the mortgage themselves. The traditional reason of the principal being overseas is no longer valid due to Docusign and emails. The other reason – the incapacity of the principal is simply to fraught to rely on. Below are the key dangers and case law.
1. Invalidity of the POA Due to Improper Execution, Lack of Registration, or Incapacity
If the POA is not properly executed (e.g., not by deed when required for dealings with land under s 163B of the Conveyancing Act 1919 (NSW)), registered with the relevant land titles office, or if the principal lacked mental capacity at the time of granting it, the mortgage executed under it may be deemed invalid or unenforceable.
Case Law Support:
- Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 (affirmed in part on appeal in Permanent Mortgages Pty Ltd v Vella [2011] NSWCA 377) – Involved a POA not granted by deed and unregistered, contributing to mortgage invalidity due to unauthorized actions, though the appeal focused on proportionate liability rather than overturning the core findings on POA defects.
- Taheri v Vitek [2014] NSWCA 209 – Confirmed that registration (under s 163B of the Conveyancing Act 1919 (NSW)) is necessary for POAs affecting land to protect third parties, though the case upheld the transaction as the POA was registered and within scope.
- Holt v Protective Commissioner (1993) 31 NSWLR 227 – POA invalidated due to the principal’s lack of capacity at execution, emphasizing the need for contemporaneous evidence of mental competence.
2. Fraud, Forgery, or Misrepresentation in the POA
Fraudulent creation or use of a POA can invalidate the mortgage. Lenders may not detect this without thorough due diligence.
Case Law Support:
- Yaktine v Perpetual Trustees Victoria Ltd [2004] NSWSC 1078 – Forged POA used to secure a mortgage over parents’ property; the court highlighted solicitor duties in verifying POA authenticity.
- Azar v Citigroup Pty Ltd [2011] NSWCA 380 – Illustrates broader dangers of agent fraud in loan arrangements, though not directly involving a POA, showing how misrepresentation can undermine transactions.
3. Undue Influence, Unconscionable Conduct, or Lack of Independent Legal Advice
Elderly or incapacitated mortgagors may be unduly influenced, particularly by family members, leading courts to set aside mortgages under equitable doctrines.
Case Law Support:
- Spina v Permanent Custodians Ltd [2009] NSWCA 206 – Mortgage set aside due to unconscionable conduct and lack of independent advice to the elderly principal, where the attorney (son) benefited personally.
- Stubbings v Jams 2 Pty Ltd [2022] HCA 6 – Reinforced lenders’ obligations to inquire into suspected vulnerability (e.g., incapacity or disadvantage), with deliberate avoidance of checks amounting to unconscionability; applicable to POA scenarios involving vulnerable principals.
4. Attorney Exceeding Authority or Engaging in Self-Dealing
If the attorney acts beyond the granted authority or uses the POA for personal gain, the mortgage may be void or set aside, as attorneys owe fiduciary duties to the principal.
Case Law Support:
- Despot v Registrar-General of NSW [2013] NSWCA 313 – Confirmed that attorneys under irrevocable POAs owe fiduciary duties, and self-dealing (e.g., benefiting from property transactions) can breach these, leading to invalidation.
- Dimitrovski v Australian Executor Trustees Ltd [2013] NSWSC 337 – Mortgage disputed where the attorney benefited without express authorization under s 12 of the Powers of Attorney Act 2003 (NSW).
- Siahos v JP Morgan Trust Australia Ltd [2009] NSWCA 20 – Attorney unauthorized to direct loan funds for personal benefit; transaction limited, with potential links to fraud under general law (though not explicitly deemed criminal in the judgment).
- McFee v Reilly [2018] NSWCA 322 – Transfer under POA for nominal value set aside for breaching fiduciary duties; attorneys must account for undue benefits.
5. Revocation, Suspension, or Termination of the POA Without Notice
POAs may be revoked, suspended, or terminated (e.g., by court order or principal’s incapacity) without the lender’s knowledge, potentially affecting mortgage enforceability. Section 48 of the Powers of Attorney Act 2003 (NSW) protects third parties acting in good faith, but limitations apply.
Case Law Support:
- Despot v Registrar-General of NSW (No 1) [2013] NSWSC 33 (trial decision, affirmed on appeal at [2013] NSWCA 313) – Discussed s 48 protections for third parties but highlighted gaps where revocation or fiduciary breaches undermine transactions.
- Scott v Scott [2012] NSWSC 1541 – Court-ordered termination of POA due to principal’s incapacity under s 50 of the Powers of Attorney Act 2003 (NSW), impacting associated property dealings.
6. Specific Risks in Reverse Mortgages or Elder Abuse Scenarios
Reverse mortgages heighten vulnerability due to the typical age and potential incapacity of principals, often intersecting with elder abuse.
Case Law Support:
- Spina v Permanent Custodians Ltd [2009] NSWCA 206 (as discussed above) – Exemplifies elder abuse through POA misuse in a mortgage context.
- Watson v Watson [2002] NSWSC 919 – Mortgage-like transactions set aside where son abused POA for self-benefit, constituting fiduciary breach and elder abuse.
- Woodland v Rodriguez [2004] NSWSC 1167 – Property transfer (with financial implications akin to a mortgage) set aside for unconscionable conduct and abuse by a carer; relevant to elder vulnerability in POA dealings.
