Real Property: Exceptions to indefeasibility Assoc Prof Cameron Stewart (c) Cameron Stewart 2009.

Real Property Exceptions to indefeasibility

Assoc Prof Cameron Stewart

(c) Cameron Stewart 2009

Last week

bull Introd to Torrensbull Indefeasibilitybull Fraud

bull against an interest holderbull against the Registrar General ndash Australian Guarantee

Corp v De Jager [1984] VR 483 ndash needs dishonesty

Bill introduced on motion by Mr Barry Collier

I will now move on to the most significant amendment that this bill proposes to make to the Real Property Actand that is the section that deals with mortgages As members of the House may be aware identity fraud is one of the fastest-growing crimes in Australia and costs the Australian community billions of dollars every yearProtecting the community from identity fraud is an important task that we take seriously The department has Been involved in an increasing number of claims for compensation relating to mortgage fraud involving whatappears to be a lack of due diligence by some lenders in verifying the identity of borrowers While the TorrensAssurance Fund may be available to compensate innocent landowners who are the victims of a fraudulentmortgage it is preferable if the fraudulent mortgage can be avoided in the first place The mortgagee who isdealing directly with the fraudster has the best opportunity to prevent a fraud The amendments this billproposes are intended to encourage due diligence in mortgagees loan approval practicesThe majority of cases of fraudulent mortgages in which the Registrar-General has been involved are with thosemortgages that are commonly known as low-doc loans These loans are usually offered by lenders of last resortwho lend at excessively high interest rates Usually these types of loans are not covered by the consumer creditcode and in many cases the lender has not performed due diligence Disturbingly it appears that the value of The property to be used as security for the loan is usually the only qualifying requirement for a low-doc loan to be granted The nature of these loans I have described presents a perfect opportunity for fraudsters to perpetrate their crime the department has many examples of claims of compensation based on these types of loans

For example a few years ago the department was involved in a claim for compensation made by elderly Property owners whose title was encumbered by registration of a mortgage they did not sign and knew nothing about The son of the property owners together with an accomplice obtained a loan of $750000 at upwards of 125 per cent interest per month pretended to be the owners of the property and purported to give a mortgage over it as security for this loan The lender appears to have done little or nothing to confirm that the borrowers were the persons recorded in the freehold land register as the owners of the then unencumbered property and to verify that the borrowers were able to service the loan It appeared that the value of the property alonemdashmore than $1 millionmdashwas enough to satisfy the grant of the loanSoon the borrowers defaulted on the loan and it was only when the mortgagee came to exercise its power ofsale that the true owners found out that a mortgage was registered on their title The fraudsters wereapprehended and sent to jail but in the end the Torrens Assurance Fund had to compensate not only theowners but also other parties that were affected by the fraud This included paying the lenders legal costs Thisclaim resulted in payment of in excess $2 million from the Torrens Assurance Fund As this example indicatesthere is clearly potential for our State to be liable for payment of large amounts of compensation for fraudQuestionable lending practices or wilful disregard of matters that might raise doubts in a prudent persons Mind unfortunately do not currently disentitle a lender from recovering its loss under the Real Property Act 1900

This bill proposes to amend the Real Property Act 1900 to require mortgagees that is the lenders to takereasonable steps to confirm the identity of the mortgagor that is the borrowers before presenting a mortgage For lodgement and registration If the mortgagee fails to comply with the requirement to confirm the identity of the mortgagor and the execution of the mortgage involved fraud against the registered proprietor of the Mortgaged land the Registrar-General may cancel any recording in the register with respect to the mortgage The reasonable standard required to be taken by mortgagees for identification under the proposed amendments will be established by the guideline to be known as the Registrar-Generals Directions In most cases the reasonable standard will at minimum be the equivalent to the 100-point check that is common to financial institutions The Registrar-Generals Directions is intended to be available on the departments website It will also be necessary for the mortgagee to keep a written record of the steps taken to comply with this requirement and a copy of any associated documents The Registrar-General may require the mortgagee

to answer questions and produce documents in determining whether the mortgagee has complied with their obligation to verify the identity of the borrower If a mortgagee refuses to comply with a request of this nature the Registrar-General will have the power to either put a notation on the title to alert anyone dealing with the property that the mortgagee has not complied with the requirement to verify the identity of the borrower or if the mortgage has not yet been registered refuse to accept the mortgage for lodgement

Real Property and ConveyancingLegislation Amendment Act 2009

NB Not yet in the legislation56C Confirmation of identity of mortgagor(1) Mortgagee must confirm identity of mortgagorBefore presenting a mortgage for lodgment under this Act themortgagee must take reasonable steps to ensure that the personwho executed the mortgage or on whose behalf the mortgagewas executed as mortgagor is the same person who is or is tobecome the registered proprietor of the land that is security forthe payment of the debt to which the mortgage relates

(2) Without limiting the generality of subsection (1) the mortgageeis to be considered as having taken reasonable steps to ensure theidentity of the mortgagor under subsection (1) if the mortgageehas taken the steps prescribed by the regulations

(3) Record-keeping requirementsA mortgagee must keep the following for a periodof 7 years from the date of registration of themortgage under this Act (or for such other periodas may be prescribed by the regulations)(a)a written record of the steps taken by the

mortgagee to comply with subsection (1)(b) a copy of any document obtained by the

mortgagee to comply with subsection (1)

(4) Mortgagee to answer questions and produce documentsThe Registrar-General in determining whether or not this section has beencomplied with may at any time require the mortgagee(a) to answer questions in relation to the steps taken by the mortgagee to

comply with subsection (1) and(b) to produce for inspection any records kept under subsection (3)

(5) If a person fails to comply with a requirement made under subsection (4) the Registrar-General may

(a) in relation to a registered mortgagemdashmake a recording in the Register with respect to the relevant land to that effect and

(b) in relation to a mortgage that has not been registeredmdash refuse to register or reject the mortgage in accordance with section 39 (1A) or refuse to make any recording or entry in the Register or take any other action in respect of the mortgage

(6) Cancellation of recordings in the RegisterThe Registrar-General may cancel in such manner as the RegistrarGeneral considers appropriate any recording in the Register withrespect to a mortgage if the Registrar-General is of the opinion

(a) that the execution of the mortgage involved fraud against the registered proprietor of the mortgaged land and

(b) that the mortgagee(i) has failed to comply with subsection (1) or(ii) had actual or constructive notice that the mortgagor was not the same person as the person who was or was about to become the registered proprietor of the land that is security for the payment of the debt to which the mortgage relates

(7) Before cancelling a recording of a mortgage in theRegister under subsection (6) the Registrar-General mustgive notice of the proposed cancellation to themortgagee and may also give notice to any other personthat the Registrar-General considers shouldbe notified of the cancellation Section 12A (2) and (3)apply to and with respect to a notice given under thissection

(8) Application to transferee of a mortgageThis section applies to the transferee of a mortgage in the sameway that it applies to a mortgagee (that is requiring the transfereeof a mortgage to take reasonable steps to ensure that the personwho executed the mortgage as mortgagor is the same person whois or is about to become the registered proprietor of the land thatis security for the payment of the debt to which the mortgagerelates) Accordingly a reference in this section to

(a) the presentation of a mortgage includes a reference to thepresentation of a transfer of mortgage and(b) the mortgagee includes a reference to the transferee of themortgage and(c) the date of the registration of the mortgage includes areference to the date of registration of the transfer ofmortgage

NB not yet in force - Sec 117 ndash certification of correctness by witnesses(4) In this section eligible witness in relation to the execution of anapplication dealing or caveat means a person who(a) is at least 18 years of age and(b) is not a party to the application dealing or caveat and(c) has known the person to whose execution of theapplication dealing or caveat the witness is attesting formore than 12 months or has taken reasonable steps toensure the identity of that person(5) Without limiting the generality of subsection (4) (c) a witness isto be considered as having taken reasonable steps to ensure theidentity of the person to whose execution of the applicationdealing or caveat the witness is attesting if the person has takenthe steps prescribed by the regulations

138A Registrar-General may take steps to rectify Register in case of fraud(1) The Registrar-General may in relation to the settlement of a claim in accordance with section 135 take

any of the steps set out in subsection (2) that are required to rectify the Register (including by registering a person as proprietor of land) if the Registrar-General is satisfied that (a) the person has been deprived of land or an estate or interest in land as a result of fraud and (b) the current registered proprietor acquired the estate or interest in land through fraud

(2) The Registrar-General may do one or more of the following (a) cancel or amend a folio of the Register (b) cancel amend or make a recording in a folio of the Register (c) create a new folio of the Register (d) create a new edition of a computer folio (e) issue a new certificate of title

(3) The Registrar-General may if he or she considers it appropriate to do so require the current registered proprietor to deliver up the certificate of title for the purpose of it being cancelled by notice in writing to the current registered proprietor

(4) If the current registered proprietor fails to respond to such a notice within a reasonable time or cannot be found for the giving of such a notice the Registrar-General may if the Registrar-General considers it appropriate dispense with the production of the certificate of title or take action under the authority conferred upon the Registrar-General by section 111 (3)

Exceptions to indefeasibility- Prior folio

bull If the RG makes a mistake and issues two folios for the one piece of land the earlier folio is said to take priority ndash s 42(1)(a) or

bull If two folios are issued one for a larger block the other for a block within the larger the earliest one issued has priority or

bull Two blocks which have an overlapping strip probably better dealt with under s 42(1)(c)

Exceptions to indefeasibility- Prior interests entered into the folio

Sometimes an instrument will be registered but the folio may not properly or fully describe all the interests registered - the interest described in the folio is said to be subject to the actual import of the instrument (s 42(1)) ndash Hence in a case where the folio had not fully described the transfer of an interest subsequent interest holders took their interests subject to the original import of the document and not the register[Bursill Enterprises Pty Ltd v Berger Bros Trading Co Pty Ltd (1971) 124 CLR 73]

Mercantile Credits Ltd v Shell Co of Australia [1976] 136 CLR 326 In this case a folio contained reference to a lease The lease itself turned out to be a lease for five years with two options to renew making it apply for a possible total of 15 years The holder of the title defaulted on a mortgage and the mortgagee sought to exercise their power of sale They went to court arguing that while they were subject to the lease as noted on the folio they were not subject to the options to renewThe lease document contained in the register contained the options so the question was did the option to renew in that registered lease bind subsequent interest holders even though the folio made no reference to that option The case went to the High Court which said yes The option to renew is enforceable against successors and so in this case is enforceable against the mortgagee What we learn from this is that a purchaser needs to look at the documents in the register to see exactly what it is that they are being bound by

Exceptions to indefeasibility- Omitted or misdescribed easements

bull An easement is right attached to land which is held by someone other than the owner of the land to use the land in a particular way eg right of way

bull Section 42(1)(a1) ndash registered proprietors take subject to omitted easements

bull ldquoOmittedrdquo when simply not there on the register not fault on part of RG

bull Works either when old system land brought under Torrens and easement left out OR when a registered easement has been left off a reprint of a new folio

bull Easements lsquovalidly createdrsquo ndash probably excludes what of easements where parties have complied with creation formalities but been frustrated by lack of registration

bull Implied easements If an implied easements existed under the old system and was left off the register on conversion then it will be lsquovalidly createdrsquo

bull What if land was always Torrens Implied easements should work against the RP as an in personam exception but will fail when a new RP registers

Australian Hi Fi Publications Pty Ltd v Gehl [1979] 2 NSWLR 618 In this case land was owned by the Savage family During their ownership a block of shops was erected and subsequently an office block At that time there were two buildings on the land The land was subdivided such that lot 1 comprised the shops and some of the land and lot 2 comprised the office block and the land adjoining it The Savage family sold lot 1 to Gehl and several years later sold lot 2 to Australian Hi-Fi Publications Pty Ltd There was no reference in any of the contracts or transfers or the certificates of title to any easements providing for rights of way Evidence was adduced that prior to the first sale the tenants of the shops constructed on what became lot 1 used part of the land that became lot 2 to access a public road The Court considered that if the land had been under old system title then the rule in Wheeldon v Burrows would have allowed the subsequent owners of lot 1 to claim a right of way over those parts of lot 2 used as the right of way In his judgment in the Court of Appeal Mahoney JA considered the application of the rule in Wheeldon v Burrows to land held under the Real Property Act and said

The argument that such an exception should be created has been put in substance upon the following basis that interests such as Wheeldon v Burrows easements are interests well recognized by the law that as they are incapable of being registered or noted on the register they will unless protected by s 42 (b) be incapable of existing and that it could not have been the intention of the Act to destroy such interest But in my opinion such an argument involves at least two difficulties

Rights such as those which arose upon the sale of the land by the Savage family to the defendant and his wife would normally be within the class of rights existing personally against the Savage family as proprietors and so enforceable against them notwithstanding s 42 Those rights would not be enforceable against a subsequent registered proprietor taking without fraud the existence of such rights is proscribed by s 42 to that extent There is in my opinion nothing special in this such as would warrant the creation of an exception to the ordinary effect of s 42 or the extension of the term ldquoomissionrdquo to make such rights enforceable against the subsequent registered proprietor I see no reason why for example a Wheeldon v Burrows interest should be in a better position than he interest which would have arisen had the Savage family by deed purported to grant to the defendant exactly a right in similar terms The right created by that deed would not be enforceable against a subsequent registered proprietor

McGrath amp v Campbell [2006] NSWCA 180 ndash (from the headnote) Two adjoining lots were owned by a single registered proprietor The northern lot (Lot 6) faced a main road while the southern lot (Lot 12) was bounded by a street known as Brighton Avenue A registered easement had been created over both lots in favour of a third adjoining property which permitted access to the third lot from Brighton Avenue The easement had also been used for some years as an access point for Lot 12 although this use had never been noted on the register

In 1980 Lot 6 was sold to the respondents and Lot 12 was sold to the appellants and the transfers of title were recorded in the register as having occurred on the same day The respondents continued to use the easement over Lot 12 to access Lot 6 until a dispute arose in 1995

The respondents argued that the circumstances of the sale gave rise to an implied easement over Lot 12 for the benefit of Lot 6 and that the simultaneous transfers of the two lots gave rise to an equity or right in personam enforceable against the appellants The appellants argued that the indefeasibility provisions of the Real Property Act 1900 and the circumstances of the transfers in this case prevent the recognition of any such equity

Aldridge v Wright [1929] 2 KB 1174 Where an owner executes contemporaneous conveyances of adjoining plots with the houses erected on them and there exists a made road across the land of one plot to an entrance to the house on the other plot and it is proved that the road was constructed for the use of both houses there will be implied a grant in the one conveyance of a right to use the road and a corresponding reservation in the other conveyance

Implied easements can arise but they are equitable

79 One might accept for present purposes that had Lots 6 and 12 been under old system title the authority of Aldridge v Wright may have carried the day in favour of the Campbells According to Professor Butt in Land Law (2006 5th ed) at 446 such an easement would be a legal and not merely an equitable interest Professor Butt refers to the statement of Priestley JA in Dobbie v Davidson (1991) 23 NSWLR 625 at 646 to the effect that easements such as those arising under the doctrine of Wheeldon v Burrows are equitable and suggests that this approach may be explained upon the basis that the easement in that case arose over Torrens title land and was at the time of the litigation unregistered As an unregistered interest it could only be an ldquoequitablerdquo and not a ldquolegalrdquo interest The finding by the primary judge in [71] that the Wheeldon v Burrows implied easement in the present case brought about ldquoin equity the result that lot 6 had the benefit of and lot 12 was burdened byrdquo may be explained in a similar way

While the original title holders may be bound in equity the personal equity will not be created in the case of simultaneous transfers of title in circumstances where the new owners of the putative servient tenement have not in any way contributed to the creation of the implied easement or conducted themselves in any way which could be regarded as unconscionable

Easements by prescription (long use) ndash 20 yrs - doctrine of the lost modern grant - Dobbie v Davidson (1991) 23 NSWLR 625 The Court was asked to consider whether a track used for access to a property across another property for a period of 60 years prior to the land being brought under the Real Property Act constituted a right of way and further considered whether the ldquoomissionrdquo from the certificate of title after the land was brought under the Real Property Act constituted an exception to indefeasibility within what was then s 42(b)

In his judgment in the Court of Appeal Kirby P made the following observations- The purpose of the rule by which a prescriptive right is upheld by the law is ultimately to guard the peaceful enjoyment of the use of land where that use has endured for more than twenty years as of rightrdquo The evidence showed that the use of the road constituting the right of way to ldquoEllerslierdquo was extensive In connection with access to that property it had been used by bullock drays and bullock wagons horse drawn vehicles carrying products carts trucks cars and tractors visitors tradespeople shearing teams droving stock electricity and bush fire brigade vehicles shooters for carting and bailing hay and by children None of the aforementioned people using the road over this time ever sought permission from the owners of ldquoLumley Parkrdquo They just used it without dispute until the present litigation began

Relevant to assigning conduct to one category rather than the other will be (i) the time during which the conduct has been peacefully followed (ii) the persistence of the conduct despite supervening sale and the acquisition of new owners by the dominant and servient tenements (iii) the unlimited variety of the persons who have utilised the alleged right-of-way (vi) the absence of physical impediments or obstructions to that use and (v) the knowledge of the use by the owners of the servient tenement yet their failure to attempt to forbid limit or control the use of the right-of-way by the owners of the dominant tenement and those having dealings with them

Both Kirby P and Priestly JA found that the missing easement had been omitted in the conversion

Williams v State Transit Authority of NSW [2004] NSWCA 179 the Court of Appeal considered an appeal from a judgement of Young CJ in Eq In the case before Young J the court was asked to consider whether the doctrine of lost modern grant applied to claim for rights of way over land under the provisions of the Real Property Act

In his judgment Mason P deals with the doctrine commencing at paragraph 78 He says At common law an easement may be created by twenty years uninterrupted enjoyment of the right claimed This doctrine of ldquolost modern grantrdquo requires the court to presume even if contrary to the truth the existence of an express grant which has been lost The presumed grantor must have the legal capacity to have executed the grantrdquo In particular s46 of the Real Property Act relevantly provides that ldquowhere any easementhellipaffecting land under the Act is intended to be created the proprietor shall execute a transfer in the approved formrdquo Until the present case there was an unbroken stream of authority in New South Wales to the effect that easements by prescription could not arise over land subject to the Real Property Act where the acts of user occurred during the time the land was under the Act

Mason P

In my opinion it is to pile fiction upon fiction to extend the doctrine of lost modern grant into the Torrens system because (assuming no relevant exception to s42 or its equivalents) that system contemplates title at law as arising only upon registration To transpose the fiction of lost modern grant into a Torrens context one has to presume considerably more that the loss of an executed (and delivered) deed At the very least one would have to

presume the execution and delivery of a registrable instrument But the logic suggests that one has to go further and presume delivery accompanied by certificate of title since that is the normal way in which the person entitled to have an interest registered goes about perfecting such title so far as lies in the grantorrsquos power Indeed title is only perfected through the act of a third party (the Registrar General) and there is no basis for inferring that officerrsquos acquiescence in the user giving rise to the common law doctrine

Dabbs v Seaman (1935) 36 CLR 538 ndash where conveyancedescribes land as adjoining a road there is an implied grant of aneasement to the road even in Torrens title without an express

easement

Limited to where the road is also Torrens land Cowlisaw v Ponsford (1928) SR(NSW) 331 at 336

Exceptions to indefeasibility- Omitted or misdescribed profits a

prendre

bull A profit is a right attached to land which is held by someone other than the owner of the land to enjoy part of the sold or the nature produce of the soil eg timber wild animals

bull Section 42(1)(b) - ldquoOmittedrdquo if the transferred from old system and left off

bull ORbull If always Torrens system then if all that had to be

done for registration had been done but the RG failed to put it on the register

bull Prescription Williams

Exceptions to indefeasibility- Misdescription of a portion of land

bull Section 42(1)(c) ndash not indefeasible if misdescribed boundaries unless where the proprietor is a purchaser or mortgagee for value

bull Register is not conclusive as to its boundaries Michael v Onisforoui (1977) 1 BPR 9356

Exceptions to indefeasibility- Short term tenancies

bull By s 42(1)(d) of the Real Property Act a registered interest is subject to a short-term lease if

(i) the lease plus any option does not exceed 3 years and(ii) the tenant is in possession of the property or entitled

to its immediate possession and(iii) the holder of the registered interest had notice of the

tenancy before he became registered

bull Tenancy for less than three years do not have to be registered ndash hence under s 42(1)(d) a registered proprietor who takes with notice will take subject to a lease

bull Term probably includes the optionbull Periodic tenancy for less than 3 years do not have to

be registered (but can be)bull Notice in this section includes constructive notice

under Hunt v Luckbull Notice is timed at the date of the settlement (dealing

registrable under s 43A)bull Under Torrens system requires the registration of the

correct instrument Must be registered if term exceeds three years s 53 RPA

bull If the lease is less than three years and not registered what sort of interest does the lessee hold Legal but subject to the registered interests If there is competition between the unregistered but legal lease and an unregistered equitable interest eg an equitable mortgage the normal priority rules apply

bull Snowlong Pty Ltd v Choe (1991) 23 NSWLR 198bull A contract for the sale of Torrens Title land

disclosed the existence of and annexed a copy of an unregistered lease agreement for part of the land for a term of five years with options for renewal in favour of the lessee Under the contract the purchaser agreed to abide by the terms and conditions of the annexed lease

bull Snowlong Pty Ltd v Choe (1991) 23 NSWLR 198bull The lease which had remained unregistered while

six subsequently executed dealings were registered remained unregistered The purchaser on registration of its transfer sought to evict the lessee as a tenant at will

bull Held Construing the contract in the light of its express terms and in the light of the fact that prior to its execution the lessees interest was because of lack of registration one at will only

bull (a) the purchaser having acknowledged or agreed to recognise that the lessee had a lease for five years with two options for renewal took title subject to an express trust on those terms

bull (b) alternatively repudiation of the agreement to abide by the terms and conditions of the annexed lease constituted fraud within the exception to indefeasibility in s 42 and s 43 of the Real Property Act 1900 so that registration of the transfer free of any reference to the lease did not destroy the lessees rights

Alcova Holdings Pty Ltd v Pandarlo Pty Ltd (1988) 15 NSWLR 53 a tenant was in occupation of a property under a two year unregistered lease which contained an option to renew for a further two years At the end of the first two years the tenant exercised the option and started the second two year term After this the RP sold to a new RP and the new RP tried to evict the tenants

The court found that the tenant was in occupation of the property under a two year lease ndash the first lease was finished and a new 2 year lease had come into occupation and so they could not be evicted as their lease was an exception to the indefeasible title of the new RP Ironically had the property sold six months earlier while the first lease was on foot then the lease would not have been an exception to indefeasibility because it added up to 4 years

Last week

Real Property and Conveyancing Legislation Amendment Act 2009

Exceptions to indefeasibility - Prior folio

Exceptions to indefeasibility - Prior interests entered into the folio

Exceptions to indefeasibility - Omitted or misdescribed easements

Exceptions to indefeasibility - Omitted or misdescribed profits a prendre

Exceptions to indefeasibility - Misdescription of a portion of land

Exceptions to indefeasibility - Short term tenancies

Last week

bull Introd to Torrensbull Indefeasibilitybull Fraud

bull against an interest holderbull against the Registrar General ndash Australian Guarantee

Corp v De Jager [1984] VR 483 ndash needs dishonesty

Mason P

easement

prendre

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Mason P

easement

prendre

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Mason P

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Mason P

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Mason P

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Mason P

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Mason P

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Mason P

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Mason P

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Mason P

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Mason P

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Real Property: Exceptions to indefeasibility Assoc Prof Cameron Stewart (c) Cameron Stewart 2009.

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