Sexually transmitted debt
3 September 2010
Mortgage fraud can occur in a variety of different ways. A recent Court of Appeal decision in New South Wales, Australia, concerns this kind of fraud arising from "sexually transmitted debt" or "STD", which is when a property is jointly owned by husband and wife and one spouse transmits debt to the other without their knowledge by taking out a mortgage over the property.
When one registered proprietor discovers they have contracted a STD, there can be all sorts of ramifications as a range of different issues can arise.
A registered proprietor, who is subject to STD, is likely to become embroiled in lengthy and potentially costly legal proceedings, which may or may not result in him or her suffering loss - depending on how a lender's mortgage is drafted. The outcome is uncertain for all involved.
This leaves the defrauded registered proprietor, together with the lender, in a difficult position. As the Court of Appeal of New South Wales recently commented in Perpetual Trustees Victoria Limited v English & Anor (English):
"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."
This case concerns the proper construction of a mortgage which was executed in favour of the mortgagee (Perpetual) by Mr English over property known as 36 Brisbane Street, Castle Hill.
The signature of Mrs English on the mortgage, and on a related loan agreement, was forged by her husband.
The mortgage lists both Mr and Mrs English as "mortgagor" and the whole of the property is the subject of the mortgage.
The loan agreement was expressed as an offer of finance and contained 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 the "offer" was capable of acceptance only if all the persons to whom the offer was made signed the acceptance, which did not occur.
As a result, no enforceable agreement came into force between the Perpetual and Mr & Mrs English, or even between Perpetual and Mr English.
Perpetual appealed the decision that as a consequence the entire mortgage was void and not even enforceable against Mr English.
The Court of Appeal overturned this decision and found that: The perpetrator of a forgery should not be able to escape liability on the ground that the forgery rendered the mortgage documentation void or otherwise ineffective. Accordingly 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.
In England & Wales, First Title Insurance plc has recently launched a new risk management product, which provides cover against fraud and forgery. Please click here to read more on First Title's Home Owners' Protection Policy (HOPP).
Jon Downes, General Counsel, First Title Australia
Justin Bates, Partner, Gadens Lawyers