The recent New South Wales Court of Appeal decision in Sabah Yazgi v Permanent Custodians Limited [2007] NSWCA 240 considered what was secured by a mortgage when the signature of one of the parties was forged.
The Facts
Sabah Yazgi and Yasin Yazgi were the joint owners of a property over which a mortgage was registered to Permanent Custodians Limited. Yasin Yazgi forged the signature of Sabah Yazgi on the mortgage document and a housing loan contract that the mortgage was intended to secure.
Under the terms of the mortgage the Yazgi’s mortgaged to Permanent Custodians Limited all their interest in the land. The terms of the mortgage also incorporated a schedule which included a clause stating as follows:
'Mortgage debt' means and includes:
(a) All moneys actually or contingently owing or payable from time to time under the housing loan contract by the borrower to the mortgagee;
(b) Accrued interest on any such moneys; and
(c) All payments made by or on behalf of the mortgagee and all costs, charges and expenses (including costs as between solicitor and client) incurred by or on account of the mortgage, in the exercise or execution, or attempted exercise or execution of all or any of the powers, authorities and discretions conferred under or pursuant to or exercisable by virtue of this mortgage or housing loan contract.
The schedule further defined mortgage debt to mean all money that was owed by any one or more of the parties to the mortgage and in the event of more than one person specified as the mortgagor then each person would be held severally and jointly liable.
The Question on Appeal
There was no dispute between the parties that the consequence of the forged signature of Sabah Yazgi was that he was not legally a party to the loan contract.
The question on appeal was what was secured by the mortgage?
The Court reinforced the following principles:
(a) The forgery made the personal covenant contained in the mortgage unenforceable.
(b) The registration of the mortgage gave Permanent Custodians Limited an indefeasible title in respect of the mortgaged interests despite the forgery.
(c) The extent of the indefeasible title held by Permanent Custodians Limited needed to be determined.
What was the extent of the indefeasible title held by Permanent Custodians Limited?
The Court of Appeal held:
(a) The mortgage debt referred to in the schedule was a joint borrowing under the loan contract.
(b) As there was no joint borrowing by reason of the forged loan agreement, then as a matter of construction the mortgage could not have been secured over the interest that Sabah Yazgi held in the property.
The case highlights the need for financiers to ensure that no fraud is committed that may render a security interest unenforceable.