and which relates to the Mortgagor;
' secured money ' means all money which the Mortgagor owes the Mortgagee now or in the future for any reason and whether a loan or with another person …."
14 Because it was ineffective under the general law, the appellant's entitlement under the first mortgage was entirely dependent upon its registration and the effect of s 42 of the Real Property Act. That section should be read with s 41, which provides:
" 41 Dealings not effectual until recorded in Register
(1) No dealing, until registered in the manner provided by this Act, shall be effectual to pass any estate or interest in any land under the provisions of this Act, or to render such land liable as security for the payment of money, but upon the registration of any dealing in the manner provided by this Act, the estate or interest specified in such dealing shall pass, or as the case may be the land shall become liable as security in manner and subject to the covenants, conditions, and contingencies set forth and specified in such dealing, or by this Act declared to be implied in instruments of a like nature."
15 Section 42 is subject to exceptions which are not applicable. The exceptions aside, the section relevantly provides:
" 42 Estate of registered proprietor paramount
(1) Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded …."
16 The primary judge noted that the issue raised concerned the precise effect of these provisions in conferring indefeasibility: at [13]-[14], applying Small v Tomassetti [2001] NSWSC 1112; [2002] NSW ConvR ¶56-011 at [9] (Campbell J); see also Lansen v Olney [1999] FCA 1745; 100 FCR 7 at [91] (Sackville J, French and Tamberlin JJ agreeing).
17 The trial judge concluded that the appellant was not entitled to retain any of the proceeds of sale of the property on account of the debt secured by the first mortgage, by a process of reasoning which involved eight steps: at [40]. In substance, the reasoning depended upon three elements. The first was that the deed of loan was not binding on the plaintiff because he did not sign it. The second element was that, if there were a payment obligation, it had to be found in the mortgage. The third element required the interpretation of the mortgage. Although the first mortgage contained a covenant to pay, it referred to "secured money" which was defined to mean "all money which the Mortgagor owes the Mortgagee …". However, because the secured money could only have been owing under the deed of loan and the plaintiff owed no debt under that deed, the first mortgage secured nothing.
18 The distinction adopted by the plaintiff, and accepted by the trial judge, was nicely presented by the separate claim with respect to the second mortgage, which included an express acknowledgment of receipt of the loan moneys and a covenant to repay those moneys with interest. The plaintiff conceded that the payment covenant obtained indefeasibility on the registration of the second mortgage. Accordingly, his claim in relation to the second mortgage was limited to a claim against the Fund administered by the Registrar-General, in which he succeeded. The trial judge noted that the second mortgage involved "a distinction of fundamental importance" in contrast to the first mortgage: [2007] NSWSC 287 at [44].
Submissions on appeal
19 The appellant's argument was based upon the general proposition that where there are two contemporaneously executed instruments, and if "the series of deeds represents a single transaction between the same parties, it is then that they are all treated as one deed": see Smith v Chadwick (1882) 20 Ch D 27 at 62-63 (Jessel MR). Reference was also made to McVeigh (in the matter of Piccolo) v National Australia Bank Ltd [2000] FCA 187 at [30]-[31] (Finkelstein J) and [68]-[69] (Kenny J).
20 The plaintiff denied that the question was properly addressed by considering physical attachment or incorporation by construction. Rather, he said that it must be demonstrated that a clause in the mortgage "delimits or qualifies the estate or interest or is otherwise necessary to assure that estate or interest" to the mortgagee, adopting the language of Giles J in PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 679.
21 The Registrar-General, in submissions in support of the plaintiff, noted that the approach adopted by the primary judge had been followed by Bryson AJ in Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694; NSW ConvR ¶56-187. Both the present case and Chandra were referred to with apparent approval by this Court in Yazgi v Permanent Custodians Ltd [2007] NSWCA 240; NSW ConvR ¶56-195 at [22] (Beazley JA, Ipp and Tobias JJA agreeing). To those references may now be added the decision of Young CJ in Eq in Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 at [256]-[328].
Principles of law
22 The principles to be applied in considering the effect of registration of a mortgage are, in general terms, well-established. As explained in English Scottish and Australian Bank Limited v Phillips [1937] HCA 6; 57 CLR 302, considering the operation of the Real Property Act 1886 (SA), at 321-322 (Dixon, Evatt and McTiernan JJ):
"Under the system of registration governing the present case, the statutory charge described as a mortgage is a distinct interest. It involves no ownership of the land the subject of the security. Like a lease, it is a separate interest in land which may be dealt with apart altogether from the fee simple or other estate or interest mortgaged. But, like a lease, it involves, or usually includes, personal obligations. It is impossible to treat the personal obligations in the same way entirely as the interest in land is treated by the registration system. … But, nevertheless, the plan of the legislation is to enable the proprietor to transfer by registration not only the interest in the land, but all the accompanying personal obligations normally incident thereto."
23 It is apparent that s 41 gives effect to a dealing upon registration. It treats dealings as falling within one of two categories; first, those which pass any estate or interest in the land and, secondly, those which render the land liable as security for the payment of money. Nevertheless, because the mortgage attracts a statutory power of sale of the land to which it relates, it also constitutes an interest in that land. A mortgage is defined in s 3(1) as a charge on land created "merely for securing the payment of a debt". (The term "charge" is used to refer to a charge on land created for the purpose of securing some payment other than a debt.) The term "mortgagor" is defined as the "proprietor of land or of any estate or interest in land pledged as security for the payment of a debt" and "mortgagee" as the "proprietor of a mortgage".
24 Section 42 provides that the registered proprietor of any "estate or interest in land" shall hold the estate or interest subject to other estates and interests recorded in that folio, but absolutely free from all other estates and interests that are not so recorded.
25 Although a mortgage has conferred upon it priority over all unregistered interests and also the quality of a limitation on the estate of the registered proprietor of the fee simple, it is nevertheless important that, in contrast to the position under the general law, a mortgage under the Real Property Act does not transfer or pass title but, in the language of s 41, renders the land "liable as security", being security for payment of a debt: see, eg, Partridge v McIntosh and Sons Ltd [1933] HCA 38; 49 CLR 453 at 473 (Dixon J).
26 Being a security for payment of money, an essential element of any mortgage is that it will include a covenant on the part of the mortgagor for the payment of the debt secured by the mortgage. A second essential element as a charge which constitutes an interest in land is that the mortgage allows the mortgagee to recover the debt, in the case of default by the mortgagor, by sale of the land. That the Act considers the obligation to repay an essential element of a mortgage is confirmed by the provision for transfer which, in the case of a mortgage, includes "the right to sue upon any mortgage or other instrument and to recover any debt … and all interest in such debt …": s 52(1). As noted by Dixon and Evatt JJ in Consolidated Trust Company Limited v Naylor [1936] HCA 33; 55 CLR 423 at 434, such language "is not incapable of including among the rights which pass to the transferee the benefit of the covenant by a surety who joins as a party in the instrument of mortgage". Nevertheless, their Honours concluded (as did Starke J) that the language did not extend so far. Their Honours continued:
"The statute is concerned with dealings in land and it is because a mortgage involves such a dealing that the statute prescribes how mortgages may be transferred and with what consequences. It is concerned with the mortgage transaction in its entirety as it affects the land, and, therefore, extends to the personal liability of the mortgagor for the mortgage debt because that liability is intimately connected with the rights of property arising out of the mortgage transaction."
27 Naylor and Phillips were concerned with the effect of a registered transfer of a mortgage and thus with the construction of s 52 of the Real Property Act. However, it is clear that provisions relating to transfer will reflect the nature of the underlying interest for which transfer is provided. Similarly, assistance may be obtained from provisions relating to discharge and enforcement. In relation to discharge, s 65(2) provides that, upon registration of a discharge of mortgage, the estate or interest mortgaged "shall, to the extent specified in the discharge, cease to be charged with any moneys secured by the mortgage". Because a mortgage is a form of security, conferring powers against land, it can be discharged without affecting that which it secures, namely a personal covenant to pay: see Groongal Pastoral Company Ltd (In liq) v Falkiner [1924] HCA 54; 35 CLR 157 at 164. Whether a discharge of mortgage has the effect of discharging personal covenants contained in a separate contract or deed is a matter of construction of the instrument of discharge: see also Grundy v Ley [1984] 2 NSWLR 467 (Kearney J). It may be that a mortgagee will retain a personal right of action against the mortgagor, but it will no longer be a right enforceable against the land: see Queensland Premier Mines Ltd v French [2007] HCA 53; 82 ALJR 115.
28 Of greater direct relevance to the present case is the provision made in the Real Property Act for powers of enforcement. Section 58 provides a power of sale; s 57 provides the circumstances in which it may be availed of. Section 57(2) relevantly provides:
"A registered mortgagee … may, subject to this Act, exercise the powers conferred by section 58 if:
(a) in the case of a mortgage or charge, default has been made in the observance of any covenant, agreement or condition expressed or implied in the mortgage or charge or in the payment, in accordance with the terms of the mortgage or charge, of the principal, interest … or other money the payment of which is secured by the mortgage or charge …."
29 The section also provides for the service of a written notice on the mortgagor: s 57(2)(b) and (3). Where those conditions have been satisfied, the mortgagee is authorised to exercise the powers conferred by s 58, namely that "the mortgagee … may sell the land mortgaged … and all the estate and interest therein of the mortgagor …": s 58(1). Section 58(3) provides for the disposition of proceeds of sale:
"(3) The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee …; … and the surplus (if any) shall be paid to the mortgagor …."
30 The language of "indefeasibility" is not entirely apt in relation to an interest which arises by way of security for payment of a debt. The effect of ss 41 and 42 of the Real Property Act may more clearly be expressed as providing that, upon registration, the land becomes charged as security for the debt secured by the mortgage, regardless of any form of invalidity which may afflict the mortgage under the general law. Accordingly, the fact that no debt exists to be secured by the mortgage, because the covenant is ineffective under the general law, is a factor which must be put to one side. The mortgagee has a statutory right, as against the land, to recover the debt if not paid in accordance with the requirements of the mortgage. If upon exercising a statutory power of sale, the mortgagee were not entitled to recoup itself from the proceeds of sale to the extent necessary to extinguish the debt, the power of sale would be rendered nugatory. Similarly, an action to recover the proceeds of sale from the mortgagee by the former registered owner would seem to set at nought the statutory allocation of the proceeds under s 58(3). Nevertheless, that is the effect of the orders made by the primary judge in the present case and it is, accordingly, necessary to consider the justification presented by the plaintiff (with the support of the Registrar-General) and accepted by the trial judge.
The transfer provision
31 When a registered mortgage is transferred, the right to sue upon the mortgage and recover any debt "thereunder" is also transferred: see s 52 and, in relation to the equivalent provision (s 62) in the Land Title Act 1994 (Qld), see French in the High Court and in the Victorian Court of Appeal, French v Queensland Premier Mines Pty Ltd [2006] VSCA 287. French demonstrates that the assignment of a registered mortgage may not involve the assignment of rights under a loan agreement secured by the mortgage. One effect of separating ownership of the rights under the mortgage from those arising under the loan agreement may be that the mortgagor (as a borrower) is not indebted to the assignee of the mortgage because the borrower's obligation is to pay pursuant to the loan agreement, which will no longer be an obligation owed to the person who holds the mortgage rights by assignment. Accordingly, in French the assignee of the mortgage was able to discharge the mortgage and clear the land, but the borrowers remained indebted to the assignee of the loan agreement (Mr French), although he held no security over the land. Having sold the mortgage Mr French may have lost the practical possibility of recovering by sale of the land on which the debt was secured, but he retained the right to sue both the mortgagor and its co-borrowers personally.
32 The separation of the personal covenants from the security is significant, not only in relation to transfers and discharges of the registered mortgage, but also in relation to the vesting of rights in the registered mortgagee. Thus, where the loan is contained in the mortgage, although it will involve a separate personal covenant, registration of the mortgage will allow the mortgagee to enforce the debt by sale of the land, despite not being able to sue the mortgagor personally: see Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202 at 224. As explained by Dixon and Evatt JJ in Naylor (at 434), (in the passage set out at [25] above), the Act "extends to the personal liability of the mortgagor for the mortgage debt because that liability is intimately connected with the rights of property arising out of the mortgage transaction."
33 Naylor itself was a case concerned with a guarantee contained within a mortgage. The High Court concluded that the Act was concerned with rights as between mortgagee and mortgagor, and not with the rights of a surety, in construing ss 51 and 52 dealing with transfers. The Court did not seek to identify more precisely "the personal liability of the mortgagor for the mortgage debt". Nevertheless in this case it was accepted by the plaintiff and the primary judge that if that liability were set out in full in the mortgage, or in a document incorporated into the mortgage, the fact that the mortgage or the incorporated document (or both) is a forgery will not prevent the mortgagee obtaining the benefit of a right to enforce the debt against the land in the event of default.
34 It may be that ss 57 and 58, together with the definition of "mortgage", should be read down, as s 52 has been in relation to the right to sue "upon any mortgage" and recover "any debt … thereunder". French held that that the language of s 52 identified the source of the debt. As explained by Kiefel J in the High Court at [55]:
"The two rights, to sue for and to recover a debt, arise from the same source. The words of the section provide no warrant for a construction which extends it to the right to recovery of a debt merely collaterally secured by the mortgage."
35 In French in the Victorian Court of Appeal, Maxwell P dealt at [39] with a statement of the trial judge in relation to the passage from Naylor set out at [25] above, noting that her Honour had said of that passage:
"The crucial circumstance was thus 'the personal liability of the mortgagor for the mortgage debt'. There was no suggestion that the section would not apply if that personal liability arose as a surety or pursuant to a transaction external to the mortgage."