By Elton Law Group
It should be impossible to lose a registered mortgage by accident. Yet lenders in New South Wales do discover, from time to time, that a discharge of mortgage has been signed and registered while money is still owing on the loan. A payout figure is miscalculated, the wrong loan account is closed, two facilities are confused at settlement, or an administrative error slips through in a busy back office. Whatever the cause, the moment that discharge is registered the mortgagee’s position changes dramatically, and often permanently.
This article explains what happens when a discharge of mortgage is registered by mistake, why the Torrens system makes the problem so difficult to undo, and what practical steps mortgagees can take both before and after the error occurs.
What a registered discharge actually does
Under the Torrens system, a mortgage over land in New South Wales is a registered interest recorded on the title under the Real Property Act 1900 (NSW). When the loan is repaid, the mortgagee executes a discharge of mortgage, which is lodged for registration under section 65 of the Act. Once registered, the discharge removes the mortgage from the folio and the registered proprietor holds the land free of it.
The critical point is that registration does the legal work. The register is everything in the Torrens system. If a discharge is registered, the title no longer carries the mortgage, regardless of whether the underlying debt was ever actually repaid.
Indefeasibility: why a mistaken discharge is so hard to reverse
The leading New South Wales authority is State Bank of New South Wales v Berowra Waters Holdings Pty Ltd (1986) 4 NSWLR 398. The bank held two mortgages, one over Torrens title land and one over Old System land. Both discharges were executed and registered in circumstances where the mortgagee believed the debt had been paid out. In fact, it had not.
The bank argued that the discharges were invalid, or alternatively that they were registered in error and the Registrar-General could cancel the registration. Needham J rejected both arguments in relation to the Torrens title mortgage.
His Honour held that indefeasibility of title under section 42 of the Real Property Act worked in favour of the mortgagor. By virtue of a registered dealing, the discharge, the mortgagor held title free of the former mortgagee’s mortgage. Unless the mortgagee could establish one of the recognised exceptions to indefeasibility, the discharge was effective. On the facts, no exception applied.
Needham J also found that the Registrar-General had no power to cancel the registration. The registration was not an error within the meaning of the correction provisions, because the discharge was in proper form, the mortgagee intended it to be lodged, and the Registrar-General made no error in recording it. The mistake was the mortgagee’s own, and the statutory correction power does not exist to fix a mortgagee’s commercial blunder.
Similar correction provisions exist in every other Australian state and territory, so the same broad principles apply nationally, although the precise statutory wording differs between jurisdictions.
The debt survives, but the security does not
There is one important consolation. A mistaken discharge of the mortgage does not extinguish the debt. In Berowra Waters itself, the mortgagor accepted that it remained liable under its personal covenant to repay. The real dispute was whether a continuing mortgage secured that covenant, and the answer was no.
For a mortgagee, this is cold comfort. You can still sue on the loan agreement or personal covenant, but you sue as an unsecured creditor. If the borrower is insolvent, or the property is sold or refinanced, the practical value of the debt may evaporate. The whole point of taking a mortgage was to avoid exactly that position.
What options does a mortgagee have after a mistaken discharge?
The position is difficult, but not always hopeless. Depending on the facts, avenues that may be available include the following.
Exceptions to indefeasibility. If the discharge was procured by fraud, or if the mortgagor’s conduct gives rise to a personal equity (the in personam exception), the court may grant relief against the registered proprietor. For example, where a borrower knows full well that money remains owing and that the discharge was a mistake, equity may in some circumstances intervene. These claims are fact sensitive and outcomes are far from guaranteed.
Restoration of security by agreement or court order. A cooperative borrower can simply grant a new mortgage. Where cooperation is not forthcoming, a mortgagee may seek relief from the Supreme Court, which has power under section 138 of the Real Property Act to direct the cancellation or amendment of recordings in limited circumstances. Berowra Waters shows the limits of this route, so early and well targeted advice matters.
Caveats. If the mortgagee can assert an equitable interest, for example under an agreement to grant a replacement mortgage or an in personam claim to have the security restored, a caveat may be lodged to protect that claimed interest while the dispute is resolved. Speed is essential. Once a third party purchaser or incoming lender registers a dealing for value, the former mortgagee’s position deteriorates sharply, because the correction powers cannot prejudice rights accrued from recordings already made.
Recovery of the debt. In parallel, the mortgagee should pursue the personal covenant, any guarantees and any other securities that were not discharged.
Preventing the problem: payout figures and tender
Prevention is far cheaper than cure. Most mistaken discharges trace back to payout figure errors. Mortgagees should verify payout calculations against the loan ledger before executing any discharge, reconcile all accounts secured by the mortgage (an all moneys mortgage may secure more than one facility), and build a second person check into settlement procedures, including in PEXA electronic workspaces.
Mortgagees should also understand the law of tender. Disputes over payout figures are common, and a mortgagor who makes good tender of the amount ultimately found to be owing can stop interest running from the date of tender. That is not the same as an obligation to discharge: a mortgagee is generally entitled to payment of the amount it reasonably claims before providing a discharge. Getting the payout figure right, and responding properly when a borrower disputes it, protects both the security and the interest recovery.
Key takeaways for mortgagees
A registered discharge of mortgage is effective even if it was executed by mistake and money is still owing. Indefeasibility under section 42 protects the mortgagor, the Registrar-General cannot simply cancel the registration, and the mortgagee is left with an unsecured debt unless an exception to indefeasibility or an equitable remedy can be established. Time matters enormously, because rights acquired by third parties in the meantime are generally protected.
How Elton Law Group can help
If you have discharged a mortgage by mistake, or a borrower is disputing a payout figure, our property and banking litigation team can act quickly to protect your position, including urgent caveats, negotiations for replacement security and Supreme Court proceedings where required. We act for banks, non-bank lenders and private mortgagees across New South Wales.
Contact Elton Law Group today for advice on protecting your security.
This article is general information only and is not legal advice. You should obtain advice about your specific circumstances.
Frequently asked questions
Can the Registrar-General cancel a discharge of mortgage registered by mistake?
Generally no. Where the discharge was in proper form and the mortgagee intended to lodge it, the registration is not an error the Registrar-General can correct, as confirmed in State Bank of NSW v Berowra Waters Holdings.
Does a mistaken discharge cancel the loan?
No. The debt survives under the personal covenant and remains recoverable, but without the mortgage the lender is usually an unsecured creditor.
Can I lodge a caveat after mistakenly discharging my mortgage?
Only if you can claim an equitable interest in the land, such as a right to a replacement mortgage. Whether such an interest exists depends on the facts, so obtain advice before lodging.
What should a mortgagee do first after discovering the mistake?
Act immediately. Get legal advice, consider a caveat if an equitable interest can be claimed, notify the borrower in writing, and preserve all records showing the outstanding balance, before the borrower sells or refinances.