The British Columbia Court of Appeal recently heard two appeals involving fraudulent mortgages. The decisions in Gill v. Bucholtz, 2009 BCCA 137, and Oehlerking Estate v. John Doe,  B.C.J. No. 668, were released jointly on April 6, 2009, and the precedent set by these decisions will require lenders to review, and possibly revise, their due diligence and lending practices.
The land title system in British Columbia is modeled on the principles of the "Torrens" registration system. Under the Torrens system, only the person registered on title is able to transfer or otherwise deal with the land. An integral component of the Torrens system is indefeasible title which, with several exceptions, is conclusive evidence at law and in equity that the registered owner has a right, good against the world, to the land. Registered titles are assured and there is no need for extensive due diligence regarding the validity of title. Backing the land title system is the Assurance Fund which provides compensation in the event that an individual loses title to their land as a result of error or fraud. The two recent Court of Appeal decisions considered whether a registered charge on title, such as a mortgage, offers the same "indefeasibility" as that of the registered owner.
The Court of Appeal held that lenders in British Columbia can no longer rely on the register when granting a mortgage to a registered owner. A mortgage taken from a fraudster is a void instrument which does not give the lender any interest in the land. Such mortgages will be cancelled from title and the lenders will be responsible for the cost of the frauds.
In Gill v. Bucholtz, Mr. Gill was the registered owner of a property. The property was fraudulently transferred from a fraudster to an accomplice who then granted a mortgage to Mr. and Mrs. Bucholtz and later granted a second mortgage to a numbered corporation. Both mortgagees, unaware of any fraud, advanced the money on the security of a mortgage granted by the registered owner.
In Oehlerking Estate v. John Doe, Mr. Oehlerking, the registered owner of the land, died in January 2006. In March of that year a "John Doe" and a female accomplice, Sarah Mullen, posed as Mr. Oehlerking and his niece. John Doe forged a transfer of the property to Ms. Mullen and shortly thereafter, Ms. Mullen applied for a mortgage on the property and acquired a loan from the defendant mortgage lender.
In both decisions, the mortgages were declared null and void as against the rightful registered owners to the lands. Despite their reliance on the registered title and the registration of the mortgages on title, the lenders did not acquire any interest in the land because they were granted by a person who had no interest to give. The true owner of the land was entitled to recover title and to have the mortgages removed. As opposed to paying the lenders out of the Assurance Fund, the Court decided that the cost of mortgage fraud is best borne by the lender and not the public (as funders of the Assurance Fund). Essentially, a registered charge, such as a mortgage, does not obtain the same quality of indefeasibility as that which is given to a registered owner.
What does this mean for lenders in British Columbia?
Lenders in British Columbia who rely on mortgage security will not be protected by the registration of such mortgage in the event of fraud. The fact that a person is on title as the registered owner is not sufficient proof for the lender. Mortgages granted by a fraudulent registered owner will be found null and void and cancelled as encumbrances against the innocent land owner’s title.
To protect themselves from fraud (and the costs which lenders will be forced to bear), lenders must look beyond title and conduct a higher level of due diligence to satisfy themselves that the owner of the property is in fact the true owner. While there is no fail-safe method of due diligence, lenders should consider:
- reviewing due diligence practices;
- reviewing the circumstances (and documents) of the borrower’s acquisition of title
- reviewing their "know your client" practices;
- title insurance; and
- working with the borrower’s lawyer to confirm information
The Court’s decision to place the burden of mortgage fraud on the lenders was in part based upon the policies adopted by the Legislature of British Columbia. Perhaps this decision will be later addressed by the government or the courts, but until that time, lenders must do what they can to protect themselves.