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So if property has not been utilised by the original owner, and another person starts to occupy and utilize it for a reasonable period of time (i.e., 20 years), the new occupier can lodge for the property title to be transferred to themselves. This is know as 'Adverse possession' or 'Squatter rights'.

Let's assume the property has been successfully 'adversedly possessed', but there was a mortgage on the property. Is the original owner still responsible for the mortgage, or does it transfer to the new owner?

I am interested in NZ/Aus law, but feel this is an interesting question, so am happy for answers pertaining to other locations as well

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The mortgage is part of the title on the land

First, a mortgage is a right given to a mortgagee to seize and sell the land if obligations under another contract are not fulfilled. Most usually the mortgage is offered as security for a loan taken out by the mortgagors (landowner), however, mortgages can be given for all sorts of other reasons. For example, I might give a mortgage to guarantee a loan by someone else. Or as surety for bail.

The Registrar General says:

The effect of adverse possession is to destroy the title of the person who is dispossessed, however, it does not destroy the rights of other persons who have an enforceable interest in the land such as easements or restrictive covenants.

Since a mortgage is a type of restrictive covenant the mortgagee would retain the right to seize and sell the property if whatever trigger for that to happen, happened.

So, to keep it simple, if we assume that the original owner offered the mortgage as security for a loan, then, if they stopped paying the loan one of the lender's options would be to seize and sell the land irrespective of who owns it.

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  • Can you, please, clarify how this is reconciled with the fact that the squatter is not a party to the agreement. Maybe the answer does cover it, but I am having difficulty understanding where and how it does cover it (if it does). – grovkin Apr 23 at 8:21
  • @grovkin the squatters rights dont trump the creditors interest in the property. – Moo Apr 23 at 11:30
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    @grovkin adverse possession only replaces the legal owner on the title - other rights on the title are unaffected. – Dale M Apr 23 at 11:32
  • @DaleM So a likely result would be the original owner would be "upset" (a given), and would stop paying for the mortgage. It would go into default, and the bank would force an auction. The new owner would get what is leftover from the sale, once the mortgage is repaid. Losing the land but getting some cash. Does that sound reasonable? – DarcyThomas Apr 26 at 22:54
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    @DarcyThomas That is possible. However, the load default will be the previous owner’s default and will be on their refit history. Also, the previous owner may have assets that are easier to seize - cash in the bank for example. – Dale M Apr 26 at 22:58

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