What is a Hypothec in Quebec?
How do you legally define it?
What are the essential elements you should know!
In this article, we will break down the notion and legal definition of Hypothec so you know all there is to know about it!
Keep reading as we have gathered exactly the information that you need!
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Table of Contents
What Is A Hypothec
A hypothec is a right registered by one person against a real estate property or personal property.
In other words, a “hypothec” is a “lien” registered against the property to provide assurance to a creditor that the debtor will perform and execute its legal obligations.
For example, when a person borrows money to purchase a house, the bank will register a hypothec against the purchased home to ensure that it can be paid back in the event of the borrower’s default or non-payment.
In Quebec’s civil law, a hypothec does not grant the creditor any title or possession rights to the property.
In essence, it provides the creditor the ability to exercise certain rights against the debtor if the terms and conditions of the contract are not respected (default) or performance not executed.
Hypothecs involve real rights but do not include ownership rights.
Hypothec Legal Definition
The term “hypothec” comes from the Latin term “hypotheca”.
In Quebec, we refer to the term hypothec as “hypothèque”.
A hypothec is a real right on movable or immovable property made liable for the performance of an obligation.
As can be seen by this legal definition of a hypothec under Quebec’s substantive laws, it is a “real right” on a movable (personal property) or immovable (real estate) property intended to secure the performance of an obligation.
According to the Merriam-Webster dictionary, a hypothec is defined as:
an obligation, right, or security given by contract or by operation of law to a creditor over property of the debtor without transfer of possession or title to the creditor
This definition is similar to how the Quebec Civil Code defines a hypothec where it is indicated that it’s a form of security given by contract or by operation of the law.
Purpose of Hypothecs
The purpose of charging a property with a hypothec is to provide the creditor or lender the possibility to exercise legal recourse against the property in the event the borrower defaults on its payment.
For example, a lender may not want to lend money to a borrower who does not have a good credit history or a sufficient level of income.
However, if the borrower provides a hypothec on a real estate property having sufficient equity or property, that may entice the lender to proceed with the loan or offer credit it would not have otherwise offered.
The lenders benefit from hypothecs as they are given a “security” or property pledged to protect them against the debtor’s default.
Borrowers also benefit from granting hypothecs as they may access financing or loans to purchase a home or property that they could not otherwise purchase.
Types of Hypothecs
Under Quebec laws, there are generally two types of hypothecs:
- Conventional hypothec
- Legal hypothec
Let’s look at each of these in sequence.
Article 2665 CCQ states that “a hypothec may be conventional or legal”.
We say “conventional” as it’s a hypothec granted by one party contractually to another.
For example, if a person grants a movable hypothec on property to another in virtue of a loan agreement or another type of agreement, we’ll refer to that as a conventional hypothec.
In other words, the creditor and debtor mutually agree on the scope and extent of the hypothec to be charged against the debtor’s asset.
A hypothec can also be established or charged against a property by virtue of the law.
We refer to this as legal hypothec (in French, we’ll say “hypothèque légale”).
In other words, in certain cases, the law will specifically authorize certain persons or categories of persons to register a hypothec against a property to secure the debtor’s obligations.
For example, the law in Quebec enables contractors, subcontractors, employees or other individuals who have worked on a real estate property (like renovation work) to publish a “legal” hypothec in the event they are not paid for their services or material.
In this case, by operation of the law, contractors, subcontractors, and employees are a category of persons
Rights Granted By Hypothecs
What are the rights granted to a creditor of a hypothec?
In essence, a hypothec will generally provide a few key rights to the creditor:
- The right to sell the property to realize the value
- The right to have the property legally sold (legal auction)
- The right to take over the property
- The right take the title or ownership of the property in payment of outstanding debt
The most common form of hypothec we are familiar with is the charge registered against a property further to execution of a mortgage agreement.
A borrower of funds will enter into a mortgage agreement with the lender obligating itself to reimburse the capital and interest.
If the borrower fails to pay, the lender may foreclose the property and exercise its rights under the hypothec.
Quite often, banks will exercise their hypothecary rights to have the property sold so they can get reimbursed the money owed to them by the borrower.
Interest And Principal Protection
Article 2667 CCQ states that the hypothec “secures the capital, the interest accrued thereon and the costs, other than fees for professional services, legitimately incurred for their recovery or to conserve the charged property”.
In general, the main hypothec will protect and offer security to cover interest accrued during the year along with the three prior years.
You may register a notice of preservation should you wish to protect interest for a further period.
Mortgage agreements will also have an additional hypothec.
For example, if you borrow $100,000, the bank will take a main hypothec of $100,000 and an additional hypothec of $20,000 (generally 20% of the value of the loan).
The additional hypothec is intended to provide security for interests not covered by the main hypothec, such as:
- Recovery costs
- Bailiff expenses
- Prior notice of exercise of hypothecary rights
According to the Quebec Court of Appeal, the additional hypothec can cover any additional hypothec specifically outlined in the deed of hypothec.
So what is the legal definition of Hypothec?
How does it work in Quebec?
What rights are associated with hypothecs?
Let’s look at a summary of our findings.
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