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Hypothecs (Mortgages)

George needs money to buy a car, so he is thinking of taking out a loan from the bank. The bank agrees to lend money to George, if George will give to the bank a hypothec on his house. George already has a hypothec on his house; he gave a hypothec to another bank ten years ago when he borrowed money to buy it.

George finds an ad for a great deal on a used car, and he goes ahead and buys it quickly. After he buys the car he is contacted by a loan agency. They tell George that they have a hypothec on the car he bought, and that 5 payments of $500 a month are still due to be paid by the old owner. If they don’t get the money, they will seize and sell the car! George is stressed. He thought that hypothecs were only for houses. And in any case, he never signed a hypothec for the car… does he still have to pay?

In this Infosheet, Éducaloi explains some of the basics of hypothecs. Although there are different types of hypothecs, in this Infosheet, Éducaloi describes hypothecs created by an agreement.

What is a hypothec?

A hypothec is a right linked to a property that is given by one person, called the debtor, to another person, called the creditor, in order to guarantee (promise) that an obligation will be fulfilled. The obligation is usually owed by the debtor to the creditor. The debtor is generally the owner of the property.

If the obligation is not fulfilled, the creditor can use the rights he gets from the hypothec to make up for the fact that the obligation was not fulfilled. The property for which a hypothec is given is called the property charged with a hypothec. A loan whose repayment is guaranteed by a hypothec is called a hypothecary loan.

For example, Marc gave the bank a hypothec over his house in order to guarantee that he will pay back a $100,000 loan he got from the bank. If Marc fails to pay back the loan, the bank may sell the house to recover the money that Marc owed it.

What rights does a creditor get from a hypothec?

A hypothec over a property gives the creditor the right to:

• Sell the property himself; or
  
  
• Have the property sold in a judicial sale; or
  
  
• Take possession of the property in order to manage it (for example, if it is a business); or
  
  
• Take the property himself as payment for the debtor’s obligation.

When can a creditor exercise the rights he gets from a hypothec?

The creditor can’t just exercise the rights he gets from the hypothec whenever he wants! First, the creditor can only exercise these rights if three conditions are fulfilled:

1. The debtor is in default (See question “What is a default?”).
   
   
2. The obligation's due date has arrived. For example, the loan is due to be paid.
   
   
3. The amount of money that the obligation is worth can be determined. For example, the unpaid part of the loan is worth $50,000.

Second, the creditor must take certain steps before he can exercise the rights he gets from the hypothec. (See question “What does a creditor have to do before exercising the rights he gets from the hypothec?”)

What is a default?

A debtor is in default when she fails to fulfill her obligations to the creditor. An obligation is a promise, contained in a contract, that a debtor makes to the creditor to do something or to not do something. For example, Joe and his bank signed a contract in which Joe promises to repay a $10,000 loan he took from the bank. Joe owes an obligation to the bank to repay the loan. If Joe misses a monthly payment on his loan, he is in default because he failed to fulfill the obligation he owed to the bank.

Other conditions of default can be specified in the contract between the debtor and creditor. For example, the agreement between Joe and the bank says that Joe will be in default if Joe doesn’t keep his house insured. So Joe must keep his house insured, or he will be in default and the bank may be able to exercise the rights it gets from the hypothec on Joe’s house. (See question “What rights does a creditor get from a hypothec?”).

Remember that a debtor must be in default before a creditor can exercise the rights he gets from the hypothec. So if the debtor fulfills all the obligations she owes to the creditor, the creditor can’t exercise any of the rights he gets from the hypothec.

To find out what happens to the hypothec on their home when spouses separate, read our Infosheet entitled “The legal aspects of moving out”  (http://www.educaloi.qc.ca/en/abonport/family_law/353/).

What does a creditor have to do before exercising a right he gets from a hypothec?

The creditor must first send a document called a prior notice to the debtor. He must then register the prior notice at the registry office where the hypothec was published (i.e. the land register or the Register of personal and movable real rights). Before registering the prior notice, the creditor must prove that he sent the prior notice to the debtor.

The prior notice must:

• Indicate the reasons why the debtor is in default (see question “What is default?”).
  
  
• Remind the debtor that she has the right to remedy (fix) the default.
  
  
• Indicate the amount of money the debtor owes the creditor as well as any interest.
  
  
• Specify the right that the creditor intends to exercise on the property charged with a hypothec (see question “What rights does a creditor get from a hypothec?”).
  
  
• Describe the property charged with a hypothec.
  
  
• Inform the debtor that she must surrender the property charged with a hypothec before a certain time limit is over.

The time limit for surrendering the property charged with a hypothec starts when the creditor registers the prior notice. The creditor must usually wait until the specified time limit is over before he can exercise the rights he gets from the hypothec. The time limit is of 10 days if the creditor wants to take possession of the property to manage it. Otherwise, the time limit varies depending on the type of property charged with a hypothec:

How are hypothecs over land or buildings created?

Hypothecs over land or buildings are called immovable hypothecs. In general, anyone who is the owner of the land or building can create a hypothec over that land or building. An immovable hypothec must be written down in a notarial act “en minute”, which is a document made by a notary.

The notarial act “en minute” that creates an immovable hypothec must:

• Designate the land or building being charged with the hypothec; and
  
  
• Indicate the amount of money for which the hypothec is given.

The amount of money for which a hypothec is given is the maximum amount of money that a creditor can get from the hypothec. It is usually larger than the amount of money owed by the debtor to the creditor because the creditor wants to make sure that the hypothec covers the interest on the money owed and other costs, like the cost of seizing and selling the property charged with a hypothec.

For example, Luke borrows $200,000 from the bank and, to guarantee the loan, he gives the bank a hypothec on his house. The notarial act creating the hypothec indicates that the hypothec is in the amount of $220,000. Luke fails to repay the loan, and he also owes $20,000 in interest. The bank decides to exercise the rights it gets from the hypothec and have the house sold. From the hypothec, the bank can get a maximum of $220,000. This amount covers the loan and the interest, but not the $5,000 that the bank had to pay to have the house sold.

An immovable hypothec must be published (registered) in the land register in order to take effect against persons other than the debtor. (See question “Why is it important to publish a hypothec?”)

Can hypothecs charge property other than land or buildings?

Yes. A debtor can create a hypothec over property other than land or buildings (for example, a car) in two ways.

First, she can create the hypothec by giving the property to the creditor. This kind of hypothec is called a movable hypothec with delivery.

Second, she can create the hypothec in a written document and keep the property. This kind of hypothec is called a movable hypothec without delivery. Certain types of property (like RRSPs) cannot be charged with this type of hypothec.

To find out how each of these hypothecs is created, see the questions “What is a movable hypothec with delivery?” and “Is it possible to create a movable hypothec without delivering the property?”

What is a movable hypothec with delivery?

Most types of movable property (property other than land or buildings) can be charged with a movable hypothec with delivery. In general, anyone who is the owner of the movable property can charge that property with this hypothec. A movable hypothec with delivery is also called a pledge.

The concept is simple. A movable hypothec is created when the debtor delivers the property to the creditor. If the creditor already possesses the property, the hypothec is created when the debtor agrees to let the creditor keep it.

For example, David goes to a pawnshop because he needs to borrow $200. The pawn shop owner, Hubert, agrees to lend him $200, if David will give him a movable hypothec with delivery on his watch. David agrees and leaves the watch with Hubert.

Like all hypothecs, a movable hypothec with delivery must be published in order to take effect against persons other than the debtor. A movable hypothec with delivery is published when the creditor receives the property charged with the hypothec. For example, the hypothec was published when David left his watch with Hubert. Another person (i.e. a person other than the creditor) can also hold the property if the debtor agrees; in this situation, the hypothec is published when this person receives a written notice saying that the property is charged with a movable hypothec with delivery.

A movable hypothec with delivery can also be published (registered) at the Register of personal and movable real rights (RDPRM). (See question “Why is it important to publish a hypothec?”)

Is it possible to create a movable hypothec without delivering the property?

Yes it is, but not for all types of property in all cases. For individuals, the law specifically lists the property on which a moveable hypothec without delivery can be placed. This list varies depending on whether the individual is creating a moveable hypothec for his own needs or for those of his entreprise.

An individual who does not run an enterprise

An individual who does not run an enterprise (e.g. a business) can create a movable hypothec without delivery on:

• Certain motorized property (e.g. cars, motorcycles, motor homes, boats);
  
• Certain precious goods (e.g. paintings, sculptures, jewellery, rare books, stamps, coins);
  
• Certain property that cannot be described as a “thing” although it is often created on a piece of paper and has a certain value (e.g. publicly traded securities, shares, participation in a trust, rights arising from copyrights, trademarks, patents).

Be careful! The law specifically excludes registered retirement savings plans (RRSP), registered retirement income funds (RRIF), registered education savings plans (RESP) and registered disability savings plans (RDSP).

An individual who runs an enterprise

An individual who runs an enterprise can also create a movable hypothec without delivery on the movable property of the enterprise (for example, the computers and furniture of the business).

A legal person

Legal persons, like companies, can generally create a movable hypothec without delivery on any type of movable property.

How does one create a moveable hypothec without delivery?

A movable hypothec without delivery must be written down. The document containing the hypothec must:

• Describe the movable property charged with a hypothec; and
  
  
• Indicate the amount of money for which the hypothec is given.

The amount of money for which a hypothec is given is the maximum amount of money that a creditor can get from the hypothec. It is usually larger than the amount of money owed by the debtor to the creditor because the creditor wants to make sure that the hypothec covers the interest on the money owed and other costs, like the cost of seizing and selling the property charged with a hypothec.

A movable hypothec without delivery must be published (registered) in the Register of personal and movable real rights (RDPRM) in order to fully take effect against persons other than the debtor (see question “Why is it important to publish a hypothec?”). Moveable hypothecs without delivery on securities or security entitlements are automatically published when they are created by a securities intermediary. He does not need to go and register them.

Why is it important to publish a hypothec?

Because this is what allows the creditor to maintain the rights he has on the property even if it is sold or given away. The publication of a hypothec generally gives two rights to the creditor:

• The right to follow the property charged with a hypothec; and
  
  
• The right to have a preference on the money obtained from the sale of the property charged with a hypothec

The right to follow means that the creditor can exercise the rights he gets from the hypothec even if the property is sold or given to another person. The hypothec continues to exist even though the debtor sold or gave away the property and even though the property has a new owner. See question “What happens when a property charged with a hypothec is sold or given away?”

The right to have a preference on the money obtained from the sale of property means that if the property is sold, the creditor with a hypothec will be paid before certain other creditors will be paid. Unless the sale brings in a lot of money, he might even be the only person who gets paid (See question “What happens when a property is charged with more than one hypothec?”)

If a hypothec is not published, the creditor loses his right to follow the property if the property is sold or given away. He also loses his right to be paid before certain other people if the property is sold. This is why it’s pretty rare for a creditor to forget this important requirement!

What happens when a property charged with a hypothec is sold or given away?

If the hypothec was published, the creditor can exercise all the rights he got from the hypothec even though the property has a new owner. This is called the creditor’s "right to follow" the property, no matter who owns.

If the debtor fails to fulfill the obligation guaranteed by the hypothec, the creditor could, for example, decide to take possession of the property or to have it sold, even if the property is in the hands of a new owner. The new owner does not have to fulfill the obligation guaranteed by the hypothec, but she may decide to do it if that is the only way she can keep the property charged with a hypothec.

For example, George bought a car from Marianne without checking the Register of personal and movable real rights (RDPRM). Had he checked the RDPRM, he would have noticed that a loan agency had published a hypothec against the car. Marianne fails to repay the loan she had taken from the loan agency. So the loan agency tells George that they will sell his car to recover the money owed by Marianne. They also tell George that he can keep the car if he pays them the money owed by Marianne. George did not take a loan from the loan agency, so he doesn’t have to repay the loan. But he could decide to do it since it is the only way he can keep the car.

The seller of a property must warrant (promise) to the buyer that the property is not charged with a hypothec, or he must inform the buyer of any hypothecs charging the property. If that’s not the case, the buyer can sue the seller to either recover:

• the money he paid to buy the property, if the creditor exercises his rights; or
  
• the amount he paid to the creditor in order to keep the property.

For example, George repaid the loan agency the $5,400 owed by Marianne in order to avoid having his car seized and sold by the agency. George can sue Marianne to recover the $5,400 he paid. Obviously, if Marianne’s financial situation is bad, George may not get any money from her even if he sues her. Marianne couldn’t repay the loan agency, so she probably won’t be able to repay George, even if he gets a judgment against her. This is why it is always important to check the RDPRM!

A creditor loses his right to follow the property if the hypothec has not been published. For example, if the loan agency had forgotten to publish its hypothec, it could not have sold George’s car to recover the money owed by Marianne.

What happens when a property is charged with more than one hypothec?

When a property is charged with more than one hypothec, the date, hour and minute when each hypothec was published become very important. This is because, in general, hypothecs that are published first are given priority over hypothecs that are published later. A creditor who published his hypothec first can exercise the rights he gets from the hypothec before creditors who published their hypothec later. He can also be paid from the sale of the property charged with the hypothec before creditors whose hypothec was published later and before ordinary creditors (persons who don’t have a hypothec but to whom the debtor owes money).

For example, Beatrice owns a rental building, which is charged with two hypothecs. She gave the first hypothec to the bank when she took out a $70,000 loan. This hypothec was published five years ago. She gave the second hypothec to a loan agency when she took out a $5,000 loan. This hypothec was published two years ago. If Beatrice stops reimbursing the two loans, the bank can exercise the rights it gets from its hypothec before the loan agency. For example, the bank can decide to sell the rental building, regardless of what the loan agency wants to do (for example, the loan agency may want to take control of the rental building in order to manage it).

What can a debtor do to prevent a creditor from exercising the rights he gets from the hypothec?

A debtor has two options if she wants to prevent the creditor from exercising the rights he gets from the hypothec:

1. She can pay the creditor the total amount of money she owes him; or
   
2. She can remedy (fix) the reasons why she is in default.

In both cases, the debtor must also pay for the creditor’s costs. A debtor can use either of these options at any time after the creditor takes possession of the property in order to manage it. If the creditor decides to take the property as payment, to sell it, or to have it sold, the debtor can use one of these options only before the property is taken as payment or sold.

Of course, the debtor can always try to negotiate with the creditor: for example, she could offer to partially pay her debt, in exchange for the creditor giving her some extra time or in exchange for the creditor not exercising the rights he got from the hypothec.

Remember that if need be, the creditor must prove to the court that his debtor has failed to meet her obligations. The registration of a prior notice is not enough to set off the exercise of hypothecary rights. This means that a debtor who believes that she has respected her agreement can challenge her creditor’s claim to the contrary.

What happens when the obligation guaranteed by the hypothec ends?

The hypothec also ends.

For example, Richard gave the bank a hypothec over his house in order to guarantee a loan he had taken from the bank. Once Richard pays off the loan, the hypothec no longer exists because Richard’s obligation to repay the loan no longer exists.

But, even though the hypothec does not legally exist anymore, it still remains registered in the land register or in the Register of personal and movable real rights (RDPRM). This is why it is important to publish (register), in the land register or in the RDPRM, the document that confirms the end of the hypothec (discharge, release, etc.).