Hypothec Explained: A Comprehensive Guide

Hypothec is a type of secured credit that allows individuals and businesses to borrow money using an asset as collateral.

A hypothec can be used to finance various expenses such as buying a new property, consolidating debt, or investing in a business.

The key characteristic of a hypothec is that it gives the lender a security interest in the collateral, which can be seized if the borrower defaults on the loan.

This type of credit is often more flexible than traditional loans and can offer better interest rates and repayment terms.

Hypothec is a type of security that operates through hypothecation. This means it's entered into the land and hypothec register or the ship registry, usually through a notarial act or an administrative or court decision.

A hypothecary loan contract is required for a contractual hypothec, while an administrative or court decision is needed for a compulsory hypothec. This is the only way a hypothec can arise.

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The property doesn't pass to the creditor in a hypothec, but they do gain a preferential right to have their debt paid out of the hypothecated property. This is a crucial distinction.

In the event of default, the creditor can sell the property and pay themselves out of the proceeds. Alternatively, if there's no buyer, they can become the owner themselves.

Here are the two ways a hypothec can arise:

The concept of a hypothec has a rich history that dates back to Roman law. Originating in Roman law, a hypotheca was essentially a non-possessory pledge over a person's entire estate.

During the Renaissance, civil law systems revived the device as a hypothecatory security interest taken strictly over immovable property. This security interest ran with the land, a concept known as jus persequendi in Latin.

The hypothecatory security interest was also referred to as droit de suite in French and zaaksgevolg in Dutch, highlighting its significance in European legal systems.

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The concept of a hypotheca has its roots in Roman law, where it was essentially a non-possessory pledge over a person's entire estate.

In the Renaissance, civil law systems revived the device as a hypothecatory security interest taken strictly over immovable property. This type of security interest was unique in that it ran with the land, meaning it stayed with the property even after changes in ownership.

The term "jus persequendi" is Latin for "right to pursue", which refers to the idea that the security interest follows the land. This concept is also known as "droit de suite" in French and "zaaksgevolg" in Dutch.

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Title and Legal Services play a crucial role in the history and evolution of property ownership. They ensure that the buyer and seller are aware of any outstanding claims or mortgages on the property.

You should always be on the lookout for "legal mortgages" that can be created without the owner's agreement. These can result from unpaid taxes, court judgments, or claims from people involved in construction or renovation work.

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A construction mortgage is a type of legal mortgage that can catch buyers off guard. It's essential to investigate if the property has recently undergone or is still undergoing construction or renovation work.

The seller is obligated to inform you of any legal mortgages affecting the house and have them cancelled. This is a critical step in the buying process to avoid any surprises down the line.

Here are some common types of legal mortgages to watch out for:

Title insurance can also provide protection against unexpected legal issues. However, it's essential to understand that it may not cover all types of disputes, such as those related to construction mortgages.

In Quebec law, the hypothèque is used as an equivalent of a mortgage or lien, and it's defined as an elastic, hypothecatory security interest that has all the rights of recourse of an American lien-theory mortgage or English mortgage by way of legal charge.

The Quebec Civil Code provides for two types of hypothèques: hypothèques conventionnelles, which is a mortgage lien or legal charge, and hypothèques légales, which is an involuntary lien or equitable charge.

In Quebec, a hypothèque can be taken over movable and/or immovable property alike, and it must be perfected (i.e. registered) to be valid. This is in contrast to a priorité, which is a non-possessory, indivisible, unregistrable real security arising by operation of law alone, providing a priority right over the security subject.

Here are the types of hypothèques in Quebec:

Note that the concept of hypothèque is broader in Quebec than in common law jurisdictions, encompassing a range of security interests.

Rethypothecation allows entities to reuse the collateral to secure their own borrowing, making it easier for creditors to refinance at lower rates. This practice is beneficial for creditors but can be restricted by debtors in initial hypothecation contracts.

The creditor can seize the house if the debtor defaults, but if the creditor becomes responsible for the outstanding hypothecary debt, it adds an extra layer of complexity.

Mixed Legal Systems often have unique approaches to security interests, and Scotland is no exception. The Moveable Transactions (Scotland) Bill proposes significant changes to Scots law on security over goods, intellectual property, and shares.

In Scotland, the Bill aims to introduce a new regime that will impact how security interests are prioritized. The Bill is currently going through the Scottish Parliament.

The case of a St Lucian company's liquidation highlights the importance of understanding the order of priority for security interests. The Board of the Privy Council dismissed an appeal brought by Interested Creditors, confirming that securities by way of hypothecs rank in priority in the order in which they are registered.

In the St Lucian case, the receiver/manager's consent orders did not constitute expenses in the liquidation. This demonstrates the need for careful consideration of security interests and their priority in liquidation proceedings.

The proposed changes in Scotland will likely have a significant impact on practitioners of the law, requiring them to adapt to the new regime.

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In Quebec, the term hypothèque is used to describe a security interest that's equivalent to an American non-possessory lien or English legal charge. This type of security interest is elastic, meaning it can be taken over both movable and immovable property alike.

The Quebec Civil Code defines hypothèque, providing that it has all the rights of recourse (jus exigendi) of an American lien-theory mortgage or English mortgage by way of legal charge. This means that a hypothèque can be used as a mortgage or legal charge.

There are two main types of hypothèques in Quebec: conventionnelles and légales. Conventionnelles are mortgage liens or legal charges, while légales are involuntary liens or equitable charges.

Here are the main types of hypothèques in Quebec, as defined in the Quebec Civil Code:

Another type of real security in Quebec is called a priorité, which is a non-possessory, indivisible, unregistrable real security arising by operation of law alone. When attaching to movable property, this security interest most closely matches the hypothèque as defined by the Quebec Civil Code.

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