Exercising hypothecary remedy and prescription

Exercising the hypothecary remedy

SYLLABUS

A hypothec is a real right made liable for the performance of an obligation. It gives the creditor a right to follow, allowing the creditor to follow the property in whatever hands it lies. The creditor can therefore exercise a hypothecary remedy against the person who has become the owner of the charged property. The fact that a hypothec is an accessory right means that it is valid only as long as the obligation whose performance it secures subsists. The prescriptive period for a hypothecary action follows that which applies to a personal action, since the accessory follows the principal. The rights and remedies arising from a hypothec are in addition to the personal rights and remedies that the law confers on the creditor. It is a cardinal principle of the law of hypothecs that the creditor, and only the creditor, has the choice of remedy. Not only can the creditor choose the type of hypothecary remedy he or she wishes to pursue, but the creditor can also choose whether or not to exercise a hypothecary or a personal remedy. The creditor can also combine the two remedies if he or she wishes without worrying about lis pendens or res judicata, because their objects are different. Hypothecary rights are exercised directly against the person who has the hypothecated property in his or her hands. It is possible that that person will not be the person with whom the hypothecary creditor contracted in the first place. For example, a hypothecary creditor who takes property in full payment of a claim and becomes its owner takes the property subject to all hypothecs published before his or her hypothec was published. In such circumstances, that creditor therefore becomes hypothecarily obligated toward a creditor holding an earlier ranking hypothec, and the latter’s hypothecary rights must then be exercised against the former.

Expansion of the Thesis

Hypothecs form part of the arsenal of securities available to a creditor to secure a claim and thereby be protected from a defaulting debtor. A hypothec is a real right “made liable for the performance of an obligation” and provides the creditor with a direct link to the property that is the subject of the security. “A real right is a power that a person can exercise directly over the property. Because there is a direct link, there is no intermediary between the holder of the right and the property”

Therefore, one of the fundamental features of a hypothec is that it gives the creditor a right to follow. This means that it allows the creditor to follow the property in whatever hands it lies. The right to follow helps ensure the effectiveness of a hypothec as security and enables the creditor to exercise the hypothecary rights provided for in the Civil Code “regardless of who holds the property hypothecated in the creditor’s favour”. This means that if the hypothecated property leaves the patrimony of the grantor of the hypothec, the creditor can assert his or her right to follow and exercise a hypothecary remedy against the person who has become the owner of the charged property, “who is bound only hypothecarily on the property”.

Another fundamental feature of a hypothec is that it is accessory to the principal obligation it secures. This means that it is valid only as long as the obligation whose performance it secures subsists. This affects the prescriptive period applicable to a hypothecary remedy. While a hypothec is accessory to the principal obligation it secures, it confers rights that are nonetheless distinct. The principal obligation, or the claim, confers personal rights and remedies, whereas the hypothec confers hypothecary rights and remedies. The rights and remedies arising from a hypothec are therefore in addition to the other rights that the law confers on the creditor. It is a cardinal principle of the law of hypothecs that the creditor, and only the creditor, has the choice of remedy.

To be clear, this choice is multidimensional. Not only can the creditor choose the type of hypothecary remedy he or she wishes to pursue — taking of possession for the purposes of administration, taking in payment, sale under judicial authority or sale by agreement, by a call for tenders or by auction — but the creditor can also choose whether or not to exercise a hypothecary or a personal remedy. After all,  “a hypothecary creditor remains above all a creditor, who retains all of his or her rights in the debtor’s entire patrimony”. The creditor may therefore choose to sue the debtor in personam or in rem or both. If the creditor chooses to sue the debtor in personam, the personal remedy will enable the creditor to obtain a judgment that is enforceable against all property in the debtor’s patrimony, whereas if the creditor chooses to sue the debtor in rem, the hypothecary remedy will enable the creditor to realize on the hypothecary security on the charged property. The creditor can also combine these two remedies if he or she wishes. There are therefore three choices: the creditor can exercise a personal remedy or a hypothecary remedy or a personal and hypothecary remedy.

It is important to note that even where a personal remedy is exercised concurrently with a hypothecary remedy, each remedy retains its own features. While personal and hypothecary remedies can be pursued jointly, they nevertheless remain two different remedies, “that each retain their nature”. A creditor can therefore exercise them at the same time, or even in the same proceeding, without worrying about lis pendens or res judicata, because their objects are different. This hypothecary remedy involves taking the hypothecated property in full payment of the claim. Taking in payment, therefore, enables the creditor to become the owner of the property — whether the value of the property is higher or lower than the value of the creditor’s claim — and extinguishes the principal obligation. It can thus truly be said that there is a transfer of the ownership of the property, which leaves the debtor’s patrimony and is transferred to that of the creditor, who becomes its owner. It should be noted that taking in payment has a retroactive effect; the creditor becomes the owner of the hypothecated property and the obligation is extinguished retroactive to the date on which the prior notice of the exercise of a hypothecary right was registered.

When exercising a hypothecary remedy, a creditor must first determine from whom the remedy is to be sought. I reiterate that “the creditor may exercise his hypothecary rights in whatever hands the property lies”. It is true that the hypothec, as a real right, gives the creditor a direct link to the property, but that right must nevertheless be exercised against a person who can be answerable for it in court. That person is the holder of the property, who, as such, is under a “real” obligation:

“As a result of having possession of the property, a person becomes obliged to bear the real rights attached to the property; the person is therefore said to be “under a real obligation”, that is, under an obligation by reason of the property. This is true of a person who acquires hypothecated property without having undertaken to pay the obligation secured by the hypothec: in such a case, the creditor retains the right to exercise his or her hypothecary remedies against the property but does not have the right to bring a personal action against the person. The “real” obligation is not reflected through the entire patrimony”.

Hypothecary rights are therefore exercised  “directly against the person who has the hypothecated property in his or her hands”. Usually, that person is the original debtor and grantor of the hypothec, who remains the owner of the hypothecated immovable. However, it is possible that the person will not be the person with whom the hypothecary creditor contracted in the first place: Pratte (2012), at No. 64. Where the property is no longer part of the patrimony of the grantor or the original debtor of the hypothec, the right to follow enables the creditor to exercise a hypothecary remedy against the new owner of the property, [translation] “who is bound only hypothecarily on the property”.

A hypothecary remedy remains closely connected with the secured obligation even though it is exercised on a different basis, i.e. a hypothecary basis. Like a personal remedy, a hypothecary remedy must be exercised while the principal obligation is not prescribed. Since it is possible that a hypothecary remedy will be exercised against a person other than the debtor of the principal obligation, it is even clearer that the hypothecary debtor is the person who is to be prevented from prescribing by exercising a hypothecary remedy. That debtor is not necessarily the debtor of the principal obligation but may be a third party grantor, a subsequent purchaser or a second-ranking hypothecary creditor who has taken the immovable in payment. In this last case, as I stated above, that creditor takes the property subject to all hypothecs published before his or her hypothec was published. This means that that creditor is bound propter rem, or hypothecarily: “In relation to those earlier ranking hypothecary creditors, the creditor who has taken in payment is a third party holder who is not bound personally for the debt but is bound hypothecarily”

BIBLIOGRAPHY

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