THE LEGAL CONSTRUCTION HYPOTHEC AND ITS SUBSTITUTE: AN OVERVIEW OF THE MAIN PRINCIPLES AND CHALLENGES FOR THE LENDER
The legal construction hypothec is a well-known mechanism for the guarantee of receivables offered to those who participated in the construction of a building. This hypothec is given a priority ranking on conventional hypothecs, which can be an aggravation for the owner of the building and its creditor.
The legal construction hypothec exists from the execution of the work by the simple effect of the law. It lasts for 30 days after the completion of the work. However, to be retained, the creditor of the legal construction hypothec must complete the formalities for its conservation, which require the registration of a notice of legal hypothec before the expiration of the 30 days following the end of work and the registration of a prior notice of the exercise of a hypothecary right within 6 months of the end of the work.
The beneficiaries of the legal construction hypothec are provided for in the Civil Code of Québec. However, there are some nuances as to the quality of the beneficiaries. For example, only architects and engineers duly registered with their Québec professional organizations can benefit from a legal construction hypothec. Similarly, contractors who are not duly licensed with the Régie du bâtiment du Québec can be subject to a request for cancellation of a legal construction hypothec. Unless they have contracted directly with the owner, the beneficiaries of the legal hypothec must give a written declaration of the contract to the Owner before the execution of the work. One beneficiary, however, is not subject to this rule: the workmen. The workmen, who are individuals and must report to the contractor, have no obligation to contract or report to the owner.
The end of the work
The notion of the end of work is often the central element of a dispute between an owner and the contractor. Although there can only be one date for the end of the work, its determination is a question of fact to be proven according to the circumstances of each project. Elements such as the start date of the work, the list of deficiencies, the certificate of completion of the work issued by the architect are all information available to the parties, but do not correspond, on their own, to the date on which the work was actually completed.
Options to discharge the legal construction hypothec
Although not usually practiced, the parties opposed to a legal construction hypothec are always able to ascertain the sums claimed and to pay them to ensure the discharge of the legal hypothec. The owner may also make a payment under protest and claim the overpayment once the merits of the claim have been established. Lastly, it is possible to institute an action for the cancellation of a legal hypothec if the file clearly shows non-compliance with the conditions of its creation or conservation. Failing this, the substitution of the legal hypothec, by contractual or judicial means, is the option most often used.
The substitution of the legal hypothec has an equity objective between the protection of the debt of the contractor having participated in the construction of the building and the right of the owner to dispose of its building. In the absence of an agreement between the parties to substitute the legal hypothec with sufficient security, it is possible to present an application in judicial substitution. To do this, the owner must prove that the legal hypothec causes real and serious prejudice: a simple embarrassment caused by the presence of such an hypothec cannot be qualified as serious and real damage. The owner must demonstrate that the legal hypothec has a substantial negative impact on its financing, its progressive disbursements or its sales. The security proposed to replace the legal hypothec must not, in any way, weaken the security of the contractor who participated in the construction of the building: it must be unconditional, irrevocable and sufficient, in monetary terms and in guarantee of payment. The most common examples of substituted security are a bond, a letter of guarantee by a financial institution and a deposit in trust. The latter is a classic security, but problematic. Indeed, recent decisions in this area tend to demonstrate legal uncertainty related to a deposit in trust because of the risk for the contractor to collect the amount deposited in trust in the event of the bankruptcy of the owner.
By Audrey Robitaille