Canada: Those Who Believe They Are First Are Not Always

Last Febuary, the Court of Appeal of the Province of Quebec rendered an important decision for all hypothecary creditors who allow their debtor to collect the rents generated by the hypothecated immovable. In Royal Bank

of Canada vs. Caisse Populaire St-Albert-le-Grand, the highest court of the Province confirmed that a hypothecary creditor holding a second-ranking hypothec who has collected rent following the registration of its notice of withdrawal of authorization to collect the rentals may apply these sums against the indebtedness of its debtor and legally oppose this collection to the first-ranking hypothecary creditor, in apparent violation of the general principals of law with respect to the ranking of hypothecary creditors. However, the Court of Appeal stated that as soon as a similar notice is registered by the first-ranking hypothecary creditor, it then holds the right to collect such rent in the future. Although it was rendered in a context of realization of immovable property, the principles of this decision should also apply to the realization of movable property, namely with respect to accounts receivable.

It is always interesting to note the difference between the legal beliefs of most and the relevant applicable legal principles. This decision is a striking example thereof.

For most individuals, a first-ranking hypothec implies that any money collected from the realization of the assets will be first applied to the debt secured by the first-ranking hypothec. Therefore, a first-ranking creditor holding a hypothec on the rent generated by the secured property normally considers that any and all relevant rent may be collected and applied to the reduction of the debt owing to it regardless of the date of registration of its notice of withdrawal of authorization to collect the rentals. The Court of Appeal has thus reminded us that an essential condition to the collection of rent is the registration of such notice of withdrawal of authorization in the appropriate land register. As long as such notice is not registered by the first-ranking hypothecary creditor, a subsequent-ranking hypothecary creditor may register its own notice and validly collect said rent without any obligation to remit such sums to the first-ranking hypothecary creditor.

It is easy to imagine situations where, following the collection of rent by a subsequent-ranking hypothecary creditor, a first-ranking hypothecary creditor will be required to expend his own money in the taking of possession of the property for administration purposes as it intends to realize its security, since the revenue generated by said property will have been collected by another creditor.

In order to avoid such a situation, when other hypothecs have been registered against the secured property, it is imperative for any hypothecary creditor to act quickly and to register its notice of withdrawal once the debtor defaults or as soon as the decision to realize on the hypothec has been taken. If the creditor holds a first-ranking hypothec, this registration will prevent the collection of rent by other hypothecary creditors. On the other hand, a subsequent-ranking hypothecary creditor having registered its notice of withdrawal first will have the legal right to apply the sums collected to reduce its own debt until the first ranking creditor follows with the same notice. As William Shakespeare might say: "it is not to be a first-ranking hypothecary creditor, it is to be the first hypothecary creditor to register a notice of withdrawal of authorization to collect the rentals".