Canada: A Banker Asked Us: Determining The Amount Of A Québec Hypothec

Q:

The bank's cross-country security package includes a moveable hypothec registered in Québec charging the Québec assets. Our borrower wants to know why the amount of the hypothec is larger than the aggregate amount of the credit facilities. How is the amount of the hypothec determined, and is it intended to be limited to the value of assets located in Québec?

A:

Québec hypothecs differ from common law security in that the amount guaranteed by the security must always be stated and such amount must be in Canadian currency in order for the hypothec to be valid.

Being an essential stipulation, the amount of the hypothec cannot be changed by an amending agreement and this is the reason why the amount of the hypothec must be sufficient to secure the obligations described therein. The amount of a hypothec is largely theoretical because a hypothec is an accessory: when exercising its rights under a hypothec, a lender can only obtain the amount that is actually owed to it, regardless of the amount of the hypothec, insofar as the amount is large enough to cover such secured obligations. For this reason, it is better to err on the side of caution and stipulate a larger amount than necessary. The benefits of this practice are twofold: they protect the lender's rights by ensuring that all obligations are guaranteed by the hypothec, but they also save borrowers the cost of having to prepare and grant a new hypothec every time credit facilities are increased. Therefore it is preferable for the lender to take a single hypothec in an amount large enough and containing a description of guaranteed obligations broad enough to allow some flexibility in this respect.

For these reasons, the practice has developed in Québec to add what is referred to as an "additional hypothec" to the principal amount of each hypothec. As a result, the amount of a hypothec in Québec usually corresponds to the total amount of the credit facilities granted by the lender (regardless of the value of assets located in Québec), plus the additional hypothec, which is meant to secure the payment of interest and other costs, expenses and amounts payable to the lender, which are not otherwise secured by the principal hypothec. It must be noted, however, that Article 2667 of the Civil Code of Québec specifically excludes extra-judicial professional fees from the obligations than can be secured by a hypothec. Therefore, any legal fees incurred by the lender for the recovery of principal and interest or for conserving the charged property cannot be included as part of the "costs" secured by the additional hypothec.

Such additional hypothec is generally granted in an amount ranging from 15% to 30% of the amount of the principal hypothec, but the most common practice is to add an additional hypothec of 20%. As a result, the amount of a hypothec will usually range from 115% to 130% of the total credit facilities. The additional hypothec can be presented textually in two ways: it is either included in the overall amount of the hypothec in a single clause stipulating the total amount, or the amount of the hypothec is initially stipulated in a principal hypothec clause as an amount equal to the total amount of the credit facilities, with the additional hypothec stipulated in a separate clause known as the "additional hypothec clause".

Finally, it should be noted that the amount of a hypothec must always be stated in Canadian dollars. For that reason, in cases where the credit facilities are stipulated in foreign currency, the amount of the hypothec is adjusted in consequence. For example, where credit facilities are stipulated in U.S. dollars, the general practice is to obtain a hypothec in a principal amount of 150% (in Canadian dollars) of the total credit facilities (in U.S. dollars) in order to allow for currency fluctuations. In the same way, where credit facilities are stipulated in Euros, for example, an even higher principal amount would be stipulated.