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 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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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