Canada: The Legal Construction Hypothec: A Security Whose Validity Depends On Both Formality And Substance

Two decisions were rendered recently by the Superior Court of Québec concerning legal construction hypothecs. These decisions highlight the importance of respecting the conditions for the validity of any claim made regarding this type of security, whether they be procedural ones or those that give rise to the right to register such a charge.

A fatal procedural defect

7162936 Canada Inc. et al. were the owners of a building whose construction was entrusted to Magil Construction Inc. ("Magil"). Magil entered into a subcontract with Gamma Murs et Fenêtres International Inc. ("Gamma") which undertook to supply products and perform the work for the installation of walls, drapes, glazing and aluminum siding.

Not having been paid, Gamma registered a legal hypothec in the amount of $4,471,463.98 against the lots covered by the construction project.

The owners thereupon filed a motion asking the Court to reduce the amount of Gamma's hypothec, maintaining that it was exaggerated. Gamma argued that the motion should be dismissed, on the basis in particular that it was procedurally defective.

The owners' motion was based on Article 804 of the Code of Civil Procedure (the "CCP") and on Article 2731 of the Civil Code of Québec (the "CCQ"). Coincidentally with that motion, they also filed a motion to institute an action seeking to have the legal hypothec reduced, based on those same legislative provisions.

On July 9, 20151, the Superior Court sided with Gamma and dismissed the first motion. In doing so, it confirmed a long line of cases holding that a motion seeking the cancellation of the registration of a hypothec, as provided in Article 804 CCP, must be in the form of a motion to institute proceedings. Thus, this article does not permit a preliminary motion challenging the validity of a secured claim, including its amount.

It must thus be borne in mind that Article 804 CCP allows the amount of a legal hypothec to be challenged pursuant to a motion to institute proceedings accompanied by reliable and irrefutable evidence. A motion simpliciter under Article 804 CCP can be used to challenge only the formal compliance or validity of the registration of a legal hypothec.

Not having the right contractor's licence can be costly

The owners of a plot of land decided to source, from a supplier in Estonia, a "wooden house kit" with components to be assembled. In order to do so they retained the services of Aménagement Jonathan Tessier Inc. ("AJT") to purchase and import the kit. They then retained the services of Entrepreneur Général T & T Construction Inc. ("T&T") to assemble and erect the structure on their lot.

On July 8, 20152, the Court ruled on a motion filed by the owners for the cancellation of two legal construction hypothecs in a combined amount of $133,550.91 that had been registered against their property by the aforementioned contractors for the balance due on work they had performed on the owners' behalf.

Had the contractors fulfilled the conditions for the validity of a legal construction hypothec?

First of all, the beneficiaries: at the outset, Justice Jacques Babin endorsed the case law recognizing that the supplier of a pre-fabricated house can benefit from the legal hypothec in favour of a supplier of materials under Article 2726 CCQ. Thus, while the construction of the owners' house was not traditional and consisted of assembling pre-fabricated wood components, the sale of those components by AJT to the owners entitled it to a legal hypothec.

Next came the increase in value: Justice Babin found that the entirety of the work performed by the defendants had added value to the owners' property, as it had resulted in a brand new building. In obiter, however, he stated that the amount secured by AJT's hypothec was clearly exaggerated.

Nevertheless, AJT's legal hypothec was found to be valid. The same was not true, however, for that of T&T, which ended up being cancelled due to a technicality.

Invalid contractor's licence: T&T held only a contractor's licence "for small buildings". While the owners' house was assembled from a kit of pre-fabricated components, the Court nonetheless concluded that a licence for small buildings was not sufficient and that T&T should have held a contractor's licence "for new buildings covered by a guarantee plan".

On that basis, the owners succeeded in having T&T's legal hypothec cancelled pursuant to section 50 of the Building Act.

Footnotes

1. 7162936 Canada inc. v. Gamma Murs et fenêtres international inc., 2015 QCCS 3192

2. Gérard v. Aménagement Jonathan Tessier Inc., 2015 QCCS 3326

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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