The taking and enforcement of security over property in Jersey, whether commercial or residential, is a very different procedure from that in England. It is a particularly arcane area of law, which is still being clarified by the courts, as lenders may learn to their cost.
Jersey law recognises three principal types of charge over immoveable property all governed by a statute over 125 years old, namely the Loi (1880) sur la propriété foncière ("the 1880 Law"). They are:-
- hypothèques légales (legal
hypothecs, arising automatically by operation of law, such as
a widow's rights over property in relation to her
- hypothèques conventionnelles (contractual
hypothecs created by an agreement between the parties);
- hypothèques judiciaires (judicial
hypothecs created by the registration in the Public Registry
of an act of the court, whether in respect of a
reconnaissance (acknowledgement of a debt) or a judgment on a
debt – it is these which are used most frequently
to secure lending on conveyancing transactions).
A hypothec is a right in rem attaching to a debt or obligation. It is dependent upon the existence of the debt or obligation and whilst a debt or obligation can exist without a hypothec, the converse situation can not. A hypothec confers certain advantages on a holder – he obtains priority payment in a désastre. He can also enforce the security by way of dégrèvement proceedings – an older insolvency procedure set out in the 1880 Law focused on freeing the land of charges rather than achieving fairness for the creditors. The hypothec registered first in time takes priority over later hypothecs.
In dégrèvement proceedings, the creditors are called upon to take over the particular property subject to paying off all prior charges on it. The creditors are approached in order of their charges – the most recently registered first. If the creditor declines to take on the property and pay off the others he gets nothing (although the debt can be pursued separately as it is not discharged). The creditor who takes the property will then, however, be entitled to take the full value of the property even if it is in excess of the debt owed, provided he pays off the holders of any earlier hypothecs.
The law relating to the priority of judicial hypothecs came to the fore in a recent judgment of the Court of Appeal in December 2007: Ansbacher (Channel Islands) Limited v. HSBC Bank PLC  JCA 228.
Ansbacher had given a loan to two borrowers. Security was a first charge over their house in the form of a judicial hypothec. There was a subsequent borrowing from HSBC for which a second charge was given. A judgment creditor obtained and registered a third hypothec. The borrowers defaulted on the loan. Ansbacher obtained a judgment in the Royal Court which it registered as a further judicial hypothec. The Public Registry showed the following hypothecs against the names of the property owners:-
In favour of Ansbacher – acknowledgement of debt re loan agreement
In favour of HSBC – promissory note
In favour of a judgment creditor - judgment arising out of a breach of contract claim against the property owners
In favour of Ansbacher - judgment after default on loan agreement (including additional sums for interest)
When the borrowers failed to pay off the judgment debt, Ansbacher commenced dégrèvement proceedings against them so as to enforce its security. It assumed that its original 2002 charge would be valid, and so it would be repaid in full by the later charge holders, or if they declined to do so, would take on the property and at least receive all the moneys raised by a sale of the property. HSBC contended that only one registration was permitted in respect of any one debt and that the registration of the 2006 judicial hypothec by Ansbacher had destroyed the 2002 judicial hypothec. Thus if Ansbacher did not want to take the property (under the 2006 charge) and repay the pre-dating charge-holders, HSBC itself would have the opportunity to take the property, free of the Ansbacher charge.
The Royal Court had held that a lender who obtained a judicial hypothec by registering his acknowledgment of debt at the Public Registry, would lose the benefit of any priority by that registration if he later obtained judgment for the same debt and registered that judgment, as a second judicial hypothec.
The Court of Appeal considered the interpretation of the 1880 Law and when a hypothec must be removed from the Public Registry. It stated that: "Two circumstances are set out: first, the extinction of the debt; secondly, the registration of a subsequent act of judgment & but only if it is in the same procedure". What did the "same procedure" mean? The Court of Appeal decided "procedure" meant "the whole judicial process affecting the debt or obligation in question".
The court concluded that "if there is a single underlying obligation or debt, the law provides that there can be only one judicial hypothec securing such a debt or obligation, because the earlier hypothec loses its effectiveness upon the registration of the later act or judgment given within the judicial process". Ansbacher, by registering the second hypothec had lost the priority of the first hypothec. Thus the court of Appeal upheld the first instance decision. Ansbacher could only rely on the 2006 hypothec and if it wanted the property, would first have to pay off HSBC and the judgment creditor even though the sale proceeds of the property would not necessarily also cover the entirety of its own indebtedness.
Significantly, the Court of Appeal stated "neither the rules nor the principles applicable to mortgages in English law can be transplanted into the regime established for hypothecs under the 1880 Law ... whilst it might seem unjust to an English lawyer that the holder of the first registered charge should have his charge displaced by the subsequent registration of a judgment for the self-same debt, there is in fact no such injustice in Jersey law, because a hypothec is quite different in juridical principle from a mortgage, and is enforced by quite different procedures".
Thus those who have the benefit of a judicial hypothec, and then judgment in respect of the same debt, must not register that second judgment as a judicial hypothec but instead proceed onto enforcement either by désastre or dégrèvement or other means; lenders beware.
This article first appeared in the spring issue of Appleby Jersey's Resolution newsletter.
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.