The construction legal hypothec is a well-known mechanism for securing receivables from those involved in the construction of a building. It ranks ahead of conventional mortgages, which can be a major irritant for the building owner and his financial institution.

Conservation measures

The legal construction mortgage exists as soon as the work has been carried out, simply by operation of law. It subsists for 30 days following completion of the work. However, in order to be preserved, the creditor of the legal construction hypothec must complete certain conservation formalities, including publishing a notice of legal hypothec before the expiry of the 30 days following completion of the work, and publishing a notice of hypothecary recourse within 6 months following completion of the work.

Beneficiaries

The beneficiaries of a legal construction hypothec are defined in the Civil Code of Québec. However, certain nuances must be taken into account with regard to the status of beneficiaries. For example, only architects and engineers duly registered with the Ordre du Québec can benefit from the legal construction hypothec. Similarly, contractors who are not duly licensed with the Régie du Bâtiment du Québec may be subject to a request for cancellation of a legal construction hypothec.

Unless they have contracted directly with the owner, beneficiaries of the legal hypothec are obliged to withdraw from the contract before any work is carried out. One beneficiary is exempt from this rule: the workman. The latter, who is a natural person subordinate to the contractor, is under no obligation to contract or to give notice to the owner.

The end of the works

As for the notion of completion, it often represents the central element in a dispute between an owner and a contractor. Although there can be only one end to the work, its determination is a question of fact that must be proven according to the specific circumstances of each project.

Elements such as the date of acceptance of the work, the list of deficiencies and the architect’s certificate of completion all represent clues available to the parties, but do not, on their own, determine when the work has been completed.

Options for cancelling a legal construction mortgage

Although not very common in practice, parties opposed to a legal construction mortgage always have the option of recognizing and paying the sums claimed, thereby ensuring that the registration is cancelled.

The owner can also make a payment under protest and reclaim the overpayment once the claim has been established.

Finally, it is possible to institute an action for cancellation of a legal hypothec if the case clearly fails to comply with the conditions governing the creation or preservation of the legal hypothec. Failing this, substitution of the legal hypothec by contractual or judicial means is the most commonly used option.

Substitution

Substitution of the legal hypothec is intended to ensure equity between the protection of the claim of the person who participated in the construction of the building and the owner’s right to dispose of his building.

Should the parties fail to reach an agreement to replace the legal hypothec with adequate security, the owner may apply to the courts for judicial substitution. To do so, the owner must prove that the legal hypothec causes him real and serious prejudice: mere embarrassment caused by the presence of such a hypothec does not qualify as serious and real prejudice. The owner must demonstrate, by a preponderance of evidence, a major impact on his or her financing, progressive disbursements or sales.

The security proposed to replace the legal hypothec must in no way weaken the position of the person having participated in the construction of the immovable: it must be unconditional, irrevocable and sufficient, both in pecuniary terms and as a guarantee of payment. The most common examples of substituted security are surety bonds, letters of guarantee from financial institutions and trust deposits. The latter is a classic but problematic form of security. In fact, recent decisions in this area tend to demonstrate the legal insecurity associated with trust deposits, given the risks for the contractor of collecting the amount deposited in trust in the event of the owner’s bankruptcy.

By Audrey Robitaille