Press "Enter" to skip to content

How is a chattel mortgage without delivery created?

How do you create a mortgage on land or a building?

Mortgages on land or a building (house, apartment building, etc.) are called real estate mortgages. In general, any landowner or facility can decide to mortgage it. A real estate mortgage must be created in a notarial deed en minute, i.e., by a notary. The act that makes the immovable mortgage must describe the mortgaged property and specify the amount of money the mortgage relates.

The amount of money to which the mortgage relates is the maximum amount that the creditor will be able to recover under the mortgage. This is usually a higher amount than the amount owed to the creditor by the debtor because the creditor thus ensures that the mortgage covers the amount of the debt and interest and other costs, such as fees for foreclosure and sale of the mortgaged property.

For example, Luke borrows $200,000 from the bank to secure the loan. He gives him a mortgage on his house. The notarial deed creating the mortgage indicates that it is for $220,000. Luke defaults on his obligation to repay the bank. Interest on the loan is $20,000. The bank decides to exercise its rights under the mortgage and have the house sold. Under the mortgage, she can recover a maximum of $220,000. This will cover the loan and interest, but not the $5,000 she had to pay to sell the house.

A real estate mortgage must be published (registered) in the land register to be invoked against a person other than a debtor. (See the question “why should a mortgage be published”?).

Can there be mortgages on anything other than land or a building?

Yes. A debtor can create a mortgage on property other than land or building (e.g., a car) in two ways.

First, he can return the property to the creditor. This type of mortgage is called a movable hypothec with delivery.

Then he can create the mortgage in a written document and keep the mortgaged property in his possession. This type of mortgage is called a movable hypothec without delivery. But beware! Some assets – such as a Registered Retirement Savings Plan (RRSP) – cannot be mortgaged this way.

To learn more about these hypothecs, see the questions “What is a movable hypothec with delivery?” And what is a movable hypothec without delivery? “.

What is a movable hypothec with delivery?

Most movable property (that is, property other than land and buildings) can be the subject of a movable hypothec with delivery. The owner of movable property can decide to grant this type of mortgage on his property. A movable hypothec with delivery is also called a pledge. (Hence the term “pawnbroker”).

The principle is simple. The mortgage is created when the debtor returns the property to the creditor. If the creditor is already in possession of the property, then the mortgage is created by the decision of the debtor to leave it in the hands of the creditor.

For example, David goes to a pawnshop because he needs to borrow $200. Hubert, the pawnbroker, agrees to lend him $200 in exchange for a movable hypothec with delivery on his watch. David accepts and leaves the eye to Hubert.

Like all mortgages, a movable hypothec with delivery must be registered to be invoked against anyone other than the debtor. A movable hypothec with delivery is issued when the creditor receives the mortgaged property. For example, when David gives his watch to Hubert. A person other than the creditor can also hold the property if the debtor agrees. In this case, the hypothec will be published when this person notices that the property is subject to a movable hypothec with delivery.

A movable hypothec with delivery can also be published (registered) in the Register of personal and portable absolute rights (RDPRM). See the question “Why should a mortgage be published?”. 

Is it possible to create a movable hypothec while keeping the property?

Yes, but not for all goods in all cases. The law provides that the assets that can be mortgaged and kept vary depending on whether it is done for oneself or the needs of a business.

A person who does not carry on a business

A person who does not carry on a business can establish a movable hypothec without delivery for:

  • certain vehicles (for example, cars, motorcycles, motorhomes, boats);
  • certain precious goods (for example, paintings, sculptures, jewelry, rare books, lovely stamps, or collector coins);
  • certain assets which are not strictly speaking things – even if they are often created on a piece of paper – but which nevertheless have a value (for example, savings bonds, stocks, participation in a placement, copyright, right to use a trademark or exploit an invention)

A person who operates a business

If carrying on a business, a person could create a non-possessory chattel mortgage on other business assets (e.g., computers and business furniture).

A moral person

Legal persons, like companies, can create a movable hypothec without delivery on any property.

How is a chattel mortgage without delivery created?

A movable hypothec without delivery must be created in writing. The document must describe the mortgaged property and specify the amount of money the mortgage relates.

The amount of money to which the mortgage relates is the maximum amount that the creditor will be able to recover under the mortgage. This is usually a higher amount than the amount owed to the creditor by the debtor because the creditor thus ensures that the mortgage covers the amount of the debt and interest and other costs, such as fees for foreclosure and sale of the mortgaged property.

To be effective, a movable hypothec without delivery must be published (registered) in the Register of Personal and Movable Real Rights (RDPRM). See the question “Why should a mortgage be published?”. There is one exception: a securities intermediary does not need to register a movable hypothec without delivery that it creates on securities or intermediated securities. Indeed, the law provides that this mortgage will be automatically published when it is completed. 

Why should a mortgage be published?

Because this is what allows the creditor to retain his rights to the property even if it is sold. More specifically, the publication of a mortgage generally gives two requests to the creditor:

  • A resale right on the mortgaged property
  • A right of preference over the money arising from the sale of the mortgaged property.

A resale right means that the creditor can exercise his rights under the mortgage even if the mortgaged property is sold or given away. The mortgage exists even if the debtor no longer owns the property.

The right to be preferred over the money obtained during the property sale means that the creditor who holds a mortgage will be paid before the other creditors. Unless the sale brings in a lot of money, he’ll often be the only one getting born! (See the question “What happens when mortgaged property is given away or sold”?).

If the mortgage is not published, the sale of the mortgaged property deprives the creditor of his rights. He loses his resale right on the mortgaged property and his right to be preferred to other creditors during the sale. It is, therefore, scarce that a creditor forgets this necessary formality!

Be First to Comment

Leave a Reply

Your email address will not be published.