The construction industry is difficult and risky: many companies can become insolvent and have to close shop after a project that has gone wrong.
In this context, the law gives construction contractors an important privilege, namely the ability to register a notice of legal hypothec on an immovable. Commonly referred to as a “lien” in the industry, it provides a guarantee to be paid from the building in the event of a default in payment.
Legal hypothec: Advantages
What is a guarantee? Many people mistakenly believe that this ensures that they are paid the full amount invoiced. In fact, the guarantee is intended to protect against the insolvency of the person who must pay, whether it is the general contractor or the owner of the building. A legal hypothec is a secured claim in a bankruptcy and is paid before any other hypothec.
It is also very useful for lobbying and obtaining payment of the claim. Among other things, it prevents the owner from selling the property without first paying the legal hypothecs.
However, there is no protection against negligence. In other words, even if the contractor can publish their hypothec on the title of the building, the owner will be able to contest the claim for any usual reason: defects, delays in the schedule, damage caused, unjustified extras, etc.
Who can take advantage of it?
The architect, engineer, material supplier, worker, contractor and subcontractor can all benefit from the legal construction hypothec.
The essential condition is that these people actually participated in the construction and that their work brought added value to the building.
Jurisprudence has determined that some contractors do not have the right to a legal construction hypothec, including urban planners, landscape architects, landscapers, project managers, interior designers and equipment lessors, among others.
What work is covered by this kind of hypothec?
Although you may be a person who is legally entitled to register a legal construction hypothec, you may not be entitled to it, in whole or in part. In fact, it is still a prerequisite that your construction or renovation work has brought added value to the property. This capital gain is not necessarily equivalent to the amount of the work but rather to the additional value given to the building by the execution of the work and the supply of materials.
In addition, the work must have been “requested” by the owner. Therefore, any contractor or professional who has not entered into a direct contract with the owner must report the contract in writing to the owner before the work commences and the materials are delivered. Failing this, the materials delivered and the work carried out before the contract is terminated cannot be guaranteed by the hypothec.
This termination is justified by the owner’s right to be informed of suppliers, subcontractors and other intermediary contractors, in order to ensure that they are paid and to avoid the publication of a notice of legal hypothec.
Contact us to learn whether your work is covered by a legal hypothec.
Which immovables can be the subject of a construction hypothec notice?
Certain municipal and Québec government buildings cannot be the subject of a legal hypothec. Each case must be assessed in advance before publication but, in general, cases not subject to a hypothec include such things as roads, salt and sand storage facilities, hospitals, schools, parks, metros, etc. This ban may also apply to certain government agent buildings such as Hydro-Québec, a transport company like the STO, Place des arts, etc.
In the case of Canadian government buildings, they enjoy full immunity.
However, in municipal and government projects, the contractor is not negatively affected, as long as the public body, whether the municipality or the government, is deemed to be solvent. However, it is essential to terminate your contract beforehand in writing to the organization that owns the building. This allows the project manager to ensure that all subcontractors have been duly paid before paying the general contractor.
In addition to these exceptions, all buildings are subject to the legal construction hypothec if the other conditions are met.
Procedure and timeframes
The construction stakeholder who does not contract directly with the building owner, for example the contract has been entered into with the general contractor, must report their contract by sending a notice of denunciation in the form of a simple letter, but proof of receipt is essential.
The following elements should always be included in the denunciation:
- the names of the owners of the building, a title search may be necessary to determine who the owners are, and each of the owners must receive the notice of denunciation, sending it to a single owner is not sufficient;
- the name of the company or person providing the notice of denunciation;
- the denunciation of the contract, with the mention that it is carried out in accordance with the articles of the Civil Code of Québec regarding the legal construction hypothec;
- a description of the work, materials or services so that the nature of the work, materials or services can be identified. Their identification must be sufficiently precise, as a lack of clarity could invalidate the denunciation;
- the name of the contractor with whom a contract is established, usually the general contractor;
- the approximate value of the contract.
It should be noted that additional work of the same nature, often referred to as extras, does not always require new denunciations, but it would always be prudent to do so. It is also recommended to state in the denunciation that the contract price is subject to change according to any additional work that may be required.
- b) Timeframe
The hypothec must be published in the land register within 30 days of the completion of the work.
What is meant by “completion of the work?” Two conditions are necessary:
- All required work has been carried out. There is only one work completion date for the entire construction project. So, if you are a subcontractor who only intervened at the beginning of the construction phase (e.g., foundations), the end date of the work will not be the end of your work, but the end of the work of all the other parties involved.
- The building is in a condition to be used in accordance with its intended purpose or, if plans and specifications exist, when the full execution of the initial contract is completed. The fact of having to correct deficiencies, defects or replace equipment does not delay the completion of the work. Similarly, if a contract provides that monies will only be payable at a later date or if a holdback on the price has been negotiated, the work is still completed.
- c) Registration and conservation
The legal construction hypothec notice is a formal document and will not be accepted in the land register if the formal rules are not adhered to in every respect and must be served on the owner of the building. Given the short time frame for registration, it is important to assign the task to a lawyer or notary to avoid losing this security.
Within 6 months of the completion of the work, it is also mandatory that a legal action be instituted or that a notice of the exercise of a hypothecary right be published. Otherwise, the hypothec will be discharged and may be cancelled. Again, it is necessary to retain the services of a lawyer or notary.
In all cases, it should be remembered that, regardless of whether or not a guaranty is provided, the construction stakeholder can always apply to the courts to claim their payment.
Consult us to learn more about the procedure and time frames of a legal hypothec.
Cancellation of a notice of legal hypothec
Any legal hypothec that is published in an unauthorized manner or in a manner contrary to the prescribed procedure is null and void and may be cancelled at the request of any interested party. For example, if no action is initiated and published or if no notice of exercise of a hypothecary right has been published by the contractor within six months of the completion of the work, or if the work performed has not added value to the building, the legal hypothec may be contested.
The rules regarding legal construction hypothecs are often complex and difficult to navigate. The construction stakeholder should be familiar with the basics in order to be able to determine when to consult a lawyer. We recommend that construction stakeholders consult us:
- before starting the work or delivering material when the contract is not concluded with the owner of the building;
- when the work is completed, when the stakeholder has still not been paid and has doubts about the solvency of their debtor but keeping in mind the short 30-day delay after the work is completed, it is therefore important to consult quickly to avoid losing rights;
Consult a lawyer for advice on legal hypothecs.