Hypothec (// or //; 16th century, from Fr. hypothèque, from Lat. hypotheca, from Gk. ὐποθήκη: hypothēkē), sometimes tacit hypothec, is a term used in mixed legal systems (e.g. Scots law, South African law) to refer to an express or implied non-possessory real security over corporeal movable property. This real right in security operates by way of hypothecation, often arises by operation of law (generally statute), and gives a creditor a preferential right to have claims paid out of the hypothecated property as last recourse when the debtor is in default. At common law it is equivalent to an American non-possessory lien or English legal charge.
Originating in Roman law, a hypotheca was essentially a non-possessory pledge over a person's entire estate, but during the Renaissance the device was revived by civil law legal systems as a hypothecatory security interest taken strictly over immovable property and, like the late medieval obligatio bonorum, running with the land (Lat jus persequendi, Fr droit de suite, Du zaaksgevolg, Ger Folgerecht). However, under a handful of mixed legal systems, the hypothec was imported as a non-possessory real security over movable property (in opposition to the common-law chattel mortgage). Whereas a pledge operates by bailment and transfers possession on delivery and a chattel mortgage operates by conveyance and transfers title, a hypothec operates by hypothecation and transfers neither possession nor title.
In the hypothec, the property does not pass to the creditor, nor does he get possession, but he acquires a preferential right to have his debt paid out of the hypothecated property; that is, he can sell it and pay himself out of the proceeds, or in default of a purchaser he can become the owner himself. The name and the principle have passed into Scotland's civil law system, which distinguishes between conventional hypothecs, as bottomry and respondentia, and tacit hypothecs established by law. Of the latter the most important is the landlord's hypothec for rent (corresponding to distress in the law of England), which extends over the produce of the land and the cattle and sheep fed on it, and over stock and horses used in husbandry.
The law of agricultural hypothec long caused much discontent in Scotland; its operation was restricted by the Hypothec Amendment (Scotland) Act 1867, and by the Hypothec Abolition (Scotland) Act 1880 it was enacted that the landlords right of hypothec for the rent of land, including the rent of any buildings thereon, exceeding two acres (8,000 m²) in extent, let for agriculture or pasture, shall cease and determine. By the same act and by the Agricultural Holdings (Scotland) Act 1883 other rights and remedies for rent, where the right of hypothec had ceased, were given to the landlord.
The Bankruptcy and Diligence etc. (Scotland) Act 2007 abolishes the common law diligence of sequestration for rent. Under Scots law, Landlord's hypothec is a common law right of security enjoyed by landlords over any goods sited on the leased premises, regardless of who owns those goods. The hypothec does not secure all sums which happen to be due to the landlord, only a portion of the rent. Landlord's hypothec is enforced by court proceedings known as sequestration for rent.
The Scottish Executive felt that such a mechanism had no part to play in a modern enforcement system, not least because a landlord is able to use other diligences to recover unpaid rent, such as attachment Sequestration for rent can now be used to sell only goods that are secured by a right known as the landlord's hypothec, which arises automatically whenever there is a qualifying lease.
The Act makes some changes to the hypothec, even though it is not a diligence. For example, it completes the process of abolishing the hypothec over goods in dwelling-houses that was initiated by the Debt Arrangement and Attachment (Scotland) Act 2002 (section 208(3) of the 2007 Act). It also abolishes the hypothec over goods owned by a third party (section 208(4)).
The Act also states that, notwithstanding the abolition of sequestration for rent, landlord's hypothec does continue as a right in security (section 208(2)(a)).
In Quebec law, the word is nevertheless used in translations as an equivalent of hypothèque, which has a much broader meaning and encompasses the common law equivalents of, inter alia, mortgages, non-possessory liens over movables or immovables, and legal or equitable charges. Thus, art. 2660 of the Quebec Civil Code defines hypothèque, providing as follows:
- A hypothèque is a real right [right in rem] taken over movable or immovable property in security for the performance of an obligation. It confers on the creditor the right to follow the property into whosoever hands it may be [= jus persequendi], to take possession of it or to take it in payment [= repossession], or to sell it or cause it to be sold and [= power of sale], in that case, to have a preference upon the proceeds of the sale ranking as determined in this Code.
The Quebec hypothèque, essentially equivalent to an American non-possessory lien or English legal charge, is an elastic, hypothecatory security interest that has all the rights of recourse (jus exigendi) of an American lien-theory mortgage or English mortgage by way of legal charge, may also be taken over movable and/or immovable property alike, and must be perfected (i.e. registered). The types as set forth in the Civil Code are:
- hypothèques conventionnelles (art. 2681) - mortgage lien or legal charge (acting as a mortgage)
- hypothèque immobilière - American real estate mortgage (REM) or English mortgage of land
- hypothèque mobilière (art. 2702) - Australian personal property security (PPS)
- hypothèque mobilière sur une créance (art. 2710) - credit mortgage
- hypothèque ouverte (art. 2715) - American floating lien or English floating charge (in Europe, hypothèque ouverte refers to an open-end mortgage)
- hypothèques légales (art. 2724) - involuntary lien or equitable charge
- equivalent to the American tax lien, mechanic's or construction lien, home owner's association lien, and judgment lien.
The Qc. Civ. Code also provides for another real security called a priorité, formerly known as a privilège (as it is still known in France, Louisiana, etc.), defined as follows:
- A preferential right allowing a creditor to rank prior to all other concurrent creditors, even prior secured creditors [...] (art. 2650)
More specifically, a Quebec priorité is a non-possessory, indivisible, unregistrable (i.e. un-perfectable) real security arising by operation of law alone merely providing a priority right over the security subject. When attaching to movable property, this security interest most closely matches the hypothec as defined at the head of this article. The primary priorités correspond to the American vendor's lien, lien for court costs, municipal lien, and possessory lien (over movables).