When you purchase an apartment in a recently built co-ownership, a portion, if not all the private portions of the immovable, can be encumbered by a prior notice of a legal hypothec in favor of persons having taken part in the construction.
As a purchaser, you will be compelled to pay the debts of the developer, if he is in default of paying its construction creditors? If so, how will the amounts claimed be allocated between the co-owners? And what happens if they refuse to pay?
What is a legal hypothec of construction?
Article 2726 of the Civil Code of Quebec provides that a legal hypothec is acquired “in favor of persons having taken part in the construction or renovation of an immovable”. This right is granted to contractors, sub-contractors (such as plumbers, electricians and plasterers), suppliers of materials, workmen, engineers and architects, to secure the increase in value given to the immovable.
This increase in value is the result of the work, and the materials or services supplied. When the contract for the services to be rendered has not been signed directly with the owner, the exercise of this right is conditional upon the contract having been previously notified to the owner.
A strict procedure
Legal hypothecs of construction and their registration are governed by strict rules. Its existence is predicated upon the registration of a notice on the titles of the property within 30 days after all the construction work of the entire project has been substantially completed, which is to say within 30 days after the work has been completed. Furthermore, the beneficiary must file within six months after the work has been completed, a “prior notice of exercise of a hypothecary right”, to take the immovable in payment or to sell it under judicial authority. Failing abiding to these conditions, the legal hypothec will be extinguished.
The division of the legal hypothec
Article 1051 of the Civil Code of Quebec provides that the legal hypothec of construction registered in relation with work carried out anywhere in the co-ownership, is divided amongst the fractions owned by each co-owners. This partition varies in accordance with the relative value of each fraction, or in accordance with any other established proportion. After having paid their share of a legal hypothec of construction the co-owners can then obtain the radiation of the hypothec on their fraction.
The legal recourse
If the co-owners affected by a legal hypothec of construction refuse to pay the amounts claimed, the creditor (such as the contractor or sub-contractor) can exercise a recourse against each of them, up to the amount allocated to their fraction. In exercising its hypothecary right, he can ask either for a judicial sale or the taking in payment of the said apartment, thereby depriving the owner of his right of ownership.
A formidable risk
The legal hypothec of construction exists automatically for the duration of the work and to subsist, a notice must be registered within 30 days following the end of the work. It may be in existence at the registration of the declaration of co-ownership, even though it has not been registered. This is the reason why it is, practically impossible for the notary who will notarize your purchase to discover it.
You also should know that the work can be completed in your private portion at the time of purchase, but that work could remain to be completed elsewhere in the building. For example, the swimming pool may be under construction, and carpeting of other floors yet to be carried out. It is therefore difficult, in such cases, to determine the date on which the work will be finalized.
The consequences of the registration of a notice of a legal hypothec can be dramatic. Based on the hypothecary recourses at its disposal, its beneficiary can ask that your apartment be sold under the authority of justice if you don’t pay his claim. He can also ask the Court to be declared the owner of the premises, without having to indemnify you, even though your apartment has a much higher value than the amount of the secured debt.
Furthermore, a legal hypothec of construction could put you in default towards your own hypothecary creditor, who could ask for the reimbursement of your loan, failing your obtaining the radiation of the notice in a specified delay. The beneficiary of a legal hypothec of construction acquires, up to the increase in value caused by its work, a first ranking right of higher ranking than the hypothecary lender on your immovable, which puts the claim of your hypothecary lender at risk.
WHAT YOU SHOULD KNOW! A few title insurance companies offer , to purchasers of new apartments, insurance coverage to protect them in the event of the registration of a legal hypothec of construction, for work carried out before or after your purchase, under reserve that such work has already been contracted before the effective date of coming into force of the policy. For more information on the legal hypothec of construction and on the insurance coverages available, click here.
WHAT TO KEEP IN MIND: Each co-owner may be compelled to pay its share of a legal hypothec of construction .Once the payment is made, each of them can have it radiated from its private portion.
WARNING! The notice of a legal hypothec may be published not only against the apartments still owned by the developer, but also against those already sold to purchasers, for instance you.
CONSULT THE PUBLICATION: Purchase and sale of a condo: Everything you should know at pages 227 and following.