With business transaction costs constantly rising, lenders need to leverage the most effective tools not just for a current transaction but also for any amendments, renewals or new loans involving the same borrower. In Quebec, using a hypothecary representative can, in some cases, help lenders save time and money down the line.
By way of example, let’s take the case of financial institution A and its subsidiaries B and C, all of which together form financial group X. If a borrower grants a hypothec in favour of A today, only A can benefit from it. As a result, if this same borrower ever deals with B or C in the future, a new hypothec will have to be granted to each of them. In other words, if the borrower obtains another loan from another member of financial group X (i.e. B or C), a series of transaction costs will again be incurred. However, if the original hypothec had been granted to A in its capacity as hypothecary representative of financial group X rather than purely in its personal capacity, the other entities of X—namely B and C—would benefit from the hypothec in the future. This reasoning also applies if the original loan had been granted to B or C (as hypothecary representative of the group) rather than A.
Using a hypothecary representative requires taking certain considerations into account. For example, the amount of the hypothec granted to A as a hypothecary representative should ideally be large enough to cover not only the loan with A, but also any subsequent loan granted by B or C.
Major project or investment financing involving large dollar amounts is traditionally handled by loan syndicates, which typically consist of multiple lenders seeking to spread out the burden and risk amongst themselves. However, such financing customarily requires granting collateral security in favour of lenders prior to any disbursement.[1]
Loan syndicates can be useful not only where multiple lenders seek to extend a high-value loan together, but also where other lenders may potentially join a lender who initially acted on its own. In particular, a future lender will often wish to benefit from any existing security interests. Various mechanisms exist in Canada to achieve this.
In all Canadian provinces (except Quebec) and in the United States, collateral security may be granted in favour of a representative known as a “collateral agent.” This agent holds the security for the benefit of the other lenders forming a syndicate, whose composition may change over time.[2]
In Quebec, the representative is instead referred to as a “hypothecary representative” and is responsible for representing creditors in dealings with the debtor. Article 2692 of the Civil Code of Québec (“C.C.Q.”) provides that a hypothec securing the performance of the obligations of a legal person, partnership or trustee may be granted in favour of the hypothecary representative for “all present and future creditors of those obligations.” The hypothecary representative may be one of the creditors, or the only creditor. However, where the hypothecary representative acts not only for each lender involved, but also for any other lender related to it, each related lender may in the future benefit from the hypothec granted at that time. This enables related lenders to save time and money when granting new loans.
The hypothecary representative is the holder of the hypothec and exercises the rights arising from it. The syndicate’s lead lender often serves as the hypothecary representative. In addition, article 2692 C.C.Q. allows a third person who is not a creditor to act as a hypothecary representative. Moreover, this article also allows the hypothecary representative to be replaced. The successor then holds the same rights as the original hypothecary representative. Any granted security subsists in favour of the successor.[3] That being said, for the successor to be able to exercise any hypothecary rights, a notice of replacement must be entered into each register in which the hypothec was published.
Note that there is a crucial difference between Quebec and the common law jurisdictions when it comes to this type of financing. Pursuant to article 2692 C.C.Q., a deed of hypothec must, on pain of absolute nullity, be granted by notarial act en minute. Accordingly, any agreement involving a hypothecary representative must be signed before a Quebec notary.
Movable hypothecs without delivery in favour of a hypothecary representative must be granted by notarial act en minute. Movable hypothecs with delivery are the only exception and may be granted by private writing in favour of a hypothecary representative.[4] This must be taken into account when contracting in Quebec.
If you have any questions or would like more information, please feel free to reach out to a member of Miller Thomson’s Financial Services group.
[1] Jacques Deslauriers and Aurore Benadiba, Les sûretés au Québec, 2nd ed., Montréal, Wilson et Lafleur, 2018 para. 2137.
[2] Ibid., para 2139.
[3] Civil Code of Québec, CQLR, c CCQ-1991.
[4] Jacques Deslauriers and Aurore Benadiba, Les sûretés au Québec, 2nd ed., Montréal, Wilson et Lafleur, 2018 para. 2153.
