The Fate of the Immovable Hypothec on Rents following the Transfer of Property

Maxime Rhéaume authors a paper in the September issue of Éditions Yvon Blais (Thomson Reuters)

The issue addressed in this piece concerns what rights the mortgage creditor may retain on the rents produced by a building, after its mortgagor has disposed of the mortgaged building, without this creditor having granted release of its real estate mortgage. This is therefore a situation where the building changes hands, with the purchaser being responsible for the real estate mortgage of the transferor’s creditor.

HIGHLIGHTS

• When transferring a hypothecated property, the hypothecary creditor has no right to the rents generated by a lease granted by the purchaser of the property with a new tenant.
• The purchaser of a hypothecated property and an existing tenant may agree to cancel the current lease and replace it with a new one, thus preventing the hypothecary creditor of the seller of the property from collecting the rents generated by the new lease.
• The hypothec on rents is distinct and autonomous and can exist even without hypothecating the property.
• The rules governing the validity of immovable hypothecs are not the same as those applicable to hypothecs on rents, so a nominee cannot hypothecate rents.
• Rent generated by a property remains a movable claim despite the fact that the immovable hypothec vehicle is imposed.
• The transfer of a hypothecated property, with the purchaser assuming the hypothecary  debt, with or without the debtor, is a frequent situation that can occur, particularly during a corporate reorganization involving the transfer of a property from one entity of a group to another entity of the same group. However, this does not apply in the case of a merger of corporations, since the merger does not involve a transfer of assets.
• A prudent hypothecary lender should not accept the transfer of a hypothecated property in its favour without the purchaser being required to hypothecate future rents arising from leases to be entered into between the purchaser and its new tenants.
• Rents payable under the new leases are hypothecated in favour of the purchaser’s hypothecary creditor, who becomes a 2nd ranking creditor on the property, but a 1st ranking creditor on the newly created rents.
• A hypothecary creditor of the seller of the property who collects rents under leases granted by the purchaser of the property may be required to remit the rent to the rightful owner on the grounds that it has been collected without right.

Read the full text (in French)