1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
In Canada, the common forms and requirements for the creation and perfection of security granted over immovable and movable property depend on provincial/territorial legislation. Canada is a federal jurisdiction with two distinct legal systems. All provinces and territories are common law jurisdictions except the Province of Québec, which is a civil law jurisdiction.
Immovable property
Common law jurisdictions
Forms of security over immovable property/real property commonly utilized in the common law provinces include:
- Mortgages. Generally used on specific parcels of real property, financed by one or multiple lenders
- Debentures. Commonly used in commercial lending transactions to cover multiple parcels of real property, as well as movable property. Similar to a mortgage, there may be one or multiple lenders.
- Trust deeds. Commonly used in sophisticated bond financings and syndicated loan transactions where many lenders are involved.
In rare circumstances, a person without a registered mortgage may be able to assert an equitable mortgage or interest in immovable property. An equitable mortgage may arise where the original mortgage documentation is defective in some way, and the court has been asked to deem the mortgage as an equitable mortgage. Generally equitable interests in land are not enforceable against the holders of registered mortgages.
For a security interest granted over immovable property to be enforceable, the mortgage, debenture or trust deed must be (1) in writing; and (2) registered on the title to the property that is subject to the charge.
Each province and territory in Canada has its own real property registry system. The registration of a charge in the applicable real property registry system constitutes notice of a security interest.
The various provincial Personal Property Security Acts (PPSA) may apply to fixtures that have become immovable property, provided the security interest was created when the fixture was movable property (see below, Movable property).
If registration requirements are not complied with, a creditor's security interest will be ineffective over the debtor's immovable property in a bankruptcy. Furthermore, any secured creditors holding unregistered interests in relation to such property will rank in priority with other unsecured creditors in a bankruptcy.
Québec
In Quebec, security over immovable property is generally obtained through a hypothec, which is similar in function to a mortgage. To be enforceable, a hypothec must be (1) created by deed; (2) signed in the presence of a Québec notary; and (3) registered in the land registry office of the jurisdiction where the property is located.
In Quebec, security over immovable property is generally obtained through a hypothec, which is similar in function to a mortgage. To be enforceable, a hypothec must be (1) created by deed; (2) signed in the presence of a Québec notary; and (3) registered in the land registry office of the jurisdiction where the property is located.
As in common law jurisdictions, the registration of a hypothec serves as notice of the security interest.
The impacts of non-compliance with the above registration requirements are the same as in common law jurisdictions. If registration requirements are not complied with, a creditor's security interest will be ineffective over the debtor's immovable property in a bankruptcy, and any secured creditors holding unregistered interests in relation to such property will rank in priority with other unsecured creditors in a bankruptcy.
Movable property
Like immovable property, the treatment of movable/personal property depends on whether the property is located in a common law or civil law jurisdiction.
Common law jurisdictions
Creditors can take security over movable property under a properly executed and registered security agreement. Typical types of security agreements include general security agreements, chattel mortgages, general assignments of accounts and equipment leases.
A general security agreement is an agreement under which the debtor grants the secured party a security interest over all of the debtor's present and afteracquired property. A chattel mortgage or equipment lease is an agreement under which the debtor grants a security interest over specific assets. A general assignment of accounts grants a security interest over accounts owing to the debtor.
For movable property, most Canadian provinces and territories have adopted provincial PPSA legislation. PPSA legislation is structured to apply to both (i) transactions which create (in substance) a security interest in personal property, regardless of the type of security involved; and (ii) certain enumerated transactions when the enumerated transaction secures payment or the performance of an obligation (for example, leases for a term of more than one year).
To be enforceable against third parties, a security interest in the debtor's personal property must be both attached and perfected.
Attachment of a security interest occurs when all the following conditions are met:
- value is given;
- the debtor has acquired rights in the secured asset over which the security is being granted;
- a written security agreement is signed by the debtor; and
- the written security agreement provides a clear description of the secured asset over which the security interest has been granted.
Perfection of a security interest can be achieved in a number of different ways. Most commonly, perfection of a security interest is achieved by registration under the PPSA in the applicable electronic registration system.
Alternatively, perfection can be achieved by possession of the secured asset by the secured party. Perfection by possession can be used where the secured asset is chattel paper, a tangible good, an instrument, a negotiable document of title or money.
Furthermore, investment property can be perfected by control, amongst other means. Control is obtained when a secured party can sell the property without any further action by the debtor. Depending on the type of investment property, this can be achieved by either the secured party becoming the entitlement holder, or the secured party and the debtor entering into a control agreement.
A security interest in a secured asset that is perfected as at the date a debtor commences insolvency proceedings will be effective against a trustee in bankruptcy. In contrast, an unperfected security interest will not be effective in an insolvency and, in terms of priority, the creditor will rank as an unsecured creditor.
Mistakes in registering a PPSA financing statement can be (although are not always) fatal to a secured creditor's security, rendering the security interest unperfected. A security interest in the personal property of a debtor that has not attached and/or been perfected will be ineffective against a trustee in bankruptcy. This means the creditor will rank with any other unsecured creditors for any recovery of debt.
Québec
Security over movable property in Québec is granted under a hypothec, as with immovable property. However, the requirements for deeds of hypothec over movable property differ from those applicable to hypothecs for immovable property. For example, a notary is not required for the creation of a hypothec over moveable property.
The movable hypothec may be granted with delivery or without delivery in favour of the creditor. The hypothec will be with delivery if: (i) the property subject to the security interest has been remitted to the creditor or third party (pledge); or (ii) the creditor has obtained control over the property subject to the security. The hypothec with delivery does not have to be published (the Quebec equivalent to perfection, as discussed above) in order to be effective against a trustee in bankruptcy.
The hypothec will be without delivery if the creditor does not have possession or control of the property subject to the security interest. In such case, the hypothec must be published and, therefore, recorded electronically in the Register of Personal and Movable Rights Registry (RPMRR), in order to be effective against a trustee a bankruptcy. Therefore, a movable hypothec without delivery that has not been published will be ineffective against a trustee in bankruptcy. This means the creditor will rank with any other unsecured creditors for any recovery of debt.
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