Hypothec

This real right in security operates by way of hypothecation. It may arise only through being entered into the land and hypothec register or the ship registry, as a result of: • a hypothecary loan contract, required in the form of a notarial act - in case of a contractual hypothec • an administrative or court decision - in case of a compulsory hypothec Hypothec gives a creditor a preferential right to have claims paid out of the hypothecated property as last recourse when the debtor is in default. In the hypothec, the property does not pass to the creditor, but they acquire a preferential right to have their debt paid out of the hypothecated property; that is, they can sell it and pay themself out of the proceeds, or in default of a purchaser they can become the owner themself. == History ==

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 (Latin jus persequendi. ==Hypothecation and rehypothecation==

Hypothecation is the practice where a debtor pledges collateral to secure a debt or as a condition precedent to the debt, or a third party pledges collateral for the debtor. A common example occurs when a debtor enters into a hypothecary loan agreement, in which the debtor's house becomes collateral until the hypothecary loan is paid off. The debtor retains ownership of the collateral, but the creditor has the right to seize ownership if the debtor defaults. The main purpose of hypothecation is to mitigate the creditor's credit risk. If the debtor cannot pay, the creditor possesses the collateral and therefore can claim its ownership, sell it and thus compensate the lacking cash inflows. In a default of the obligor without previous hypothecation, the creditor cannot be sure that it can seize sufficient assets of the debtor. Because hypothecation makes it easier to get the debt and potentially decreases its price; the debtor wants to hypothecate as much debt as possible but the isolation of 'good assets' for the collateral reduces the quality of the rest of the debtor's balance sheet and thus its credit worthiness. The detailed practice and rules regulatory hypothecation vary depending on context and on the jurisdiction where it takes place. Hypothecation is a common feature of consumer contracts involving mortgages the debtor legally owns the house, but until the mortgage is paid off, the creditor has the right to take ownership (and possibly also possession) but only if the debtor fails to keep up with repayments. If a consumer takes out an additional loan secured against the value of his hypothec (known colloquially as a "second hypothec", for up to approximately the current value of the house minus outstanding repayments) the consumer is then hypothecating the hypothec itself the creditor can still seize the house but in this case the creditor then becomes responsible for the outstanding hypothecary debt. Sometimes consumer goods and business equipment can be bought on credit agreements involving hypothecation the goods are legally owned by the borrower, but once again the creditor can seize them if required. Rehypothecation occurs when entities re-use the collateral to secure their own borrowing. For the creditor the collateral not only mitigates the credit risk but also allows refinancing more easily or at lower rates; in an initial hypothecation contract, however, the debtor can restrict such re-use of the collateral. ==Hypothec in mixed legal systems==

banks that provide prime brokerage services are able to expand their trading operations by re-using collateral belonging to their counter-parties. 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). In the mixed legal systems of some other countries (e.g. Scots law, South African law) it may cover any corporeal movables, securities or intangible assets. 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. 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. In the US, the legal right for the creditor to take ownership of the collateral if the debtor defaults is classified as a lien. In 2007, rehypothecation accounted for half the activity in the shadow banking system. Because the collateral is not cash it does not show up on conventional balance sheet accounting. Before the Lehman collapse, the International Monetary Fund (IMF) calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statutory limits governing the reuse of a client's collateral. It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated several times over, with an estimated churn factor of 4. and by the Hypothec Abolition (Scotland) Act 1880 (43 Vict. c. 12) it was enacted that the landlord's right of hypothec for the rent of land, including the rent of any buildings thereon, exceeding two acres (8,000 m) in extent, let for agriculture or pasture, shall cease and determine. By the same act and by the Agricultural Holdings (Scotland) Act 1883 (46 & 47 Vict. c. 62) other rights and remedies for rent, where the right of hypothec had ceased, were given to the landlord. abolishes the common law diligence of 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)). Quebec 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 hypothec, providing as follows: : A hypothec is a real right on movable or immovable property made liable for the performance of an obligation. It confers on the creditor the right to follow the property into whomsoever's hands it may come, to take possession of it, to take it in payment, to sell it or to cause it to be sold and thus to have a preference upon the proceeds of the sale, according to the rank 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). California Under California Civil Code Section §2920 (a), a mortgage is a contract by which specific property, including an estate for years in real property, is hypothecated for the performance of an act, without the necessity of a change of possession. ==See also==