Hypothec
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Property law |
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Part of the common law series |
Types |
Acquisition |
Estates in land |
Conveyancing |
Future use control |
Nonpossessory interest |
Related topics |
Other common law areas |
Higher category: Law and Common law |
Hypothec (
Overview
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 contractuslhypothec
- an administrative or court decision - in case of a compulsory hypothec
Hypothec gives a
History
Originating in
Hypothecation and rehypothecation
Hypothecation is the practice where a debtor pledges collateral to secure a
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.[4]
Hypothec in mixed legal systems
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
The most common form of hypothecation is a repo transaction: the creditor gives a loan to the debtor and receives in return the possession (not the ownership) of a financial asset until the maturity of the loan. A reverse repo is a hypothecation 'in the reverse direction': creditor and debtor swap roles. When an investor asks a broker to purchase securities on
Rehypothecation can also be involved in repurchase agreements, commonly called repos. In a two-party repurchase agreement, one party sells to the other a security at a price with a commitment to buy the security back at a later date for another price. Overnight repurchase agreements, the most commonly used form of this arrangement, comprise a sale which takes place the first day and a repurchase that reverses the transaction the next day. Term repurchase agreements, less commonly used, extend for a fixed period of time that may be as long as three months. Open-ended term repurchase agreements are also possible. A so-called reverse repo is not actually any different from a repo; it merely describes the opposite side of the transaction. The seller of the security who later repurchases it is entering into a repurchase agreement; the purchaser who later re-sells the security enters into a reverse repurchase agreement. Notwithstanding its nominal form as a sale and subsequent repurchase of a security, the economic effect of a repurchase agreement is that of a secured loan.
Re-hypothecation occurs mainly in the financial markets when the creditor (a bank or
By jurisdiction
Scotland
Hypothec Amendment (Scotland) Act 1867 | |
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Act of Parliament | |
Territorial extent | Scotland |
Dates | |
Royal assent | 15 July 1867 |
Other legislation | |
Repealed by | |
Status: Repealed |
Hypothec Abolition (Scotland) Act 1880 | |
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Act of Parliament | |
Territorial extent | Scotland |
Dates | |
Royal assent | 24 March 1880 |
Other legislation | |
Repealed by | |
Status: Repealed |
The law of agricultural hypothec long caused much discontent in Scotland; its operation was restricted by the
Under Scots law, landlord's hypothec is a common law right of security enjoyed by landlords over any goods sited on the leased premises, regardless of who owns those goods. The hypothec does not secure all sums which happen to be due to the landlord, only a portion of the rent. Landlord's hypothec is enforced by court proceedings known as sequestration for rent. The Bankruptcy and Diligence etc. (Scotland) Act 2007 (asp 3)[9] abolishes the common law diligence of sequestration for rent.
The
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
Notes
- ^ Though of course a bank can only rehypothecate the assets the client has posted as collateral.
- ^ Hedge funds often have a considerably higher amount of securities pledged as collateral than their current borrowings – they continue to receive the normal income stream from the securities and it gives them the flexibility to quickly execute trades if an opportunity arises – the 140% limit does in many cases considerably reduce their exposure to rehypothecation.
References
- ^ a b c public domain: Chisholm, Hugh, ed. (1911). "Hypothec". Encyclopædia Britannica. Vol. 14 (11th ed.). Cambridge University Press. p. 208. One or more of the preceding sentences incorporates text from a publication now in the
- ^ "What Is Hypothecation? – Forbes Advisor". www.forbes.com. Retrieved 2023-07-27.
- ^ a b "Hypothecation explained at the financial dictionary". Retrieved 2010-08-31.
- ^ .
- ^ a b c d Manmohan Singh and James Aitken (2010-07-01). "The (sizable) Role of Rehypothecation in the Shadow Banking System" (PDF). International Monetary Fund. Retrieved 2010-08-31.
- ^ The Financial Times. Retrieved 2010-08-31.
- ^ Hypothec Amendment (Scotland) Act 1867
- ^ Hypothec Abolition (Scotland) Act 1880
- ^ Bankruptcy and Diligence etc. (Scotland) Act 2007, section 208