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HYPOTHECS BUT NO GUARANTEE
Nicole Langlois
INTRODUCTION
Regular subscribers to the Jersey Law Review will recall the publication in a previous edition of the text of a lecture given in 1955 by Advocate Philip Le Couteur, the then Judicial Greffier, to a group of bankers in Jersey.[1] The subject matter of the lecture was the development of the law in Jersey relating to hypothecation and guarantee, focussing on the fundamental changes brought about by the Loi (1880) sur la propriété foncière (“the 1880 Law”).
Advocate Le Couteur concluded his lecture by remarking that he regarded the 1880 Law as being “the finest piece of legislation in our statute book”,and stated that its draftsman, Sir Robert Marrett [2] had made the “purchase of real property as safe as the purchase of a cow.” Whilst this may have been the case in 1955, in more recent years borrowers have begun to demand, and lenders have begun to offer, increasingly sophisticated financial products. The question which we must now ask ourselves is whether borrowers and lenders in Jersey are still as well served by the statutory framework within which their transactions are carried out as they were when Advocate Le Couteur delivered his lecture nearly half a century ago.
The scope of this article is limited to a consideration of the provisions of the 1880 Law which relate to judicial hypothecs[3] and more particularly to the changes brought about by the Loi (2000) (Amendement No. 4) sur la propriété foncière (the “ 2000 Law”).
DIFFICULTIES ENCOUNTERED PRE - 2000
Hypothecation of part only of a larger corps de biens fonds – was this possible?
Prior to the coming into force of the 2000 Law, it was not clear whether part only of a larger corps de biens fonds[4]could be hypothecated by way of judicial hypothec.
Article 15 of the 1880 Law provides that a judicial hypothec gives to the person who has obtained it a “droit réel et spécial et de suite par hypothèque, du jour qu’elle prendra date, sur tous et un chacun des biens-fonds que le débiteur possédait actuellement ou auxquels il avait droit à cette date…. ” In other words, unlike a simple conventional hypothec which is constituted over “un bien-fonds spécial et déterminé”[5] a judicial hypothec takes effect over all the land and property which the borrower owns as at the date when it is entered into.
However, Advocate Le Couteur acknowledged in his lecture that, notwithstanding the provisions of Article 15, by 1955 there had grown up amongst the legal profession in Jersey the practice of restricting the scope of an hypothec to certain specified property. He commented that “Doubts have often been expressed by eminent practitioners as to the legality of this clause.” He concluded however that it was unlikely that the Court would declare such a clause null and void, for the following reason:
“The Law gives a creditor certain rights over all the property owned by the debtor, but the creditor is surely entitled to consent to these rights being restricted to certain specified property belonging to the debtor at the time of the loan, though according to the strict letter of the law the hypothecation of a specified property should be effected by a conventional hypothec”.
So much therefore for restricting the effect of a judicial hypothec to one of several corps de biens fonds owned by a debtor, but what of the position where the debtor owns a large corps, perhaps comprising several houses and fields, and wishes to restrict the effect of the hypothec to part only of this larger corps?
In our opinion, prior to the 2000 Law such a practice gave rise to a number of practical difficulties.
The first such difficulty related to the precise description of the property which was to be subject to the charge. Although attempts were made to create in the billet an internal boundary between that part of the land which was to be hypothecated, and the remainder of the land, it was doubtful whether the registration of the billet in the Register of Contracts could have the effect of creating a boundary between two adjoining pieces of land in common ownership, since such a boundary could have no real existence until both parts of the land were in separate ownership.
A second difficulty arose with regard to rights appurtenant to the land, such as rights for services, rights of way and rights of access on to the adjoining property of the borrower. Although it was arguable that such rights could be acquired under the doctrine of destination de père de famille (a form of implied grant), for this doctrine to apply the right claimed must be continuing, apparent and permanent, and this would not always be the case. Furthermore, doubts have been expressed as to whether the principle only applies to the case where both properties simultaneously devolve on different people, or whether it also applies in circumstances where one property devolves on another and the other is retained by the original owner.[6]
The extent to which the difficulties outlined above affected a secured lender depended to some extent upon whether it sought to enforce its security by making an application for the borrower to be declared en désastre, or by instituting dégrèvement proceedings. These procedures are considered separately below.
Désastre
On the making of a declaration en désastre, all the debtor’s property (including immovable property) vests in the Viscount, subject to all hypothecs to which the property was subject prior to the vesting.[7] In these circumstances, to the extent that there was any uncertainty as to the precise location of the boundary between that part of the corps de biens fonds which was subject to the hypothec and the remainder, this could be sorted out in the contract of sale between the Viscount and a third party purchaser. It was possible however for there to be differences of opinion between the Viscount and a secured creditor as to the extent of the borrower’s land which was subject to the charge. Furthermore, unless the Viscount sold the part of the land which was subject to the charge simultaneously with a sale of the remainder of the corps de biens fonds, it was arguable that the doctrine of destination would not operate to confer upon a third party purchaser all necessary rights. The lender was thus dependent upon the Viscount agreeing to grant such rights over the remainder of the land in his ownership. Whilst the granting of such rights would, of course, increase the value of the land subject to the charge, it might also diminish the value of the remaining land and hence, perhaps, the sums available for distribution amongst the unsecured creditors. In these circumstances, a lender could not be entirely certain that the rights in question would be granted without some compensation being sought by the Viscount for the benefit of other creditors.
Dégrèvement
In the event that dégrèvement proceedings were instituted against a defaulting borrower, the difficulties faced by a secured lender were rather different.
The first issue which arose was whether, as a matter of law, there could be a separate discumberment of that part of the corps de biens fonds which was subject to the lender’s hypothec, or whether the corps de biens-fonds had to be discumbered as a whole.
The 1880 Law defines a corps de biens-fonds as “un héritage formant un tout distinct et complet, susceptible d’être hypothéqué séparément des autres héritages du propriétaire et qui doit etre… soumis au dégrèvement independamment des autres biens-fonds qui furent au cessionaire”. Article 91 of the 1880 Law provides that “Dans tous les cas, le dégrèvement de chaque corps de biens-fonds se fera séparément”.
The requirement for a separate discumberment of each individual corps de biens-fonds is one of the cornerstones of the régime established by the 1880 Law. The position was however altered slightly by the passing of the Loi (1904) (Amendement No 2) sur la propriété foncière. Article 17 of the 1904 Law provides as follows:
“Toutes maisons, terres, appartenances et dépendances qui auront été prises ou acquises par un cessionnaire par un même contrat, quoique désignées dans ce contrat comme différents corps de biens-fonds seront sujets à un seul dégrèvement à moins toutefois que des rentes ou hypothèques conventionnelles n’aient été consenties par le cessionnaire sur une partie spéciale dudit héritage; alors cette partie sera dégrèvée indépendamment du reste des héritages pris ou acquis par ledit contrat. Cet Article s’applique aussi aux biens-fonds dont un cessionnaire aurait hérité dans une même succession.”
At first blush, Article 17 appears to make implicit provision for the hypothecation, and separate discumberment, of part only of a larger corps de biens-fonds, albeit in very limited circumstances where a purchaser consents to the registration of a conventional hypothec as security for unpaid purchase consideration. However, in our opinion, the Article is only intended to govern a situation where a purchaser has purchased two or more corps de biens-fonds by a single contract, and has consented to the creation of a rente or conventional hypothecover one or more, but not all, of those corps de biens fonds. This interpretation is supported by the fact that there is no express provision in the 1880 Law for the creation or constitution of a conventional hypothec over part only of a larger corps de biens-fonds. Furthermore, in the specific case of a simple conventional hypothec consented to by a borrower as security for unpaid purchase consideration, Article 21 of the 1880 Law provides that “Lorsque la rente ou somme d’argent hypothequée aura été constituée comme prix ou partie du prix d’alienation d’un biens-fonds, ce biens-fonds sera seul sujet à l’hypothèque”. The wording of this Article suggests that the draftsman of the 1880 Law had anticipated that the whole of the corps de biens-fonds would be subject to the charge, not just part of it.
However, even if this interpretation is not correct, it is quite clear that Article 17 of the 1904 Law does not apply to hypothecs which have been created by the borrower, nor does it apply to hypothèques judiciaires. Thus, where a loan was secured by way of judicial hypothec over part only of a larger corps de biens-fonds, in the event of dégrèvement proceedings being instituted against the borrower, the lender would be obliged to make itself tenant of land which it had not needed or intended to take as security for its charge, and which might be subject to charges ranking in priority to that of the lender. Thus, the lender was deprived of one of the advantages intended to have been conferred upon secured creditors by the 1880 Law.
If the lender chose to make itself tenant of the entire corps de biens-fonds, then any potential difficulties relating to the location of the boundary, and the rights for services etc. would of course fall away. However, if the lender did not do so, then the same issues arose as in the case of a désastre, save that the tenant and not the Viscount would have the power to determine the location of the relevant boundary, and to grant such rights as it thought fit.
Provisions of the Royal Court Rules
There are those who have sought to argue that, even prior to the 2000 Law, our law did provide for the hypothecation by way of judicial hypothec of part only of a larger corps de biens fonds, and they point to the provisions of Article 12 of the 1880 Law, which provide that “L’hypothèque judiciaire est celle qui résulte des actes et jugements de la Cour Royale de cette Ile, pourvu que les prescriptions de la présente Loi aient été remplies.” The judgment of the Court arguably confers a presumption of validity upon the charge, and the lender’s rights thereunder. Furthermore, the Royal Court Rules 1992 (as amended) appear to make provision for security to be taken over part of a larger corps de biens fonds.
Rule 14/4(3)(h) provides that the billet must describe the property to be hypothecated, but that the description must, inter alia,
“(iv) not include any description of boundaries or abutments (other than the name of the road which the property borders or from which access is gained to it) except where necessary for the purpose of demarcating the property to be hypothecated from other property belonging to the borrower.”
Whilst it is admittedly difficult to conceive of any circumstances in which it would be necessary to demarcate hypothecated property from other property belonging to the borrower other than where the properties in question adjoined each other, and therefore formed one corpus fundi, the words underlined above could simply be construed as intending to govern the practice sanctioned by Advocate Le Couteur of hypothecating one particular corpus fundi where the borrower owns several. However, even if it was the intention of the Royal Court to make provision for the hypothecation of part only of a larger corps de biens fonds, neither the Rules nor the 1880 Law address the difficulties identified above. Furthermore, the provisions of Rule 14 appear to conflict with the definition of an hypothec in Article 2 of the 1880 Law, as a “droit réel attaché à une rente ou autre réclamation en vertu duquel un ou plusieurs biens-fonds appartenant au débiteur sont spécialement affectés à l’acquittement de cette rente ou réclamation..”, and are therefore arguably ultra vires.
Flexible mortgages
A second area of uncertainty which arose prior to the 2000 Law related to the issue of so called “flexible mortgages”. The phrase is generally understood by lenders to encompass an agreement with all or any of the following features: the right to draw down funds secured by way of a legal charge, to repay the whole or part of the borrowings prior to the expiration of the loan period, to redraw funds already repaid throughout the period of the loan and to take a repayment holiday if required.
The question which arose was whether flexible loans could be secured by way of judicial hypothec within the framework of the 1880 Law prior to the coming into force of the 2000 Law.
Article 13 of the 1880 Law provided, inter alia, (in translation) that “…all acts and judgments of the Royal Court, issued in the presence of the parties or by default, in any suit for the recovery or the acknowledgement of a bond, claim or other debt…shall confer upon the party obtaining the same, for such amount as shall finally be found due to him, a judicial hypothec…”
Article 14 provided (in translation) that “No judicial hypothec shall be valid unless the Acts or judgments entered in the Public Register…shall contain the enunciation of one or several specific sums of money, beyond which the principal claim of the secured creditor against the person subjected to such hypothec shall in no case be allowed to extend, although it may be reduced, if need be.”
Let us assume therefore that Borrower “A” wished to borrow the sum of £100,000 from Lender “B”, secured by way of judicial hypothec over his property in Jersey. “A” anticipated that in the first year of the borrowing his income would be high, and he would be able to repay £50,000 of the monies loaned. However, the second year might not be so good, and if this were the case he might wish to cease his repayments altogether for a specified period, or even redraw some or all of the monies already repaid.
If the parties entered into such an arrangement, what would be the position if, at the end of year two, A drew down again the whole of the £50,000 which he had managed to repay at the end of year one, and was then declared en désastre? Would B be secured for the whole sum of £100,000?
In our opinion, the effect of the wording of Articles 13 and 14, taken together, was that B was only a secured creditor for the sum of £50,000, being the balance remaining of the initial loan which was drawn down at the commencement of the loan facility and which had not yet been repaid. With regard to the sum of £50,000 which was drawn down, repaid, and drawn down again, the redrawn funds were unsecured.
Traditionally, the only way around this difficulty was for the borrower to open two accounts. On the example given above, “A” would have had to open an account which would have had an overdraft balance of £100,000. The indebtedness would then have been secured by way of a judicial hypothec. “A” would then have paid the monies loaned into a second account, the balance of which would fluctuate as the monies were withdrawn and then repaid from time to time.
Whilst this arrangement may have served to protect the lender’s position, the borrower was disadvantaged, since he had to pay interest on the entire balance of £100,000 even though he had not required the use of all of these funds throughout the whole period of the loan. He would of course have obtained interest on the funds held in the second account, but interest rates for savers are invariably lower than they are for borrowers.
THE LOI (2000) (AMENDMENT NO 4.) SUR LA PROPRIÉTÉ FONCIÈRE
Provisions intended to resolve the difficulties identified above have now been put in place. On February 8th, 2000, the Legislation Committee lodged au Greffe the Loi (2000) (Amendement No 4) sur la propriété foncière. The Law was adopted by the States on February 22nd, 2000, and registered by The Royal Court on November 24th, 2000. The Law comes into effect upon registration, save for Articles 2,4,5,6, and 7 thereof, which come into force three months thereafter.
The Committee’s Report to the draft Law states, inter alia, that “members of the legal profession have criticised the wording of Article 13 as being confusing and not sufficiently clear on certain important matters….The draft Law would repeal and re enact Article 13 so as to resolve these areas of doubt.”
Article 1 of the 2000 Law repeals and replaces Articles 13 and 14 of the 1880 Law with a new article which is divided into six paragraphs. The main substance of the amendment may be found at Paragraph (1) of Article 1 which provides as follows:
“(1) Tout acte ou jugement de la Cour Royale rendu contradictoirement ou par défaut dans une action pour le paiement ou la reconnaissance d’une obligation actuelle ou contingente, compte, ou autre dette, ou pour le règlement d’un compte, ou statuant le montant des dommages-intérêts, donne, sous réserve des dispositions de cet Article, à la personne qui l’obtienne pour le montant qui est déterminé par la Cour ou reconnu par le défendeur lui être dû potentiellement, étant une ou plusieurs sommes, avec ou sans intérèts, une hypothèque judiciaire soit sur tous les biens-fonds du défendeur (ou sur toute partie d’iceux) spécifiés dans l’acte ou jugement.”
The question therefore arises as to whether the amendments address the areas of difficulty identified above.
Flexible mortgages
It will be apparent from the wording of Article 1(1) of the 2000 Law that one of the more fundamental changes introduced by the Law is that “contingent” obligations are now permitted to be secured by way of judicial hypothec, whereas previously the obligation had to be an existing one. The question therefore arises as to whether this amendment will permit lenders to secure sums loaned under flexible mortgages of the type identified above.
In our opinion, the answer is that it will. The Concise Oxford Dictionary defines the word “contingent” as “conditional, dependent (on an uncertain event or circumstance)”. Whilst the giving of a guarantee is a paradigm contingent liability, a borrower under a flexible mortgage arrangement may also be said to have entered into an existing obligation (to the extent of the funds initially drawn down) simultaneously with any number of contingent obligations, where the “uncertain event” is the exercise by the borrower of his contractual right to redraw down funds previously repaid. Thus, from the date upon which the new law comes into force, borrowers in Jersey who wish to avail themselves of the flexible arrangements already on offer in the United Kingdom and elsewhere, will finally be able to do so.
Hypothecation of part only of a larger corps de biens fonds
In so far as the hypothecation of part only of a larger corps be biens-fonds is concerned, the 2000 Law does not address the issue as to how a boundary may be created between two parts of land in common ownership, nor does it address the issue as to the grant of servitudes. Thus, although the law makes clear that the hypothecation of part only of a larger corps is to be permitted, until the difficulties identified have been resolved, there is still a risk that lenders will be slow to avail themselves of the new provisions for the reasons given above. Furthermore, the new Article 13(1) appears to be inconsistent with Article 2 of the 1880 Law, which is, in the circumstances, a rather unfortunate oversight.
Nicole Langlois is an advocate of the Royal Court with Olsens, 47 Esplanade, St. Helier, Jersey, JE1 0BD.
[1] Hypothecation and guarantee [1998] 2 JL Review 14
[2] Robert Pipon Marett (1820 – 1884) appointed Solicitor General in 1858, Attorney General in 1866 and Bailiff in 1880
[3] Article 2 of the 1880 Law defines an hypothec as “un droit réel attaché à une rente ou autre réclamation, en vertu duquel un ou plusieurs biens-fonds appartenant au débiteur sont spécialement affectés à l’acquittement de cette rente ou réclamation,”and which confers upon the holder certain advantages laid down by the Law. Article 12 of the 1880 Law defines a judicial hypothec as “Celle qui résulte des actes et jugements de la Cour Royale de cette Ile, pourvu que les prescriptions de la présente loi aient été remplies”.
[4] Article 1 of the 1880 Law defines a corps de biens-fonds as “un héritage formant un tout distinct et complet, susceptible d’être hypothéqué séparément des autre héritages du propriétaire et qui doit être loti et vendu en cas de liquidation ou soumis au dégrèvement indépendamment des autre biens-fonds qui furent au cessionnaire”
[5] Article 21 of the (1880) Law
[6] See Le Feuvre v Mathew 1974 JJ 49 at 54. For a more detailed treatment of the operation of the doctrine of destination see Matthews & Nicolle, The Jersey Law of Property paragraphs 1.43 and 1.44
[7] Articles 8(1) and 11(1) of the Bankruptcy (Désastre) (Jersey) Law 1990