The Legal Construction Hypothec for Work Requested by a Lessee: Scope and Purpose

The Civil Code of Quebec (“CCQ”) provides that only the work requested by the owner of an immovable may give rise to the legal construction hypothec:

Article 2726. A legal hypothec in favour of the persons having taken part in the construction or renovation of an immovable may not charge any other immovable. It exists only in favour of the architect, engineer, supplier of materials, workman and contractor or subcontractor for the work requested by the owner of the immovable, or for the materials or services supplied or prepared by them for the work. It is not necessary to publish a legal hypothec for it to exist.

Therefore, in principle, the work requested by the lessee does not allow the stakeholders designated in this article to benefit from the legal construction hypothec. This is what the Supreme Court stated in Les Industries Providair inc. v. Kolomeir, [1988] 1 SCR 1132. The Honourable Claire L’Heureux-Dubé wrote:

“As a general rule, the lessee of an immovable who, for his own benefit, carries out construction work or makes improvements to the leased premises does not act as a builder and does not bind the owner of the premises to the contractor or subcontractor. Those who contract with the lessee in such a way cannot claim a privilege on the immovable unless they contract directly with the owner. It is the contractor’s responsibility to make sure that the lessee is able to meet the cost of the work done at its request and on its behalf.”

However, exceptional situations allow to set aside the general rule and assume that the work was performed at the request of the owner even if, in fact, it was requested by the lessee.

This may be the case if (1) the lessee acts as mandatary of the owner; (2) there is a construction contract between the owner and the lessee; or (3) the lessee is considered the alter ego of the owner.

In the first case, it may be possible to assume that the work was requested by the owner if the owner and the lessee are bound by a mandate¹. To this end, the stakeholder claiming to be entitled to the legal construction hypothec must demonstrate that the owner has expressly or tacitly given the lessee the power to represent the owner in the performance of a contract for the development of the leased premises, at the owner’s request and for the benefit of the owner².

In the second case, the existence of a construction contract between the owner and the lessee, whether within the lease or through a separate agreement, must be demonstrated. The lessee would then be found to be a contractor that can benefit from the legal construction hypothec. The same may also apply to those with whom the lessee has entered into a contract in connection to this work. In order to do so, the essential components of the construction contract must be included in the agreement, namely:

1. The work is specified;
2. Its cost is readily ascertainable;
3. The lessee has full discretion in choosing the work methods and selecting the labour force;
4. There is a debt between the owner and the lessee.

Therefore, the mere fact that the work is carried out with the knowledge and prior authorization of the owner is not sufficient in itself to create a payment obligation to the benefit of the owner³.

Finally, in the last case, the demonstration that the lessee is the alter ego of the owner, i.e., distinct legal persons that are in fact one and the same person controlled by a single entity, could make it possible to assume that the work was requested by the owner. However, there needs to be evidence that the corporate structure of the owner and the lessee was put in place in order to dissemble fraud, abuse of right or contravention of a rule of public order⁴, which is a heavy burden of proof.

In sum, the legal construction hypothec is a restrictive privilege which, as a general rule, provides that only the work requested by the owner may give rise to it, to the extent that the other formalities are respected. Although certain exceptions allow the work requested by a lessee to benefit from this security, caution is required to ensure that the latter is solvent before committing to perform work at the request of a lessee.

In other words, if in doubt, we recommend the stakeholders to obtain other payment guarantees, such as suretyship or advance deposits in a trust account, in order to prevent their security rights from being challenged.