Securities and Remedies Related to Leases

Overview

When a lessor enters into a commercial lease (bail commercial), the risk of non-payment sits at the centre of the transaction. The Civil Code of Quebec (Code civil du Québec, or CCQ) provides several tools for the lessor to secure the tenant's obligations, and separately allows the lessor to grant a hypothec on rents in favour of its own creditors. The following rules concern the securities (sûretés) a lessor may demand from a lessee, and the hypothec (hypothèque) on rents that a lessor may grant to a third-party lender. A creditor may also challenge a lease granted in fraud of its rights, subject to the conditions of the applicable remedy.

Learning Objectives

After reading this lesson, the reader should be able to:

• Identify the main security devices available to a commercial lessor under Quebec law and explain why the former statutory privilege no longer exists
• Explain the limited practical value of a movable hypothec on furnishings, particularly in the context of bankruptcy
• Describe the function and limits of suretyship in the lease context, including the effect of lease renewal on the surety's obligation

Securities Available to the Lessor

A commercial lessor faces the constant risk that a tenant will default on rent or other lease obligations. Unlike residential tenancies, where regulatory protections limit the types of security a landlord may require, commercial leases permit the parties considerable contractual freedom. Quebec law offers several mechanisms for the lessor to reduce credit risk, though each carries distinct limitations that practitioners must account for in the drafting process.

The Historical Privilege and the Obligation to Furnish

The former lessor's privilege was abolished when the Civil Code of Quebec came into force in 1994. A lease therefore does not, by itself, give its lessor a prior claim or a general security over the lessee's furnishings. JurisClasseur explains the resulting use of conventional security (Contrats nommés I, fasc. 21, para. 1).

A commercial lease may require the lessee to maintain specified equipment or furnishings on the premises. That covenant does not itself create a hypothec: a separate security stipulation must satisfy the rules governing its constitution and publication. Conversely, a valid hypothec does not depend on an additional obligation to furnish.

Movable Hypothec on Furnishings

A commercial lessee may grant a movable hypothec without delivery over identified equipment or an eligible universality of movables. The deed must be written, specify the secured amount and adequately describe the property or universality; publication is normally at the RDPRM. The grantor's capacity and the restrictions in arts. 2683–2684 CCQ must also be checked. Article 2684 specifically concerns universalities, rather than every movable hypothec (JurisClasseur, Contrats nommés I, fasc. 24, paras. 54–56).

Recovery depends on the assets' resale value, realization costs and competing creditors' ranks. Bankruptcy creates a further limitation: in Canpro Investments Inc. c. Restaurant Ocean Drive Inc. (Syndic), [1998] R.J.Q. 30 (C.A.), the lessor could not improve its statutory bankruptcy ranking through a hypothec securing lease obligations. This is a rule about the lessor's security in that context; it does not mean that all hypothecs or all secured creditors lose their rights in bankruptcy (fasc. 24, para. 57).

Bankruptcy Priority for Unpaid Rent

Section 136(1)(f) of the Bankruptcy and Insolvency Act provides a preferred claim for the three months' rent arrears immediately before bankruptcy and, if the lease provides for it, up to three months' accelerated rent. The total preferred amount is capped by the realization from property on the leased premises. It remains subject to secured creditors' rights and the statutory order of distribution; having property on the premises does not guarantee recovery. Accelerated rent paid under this provision is credited against the trustee's occupation rent. Any remaining provable balance ranks unsecured under s. 136(3). Bankruptcy and Insolvency Act, s. 136.

Security Deposits and the Pledge

A residential lessor cannot require a damage or security deposit or another sum besides rent under art. 1904 CCQ. JurisClasseur contrasts that rule with commercial lease security (Contrats nommés I, fasc. 21, para. 1).

For commercial leases, the label “security deposit” does not determine ownership or bankruptcy treatment. A refundable sum held as security may remain part of the tenant's property and have to be returned to the trustee. A genuine advance payment allocated to identified rent instalments may instead have entered the lessor's patrimony. JurisClasseur expressly distinguishes these arrangements; the legal characterization controls whether the trustee can require repayment (fasc. 24, paras. 65–67).

The agreement, transfer of ownership, refund rights, applicable rules of deposit, pledge or other hypothec and federal insolvency rules must be examined together. Merely describing refundable security as “non-refundable rent” cannot conclusively determine its legal treatment. For example, a $50,000 refundable security fund and $50,000 genuinely paid for specified future rent instalments can have different consequences in bankruptcy.

Suretyship

Suretyship (cautionnement) is a personal security by which a third party obliges itself to perform the lessee's obligations if the lessee defaults. Lessors of commercial premises regularly require the personal guarantee of a controlling shareholder or a related corporate entity.

Quebec law imposes specific limits on suretyship in the lease context. Under art. 1881 CCQ, a security granted by a third party to guarantee the performance of the lessee's obligations does not extend to a renewed lease (bail reconduit). If the lease is tacitly reconducted, the surety's obligation does not carry over unless the suretyship contract expressly provides for it. A lessor who fails to address this point in the drafting stage may discover that the personal guarantee, which appeared to cover the entire lease relationship, terminated at the end of the initial term. Distinguish a fully specified contractual renewal option that merely extends the existing lease: the suretyship may continue during that extension, depending on the lease and guarantee wording (JurisClasseur, Contrats nommés I, fasc. 23, paras. 8–9).

The scope of the suretyship must also be stated with precision. A guarantee limited "to the guarantee of rent" (à la garantie du loyer) covers only the rent obligation. It does not secure the lessee's other covenants, such as obligations to maintain the premises or comply with use restrictions. Common-area charges may nevertheless be covered if the lease and guarantee treat them as additional rent. Lessors who want broad coverage should ensure that the suretyship expressly extends to all of the lessee's obligations under the lease.

A guarantee must be express (art. 2335 CCQ), and its wording also determines the treatment of accessories of the debt (art. 2344 CCQ). The lessor must respect the surety's information rights and must not prejudice the surety's useful subrogation (arts. 2345, 2355 and 2365 CCQ). In residential leasing, requesting a surety must also respect the prohibition on discrimination (Quebec Charter, arts. 10 and 12). See JurisClasseur, Contrats nommés I, fasc. 24, paras. 68–74.

Consider a scenario: a lessor leases commercial premises for a five-year term. The controlling shareholder of the lessee signs a personal suretyship for "all obligations of the lessee." Assume the lease is tacitly reconducted on expiry, creating a new lease. Unless the suretyship expressly covers reconduction or the surety gives a new undertaking, it does not cover the obligations of that new lease under art. 1881 CCQ.

Letters of Credit and Guarantee

In non-residential leasing, an increasingly common form of security is the irrevocable standby letter of credit (lettre de crédit standby) or irrevocable letter of guarantee (lettre de garantie irrévocable) issued by a financial institution.

To draw on a standby letter of credit, the lessor presents the documents specified in the instrument to the financial institution before expiry. A conforming presentation triggers payment of the sum promised under the irrevocable undertaking. In a commercial lease, the required document is often the lessor's written declaration that the lessee is in default. The instrument's wording therefore determines what must be prepared and when the demand must reach the institution.

The principal advantage of this instrument is its independence from the underlying lease relationship. The issuing institution is obligated to pay when the letter is duly presented, regardless of any dispute between the lessor and the lessee, except in a clear case of fraud. This independence principle makes the letter of credit one of the most reliable forms of lease security available.

The principal disadvantage is administrative complexity. Letters of credit are normally issued for limited periods, commonly twelve months at a time. The lease must require the lessee to renew the letter annually, for example thirty days before its expiry. If the lessee fails to renew on time, the lease should provide that this failure constitutes a default, and the letter itself must permit a complying draw on that ground before expiry. Without such a deemed-default clause, the lessor risks being left without security during a gap in coverage.

A demand guarantee may serve a similar function, but the text determines whether it is an autonomous undertaking or an accessory guarantee. Rules such as ISP98 apply when the instrument incorporates them; they do not apply automatically. ICC guide to standby letters of credit. JurisClasseur emphasizes careful drafting of expiry, partial draws, renewal and the effect of a lease assignment (Contrats nommés I, fasc. 24, paras. 75–77).

Financial institutions charge fees for issuing both types of instruments and typically require the lessee to provide counter-guarantees. These costs can be significant, though in some cases the institution may accept existing security over the lessee's assets. The letter itself must be drafted with care, and it is not always easy to convince the issuing institution to modify its standard form. Precision is particularly pressing when the lessee is at risk of bankruptcy, where the validity and enforceability of letters of credit and guarantee are commonly challenged.

Both instruments may include clauses permitting assignment or transfer to acquirers of the lessor's rights under the lease or to the lessor's hypothecary creditors, broadening the utility of the security beyond the original parties.

Worked Example: Commercial Standby Letter of Credit Drawdown and Tenant Injunction

Factual Scenario

Hypothetical example, not a reported decision. A commercial tenant provides a $270,000 standby letter of credit. After a ventilation failure, it withholds $90,000 rent and seeks to prevent the bank from paying a complying draw because it disputes the lessor's performance.

Hypothec on Rents: Securities Granted by the Lessor

The lessor may also use its stream of rental income as security for its own borrowing. When a lessor obtains financing, particularly for the acquisition or development of an immovable, lenders frequently require a hypothec on the rents (hypothèque sur les loyers) payable by the lessees. This section examines the nature, publication, and effects of such a hypothec.

Nature and Publication

Under the CCQ, a hypothec on rents derived from an immovable is deemed to be an immovable security by operation of law (art. 2695 CCQ). This classification applies regardless of the movable character of the underlying claim; the rents arising from an immovable property are treated as immovable for purposes of the hypothecary regime.

As an immovable hypothec, the security is published at the Land Register (Registre foncier) and takes rank according to the date, hour and minute of presentation, subject to statutory exceptions (arts. 2941 and 2945 CCQ). This registration establishes the creditor's right of preference over the rents as against other creditors.

Where the rents arise from a movable property lease, the hypothec on the claim remains movable and is governed by art. 2710 to 2713 CCQ.

Opposability to the Lessee

Article 2743 CCQ gives the creditor holding a hypothec on a claim the right to collect payments falling due. That collection mechanism is distinct from realization of a hypothec under art. 2748 CCQ. It does not mean that registration alone always obliges an uninformed tenant to redirect rent.

Before demanding payment, the creditor should give the tenant sufficient proof of its entitlement and identify the proper payee. Articles 1641 and 2710 CCQ govern opposability for movable claims; for immovable rents, art. 1908 expressly protects a residential tenant who has not been personally notified of the name and address of the person entitled to payment. The tenant may seek authorization to deposit rent at the TAL. Payment made in good faith to an apparent creditor is governed by art. 1559; whether it discharges the debt depends on the facts. TAL: Rent deposit.

Authorization to Collect Rents and Its Withdrawal

The deed commonly authorizes the lessor to collect rents under art. 2744 CCQ. Article 2745 permits the creditor to withdraw that authorization at any time, subject to its contractual commitments and good faith. The creditor must notify both the grantor and the debtors of the hypothecated claims that it will collect amounts due, and register the withdrawal.

The notice of withdrawal is not the prior notice required for taking the immovable in payment or selling it under a hypothecary remedy. After an effective withdrawal and proper notification, paying the lessor can expose a tenant to a second payment. A bare assertion of good faith does not neutralize a notice the tenant has received. Land Register: Withdrawal of authorization to collect rents.

The Hypothecary Creditor's Limited Role

Collecting a hypothecated rent claim does not itself transfer ownership of the building or assign the entire lease to the creditor. The lessor therefore remains responsible for its lease obligations. A mandate, an actual assumption of obligations, acquisition of the property or another legal basis may change the analysis.

The creditor receives the claim subject to the defences that can legally be raised against it. Article 1680 CCQ governs the effect of acquiescence in an assignment or its opposability on compensation. The timing and legal conditions for set-off must be checked; a judgment against the lessor does not automatically create an unrestricted right to recover that amount from the lender.

Right to Sue for Rent and Sign Leases

The right to collect includes recourse for unpaid amounts where the creditor has the necessary standing. Article 2746 CCQ specifically says that the creditor is not obliged to sue during the hypothec but must inform the grantor, within a reasonable time, of payment irregularities. Article 2713 addresses proceedings to recover a hypothecated claim with the other party impleaded.

Collection rights alone should not be treated as a blanket authorization to sign new leases or seek resiliation (résiliation) of existing ones. The creditor's mandate, any administration powers, the relief requested and participation of the lessor must be examined. Proceedings to recover rent and proceedings to resiliate a lease do not necessarily involve identical rights.

The Paulian Action Against Fraudulent Leases

A creditor may seek to have a lease made in fraud of its rights declared unenforceable against it under arts. 1631–1636 CCQ. The statutory conditions matter: prejudice, fraudulent conduct and, for an onerous contract, the other contracting party's knowledge must be assessed under the applicable rules. The claim must also satisfy the requirements concerning the creditor's claim and the one-year period in art. 1635.

Under art. 1634 CCQ, the creditor's claim must be certain when proceedings are instituted, and liquid and exigible when judgment is rendered. It ordinarily must predate the challenged act, unless the act was intended to defraud a future creditor. The one-year forfeiture period runs from knowledge of the prejudice, interpreted to include knowledge of the act's fraudulent nature; the creditor cannot negligently disregard information revealing a potentially fraudulent transaction. For a bankruptcy trustee acting for creditors collectively, it runs from appointment (art. 1635). Inopposability benefits the successful claimant and eligible creditors who intervened in the proceeding, subject to their respective priorities and hypothecs (art. 1636). See JurisClasseur Québec, Obligations, fasc. 12, paras. 19, 21 and 32–35.

A low rent or a family relationship is evidence to examine, not automatic proof of fraud (JurisClasseur Québec, Obligations, fasc. 12, paras. 26–31). Where a lender has already acquired the property, the proper basis for attacking the lease and the effect of the acquisition require separate analysis. The maxim that fraud corrupts all does not dispense with proof, standing or a judicial determination, and a disputed residential lease does not authorize self-help eviction. Civil Code, arts. 1631–1636.

Case and Article Pointers

• JurisClasseur Québec, Contrats nommés I, fasc. 21, para. 1: abolition of the privilege and commercial security.
• JurisClasseur Québec, Contrats nommés I, fasc. 24, paras. 54–77: movable hypothecs, deposits, suretyship and bank guarantees.
• Arts. 1881, 1904 and 2702 CCQ: renewed leases, prohibited required residential deposits and pledges.
• Arts. 2695, 2743–2747, 2941 and 2945 CCQ: rent hypothecs, collection, accounting and publication.
• BIA s. 136(1)(f): the lessor's preferred bankruptcy claim.
• Canpro Investments Inc. c. Restaurant Ocean Drive Inc. (Syndic), [1998] R.J.Q. 30 (C.A.): bankruptcy ranking.
• Angelica-Whitewear, [1987] 1 S.C.R. 59, and Eurobank, 2024 SCC 11: documentary compliance and the fraud exception.

Worked Example: Hypothecary Creditor Withdrawal of Rent Collection Authorization

Factual Scenario

Hypothetical example. A lender holds a registered hypothec on an office building's present and future rents. The deed allows the owner to collect until withdrawal following a payment default. Following the default, the lender notifies both the owner and each tenant that it will collect amounts due and registers the withdrawal under art. 2745 CCQ.

Practice Checklist

• Distinguish the tenant's security from the lessor's hypothec on rental income.
• Apply the residential prohibition on requiring a deposit; do not infer a statutory lessor's hypothec or prior claim merely from the lease.
• Verify a movable hypothec's written terms, secured amount, property description, publication and rank.
• Assess bankruptcy ranking and distinguish refundable security, a pledge and genuinely prepaid rent.
• Check the suretyship's scope, renewal provisions, information rights and subrogation.
• Coordinate the letter of credit's draw conditions, expiry and renewal with the lease; a lease covenant does not bind the issuing bank by itself.
• Notify the grantor and tenants of a withdrawal of collection authority and register the withdrawal.
• Check any mandate and administration powers before signing or seeking to terminate a lease.
• Establish the statutory conditions for challenging a fraudulent lease and act within the applicable period.