Civil Code of Québec regarding priority orders

Each of the prior claims set out in section 2651 of the Civil Code of Québec is listed below, along with relevant explanations and their respective impact on the broker’s work.

Legal costs

These costs can be enforced on both the debtor’s movable and immovable property.¹ We are talking here about the costs and expenses incurred in seizing and selling assets, bailiff fees and costs for legal proceedings.

Electricity or storage costs could also be included, for example in a case where food needs to be kept cold in order to preserve it.

This type of priority is enforceable only against the debtor’s creditors, which has the effect of restricting the scope of the enforceability of this prior claim. This priority is therefore not enforceable against third parties in general.

In practical terms, if the debtor sells his immovable, the creditor will not be able to exercise his priority over that immovable. The creditor may still exercise his recourse against the debtor’s other movable or immovable property, but the priority will not be enforceable against the new owner who has just bought the property.

Notwithstanding the foregoing, as long as the immovable is not sold, such a priority could impact the broker’s work, since it may affect immovable property. A creditor could exercise his priority recourse against the immovable for sale before the brokerage contract is concluded. It is therefore important for the seller to be aware of this possibility so that the broker representing him can adapt the marketing accordingly.

 

---

¹ S. 2652 C.C.Q.

 

 

Seller’s unpaid claim

We are talking here about a seller who, in the course of his business activities, sells movable property to a natural person – a consumer – who does not operate an enterprise.

Example: A furniture dealer sold a refrigerator to Josée for her personal use. Josée had her fridge delivered the following week, but was given a term to pay the purchase price. If there is a judicial sale of Josée’s property, the furniture dealer will be able to avail himself of his prior claim and require the proceeds of sale of this refrigerator in priority to all other creditors.

This second-rank priority does not apply to immovables and will therefore have very little impact on the broker’s work. However, if the seller wants to include certain movable assets in the sale of the immovable and these assets are not paid for in full, this could impact the sale.

Claims of persons having the right to retain movable property

This type of third-rank priority is a real security. This priority is granted by the Civil Code of Québec to certain creditors who must keep movable property that has been given to them – in order to perform their service, for example – until they are paid the sums agreed to in the contract.

A company exercises a right to retain movable property when, in order to perform its service, it must have the property in its possession.

Example: To fulfil its contractual commitment, a transport, moving or storage company must temporarily be in possession of the movable property to be transported.

Another example: A mechanic repairs Claude’s car. As long as the mechanic is not paid, he can keep Claude’s car.

Only movables are subject to this priority. Consequently, this priority category will have very little impact on the broker’s work, except in the case of a transaction involving the sale of a business.

State’s claims

State’s claims considered by law as a priority are restricted and include only provincial and federal income tax, deductions at source, GST and QST. They are a fourth-rank priority.

This type of prior claim applies only to movable property and not to immovable property.² Therefore, this priority category will have very little impact on a real estate transaction.

 

---

² S. 2653 C.C.Q.

Property tax claims of municipalities and school boards

This refers to transfer duties on immovables (better known as welcome tax) and to municipal and school taxes.

Section 2654.1 of the Civil Code of Québec states:

“Prior claims of municipalities and school boards for property taxes constitute a real right. They confer on the holder of the claims the right to follow the taxable property into whatever hands it may come.”

The amount of property transfer duties, which are payable by the buyer of the property is calculated in two steps.

First, the basis of imposition for the property transfer duties must be established,  which will be the greatest of the three following amounts:

• The price paid to acquire the immovable, i.e. the purchase price (excluding GST or QST);
• The amount of the consideration recorded in the deed of sale (for example, the total sale price minus the value of any movables);
• The value of the immovable entered on the property assessment roll multiplied by the comparative factor to take account of the real market value of the immovable. You should not look only at the comparative factor indicated on the tax account since it could differ from what is on the property assessment roll. The tax account does not reflect the comparative factor established for the first fiscal year to which the roll applies. The comparative factor may be amended for subsequent fiscal years.

 

This category of priority applies only to immovables, and unlike the other four types of prior claims, it confers a right of resale on the creditor. It will therefore have an impact on the real estate transaction. Prior claims may be set up against other creditors, or against all third persons if they constitute a real right, without being published.³ They are an exception to the rule.

That is why the notary who sells an immovable will check with the municipality to make sure that any existing arrears are paid out from the proceeds of the sale.

 

---

³ S. 2655 C.C.Q.