HYPOTHEC: THE MOST COMMON USED ENCUMBRANCE IN CAMBODIA

• 13 July 2019
• Local News
• 11973 Views

by Sciaroni & Associates, Unofficial translated by Construction & Property Magazine

Since the introduction of the Civil Code of the Kingdom of Cambodia in 2007, a hypothec has been known as one of the most commonly-used encumbrances for securing an obligation. This short article will briefly discuss the general overview of hypothec, its advantages as well as how to perfect a hypothec agreement for the interest of creditor.

WHAT IS HYPOTHEC?

A hypothec is defined as an agreement entered into between a creditor and a debtor or a third party that provides immovable property as security for an obligation. A creditor (hypothee) is entitled to exercise the right to receive the performance of his or her claim prior to other creditors from the sale of the immovable property that the debtor or the third party provided to secure their obligation. A perpetual lease or usufruct may also be used as security under a hypothec.

WHAT ARE THE ADVANTAGES OF HYPOTHEC?

The purpose of a hypothec is to allow a creditor to satisfy his/her claims in the event that a debtor fails to perform his/her obligation. In the event of a failure to perform on a debt, a creditor can apply to the court for compulsory sale of the hypothecated immovable property. Where the debtor or a third party erects a building on land after it is hypothecated, and the debtor owns that building, the creditor may demand the compulsory sale of the building together with the hypothecated land. However, if the price of the land together with the building thereon is less than the price of the land as a vacant plot, the creditor may demand that the debtor remove the building prior to the compulsory sale of the land. A third-party acquirer may purchase the property at the compulsory sale.

A hypothec over land extends to all things that are attached to and form part of the land comprising the object of the hypothec at the time of its creation, including buildings thereon. It also extends to things that attach to the land after the hypothec is created. However, it does not extend to a building owned by a third party or to which the rights to which are held by a third party under a perpetual lease, usufruct or leasehold.

A third party who has acquired a perpetual lease or usufruct on the hypothecated immovable may pay a price to the creditor at the request of the hypothee, and the hypothec will thereby be extinguished for the benefit of that third party. No hypothec may be extinguished by prescription in relation to obligors and hypothecators unless it is extinguished simultaneously with the claim the hypothec secures. In the event that a person who is neither an obligor nor a hypothecator has possessed the hypothecated immovable property in complete conformity with the requirements for acquisitive prescription, the hypothec shall be extinguished thereby. However, this shall not apply where a third-party acquirer of the hypothecated immovable property acquires the immovable with knowledge of the existence of the hypothec.

In terms of advantages in favour of the owner of the immovable property, a multiple hypothec may also be created on the same immovable property to secure multiple debts. For this type of hypothec, a creditors’ rights to satisfy their claims shall be based on the chronological order of their registration. However, a creditor can always transfer or waive his/her right on the hypothec or his order of priority for the benefit of other creditors.

A creditor may also hypothecate his/her right of hypothec to secure his/her debt to a third- party. This type of hypothec is known as “sub-hypothecation”.

HOW TO PERFECT A HYPOTHEC AGREEMENT?

A hypothec agreement can only be formed with the consent of parties, the creditor and debtor or the owner of the secured immovable property. In addition to the consent of the related parties, a hypothec agreement must be created in the form of an authentic deed and registered with the Cadastral Office. The official fee is KHR 200,000 per title and it takes between 3 to 5 working days to do the registration.

A certificate of hypothec agreement must be certified by the chief of Commune/Sangkat in accordance with Prakas No. 159 dated 15 June 2016. A certificate of hypothec agreement must include (i) the identity of the immovable property, and (ii) the identity of both parties to the agreement.

Sciaroni & Associates, one of Southeast Asia’s leading professional services and investment advisory firms, has been providing skilled counsel and knowledgeable business insights for over two decades. Based in Cambodia, with offices in Laos and Myanmar, our experienced team of advisors brings considerable general and sector-specific expertise to the challenges confronting companies doing business in emerging markets. We are proud that our clients comprise many of the world’s premier companies, banks, financial institutions, governments and global development organizations.