A specific thing may be given absolutely to a creditor on the understanding that it is to be given back when the creditor's debt is paid; or the property in the thing may be assigned to the creditor while the debtor is allowed to remain in possession, the creditor as owner being able to take possession if his debt is not discharged.
In the hypothec, the property does not pass to the creditor, nor does he get possession, but he acquires a preferential right to have his debt paid out of the hypothecated property; that is, he can sell it and pay himself out of the proceeds, or in default of a purchaser he can become the owner himself. The name and the principle have passed into Scotland's civil law system, which distinguishes between conventional hypothecs, as bottomry and respondentia, and tacit hypothecs established by law. Of the latter the most important is the landlord's hypothec for rent (corresponding to distress in the law of England), which extends over the produce of the land and the cattle and sheep fed on it, and over stock and horses used in husbandry.
The law of agricultural hypothec long caused much discontent in Scotland; its operation was restricted by the Hypothec Amendment (Scotland) Act 1867, and by the Hypothec Abolition (Scotland) Act 1880 it was enacted that the landlords right of hypothec for the rent of land, including the rent of any buildings thereon, exceeding two acres (8,000 m²) in extent, let for agriculture or pasture, shall cease and determine. By the same act and by the Agricultural Holdings (Scotland) Act 1883 other rights and remedies for rent, where the right of hypothec had ceased, were given to the landlord.
The Bankruptcy and Diligence etc. (Scotland) Act 2007 abolishes the common law diligence of sequestration for rent. Under Scottish law, Landlord's hypothec is a common law right of security enjoyed by landlords over any goods sited on the leased premises, regardless of who owns those goods. The hypothec does not secure all sums which happen to be due to the landlord, only a portion of the rent. Landlord's hypothec is enforced by court proceedings known as sequestration for rent.
The Scottish Executive felt that such a mechanism had no part to play in a modern enforcement system, not least because a landlord is able to use other diligences to recover unpaid rent, such as attachment Sequestration for rent can now be used to sell only goods that are secured by a right known as the landlord's hypothec, which arises automatically whenever there is a qualifying lease.
The Bill makes some changes to the hypothec, even though it is not a diligence. For example, it completes the process of abolishing the hypothec over goods in dwelling-houses that was initiated by the Debt Arrangement and Attachment (Scotland) Act 2002. It also abolishes the hypothec over goods owned by a third party.
The Bill also states that, notwithstanding the abolition of sequestration for rent, landlord's hypothec does continue as a right in security "conferring a preference in favour of landlord" on insolvency.
There are many kinds of hypothecs, such as:
The Civil Code also provides for another kind of security called a prior claim, defined as follows: