Posted on: 27 April 2020
As leasing becomes an ever more important source of finance for the global shipping industry, it is timely to draw attention to some structural and documentary issues which Lessees/Charterers should bear in mind, says WFW London Maritime Partner David Osborne.
As leasing becomes an ever more important source of finance for the global shipping industry, it draws timely attention to some structural and documentary issues which Lessees/Charterers should bear in mind.
Ship leases take many forms. They are often documented by using the BIMCO BARECON form of bareboat charter, extensively modified and supplemented by lengthy additional clauses. This has the effect of turning a document which is intended to be an industry-standard bareboat charter into a bespoke financial or quasi-financial instrument. Increasingly, however, leasing companies are moving away from the modified BARECON approach and producing self-standing forms of lease. The parties in a BARECON-based document are called “Owners” and “Charterers”, whereas in a self-standing form they are often called “Lessor” and “Lessee”. There is no significance to these names in the current context, however. For consistency in this note, the terms “Lessor” and “Lessee” are used throughout.
“With legal title to the vessel vested in the Lessor, a Lessee is potentially exposed to the vessel being made subject to non-consensual liens arising from the actions or failures of the Lessor.”
Depending on the state of the market at the time, Lessees can sometimes find themselves in a relatively weak bargaining position when documents are negotiated. Lessors might put forward a form of lease as their “standard form” in order to discourage extensive Lessee comments on significant issues. Many of the issues highlighted below are better raised by Lessees at the term sheet stage, rather than being left until documentation starts.
SOME BACKGROUND LEGAL ISSUES
A lease is not a loan in a different form. The Lessor/Lessee relationship is very different in legal terms from that between lender and borrower. This fundamental point crops up in many different ways. Two of the most important are: (i) a Lessor holds legal title to the asset, as opposed to a security interest granted by the holder of legal title; and (ii) the protections which English law gives to a borrower in respect of its “equity of redemption” are not given in the same way or to the same extent to a Lessee.
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