A ship mortgage can provide good security to a lender. But having a mortgage doesn’t automatically mean getting all of your money back should the owner default. Nor does it mean that you’ll be getting your money back first. In this article, Jonathan Hadley-Piggin, Marine lawyer at Keystone Law, briefly considers the lender’s position under English law.
One of the most conventional ways of financing the construction or purchase of a ship is via the enforcement of a ship mortgage – otherwise known as a maritime or marine mortgage. Essentially, a mortgage provides a creditor with security for the repayment of a loan by the acquisition of a property interest in the ship.
Before considering priority of lenders on default of the borrower and sale of the yacht, we will first consider the things that a lender should be aware of in order to protect its security and ensure it is as far up the priority list as possible.
To protect the lender as much as possible, the mortgage must be in the statutory form. For UK registered yachts the MCA form must be used (with the main terms being set out in the loan agreement and a deed of covenants). The mortgage must also be registered on the UK Ship Register against the yacht. The Small Ships Register does not provide for the registration of mortgages and therefore the yacht must be registered on Part 1 of the Ship's Register.
If the mortgage is not registered at the MCA, it is known as an unregistered mortgage, and will rank in priority behind other registered mortgages, even if they were created after the unregistered mortgage. Also, if the mortgage is not registered at the MCA, the lender does not have the statutory power to sell the yacht under the Merchant Shipping Act 1995, and would instead have to apply to court for an order to sell the yacht.
It is also worth noting that where the owner is a UK company, the mortgage should also be registered at Companies House, within 21 days of the date of the mortgage, in accordance with company law requirements. This is to try and ensure that the lender will be notified if the company becomes insolvent and/or the directors attempt to wind it up.
If the lender has to enforce the mortgage and takes possession of the yacht, this does not mean the lender will be repaid its debt first following the sale of the yacht. There may be other claims against the proceeds of sale which rank in priority and will be paid first. The proceeds of sale will be paid as follows:
Where there is more than one registered mortgage, the priority of mortgages is determined by the order of their registration, unless a priority notice has been filed with the MCA. For example, if a third party has filed a Notice of Mortgage Intent prior to the registration of your mortgage, and the third party’s mortgage is registered after yours, the third party’s mortgage will rank in priority.
It should be noted that holders of possessory or statutory liens do not rank in priority to a registered mortgage, unless the holder of the lien has issued an in rem claim. Therefore, the lender after taking possession will usually pay all claims against the yacht, particularly where if such a claim remains unpaid it would create a lien over the yacht. This is to avoid a lien claimant arresting the yacht prior to delivery to the buyer and so preventing the sale from being completed. The mortgage documents usually provide the lender with such powers and provide that any such payments are added to the amount of the outstanding loan.
In most instances, a mortgage over a yacht will provide a lender with good security for its loan. Issues only arise in situations where there are a number of claims against the yacht and the value of the yacht is less than the total value of those claims. However, in order to ensure that your mortgage offers the best possible security, you should insist that the yacht is Part 1 registered. If it is not already, register a Notice of Mortgage Intent as soon as possible and thereafter the mortgage at the MCA. Additionally, where the owner is a company, the lender should also register the mortgage at the company registry in the owner’s country of incorporation.
Finally, a lender should also consider taking additional forms of security from the owner to further protect itself, as well as carrying out appropriate credit and due diligence checks against the borrower, beneficial owner and any guarantors before agreeing to lend the funds.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.