As the shipping sector continues to grow, more and more companies will offer shipping services. While large, established shipping companies may be able to buy large ships outright, medium and smaller shipping companies will likely not have such capacity. Therefore, those companies will need to turn to lenders for ship financing, which is known as a ship mortgage.
Under the terms of a basic ship mortgage, the shipping company, acting as mortgager, conveys a security interest in the ship to the lender or lenders, known as the mortgagee or mortgagees. The shipping company is obligated to pay a monthly payment to the creditor, which includes principal and interest, and the mortgage terms are usually amortized.
Note that there are flag-state laws that govern mortgages. It is important for a lender to know the relevant rules of ship mortgages before engaging in lending. This includes understanding worldwide implications of ship lending.
A ship mortgage that satisfies the specific requirements of the flag-state’s law on ship mortgages and is duly recorded with the ship registry may be granted the status of a “preferred ship mortgage.” The two most significant consequences of making a ship mortgage into a preferred ship mortgage are the right to enforce the mortgage in maritime courts worldwide; and the priority of the rights given by the ship mortgage against third parties.
To institute a foreclosure against a ship mortgage in the United States, a creditor to the mortgage can institute a foreclosure action in U.S. Federal Court. Once filed, a U.S. Marshall will seize the ship and hold in custody, pending further rulings by the Court. After the necessary filings and court procedures, the creditor must prove a right to entitlement and foreclosure. If accomplished, the court will usually order that the ship is to be sold at public auction with the proceeds to the creditor.
While a ship mortgage, standing alone, is enforceable by the mortgagee against the mortgagor as a matter of contract, a foreign court may not be willing to hear a foreclosure action or may not recognize the mortgage claim against the ship when such an action is brought by a third party. Furthermore, third parties who may not be aware of the ship mortgage may also obtain rights in the ships, e.g. mechanic’s lien, that could defeat the interests of the mortgagee, even in a proceeding in the U.S.
However, a ship mortgage that has been granted “preferred” status will be enforceable in almost all maritime courts worldwide, with a high priority. By being duly recorded with the ship’s registry under the relevant statute, the preferred ship mortgage gives presumptive notice to the world of the mortgagee’s interests, allowing an internationally recognized “preferred” priority against certain liens on the ship, as well as other rights.
Are you involved in maritime lending? Are you negotiating a ship mortgage? You need a lawyer who is both experienced and knowledgeable in maritime law. Contact the Kolodny law firm, experienced maritime lawyers.
(image courtesy of Axel Ahoi)