Insights

Malta has introduced new laws designed to simplify the registering of fleets that are the subject of sale and leaseback deals.

As such transactions become more common with the increased presence of shipping funds, new legislation has increased the flexibility of the relationship between the lessor and the original shipowner, the lessee, according to shipping lawyers Jan Rossi and Ilias Theocharis, associates at Ganado Advocates on the island.

The changes concern amendments to Article 19A and the addition of Article 19B to the Merchant Shipping Act.

The lessor and lessee can use the “dual” registration option in the Maltese Register of Ships.

Article 19A now permits a lessor to register title over the vessel as registered owner while simultaneously allowing the lessee to have the operational certificate, and any other certificates issued by the Maltese flag authorities, in its name as lessee.

This option is also available in those instances where the lessee has subsequently chartered the vessel to a third-party that wishes to have the registration certificate issued in its name as charterer, subject to both the registered owner’s and the lessor’s consent, the lawyers said.

The lessee or the charterer must pay an amount equal to the annual registration fee for that year, in addition to that paid by the registered owner, however.

Article 19B provides that the lessor as registered owner retains the right to withdraw its consent at any time during the period that a certificate is issued in the name of the lessee or the charterer.

In case of default …

“Whilst the applicable provision does not specify so, it is generally understood that such right may only be exercised on condition that there is an instance of default under the lease,” the lawyers said.

This right is also afforded to any mortgagee, ensuring that the grant of the lease does not create a burden on the vessel which affects third-party rights.

“It is clear that the amendments…have made it more attractive and convenient for ship financiers to retain control over the financed vessel without added responsibility, whilst allowing the flexibility needed for a lessee to operate the vessel,” the lawyers added.

“As registered owner, the lessor enjoys all of the advantages of owning the financed asset, yet is free from the usual obligations of a vessel owner including, amongst others, those of constantly ensuring that the vessel’s certificates are valid and in order, maintaining exchanges of correspondence and communication with the flag authorities, engaging with professional third party managers for the technical management of the vessel and dealing with any hiccups at local ports.

“On the other hand, a lessee (saving any operational covenants contained in the lease and other related agreements with the lessor) is afforded a free hand in the management and operation of the vessel in its name whilst being responsible for maintaining and insuring the vessel as well as generally being liable for any loss or damage to it.”

Enforcement made easier

Rossi and Theocharis said that in an enforcement scenario, a lessor as registered owner may make use of the power to withdraw the consent required for the issue and continued use of a lessee’s or charterer’s certificate of registry, therefore essentially “freezing” the movement of the vessel and allowing greater freedom for the lessor to repossess a ship on the strength of its proprietary rights.

They added: “The mandatory support of a mortgagee through the granting of its required consent blends in well with those finance models in which a shipping fund only takes up a portion of the required funding with the remainder being provided by traditional lenders.

The latter obtain comfort through the registration of a Maltese mortgage over the financed vessel with all of the statutory powers that come with it.”

There have also been amendments and additions to the country’s Civil Code, the pair said.

Any agreement concerning the sale and the letting of ships is now to be governed by the terms of the agreement reached between the parties and international usages of trade.

“Such terms will prevail over the provisions in the Maltese Civil Code in case of conflict,” the lawyers said.

Ill-suited procedures blocked

“This ensures that any ill-suited provisions contained in the legal institutes of sale and of lease in the Maltese Civil Code, and which contextually do not apply to the realities of a modern sale and leaseback transaction, are effectively blocked from regulating the parties’ relationship and consequently being applied by the courts in a dispute.”

A lessor can now terminate a lease agreement in the event of a default by giving notice to the lessee without the need of serving a judicial act and without any prior court authorisation.

What constitutes an “event of default” has also been defined in the law with the purpose of mitigating any length negotiations between the parties on whether an “event of default” exists or not.

A default has essentially been defined as a change in the financial condition of the lessee, the fulfilment of a condition under which the dissolution of the lease was expressly covenanted and an action which deprives the mortgagee of the security expected from its own debtor, typically the lessor.

The lessee retains its right to seek damages in the event of an unjustified termination of the agreement.

The amendments “recalibrate the risk undertaken in financing transactions and that previously arose under the Maltese legal system, to produce calmer waters going forward,” Rossi and Theocharis said.

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This article was co-authored by Ilias Theocharis.