< Back to insights hub


Issues in ship leasing transactions12 September 2019

In this briefing, we consider some legal issues which arise in ship leasing transactions.


"The expansion of Chinese leasing companies into this market has accounted for much of the recent growth – but there are many other lessors based elsewhere who are also active in this sector."

This is the first in a series of briefings on the key legal issues which arise in ship leasing transactions. It is against the background of the growth in recent years of different types of such transactions, most of which involve a ‘sale and lease-back’ of one or more ships by a shipowner to a lessor, whether in respect of new or second‑hand tonnage. The expansion of Chinese leasing companies into this market has accounted for much of the recent growth – but there are many other lessors based elsewhere who are also active in this sector.

Most such transactions have the flavour of a financing, whether or not they are finance or operating leases for accounting or other purposes. Ship leasing has, to a degree, filled a gap in available credit caused by the withdrawal since the 2008 financial crisis of many of the former major shipping banks.

Leases take many forms as regards to the allocation of risk and reward between the lessor and lessee. These differences are often driven by the different tax and accounting treatment of finance and operating leases, but may also simply reflect the commercial position of the parties involved. Many of the underlying legal issues are common to all types of lease, but some are specific to certain types only.

The main focus of this and subsequent briefings is English law, which is the law predominantly chosen to govern the demise on bareboat charters by which ship leases are documented. Later briefings will also touch upon some issues of New York or US federal law, whether in the context of the chosen law, or otherwise.

A recurring theme will be the legal differences between a lease and a secured loan. This first briefing looks at ways in which a lease can in some respects be potentially more favourable to a creditor who is also a lessor as compared with the position of a secured lender. It then looks at one particular issue lessors need to be aware of.

No realistic risk of recharacterisation

Some leasing transactions have features which clearly distinguish them from a secured loan. In particular, a lease where the lessor rather than the lessee takes residual risk on the value of the asset and so also has the benefit of any upside. On the other hand, a lease where the lessee is liable to pay out the lessor’s capital investment in all circumstances and, by one means or another, take the risk and the reward of the value of the asset is in substance not very different from a secured loan. English law, however, generally respects the form of transactions even if in substance they have a similar economic effect to something else.

Only in extreme circumstances (involving fraud or something close to it) would an English court recharacterise a lease as a secured loan; the recharacterisation risk under English law can therefore be ignored for present purposes.[1]

A lessor’s enforcement remedies – general

"How the post-termination regime is agreed in the lease can vary substantially depending on the commercial intentions of the parties."

Since a lessor is the owner of an asset, its remedies on the lessee’s default are to re-possess the asset and, subject to what is agreed in the lease, sell or re-lease the asset and/or sue the lessee for damages or a liquidated termination sum.

How the post-termination regime is agreed in the lease can vary substantially depending on the commercial intentions of the parties. There are some complex legal issues around this, not least the potential application of the rule against penalties to a liquidated termination sum; these issues will be the subject of a later briefing.

The point to make for now is that English law treats an owner re-possessing its asset from a lessee differently from the way it treats a secured lender enforcing its security. An owner that has granted a mortgage has an ‘equity of redemption’ in the asset which the courts are vigilant to protect. English law imposes certain duties on a secured lender when it is enforcing its security, in particular as regards exercise of its power of sale and a duty to obtain the ‘best price reasonably obtainable’. The duties of a ship mortgagee will vary depending on the law which governs the mortgage, namely the law of the vessel’s flag on which the mortgage is registered. A lessee is in a very different legal position. It will only have an interest in a portion of the sale proceeds if the lease expressly so provides. Any duties which the lessor owes as regards selling – and at what price – will also need to be set out, otherwise a lessee which is entitled to a portion of the sale proceeds can only rely on the willingness of the courts to imply terms as to the conduct of the sale – which is by no means certain and will be dependent on the circumstances.

How matters are to be handled by a lessor following termination of a lease for lessee default is thus in most respects a matter to be addressed contractually between the parties in the lease document, without intervention by the courts. The two main exceptions to this for present purposes are (i) the doctrine of relief from forfeiture and (ii) the rule against penalties in the context of termination sums.


A further feature of the point noted above about a ship mortgagee’s duties varying according to the law of the flag or register is that their remedies will also vary.  ‘Self-help’ remedies, principally a right to take possession and a power to sell privately (i.e. not through a court sale), are available to mortgagees of ships registered in jurisdictions whose law is based on English law. The laws of many other flag states either do not permit self-help remedies at all or substantially constrain them.[2]

The remedies of a ship lessor under an English law lease are, as noted above, those of an owner and are generally unconstrained by anything other than what the parties agree contractually. Further, a ship lease is a form of demise or bareboat charter, with a lessor having rights and remedies vis-à-vis the lessee accordingly.

A lessor has a maritime claim for “the use or hire of any ship whether by charterparty or otherwise[3] and so may arrest his ship to recover possession. Courts in whichever jurisdiction the lessor arrests the ship in order to recover possession obviously cannot force a judicial sale of the lessor’s own ship, as they would when a mortgagee arrests, but they may instead be more ready to assist an owner than a mortgagee to recover possession. Indeed, an English court or London arbitration tribunal (as applicable) is likely, where the lessee refuses to surrender possession, to recognise the owner’s right to have its proprietary rights recognised without delay. Not only may a lessor arrest its own ship, it may also arrest ‘sister’ ships owned by the lessee[4]. Nowadays, ships are usually owned by SPVs, and so sister ships may be hard to find, but the lessor may also be able to track group-owned ships to South Africa, and to arrest them there as ‘associated’ ships. In contrast, a mortgagee does not have any right to arrest ‘sister’ or ‘associated’ ships.

A lessor ought also to be in a better position than a mortgagee in terms of its ability to resist maritime debts incurred by its defaulting lessee. The starting point is that such claims can only be enforced by arrest of the ship whilst the lease remains in place.[5] Once the lessor has terminated the lease, this right should be lost (unless the claim is a ‘maritime lien’). It is fair to note here that, in a recent Singapore court case[6], the court held that maritime claims for debts of a bareboat charterer could be enforced post-termination of the charter until physical redelivery of the ship to the owner. This was on the basis that, in this ‘limbo’ period, the charterer retain de facto possession and control of the ship. However, that case is probably best understood as turning on its own facts. In an Australian case[7], the court relied on Barecon 2001, Cl. 29, which provides that charterer holds the ship as “gratuitous bailee” between termination and redelivery, to find that claims against the charterer could not be enforced against the ship in this period.

Relief from forfeiture has its origins in the law of real property but also applies to other property, including ships.

Relief from forfeiture

Relief from forfeiture is an equitable doctrine which operates to protect a party from the forfeiture of a property or possessory right where the purpose of the right of forfeiture is to secure the payment of money, or some other stated result which can be achieved through legal proceedings. It has its origins in the law of real property[8] but also applies to other property, including ships.[9] It applies, in particular to bareboat charters (and hence leases) of ships where ‘the object of the transaction is essentially to secure the payment of money’, especially where there is a lessee purchase option or, even more so, a lessee purchase obligation. In a case involving the ship ‘Jotunheim‘, relief was not granted to a charterer to prevent an owner from repossessing a ship where the charterer had been late in paying instalments of hire early on in the charter (the first three monthly instalments payable under a four year charter). The charterer was obliged to buy the ship at the end of the charter period, which was relevant but in the circumstances not enough for relief to be granted.  Since relief from forfeiture is a discretionary equitable remedy it is not altogether easy to be definitive about when it would or would not be granted. It was granted in another case (not involving a ship)[10] where the leases were finance leases which were well into their term and where the lessee had substantially all the economic interest in the assets.

In the context of ship leasing transactions it is possible to draw some principles or conclusions which may be of practical guidance:

  • The essence of the doctrine is to protect a lessee from loss of a proprietary or possessory right through a technicality where the lessor does not suffer any real harm. It might be said that it operates when one party (the lessee) stands to lose a lot if another party (the lessor) exercises a right but the party with the right stands to lose little by not exercising it;
  • It is more likely to be engaged where a lessee has a purchase option and even more likely to be engaged where the lessee has a purchase obligation;
  • It is more likely to be engaged later rather than earlier in the term of the lease, when the lessee has paid substantial amounts of hire;
  • Accordingly, substantial prepayments of hire, seller’s credits, or equity contributions by the lessee are relevant;
  • It is more likely to be engaged in the case of a finance lease rather than an operating lease, i.e. in a lease where the lessee’s main interest is in receiving money and it has no primary exposure to the residual value of the ship;
  • It is not likely to be engaged where the lessee does not make good any default; and
  • Because its purpose is to protect a proprietary or possessory interest it does not apply to a time charter.[11]

Accordingly, particular care should be taken by lessors considering terminating leases for lessee default where the doctrine of relief from forfeiture might come into play.

[1] The position is very different under US and New York law, as will be addressed in a future briefing.

[2] For example, Panama requires 20 days notice from mortgagee to the owner before the mortgagee exercises a power of private sale.

[3] 1952 Arrest Convention, Article 1(1)(d).

[4] 1952 Arrest Convention, Article 3(4).

[5] 1952 Arrest Convention, Article 3(4).

[6] The Chem Orchid [2015] 2 Lloyd’s Rep. 666.

[7] The Hako Fortress [2013] FCAF 21.

[8] Shiloh Spinners v Harding (HL) [1973] AC 691.

[9] On Demand plc v Gerson plc (CA) [2004] 4 All ER 734. More OG Romsdal Flykesbatar AS v The Demise Charterers of Ship ‘Jotunheim’ (The Jotunheim) [2004] EWHC 671 (Comm).

[10] On Demand v Gerson (see footnote 9 above).

[11] Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) (HL) [1983] 2 AC 694.  However, although there is no authority on the point, it is possible to speculate that the doctrine might apply where a time charterer has a purchase option or purchase obligation.

< Back to insights hub

< Back to insights hub