Ship leasing: Does a financial lessor need to be the registered owner of the leased asset?16 October 2025

The financing amount is expressed as consideration for the acquisition of the Ship and will be paid under a Conditional Sale Agreement (CSA). The amount and manner in which such amount will be paid will of course depend on the nature of the financing. The title of the Ship shall remain with the Shipping SPV until certain conditions under the CSA are met (such as a termination event or event of default). The CSA provides a mechanism whereby such transfer of title shall be feasible at any time during the lease tenor if any such condition is met.

Leasing

Under Bareboat Charter 1 the Shipping SPV (as head lessor) bareboat charters the Ship to the Leasing SPV (as head lessee). Bareboat Charter 1 transfers the possessory rights of the Ship from Shipping SPV to Leasing SPV. At the same time the Leasing SPV will onward transfer such rights to the Shipping SPV under Bareboat Charter 2. Bareboat Charter 1 will be fully subordinated to Bareboat Charter 2. Bareboat Charter 1 will terminate automatically if title of the Ship is transferred to Leasing SPV.

Bareboat Charter 2 is similar to the charter utilised in the traditional sale and lease-back transaction. All ship and corporate-related covenants typically found in a finance lease are included in Bareboat Charter 2. The main differences between Bareboat Charter 2 and a standard non-tax driven finance lease are the CSA and the Mortgage in the security package.

Enforcement/Termination

Upon the occurrence of a termination event under Bareboat Charter 2, Leasing SPV shall be entitled to:

• exercise its rights under the CSA (i.e. register the title of the Ship in its own name);
• terminate Bareboat Charter 2; and
• repossess the Ship and, subject to the agreed termination mechanism set out in Bareboat Charter 2, sell the Ship or assume residual value;
• as a lessor would typically do in similar circumstances under a standard non-tax driven finance lease; OR
• enforce its rights as mortgagee under the Mortgage and sell the Ship via judicial sale or by selling the Ship privately if permitted under the Mortgage and the relevant laws.

Pros and Cons

From a lessor’s perspective the main pros and cons of this structure are:

• PRO: the optionality provided in enforcement scenarios (namely, to obtain title under the CSA or enforce the mortgage which is not available in a typical sale and lease-back);
• PRO: enforcement of the Mortgage allows the Ship to be sold with clean title. Case law on mortgage arrest is extensive and robust. A mortgagee generally ranks ahead of all claims except for maritime liens (such as collision damage, salvage claims and crew’s wages) and the actual costs of the arrest (depending on the jurisdiction);
• PRO: the proposed structure mitigates certain risks the lessor would incur as shipowner in connection with the operation of the Vessel, including certain sanctions, EU ETS etc.; and
• CON: whereas in a traditional sale and leaseback the Leasing SPV is the owner and thus protected in the insolvency of Shipping SPV (except under the US Chapter 11 or similar) in a CSA+LILO the lessor is not the owner of the ship. However, the lessor/Leasing SPV is protected by the mortgage as a secured creditor.

From a Lessee’s point of view the position is relatively neutral from an enforcement point of view as the new structure does not seem to adversely affect its contractual rights/right at law when compared to the rights/position at law conferred under a traditional lease. On the contrary, as the lessee remains the registered owner for as long as it performs under Bareboat Charter 2, the operation of the Vessel becomes less cumbersome.