There are several documents involved when taking security over a vessel and one of the most important is a ship mortgage.
What is a ship mortgage?
A ship mortgage is the only type of fixed charge or mortgage recognised in the UK over a vessel and is a statutory form of security governed by the law of the ship's flag state (where the vessel is registered).
In the UK the statutory form comes from the Maritime and Coastguard Agency. There are 2 standard forms that can be used and each contains an acknowledgement of the debt and a promise from the owner to pay that debt with interest to the lender. As the mortgage forms are standard forms with no additional clauses or undertakings (or space to include any), it is usually accompanied by a deed of covenant executed by the same parties as a document collateral to the ship mortgage.
The ship mortgage provides the lender, on the occurrence of an enforcement event, with recourse to the ship and the right to sell it and recover outstanding loan amounts.
Important points to be aware of when taking a ship mortgage:
1. Full or simple registration of the vessel
Security can only be taken over a vessel which has full registration rather than simple registration. If a vessel has simple registration, this will require updating to full registration prior to the lender taking security.
2. Official number of the vessel
When registered with the UK Ship Register (UKSR), a ship receives a unique official registration number, which stays with the ship for life. The official number can be used to obtain a transcript of registry from the UKSR which allows for checking of any prior ranking or priority mortgages against the ship. The official number is included in the marine finance security documents to identify the vessel.
3. Ownership and designation
The registered owner of the vessel enters into the mortgage with the lender. For the purpose of registration, ships are divided into 64 shares and the shares can be held jointly or individually. Where shares are held individually, a separate ship mortgage will be required from each registered owner. It is important that the owner's name and address are correct on the transcript of registry as these details are used within the marine finance security documents. If the owner is a company these details should match those shown on Companies House.
4. Other charges against the vessel
A transcript of registry will show if there are any prior ranking or priority mortgages against the ship. Unless otherwise agreed, it is usual that a lender will require first ranking security over the vessel and so these will require to be discharged before security can be taken.
The executed ship mortgage should be registered at the UKSR using one of the two statutory forms and, if the mortgagor is a company, the mortgage must also be registered at Companies House within 21 days of its execution. If you have any queries about ship mortgages please contact Neal Richardson, Eilidh Calvert, Nicola Watson, or Hannah Sinclair. Further details of commonly used terms in ship finance transactions is available in our glossary here.