BIMCO publishes first standard-form quiet enjoyment letters for ship financing
Charterers are increasingly requesting to receive quiet enjoyment letters (“QELs”) from the mortgagees of chartered vessels. As there has not been any standard format for QELs, owners have often found themselves caught in the middle of protracted negotiations between the charterers and the mortgagees when QELs are requested. To meet the longstanding need for a standard format acceptable to charterers, mortgagees and owners, BIMCO published two standard form QELs on 21 February 2024.
The charterers of a vessel risk having their use of the vessel interrupted by enforcement actions taken by creditors of the owners, with whom the charterers ordinarily have no direct contractual relationship. If such enforcement actions culminate in a forced sale of the vessel, the charterers risk losing their right to use the vessel outright and being left with a claim for damages against the owners for breach of the charter party. In order to better secure their right to use the vessel, charterers therefore frequently require the owners to procure a QEL from the vessel’s mortgagee. This is particularly the case for long-term charterers of specialised offshore vessels, which may be difficult or impossible to replace and mobilise on short notice. The key feature of most QELs is a contractual right granted by the mortgagee to the charterers for their quiet enjoyment and continued use of the vessel, so long as the charterers pay charter hire and otherwise conform with the terms and conditions of the underlying charter party.
QELs offer benefits to charterers and mortgagees
A right on the part of charterers to the continued use of the vessel necessarily restricts the flexibility of the mortgagee for enforcement of the mortgage following a default under the mortgage loan, and QELs are therefore frequently seen as primarily benefiting charterers.
Often, however, the mortgagee and the charterers will have a common interest in ensuring that the charter party can continue to be performed following a default by the owners under the mortgage loan. The vessel’s earnings are typically used to service the mortgage loan (with the income stream from the specific charterer party often having been a key factor in the credit assessment for such mortgage loan) and it may be difficult for the mortgagee – or the new owners of the vessel following a forced sale – to find new employment for a specialized vessel on short notice following a default.
QELs are therefore frequently structured as two-way letter agreements, with undertakings also by the charterers to give the mortgagee some notice before terminating the charter party and to cooperate with the mortgagee in transferring the charter party to another entity in connection with a forced sale of the vessel. In these cases, the QEL may be of benefit also to the mortgagee.
The new BIMCO QELs
BIMCO has published two versions of the new standard QEL.
The longform version takes the form of a letter agreement between the mortgagee, the charterers and the mortgagor and includes an undertaking by the mortgagee not to disturb the charterers’ use of the vessel for so long as the charterers perform their obligations under the charter party. In addition, the BIMCO QEL includes references to an assignment of the owners’ rights under the charter party in favour of the mortgagee and a clause whereby the charterer is notified and acknowledges being notified of such assignment, practically obviating the need for notice of assignment to be sent to the charterers as a separate document in connection with the mortgagor’s financing. The longform version also includes various undertakings by the charterers not to vary or terminate the charter party without the consent of the mortgagee and to cooperate with the mortgagee in transferring the charter party to another entity in connection with a forced sale of the vessel, all of which are helpful starting points but should be assessed on a case-by-case basis to fit the specific mortgage loan and chartering structure.
The shortform version takes the form of a simple letter, signed by the mortgagee and addressed to the charterers, and includes only the undertaking not to disturb the charterers’ use of the vessel for so long as the charterers pay charter hire in accordance with the charter party.
Both versions of the new form are intended for use with time and bareboat charter parties (including leasing structures) and are intended to complement BIMCO’s existing suite of standard term sheets for ship finance. Christian Hoppe, BIMCO’s General Counsel, provided the following statement regarding the new BIMCO QELs:
“Our objective has been to fill a gap in the market by providing a balanced starting point which generally reflects market practice and fairly represents the rights and obligations of the parties. We were also mindful that the two QELs would complement BIMCO’s suite of term sheets for ship financing and ship sale and leaseback transactions published a few years ago.”
The new BIMCO QELs represent a milestone in ship finance, offering mortgagors for the first time a balanced, standardised document that can be used as a template and reference point in discussions with charterers and mortgagees when requests for QELs are made. We highly endorse this effort by BIMCO, which should assist the industry in reducing difficult and time consuming discussions regarding QELs.