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Quiet enjoyment letters – benefit to lenders?


Quiet enjoyment letters ("QEL"s) are often used where a ship, rig or other unit being financed is subject to a long-term charterparty to govern the inter-relationship between the owner, its financiers and the charterer. But what is a QEL and do they have any benefit for the lenders?

AQEL is typically an undertaking from a ship's lenders or mort-
gagee establishing a direct relationship between the mortgagee and the charterer pursuant to which the relevant mortgagee undertakes not to enforce its rights or security against the ship as long as the charterer continues to perform its obligations towards the owner under the charter.

In other words, a QEL provides the charterer with a right to the undisturbed use and enjoyment of the ship, independent of whether or not the owner in its capacity as borrower is in default of its obligations towards its lender under the loan agreement.

No "industry standard" QEL – negotiations are key

In principle the QEL might be seen as limiting the mortgagee's rights by imposing limitations on the remedies and enforcement alternatives available to it following an owner default. Having a QEL in place is therefore often perceived to be of benefit to only the charterer and owner.

However, it is not always this black and white and in most situations, preserving the charterer's uninterrupted use and enjoyment of the ship is not only beneficial to the owner and charterer but also, in most situations to the lenders, most obviously because by ensuring the charterer's uninterrupted use of the ship, the lenders are helping to ensure regular income for the owner, which in turn can be used for repayment of the relevant debt secured by the lenders' mortgage. Lenders will therefore usually agree to issue a QEL in favour of the charterer if requested, though they also often use it as an opportunity to try to secure some additional rights of their own.

For example, to ensure that the charterer maintains the charter and continues to pay hire, lenders will often require that the charterer notifies the lenders of an owner default under the charter promptly upon its occurrence and that the charterer grants the lenders a certain period of time within which to remedy such default before the charterer is entitled to terminate. Alternatively, or in addition, lenders may seek to obtain a contractual step-in right for themselves or their nominee in a default situation, giving them the right to step into the shoes of the owner under the charter and to receive hire directly from the charterer or a right to sell the ship subject to the underlying charter remaining in place.

Since there is no industry standard form of QEL, the extent to which these additional owner protections are built in to the wording of a QEL are up for negotiation between the parties and the final agreed wording will therefore ultimately depend on the respective bargaining power of the relevant parties.

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Morten Valen Eide
E-mail mei@wr.no

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