Ship mortgages: The usual form of a ship mortgage
A ship mortgage is the most important form of security in the context of a ship finance deal, as it enables a financier to sell the ship and use the sale proceeds to pay off the debt due to it if the owner is in default. The form and contents of a ship mortgage will vary from jurisdiction to jurisdiction depending on the jurisdiction in which the ship’s title is registered. The execution formalities for the mortgage will also largely vary depending on the jurisdiction. However, what is certain without exception is that, in order to be fully effective, a ship mortgage will need to be registered against the ship's name in the ship registry where the ship’s title is registered. We set out below the two main distinctions of ship mortgages based on their form:
Statutory mortgages: In the United Kingdom and other common law jurisdictions such as the Bahamas, Cyprus, Singapore and Malta whose maritime laws are based on the British Merchant Shipping Acts, the mortgage is in a form prescribed by statute (and hence is known as a "statutory mortgage"). These statutory mortgages are one page forms which are broadly similar, but which do differ slightly from jurisdiction to jurisdiction.
There are two basic forms of statutory mortgages: one to secure an "Account Current" and one to secure "Principal Sum and Interest". As its name implies, the latter secures only a fixed sum and interest on it. In contrast, the account current form allows the mortgagee to secure other amounts such as expenses incurred by it to protect its security. A feature of account current mortgages is that they do not need to state the amount or maturity date of the debt being secured. Instead, all that is required is that they identify the finance documents by reference to which the amount secured can be ascertained.
Most of the times a statutory mortgage will be supplemented by a separate "deed of covenant". The deed of covenant usually takes the form of a private document between the owner and the mortgagee and (with some exceptions) does not usually need to be registered at the relevant ship registry along with the statutory mortgage. The purpose of the deed of covenant is to document the owner's specific obligations for insuring, maintaining and operating the ship during the period of the mortgage. In addition, the deed of covenant does also contain detailed provisions setting out the mortgagee's enforcement powers in case of the owner’s default. Finally, the deed of covenant will contain a provision mortgaging the ship to the mortgagee. This takes effect as an equitable mortgage only and its purpose is to create security over any items which relate to the ship, such as its fuel, onshore spare parts and future additions, which may not be caught by the statutory mortgage wording, where the definition of “ship” is predetermined by statute. Hence, the definition of "ship" in the deed of covenant is drafted as wide as possible so as to include all types of present and future items belonging to the ship whether onboard or onshore.
Preferred mortgages: The most common alternative to a statutory mortgage is a long form mortgage (often referred to as a "preferred mortgage") which combines in a single document the security clause creating the mortgage together with the various mortgage covenants and enforcement powers in respect of the ship granted by the owner (i.e. the same types of covenants and powers as are found in a deed of covenant in the context of a statutory mortgage). This type of mortgage is used in jurisdictions such as the Marshall Islands, Panama and Greece. Where a preferred mortgage is used, there is no need to agree a deed of covenant, as the definition of “ship” in the mortgage can be drafted as broadly as the parties wish and all ship covenants and enforcement powers can be included in the mortgage document. There is no set form for preferred mortgages although the ship registry in which the ship’s title is registered may impose some conditions as to its form and content (e.g. as to the language in which the mortgage text is written and whether a maximum mortgage amount or maturity date or minimum set of ship covenants have to be stated).
