CONTRACTUAL ENFORCEMENT

The deed of covenant sets out the lender’s enforcement powers, exercisable once the mortgage has become enforceable. This is on top of the rights existing in law anyway (set out below). Typical rights granted by the deed of covenant include the following:

• To order the captain to proceed to a port nominated by the lender – which will be within a jurisdiction where arresting the yacht is particularly easy or convenient;

• To manage the yacht, including chartering her out (assuming that the yacht is commercially registered and insured for chartering), and even replacing the entire crew if need be;

• To take possession of the yacht ahead of a sale, and take her to a jurisdiction where a relatively rapid sale can be concluded or where the lender will rank higher than other creditors; and

• To sell the yacht, either by public action or private sale.

POWER OF ATTORNEY

As well as the borrower’s covenants, the lender can use any power of attorney granted by the borrower to the lender, by which the lender can act in the borrower’s name to correct any default, or even go so far as to sell the yacht without much further ado.

PRE-EXISTING RIGHTS

Beyond the lenders rights which exist by virtue of the borrower’s covenants and any power of attorney, the law automatically gives lenders the ability to do any of the following:

• To take possession of the yacht, where the borrower has actually defaulted on loan repayments, or the lender’s security has been compromised as a result of the borrower’s (in)actions. In reality, this is rare as the lender will be on the hook for operational costs – even assuming that the lender has the relevant experience or can procure this at short notice.

• To sell the yacht, but only when the mortgage repayments are outstanding, and not simply where covenants have been breached: for this the lender will have to rely on the express provisions of the loan agreement and deed of covenant.

• To arrest the yacht, on application to the court, as a procedural step leading to the judicial sale of the vessel. A judicial sale may be preferred over a sale by the lenders this allows a buyer to but a yacht free from pre-existing liens and encumbrances – which benefits may help to boost the price of what will otherwise be something of a fire sale.

• The arrest of a yacht will result in the court’s officer, the Admiralty Marshal, incurring expenses right away, such as crew salaries, mooring fees and essential maintenance. The lender’s lawyer must provide a personal undertaking to pay such expenses, and will need a considerable sum paid to his or her firm on account. The lender will also need to arrange first and third party insurance if need be.

• Following arrest, the lender may apply to the court, even before judgment has been handed down, for an order for sale. The court order will contain instructions for the Admiralty Marshal to have the yacht appraised, valued and advertised for sale, typically on a sealed bid basis. The Admiralty Marshal’s Conditions of Sale will apply, under which – if the Admiralty Marshal accepts a sealed offer – the buyer must pay 10% right away and the balance within one week.

CHARTERS

Should a default occur when a charter has been booked or the she’s out on charter, the lender, as mortgagee, will be bound by the terms of charter, and prevented from exercising its rights under the mortgage, such as taking possession, arrest and/or sale, where doing so would interfere with the charter, as long as:

• Undertaking or completion of the charter doesn’t compromise the lender’s security; and

• The borrower is willing and able to complete the charter.

PRIORITY

Even with all the loan documentation, covenants, etc, in place, a lender’s claim as mortgagee is trumped by those with maritime liens such as unpaid crew, or those with a possessory lien such as a refit yard. This is the case even though neither maritime nor possessory liens can be registered anywhere. Mortgagees will take priority over all other unpaid creditors. The deed of covenant will usually stipulate that, following sale, the lender’s costs and expenses are paid first, then the outstanding principal and interest will be paid off. The borrower will then receive any amount left over.

Following a court sale, the proceeds are distributed in the following order:

• Admiralty Marshal’s fees and expenses;

• Lender’s legal costs;

• Maritime liens;

• Possessory liens;

• Mortgages and charges over the yacht, in order of registration; and

• Statutory liens.