Types of Ship Mortgage
What types of ship mortgages exist and what obligations may a ship mortgage secure? Can contingent obligations, including swap obligations, be secured? Are there standardized forms?
There are no standardized forms of mortgage agreements and, provided that the agreement meets the basic requirements (set out below) generally as stated in the law, the parties are free to draft the agreement. The main points to bear in mind are as follows:
the mortgage must be effected through an "official instrument". In practice, this means that the mortgage must be in Arabic and should be properly notarized. There is no statutory short form of a mortgage or prescribed form for drafting a mortgage; it should contain all the essential elements as set out in the UAE Maritime Code (UAE Code);
the loan amount set out in the mortgage should have a specific maturity date, the maximum mortgage amount should be fixed, interest, if any, should be stipulated and the mortgage should cover a particular vessel.
Also, it should be noted that:
the law in respect of provisional mortgages over a vessel that has not been registered is unclear – it is preferable to ensure that a mortgage is created over a vessel that is already registered with the National Transport Authority (NTA);
the mortgage can be in any currency; however, should proceedings be initiated in a UAE court (or if a UAE court accepts jurisdiction) the amount will be converted into UAE dirhams.
Required Form
Give details of any required form for ship mortgages in your jurisdiction.
Under the UAE law, a ship mortgage agreement has no prescribed form. In practice, dual English and Arabic documentation is accepted; however, it is important to bear in mind that the Arabic version will generally prevail if there is a dispute over language. In the mortgage agreement itself, the parties may insert whatever provisions they wish. This can include the rights and obligations of the mortgagor and mortgagee. The mortgage must be notarized.
The signed mortgage agreement, together with the respective application and other supporting documentation, must be submitted to the relevant authorities. We have noted in some instances that the bank must also consent for mortgage registration through a simple letter addressed to the NTA. Again, this needs to be in English and in Arabic, but it does not need to be notarized.
Registration of Mortgages
Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the effect of registration?
A ship mortgage is registered with the ship registry in which the relevant ship is registered. The main registries are in Abu Dhabi, Dubai and Sharjah. Upon filing an application, the registrar will enter the record of the mortgage into the registry. The transcript of register is endorsed by a stamp confirming the mortgage registration. The mortgage becomes effective only upon its registration.
Must the total amount of the mortgage be stated therein? Must the mortgage contain a maturity date? Must the underlying debt instrument be filed with or attached to the recorded mortgage?
The beneficiary bank, the amount of the secured debt and the interest rate (if any) must be recorded. The mortgage needs to specify a maturity date. There is no requirement for the underlying debt instrument to be filed with or attached to the recorded mortgage; however, it is commonplace to do so.
Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?
Yes, a security agent can be used in the UAE jurisdiction for the purpose of holding and administering security. The UAE does not recognize the concept of a trust and, to the extent that this concept is used, there is no certainty that this will be enforced by the courts. Other techniques, such as parallel debt, are also used.
Filings on Transfer
If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender?
Although it is not necessary to make any fresh filing on transfer of a portion of the underlying debt among existing lenders to a new lender, as a matter of good practice, financial institutions usually amend their filings to accommodate such modifications. With a security agent structure, transfers of underlying debt positions need not be registered at the UAE Ship Registry.
If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?
The transfer of the mortgage interest by assignment is not required to maintain the validity of the mortgage, but should be done for the protection of the assignee mortgagee’s rights with regard to the assignor and also to avoid difficulties and delays in establishing the assignee’s right to foreclose on the mortgage in the future. We have received conflicting responses when conducting our enquiries at the various ship registries in the UAE. To be certain, it may be worthwhile to register a new mortgage in the name of the new lender.
Maritime liens
What other maritime liens over vessels are recognized in your jurisdiction? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be arrested?
The UAE Code lists the debts that give rise to maritime liens. In summary, these are as follows:
legal and judicial costs in maintaining and selling the ship;
crews’ wages;
claims for salvage reward and the ship’s share in general average;
damages for collisions, bodily injury to passengers and crew, and loss of or damage to goods; and
debts arising from contracts made by the master within the scope of his or her authority for the supply of necessities to the ship while the ship was away from her home port.
Under the UAE law, a maritime lien gives rise to a right to arrest the respective vessel regardless of who the vessel’s owner is. Maritime liens cease to exist on either a judicial sale of the ship or on a commercial sale, if the purchaser has taken certain steps to advertise and register the sale.
Article 116(1) of the UAE Code permits the arrest of a sister ship at the time the debt arose, except where the claim concerns disputes over ownership, joint ownership and mortgages. The arresting party is only entitled to arrest the vessel to which the debt refers. Arrests of associated ships are not permitted under the UAE Code.
In relation to a claim against a vessel not owned by the owner but by a demise charterer, the claimant may arrest either the vessel in respect of which the claim arose or any other vessel owned by the demise charterer. The claimant may not arrest other vessels owned by the owner of the vessel in respect of which the claim arose.
What maritime liens rank higher than a mortgage lien?
Under the UAE Code, ship mortgages rank immediately after the following categories of maritime liens:
legal and judicial costs in maintaining and selling the ship;
crews’ wages;
claims for salvage reward and the ship’s share in general average;
damages for collisions, bodily injury to passengers and crew, and loss of or damage to goods; and
debts arising from contracts made by the master within the scope of his or her authority for the supply of necessities to the ship while the ship was away from her home port.
Non-Mortgage Liens
May non-mortgage liens be recorded over a vessel?
Non-mortgage liens cannot generally be recorded over the vessel. The UAE Code provides for the endorsement in the Ship Registry of any claim in rem against a registered ship. This procedure is certainly followed in respect of registered mortgages; however, we have never had experience of the registration of, for example, a maritime lien over a registered ship. Our due diligence has shown that it is unclear whether, in practice, the Ship Registry would be prepared to make such a registration.
‘Foreign’ Flag Vessels
Will mortgages on ‘foreign’ flag vessels be recognized in your jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction?
Mortgages on foreign-flagged vessels are recognized and may be enforced in the UAE. The UAE courts will normally treat a foreign-registered mortgage in the same way as a UAE-registered mortgage, insofar as both are maritime debts under the UAE Code. The UAE courts will also generally uphold claims from foreign lenders for debts secured over vessels that are registered in another jurisdiction provided that the UAE court is satisfied that they have jurisdiction and the mortgage is validly recorded in the relevant foreign jurisdiction and contains no provisions that are considered contrary to the public policy of the place of enforcement.
Enforcement of Mortgages
What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court costs and how are they calculated?
A vessel may only be arrested to secure payment of a ‘maritime debt’ as defined in article 115 of the UAE Code.
To arrest any vessel in the UAE, the claimant bank must first prepare a power of attorney (POA) in favor of the lawyers with a right of audience in the UAE to represent them in the UAE courts. If the POA is executed abroad, it must be notarized, legalized by the relevant Ministry of Foreign Affairs of the country of execution and authenticated by the UAE embassy in that country. Upon its arrival in the UAE, the POA must be further authenticated by the UAE Ministry of Foreign Affairs and then translated into Arabic. This can take time, which can be an issue, especially if the arrest is urgent. If an arrest order is granted, a letter from the UAE court will be sent to the relevant port authority requesting the arrest of the vessel.
The claimant needs to file substantive proceedings within eight days of an arrest order being granted, otherwise, the arrest can be challenged. The UAE court will then, typically, schedule a number of hearings and determine the case on its merits. In the meantime, the arrest order will remain in place unless the defendant provides a UAE bank guarantee or pays cash into court. A judicial sale typically takes between two and three years. This is for a relatively straightforward case of non-payment.
Costs vary depending on the emirate, however, and these are roughly US$4,000 in Dubai and US$8,000 in the other emirates.
Sale by Mortgagee
May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?
The private sale of mortgaged vessels by a mortgagee is not allowed. In the UAE, the enforcement process is only possible through a court and under UAE law there is no provision for ‘self-help remedies’ whereby lenders can take possession of and sell the vessel in the event of a default free from a court order.
Default Under Mortgage
Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?
It is common for ship mortgages to appoint a receiver following a default. In general, the UAE law recognizes the appointment of receivers or administrators following the insolvency or bankruptcy of the owner.
Limitations on Rights of Self-Help
What are the limitations on rights of self-help by a mortgagee?
There is no express prohibition on self-help remedies. These are contractual arrangements between parties. Accordingly, if all parties agree, self-help remedies can be exercised, but it is possible for a third party to approach the court and challenge such arrangement.
Duties To Owner or Third-Party Creditors
What duties does a mortgagee owe to an owner or third-party creditors?
In the emirate of Dubai, simultaneously with an arrest application, an undertaking needs be given by the arresting party indemnifying the port authorities in Dubai if the vessel under arrest is abandoned. We are not aware of similar undertakings requested by other emirates, although this may change.
Based on materials from Lexology.com
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