Background

Background

Until the publication of the QEL and QEL (SHORTFORM), no such standard form was available in the market.

Although QELs may often be perceived as only benefiting the charterer, in most cases, they will be beneficial to the lenders as preserving the charterers’ uninterrupted use and enjoyment of a ship (independent of whether the owner defaults under a financing facility such as a credit facility or loan agreement) will help ensure performance of the charter contract. QELs may also provide an opportunity for lenders to obtain concessions from charterers, for example, in relation to appointing a replacement owner in the event of a default, without amending the terms of the underlying charter. In light of the above, in 2022, BIMCO decided to embark on the development of a standard QEL.

The subcommittee has developed two versions of the QEL for the industry:

1. a standard quiet enjoyment letter signed by a mortgagee, acknowledged and agreed by an owner/mortgagor and a charterer who, in consideration of the mortgagee’s grant of quiet enjoyment, will give certain corresponding undertakings to the mortgagee; and
2. a “short form” version which is a unilateral quiet enjoyment letter signed only by a mortgagee for the benefit of a charterer.

The objective of the subcommittee in charge of the project has been to develop a balanced standard which generally reflects market practice and fairly represents the rights and obligations of the parties.  At the same time, it was acknowledged that many financial institutions will insist on certain provisions in QELs and/or may have particular regulatory concerns in relation to QELs, for example, financial institutions that may be subject to EU legislation in order to comply with Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (the Capital Requirements Regulation).  By the same token, certain charterers may be averse to giving some of the undertakings reflected in the standard QEL. 

Drafting Team

QEL and QEL (SHORTFORM) are the result of a collaborative and consensual process between representatives of owners, charterers, lenders, leasing institutions and legal experts. BIMCO is grateful to the drafting team for their considerable time, effort and commitment in producing the two standard form QELs:

• Catherine Smith                              Wah Kwong/Oldendorff Carriers (Chairperson)
• Sarah Jane Thompson                    BHP
• Ryan Reddy                                      Noble Resources International
• Gitte Vannus Kragelund                 Danish Ship Finance
• Jay Shi                                               CMB Financial Leasing Co. Ltd.
• Olga Petrovic                                   Linklaters LLP
• Gerald Morrissey                            Holland & Knight LLP

BIMCO Secretariat:

• Christian Hoppe
• Carl Lindahl
• Natalie Wong

As part of the development work, the subcommittee consulted a large group of stakeholders engaged in shipping and ship financing. BIMCO would like to thank them all for their support and valuable input to the process.

Explanatory Notes

These explanatory notes are intended to provide an insight into the thinking behind the QELs. They also explain how QELs are intended to operate and the allocation of responsibilities and costs between the parties. If you have any questions about the contract, please contact us at contracts@bimco.org and we will be happy to assist.

Key Features of the QEL

When entering into long term charters or lease agreements, owners will often be asked to provide a QEL from their financiers to preserve the charterer’s or lessee’s undisturbed use of the chartered or leased ship in the event of the owner’s default under their financing. While many QELs will contain a number of common provisions, so far, no standard QEL has been made available for stakeholders in the industry. These two new BIMCO QELs are therefore intended to provide a fair and balanced starting point for the provision of quiet enjoyment by lenders and what they should expect in return from the charterer.

The QEL and QEL (SHORTFORM) do not cater for, and are not intended to cater for, more complex project financings and similar structures as these structures will typically involve a bespoke and highly negotiated QEL for the specific transaction. In addition, the QELs do not cater specifically for scenarios where the charterer has a purchase option under the charter party or where the mortgagee has a step-in-right in the event of default by the mortgagor under the charter party.

Both QELs have been drafted to enable the mortgagee to enforce its rights under the mortgage to the extent that this does not disturb the charterer’s quiet enjoyment of the ship. The QELs are designed to allow the mortgagee to comply with the Capital Requirements Regulation (should it apply).

The QEL and QEL (SHORTFORM) follow the convention of a letter illustrated by the introductory reference to “Dear Charterer”. This was considered in line with current market practice but may need to be amended to cater for different governing laws in specific jurisdictions. For example, under English law, there is no need for the QEL to be in the format of a deed as mutual undertakings are given by the parties.  However, in other jurisdictions, particular formalities may apply.

The QEL should be signed by the mortgagee and acknowledged and agreed by the charterer and the mortgagor. QEL (SHORTFORM) only contemplates a signature from the mortgagee.

The following explanatory notes refer to the paragraphs in the QEL and, where appropriate, the corresponding paragraph(s) in the QEL (SHORTFORM).

Box layout

Both QELs include the traditional BIMCO box layout. This enables the parties to include key information at the top of the letter and makes the operative paragraphs easier to read. As per usual BIMCO practice, terms included in the box layout are capitalised in the paragraphs as defined terms.

Paragraph 1 (Background)

This paragraph is included in both QELs and provides some general context for the parties.

In subparagraph (c), parties may want to specify the ranking of the mortgage, for example, by referring to a “first priority” mortgage. This was deliberately not included in the standard QELs as it is intended to  operate in the context of various transactions. Also, there could be multiple mortgages and it may not necessarily be the “first priority” mortgage in each case.

Paragraph 2 (Quiet Enjoyment)

The mortgagee’s undertaking to grant quiet enjoyment of the ship to the charterer is one of the key operative paragraphs and is, for the same reason, included in both versions of the QEL.

This paragraph refers generally to the mortgagee’s “rights as mortgagee” as it was considered that including a list would entail a risk that certain rights would be unintentionally omitted, particularly since such rights may vary depending on the governing law of the mortgage. Providing a specific list was also considered problematic in relation to the Capital Requirements Regulation.

The phrase “without the prior written consent of the Charterer” has been inserted to allow for some more flexibility.

The use of “in any manner” makes it clear that the mortgagee can enforce the mortgage but not in a way that conflicts with the quiet enjoyment. For the QEL to be in compliance with the Capital Requirements Regulation, it is important that the QEL should not operate as a bar on the lenders exercising their rights and enforce the mortgage, but rather only as a qualification on the manner in which such rights may be exercised.

Paragraph 3 (Acknowledgment)

This paragraph, which does not appear in the QEL (SHORTFORM), sets out the charterer’s acknowledgement of the mortgagor’s assignment of rights, title and interest to the mortgagee.

Where a notice of assignment has separately been given by the mortgagor, this paragraph should be considered reconfirmation of such notice. Alternatively, if the parties prefer to have the assignment in a separate document, they can simply delete this paragraph or replace it with a reference to that document. If there is no assignment, the form should be amended to delete references to “the Assignment” in this paragraph as well as in paragraph 1(c)(ii) of the form (bearing in mind, however, that a QEL is normally given as a quid pro quo for an assignment of the owner’s rights under the charter).

Paragraph 4 (Charterer’s undertakings)

This paragraph, which is not included in the QEL (SHORTFORM), includes a list of undertakings by the charterer to the mortgagee. It is important to note that these undertakings may already be covered in a separate acknowledgment by the charterer of a notice of assignment. If this is the case, it may not be relevant to include some or all of the undertakings set out in this paragraph. Moreover, depending on the bargaining power of the parties, or specifics of the overall financing and chartering circumstances, parties may negotiate different terms or commitments from one party or the other.

In addition to subparagraphs (a) to (e), which are applicable both to time and bareboat charter parties, the provision includes a number of additional undertakings in subparagraphs (f) to (h) which are additionally applicable in the case of bareboat charters. Some or all of these undertakings may already be covered in the acknowledgment of the notice of assignment and, to the extent this is the case, paragraph 4 may be redundant or may  not be relevant. The parties should carefully consider the list and may wish to amend it to suit a particular transaction. 

According to the undertaking in subparagraph (a), the charterer must give the mortgagee written notice “at least equal to the notice period, if any, applicable under the Charter Party to the relevant event or circumstance entitling the Charterer to cancel, rescind or terminate the Charter Party in accordance with its terms”. The subcommittee considered whether to include a specific time period (e.g. 30 days) for the mortgagee to remedy a breach but it concluded that this might not always be consistent with the terms of a charter and/or may not always be sufficient to remedy different types of breach and that it would therefore be preferable not to provide for a specific  time period (since, in some cases, it may be unreasonable for charterers to effectively suspend their termination rights for 30 days in addition to any applicable notice period).

Subparagraph (c) has been phrased to provide the charterer reasonable time to process the redirection of payments to the mortgagee. No detailed reference has been included referring to specific bank account details as these may well change over the course of the QEL but the parties should ensure that they clearly agree when and where payments are to be made – preferably in writing.

Subparagraph (d) has been carefully drafted to recognise, on the one hand, the mortgagee’s interest in avoiding that the charterer creates liens which would affect the value of the mortgagee’s collateral and, on the other, the charterer’s interest in being able to operate the ship (which, in the ordinary course, may give rise to certain actual or potential liens). The charterer’s undertaking not to create or permit to subsist liens or encumbrances against the ship is intended to exclude maritime liens arising in connection with the normal operation of the ship that are consistent with the terms of the charter party or are otherwise expressly permitted in the charter party.

Subparagraphs (f) to (h) are aimed at establishing a direct relationship between the mortgagee and the bareboat charterer to bridge a gap between potentially stricter governance provisions in the financing facility compared with the charter party.

In the context of an inter-group bareboat charter with a time charter below it (accepting benefits from the QEL), the QEL should be amended to include reference to both of these charterers.

Paragraph 5 (Reservation of Mortgagee’s rights)

This provision is a qualification to the quiet enjoyment set out in paragraph 2 and deals with the mortgagee’s or other finance parties’ ability to enforce its rights under the mortgage and to enforce other rights under the finance documents. It is included in the QEL (SHORTFORM) as paragraph 3.

The subcommittee considered if the QEL should also include a reservation of charterer’s rights, notably, a provision clarifying that the charterer is not prevented by the QEL from terminating the charter party in accordance with its terms or otherwise due to a breach by the mortgagor. However, this was omitted to avoid any uncertainty about the mortgagee’s rights under subparagraph 4(a).

Paragraph 6 (Charterer’s cooperation)

This paragraph, which is not included in the QEL (SHORTFORM), sets out an obligation on the charterer to cooperate with the mortgagee to facilitate transfer of ownership or control of the ship or the mortgagor and any assignment, novation or replacement of the charter party in connection with an enforcement process.  The charterer’s undertakings to cooperate are intended as conditions to the mortgagee’s continued grant of quiet enjoyment to the charterer, not as independent obligations of a charterer to a mortgagee.

The phrase “in good faith and in a timely manner” was chosen deliberately to avoid being too prescriptive but, nonetheless, set out the basis of charterers’ cooperation. If the parties prefer a more express provision setting out a specific timeframe for such cooperation, they should amend this paragraph accordingly, for example, if the charterer has not fulfilled its obligations under this paragraph and such failure remains unremedied for a period of say 30 days.

Subparagraph (b) sets out a number of safeguards for the charterer, including that the party to whom the ownership or control of the ship is being transferred meets the charterer’s applicable regulatory and/or compliance requirements. This is intended to cover regulatory, Know-Your-Customer, legal compliance and sanctions-related type issues. In addition, apart from logical amendments, the replacement charter party must be on materially the same terms as the original charter party. Finally, the mortgagee is required to reimburse the charterer for expenses incurred in complying with subparagraph (a).

This issue is generally heavily negotiated in practice and the parties may wish to include additional points under subparagraph (b) such as the charterer having a consent right in terms of the choice of the new vessel owner (possibly not to be unreasonably withheld or delayed). As an alternative to a charterer consent right, in each particular transaction, the parties may wish to include more detailed provisions in the QEL to ensure that the new owner satisfies certain requirements, including being in a financial standing acceptable to the charterers, having sufficient expertise and experience, not being a competitor of the charterer, and/or otherwise not being in breach of the charterer’s internal company policy requirements.

Paragraph 7 (Effective date and termination)

This paragraph sets out the effective date of the quiet enjoyment letter and lists a number of events – the earliest of which will give rise to the termination of the letter. This provision has deliberately not listed a set of precise actions that a mortgagee can take as this may be incomplete or might potentially conflict with the Capital Requirements Regulation.

Subparagraph (d) has been included to deal with the fact that, generally, the charter party will not terminate immediately after the ship becomes a total loss as there may be a short period of time in between. Mortgagees will also generally prefer not to be restricted in any way during that period.

Paragraph 8 (Law and Jurisdiction)

This paragraph has been drafted as a relatively simple provision with no alternative other than the court system which seems to be the preferred method of dispute resolution in respect of QELs. In some instances, however, arbitration may be the preferred dispute resolution method and the parties may wish to amend this paragraph accordingly.

The QELs do not include a separate provision regarding costs as the parties will typically each bear their own costs in connection with the negotiation, execution and performance of QELs. It is otherwise left to the parties to negotiate and include an additional provision concerning this.

Paragraph 9 (Notices)

The notices provision, which is not included in QEL (SHORTFORM), sets out when notices, requests, demands or other communications are to be considered effective.

This paragraph refers back to the box layout in which the parties need to include the name of a contact person, e-mail and address for notices to the mortgagor, mortgagee and charterer.

Paragraph 10 (Miscellaneous)

This provision is not included in QEL (SHORTFORM).

Subparagraph (a) has been included to avoid that third parties further down the charter party chain believe they might have rights relating to the QEL and try to enforce such rights.

Copyright and Availability

Copyright in QEL and QEL (SHORTFORM) is held by BIMCO.