How to buy a ship

The last few months have seen increased interest from clients wanting to buy ships.  This is perhaps a sign that the shipping slump is over with sustained improvements in the freight markets.

In view of the above, we decided to share the basic process involved in buying a ship.   This is of course from a legal point of view but we hope that it will be useful for all our clients and followers.

As a starting point, one should bear in mind that buying a ship is not like buying land.  A ship moves from port to port under the flag of a designated country.  The seller, buyer and financiers are also located in different countries.  That can make things tricky in the event of a dispute.  It is important therefore to have a proper contract in place with an agreed mechanism to resolve disputes if they occur.   Another point to bear in mind is that there are many types of ship purchase.   Recently, we have been involved in a number of sale and lease back transactions, a useful way for a seller to release working capital without losing the use of the ship.  There are also newbuilding re-sales and scrap sales to cash buyers which have their own special terms.   However, at its simplest, let’s assume for our basic procedure that A owns a vessel and wishes to sell to B.   A has finance on the vessel secured by a mortgage to C and B wishes to buy with a loan from D secured by a new mortgage over the vessel.

The above scenario involves a number of steps:

1. The first step involves A making the decision to sell and agreeing terms with B.   That’s likely to involve specialist brokers on both sides.   There will often be an inspection and various haggling over the price and what is included/ excluded from the sale.   Lawyers are unlikely to come into the equation until terms have been agreed.  Even then, the sale may be on “subject” terms and may fail if the market moves or subjects cannot be lifted.   Sometimes there are legal disputes on whether subjects have been validly lifted which is a matter of contractual interpretation.
2. If there is a binding contract, then it will generally be evidenced by a clean recap i.e. all subjects lifted.  The terms of the contract will usually follow one of the standard form contracts with agreed amendments.  The most common examples are the Norwegian Sale Form or “NSF” contract or the Nippon Sale Form.
3. Depending on the terms of the contract, there will usually be a provision that a deposit is paid within a certain number of days.   The deposit is paid by the buyer to the seller but it is more common now for the deposit to be held in an escrow account.   Lawyers are often asked to act as the escrow agent and they will hold the deposit in that capacity under the terms of an escrow agreement which will be approved by both parties.   Effectively the money sits on deposit in the escrow account until delivery at which point it is released to the seller together with the balance of the sums due on delivery.  Alternatively, it is returned to the buyer with accrued interest if there is a legitimate cancellation.
4. There could be a long period between the date of the binding contract and the date of delivery of the vessel during which various formalities need to be completed.  The delivery is often referred to as the “closing” and often involves attendance of lawyers to ensure that all proper formalities are carried out.  The balance of the purchase price will be released to the sellers on closing, or alternatively, the funds may be placed into escrow along with the deposit and released by the escrow agent on closing.  In our example above, a number of things would need to be completed at the closing aside from release of the deposit and payment of the balance of the purchase price.   The existing mortgage to C would need to be discharged, the vessel deleted from the existing registry, vessel to be registered at the new registry with a new mortgage registered in favour of D in exchange for their release of funds to finance the purchase.
5. Going back to our example above, the sellers (A) need to provide certain documents to the buyers (B) on closing.   The list is dependent on the intended place of registration of the vessel by B as he needs to ensure that he obtains good title and is able to register the vessel in the intended registry.  B’s lender D will also want to make sure that his security is properly protected by registration of a mortgage over the vessel in his favour.
6. The main documents that are normally handed over by the seller to the buyer on closing are:a. A legal bill of sale notarised and apostilled;
   b. Original minutes of the meetings authorising the sellers to sell the vessel to the buyers;
   c. An original power of attorney duly notarised and apostilled in favour of the sellers’ representative (often a lawyer);
   d. An original secretarial certificate of the sellers again notarised and apostilled confirming the names of the directors and officers of the sellers;
   e. Certificate of incorporation, memorandum and articles of association of the sellers;
   f. Original certificate of good standing of the sellers;
   g. Original transcript of the register of the vessel issued by the current ships registry and dated the date of delivery confirming that there are no registered encumbrances;
   h. Original consent to the sale and deletion of the vessel from the existing registry;
   i. Original certificate of deletion from the existing registry dated as at the date of delivery (this may not always be possible hence parties often provide for an undertaking);
   j. Authorisation to class society to provide certain details to the new buyer as well as, in certain cases, copies of survey reports issued;
   k. Copies of the ships documents (e.g. Radio Licence, International Tonnage Certificate, Safe Manning Certificate, ISM documents etc.);
   l. All class, statutory and trading certificates valid, unextended and free of conditions and recommendations as at the date of delivery of the vessel;
   m. All plans, manuals, specifications and documents relating to the maintenance and operation of the vessel;
   n. Commercial invoice for the sale;
   o. Invoice for the bunkers and lube oils remaining on board as at the date of delivery which will be taken over by the buyer with all supporting vouchers;
   p. Confirmation letter confirming there has been no blacklisting of the vessel by any nation or state;
   q. Confirmation letter regarding decommissioning of INMARSAT;
   r. Confirmation of no detention by port state control within last (5) years prior to the date of the MOA;
   s. Confirmation that vessel has not touched bottom since last dry docking; and
   t. Such additional documents as may be required by the intended registry for the purpose of registering the ships title in the name of the buyers.
7. The main documents normally handed from the buyer to the seller on closing are:
   a. Original minutes of the meetings authorising the buyers to buy the vessel from the sellers and to release the deposit to the escrow account;
   b. Copies of incorporation documents, memorandum and articles of association;
   c. Original power of attorney duly notarised and apostilled in favour of the buyers’ representative (often a lawyer);
   d. Certificate of good standing of the buyers.
8. There will be separate arrangements between sellers A and their financiers C and between buyers B and their financiers D but details of the finance will often be confidential to A and B.  The only issue for closing is that there are authorised representatives for all parties in attendance with authority to release funds as directed and to undertake to discharge the existing lenders secured charge, delete the vessel from the registry and register the vessel under the new registry with a new secured mortgage being put into place on delivery.  The timing of the registration of the new mortgage is critical to ensure that the lenders’ security is not compromised.
9. The closing procedure is evidenced by a Protocol of Delivery and Acceptance which confirms the date and time of delivery of the vessel from A to B.  The documents are exchanged and checked and funds are released.
10. On closing, the vessel will be deleted from the existing registry, the mortgage in favour of C having been discharged.  The vessel will then be provisionally registered in the new registry with the new mortgage registered against the vessel.  In many cases lawyers will be on standby to ensure that registration takes place immediately to ensure that there are no problems and the new lenders security is protected.
11. There are also many practical aspects of closing, which tend not to involve lawyers such as arranging new hull and P&I insurance cover, new vessel management, crew changeover (often the new crew are already on board for familiarisation), change of markings and funnel colours and so on.   The brokers will also need to be paid their commissions and there may be a new CP lined up for the vessel.

The above is a very simple outline of what one might expect in a basic sale and purchase transaction.   It is not intended to be legal advice and you should always consult a specialist legal adviser if you are intending to enter into a particular transaction.

BDM is a specialist shipping law firm and we have particular experience of all aspects of sale and purchase including acting as escrow agents.  We offer a range of fixed price services for clients interested in selling or buying a vessel.  We can also act for their financiers in connection with the discharge and registration of mortgages.  For further details of our services please contact one of our founding partners.