Letters of quiet enjoyment in leasing operations – Newsletters
Letters of quiet pleasure
In the context of leasing transactions, it is not uncommon for the financier (registered owner) to refinance part of the transaction by resorting to third party lenders, by entering into a loan agreement which is generally guaranteed by a mortgage on the ship.
In such situations, there are three parties whose interests may conflict:
- the bareboat charterer;
- the owner or registered borrower; and
- the mortgagee.
The interest of the bareboat charterer in operating the vessel and enjoying it in peace may conflict with the interest of the lender in enforcing the guarantees (without being hampered by the existing charter) in the event of default of the ship. owner registered under the loan agreement.
Therefore, the primary purpose of letters of quiet enjoyment is to settle these potential conflicts between lenders and charterers of bare boats, depending on the contractual power of the parties.
A letter of quiet enjoyment can be requested by a bareboat charterer, when he has sufficient negotiating power to do so, in order to obtain the agreement of the mortgagee to the bareboat charterer ( and not to enforce its security interests in the vessel, provided that the charterer continues to perform its obligations). A bareboat charterer may also request a discreet letter of enjoyment to ensure that the execution of the mortgage will be done in a manner that does not prejudice his use of the vessel.
However, since letters of peaceful enjoyment establish a direct contractual relationship between the lender and the charterer, they often also represent an opportunity for the lender to obtain the charterer’s recognition and agreement on other matters. , such as the assignment of earnings and insurance proceeds by the owner under loan transaction documents.
Where a charterer does not have sufficient bargaining power to demand a peaceful enjoyment letter from the lender (with relevant limitations on the lender’s rights to enforce its securities), the lender will often use a peaceful enjoyment agreement in order to pursue the opposite goal.
Such agreements can allow the lender to obtain, under the facade of peaceful enjoyment commitments, the recognition, confirmation and agreement of the charterer (in a direct tripartite agreement) of several rights of the lender which aim to improve the chances of realization of the mortgage.
This is usually done by:
- the charterer acknowledging the subordination of its rights against the registered owner (under the bareboat rental) to those of the lender against the same registered owner or borrower (under the loan); and
- obtain the charterer’s cooperation in the event of enforcement – for example, by issuing a specific delisting power of attorney (to remove the bareboat charter from any register).
In transactions subject to Italian law, the right of a charterer to profit from a vessel enjoys a certain level of protection even if nothing is specifically agreed by the parties and no letter of peaceful enjoyment is issued.
Italian law provides that:
- the right of enjoyment of a leased property is the specific object of the legal regime for rental contracts (article 1571 of the civil code) and corresponds to the main obligation of lessors (article 1575 of the civil code);
- lessors must guarantee tenants the free use of the leased property against any recourse by third parties (article 1585 of the civil code); and
- any enforcement procedure relating to a property (including legal sales) is without prejudice to the lease contract duly registered before the opening of the enforcement procedure (article 2923 of the civil code), in application of the general legal principle of empty non tollit locatum (that is, the purchase does not remove the lease).
When balancing the interests of charterers and mortgage creditors, Italian law gives priority to charterers by granting them protection even in the absence of letters of quiet enjoyment.
For more information on this topic, please contact Brian Dardani or Laurent Dardani to Dardani Studio Legale by phone (+39 010 576 1816) or by e-mail ([email protected] or [email protected]). The Dardani Studio Legale website can be accessed at www.dardani.it.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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