One year on: Reflecting on the BIMCO Quiet Enjoyment Letters

BIMCO’s then General Counsel Christian Hoppe, who is now heading BIMCO’s Training activities, spoke to three members of the subcommittee responsible for drafting the two QELs – Catherine Smith of Oldendorff Carriers, Gitte Vannus Kragelund of Danish Ship Finance and Gerald Morrissey of Holland & Knight – about their motivation for joining the project, pros and cons of using the forms and more broadly, about their use in the industry.

Question 1: What prompted the need to draft the BIMCO Quiet Enjoyment Letters and why did you choose to be part of the drafting subcommittee?

Catherine: Although there will always be bespoke QELs in respect of the ship sale and leaseback financing and offshore industry, in particular, there was a need for a more general QEL in the industry. While at Wah Kwong in Hong Kong and at Oldendorff in Singapore when chartering in vessels on period charter in particular, I have seen various types of unilateral documents coming from Head Owners’ bank seeking contract termination rights and assignment rights where a QEL would be more appropriate. I really did feel that an industry standard QEL would be of great use to many charterers, owners and their financiers. I also felt it would be a useful addition to the BIMCO suite of ship financing and leasing term sheets: SHIPTERM, SHIPTERM S and SHIPLEASE. 

Gitte: We have found that the QELs that we have been presented with by shipowners/charterers as part of a charter-based financing vary greatly and do not take the mortgagee’s position into account. A QEL is a type of mini-inter-creditor agreement but rarely succeeds in balancing the creditors’ rights. We view a QEL as a quid pro quo for an assignment of the owner’s rights under the charter, but rarely do we find that the presented QELs are efficient in regulating such interests. They are usually one-sided in the charterer’s favor and do not consider or appropriately deal with conflicting regulatory obligations of lenders who want to book a ship mortgage with equity relieving effect by virtue of CRM techniques under the EU Capital Requirement Regulation 575/2013 subject to satisfying a number of qualitative requirements set out in CRR. In particular, in order for mortgagees to take advantage of the CRM techniques under CRR the mortgagees need to ensure that following a default under the secured loan agreement, the terms of the mortgage enable the mortgagee to realise the value of security within a reasonable timeframe which is in all its simplicity exactly what the charterer wishes to restrict – and bingo, you have a conflict which could easily be sorted out if appropriately identified up-front.  To satisfy CRR’s requirements on legal certainty with respect to timely enforcement, the QEL must provide for at least one exit avenue from the QEL without the charterer having a contractual right to block. In short, for regulatory reasons, there needs to be an ultimate contractual answer to deal with a loan default (which should never require a charterer to be concerned about its quiet enjoyment rights). The BIMCO QEL is a great starting point for discussion and further variations can be included to address the mortgagee’s concerns.

Gerald: Developing a balanced set of standardised quiet enjoyment letter forms was a natural extension of BIMCO’s development of standardised financing transaction term sheet forms because quiet enjoyment is a common component in structured finance transactions. But that said, the relative benefits of quiet enjoyment on all parties is frequently misapprehended as benefiting only one party or providing more benefits to one party than others.  The wide range of different QELs presented in transactions no doubt contributes to those views.  When appropriately balanced, QELs can provide mutual benefits, but there has been surprisingly little commercial evolution of reasonably accepted or typical terms or model forms for QELs.  In short, it is an area with a need and potential value added benefit for principals and lawyers.

Question 2: Can you explain the purpose and function of the BIMCO Quiet Enjoyment Letters, including why there are two and how they benefit shipowners, charterers, and financiers? 

Catherine: It is often the case that a ship mortgage is in place prior to a time charter. The position under English law (see The Myrto)  is that where an owner enters into a charter with a charterer for the employment of the mortgaged vessel, and the charterer and the owner is willing and able to perform that charter, the mortgagee is not entitled to interfere with the performance of the charter by exercising its rights under the mortgage (ie taking possession of or arresting the vessel).  Where a time charter is in place before a ship mortgage where the mortgagee has notice of the charterparty, the charterer may subsequently obtain an injunction to prevent the mortgagee interfering with the performance of the charterparty, other than where the owner is unable to perform that contract. This is the case even where the charter party impairs the mortgagee’s security.

Mortgagees will wish to be able to enforce their mortgage rights during such charterparties, while charterers will want to protect their rights under a charter where they are continuing to perform the charter and are not a party to the ship financing arrangements.  The QEL seeks to find a balance between these sets of rights and give all parties more certainty. 

There are two documents (a short form letter and a longer letter) to allow for a mortgagee to provide a notice to a charterer, confirm they will give quiet enjoyment to charterers but at the same time reserve their mortgagee rights.  The longer form QEL sets out in more detail charterers’ undertakings and co-operation obligations in exchange for their quiet enjoyment rights. 

The two documents are consistent with each other. 

Gerald: The purpose and function of quite enjoyment is principally to facilitate secured financing. But that should not be narrowly read as a “lender friendly” objective. Meaningful facilitation improves the cost, risk and efficiency of financing transactions for all stakeholders by balancing the risks and interests of the parties.  Appropriately balanced quiet enjoyment rights protect owner, charterer and lender rights, turning conflicting interests into mutual benefits.  Although all BIMCO forms have flexibility for negotiation, two forms were developed to address two common transactional structures: one involving mutual, multi-party structured transactions, and a “short form” version which is a unilateral quiet enjoyment letter signed only by a mortgagee for the benefit of a charterer.

Question 3: Can you provide examples of scenarios where the Quiet Enjoyment Letters would be particularly useful? 

Catherine: As alluded to in my answer to question 1, where financiers present third party charterers with a unilateral “acknowledgement” document to sign, this QEL can be a useful and balanced compromise document to propose to a mortgagee. 

Gerald: In any transaction where a charterer (or sub-charterer) is providing significant credit support, and the owner and financing party are seeking to rely on the charterer’s credit, the charterer generally seeks consideration and protection in exchange for its continued performance with respect to the financing party.  In another common scenario, in financing transactions with an existing charterer, a charterer may have little interest in consenting to new lending, to lien subordination, or agreeing to new lender default protections. However, facilitating owner’s access to financing (and re-financings) generally improves charterer’s access (and continued access) to vessels and cost of chartering. In those scenarios, providing mutual and balanced protections can bridge the perceived conflicting interests and provide mutual benefits. 

Question 4: Are there any limitations or areas that the BIMCO Quiet Enjoyment Letters do not cover, and how might these impact their effectiveness?

Catherine: When the QELs were developed, the subcommittee decided that they should not 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 provide for a standstill mechanism. The drafting subcommittee was of the view that this was a detailed mechanism it could not provide for in a general QEL and that it would be for the parties to agree such a mechanism. The QEL does not ask the charterer to acknowledge terms of the finance documents and so does not require disclosure of parts or all of the finance documents.  The drafting committee intentionally omitted making a provision for such acknowledgement/disclosure as it was considered excessive for this general document.  

Gitte: From our point of view there are no other points that the QELs should cover. They are a great starting point for any negotiation as they address relevant and never-before-addressed concerns of the mortgagee. Parties can easily work off the template and include further transaction- or party-specific covenants.   

Gerald: Structured finance transactions can have very varied structures, purposes and credit profiles, among other differences. In such cases the quiet enjoyment forms may be the starting point for more tailored provisions applicable to particular transactions.  Similarly, existing charters may have existing advance consent rights and provisions that may need to be taken into consideration. And in most situations different financing parties may have different risk considerations. In most cases, however, the existence of common forms should benefit mutual understanding and agreement on appropriate quiet enjoyment outcomes. 

Question 5: How have the BIMCO Quiet Enjoyment Letters been received by the maritime community – are you seeing them used?

Catherine: Oldendorff has not seen the BIMCO QEL used yet. We would certainly consider presenting it to owners and their banks as a balanced option to deal with charterers’ and mortgagees’ rights. 

Gitte: We have used the BIMCO QELs in five different transactions, and parties welcomed the existence of a balanced QEL prepared by a well-represented industry working group.  

Gerald: It is occasionally necessary to explain the utility and value of quiet enjoyment in a given transaction. The forms have been useful to show that quiet enjoyment is a recognised concept that can have mutual value. I have also used the forms as a common discussion point for quiet enjoyment principles. So far, parties have still tended to modify existing bespoke forms of agreement that one party or another has had prior comfort using, but that may evolve as the benefits of starting with a standard form continue to develop. 

Conclusion
The BIMCO Quiet Enjoyment Letters have filled a significant gap in the ship financing market by providing a balanced standard that protects the rights of both mortgagees and charterers. Their creation was driven by the need to address the inefficiencies and imbalances in existing QELs, and they have proven to be a valuable tool in various real-world scenarios. The positive feedback from the maritime community suggests that the BIMCO QELs are well on their way to becoming a standard recognised by the industry, offering more certainty and protection for all parties involved in ship financing arrangements.

About the BIMCO Quiet Enjoyment Letters

QEL and QEL (SHORTFORM) are the result of a collaborative process between representatives of owners, charterers, lenders, leasing institutions and legal experts. In addition to Catherine, Gitte and Gerald, the subcommittee included Sarah Jane Thompson of BHP, Ryan Reddy of Noble Resources International, Jay Shi of CMB Financial Leasing Co. Ltd. and Olga Petrovic of Linklaters LLP. The QELs are available for use via BIMCO’s SmartCon editing system. Accompanying explanatory notes are available to BIMCO members via the BIMCO website.