Introduction

In the context of lease financing transactions, it is not uncommon for the financier (registered owner) to refinance part of the transaction by recourse to third-party lenders, concluding a loan agreement which is typically secured by a mortgage over the vessel.

In such situations, there are three parties whose interests may conflict:

  • the bare boat charterer;
  • the registered owner or borrower; and
  • the lender mortgagee.

The bare boat charterer's interest in operating the vessel and enjoying the undisturbed use thereof may clash with the lender's interest in enforcing securities (without being hindered by the existing charter) in case of default by the registered owner under the loan agreement.

Therefore, the primary purpose of quiet enjoyment letters is to regulate these potential conflicts between lenders and bare boat charterers, depending on the contractual power of the parties.

Quiet enjoyment letters

A quiet enjoyment letter may be requested by a bare boat charterer, when it has sufficient bargaining power to do so, in order to secure the lender mortgagee's agreement with respect to the bare boat charterer (and not to enforce its securities over the vessel, provided that the charterer continues to perform its obligations). A bare boat charterer may also request a quiet enjoyment letter to ensure that enforcement of the mortgage will be done in a way which does not prejudice its use of the vessel.

However, since quiet enjoyment letters 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 acknowledgement and agreement on other matters, such as the assignment of earnings and insurance proceeds by the registered owner under the loan transaction documents.

Where a charterer has insufficient bargaining power to claim a quiet enjoyment letter from the lender (with relevant limitations on the lender's rights to enforce its securities), the lender will often still use a quiet enjoyment agreement in order to pursue the opposite goal.

Such agreements may allow the lender to obtain, under the facade of quiet enjoyment undertakings, the charterer's acknowledgment, confirmation and agreement (in a direct three-party agreement) of several rights of the lender which aim to improve the chances of enforcing the mortgage.

This is typically made by:

  • the charterer acknowledging the subordination of its rights against the registered owner (under the bare boat charter) to those of the lender against the same registered owner or borrower (under the loan); and
  • obtaining the charterer's cooperation in case of enforcement – for instance, through issuing a specific deregistration power of attorney (to remove the bare boat charter from any register).

Italian legislation

In transactions subject to Italian law, a charterer's right to enjoy a vessel receives a certain level of protection even if nothing is specifically agreed by the parties and no letter of quiet enjoyment is issued.

Italian legislation holds that:

  • the right to enjoyment of a leased asset is the specific object of the legal scheme of lease contracts (Article 1571 of the Civil Code) and corresponds with lessors' main obligation (Article 1575 of the Civil Code);
  • lessors must guarantee lessees free use of the leased asset against any third-party claims (Article 1585 of the Civil Code); and
  • any enforcement proceedings involving an asset (including judicial sales) are without prejudice to the lease contract which has been duly registered before the commencement of the enforcement proceedings (Article 2923 of the Civil Code), in application of the general legal principle of emptio non tollit locatum (ie, the purchase does not take away the lease).

When balancing the interests of charterers and mortgagees, Italian law prioritises charterers by granting them protection even in the absence of quiet enjoyment letters.