Quiet enjoyment letters are often used where a ship, rig or other unit being financed is subject to a long-term charterparty to govern the interrelationship between the owner, its financiers and the charterer. But what is a quiet enjoyment letter and do they have any benefit for lenders?
A 'quiet enjoyment letter' is typically an undertaking from a ship's lenders or mortgagee establishing a direct relationship between the mortgagee and the charterer, pursuant to which the relevant mortgagee undertakes not to enforce its rights or security against the ship, provided that the charterer continues to perform its obligations towards the owner under the charter.
In other words, a quiet enjoyment letter provides a charterer with a right to the undisturbed use and enjoyment of a ship, independent of whether the owner in its capacity as borrower is in default of its obligations towards its lender under the loan agreement.
No industry standard – negotiations are key
In principle, quiet enjoyment letters might be seen as limiting a mortgagee's rights by imposing limitations on the remedies and enforcement alternatives available to it following an owner's default. Therefore, having a quiet enjoyment letter in place is often perceived as benefiting only the charterer and the owner.
However, it is not always this black and white. In most situations, preserving a charterer's uninterrupted use and enjoyment of a ship is beneficial not only to the owner and the charterer, but also to the lenders – most obviously because by ensuring the charterer's uninterrupted use of the ship, the lenders help to ensure regular income for the owner, which in turn can be used for repayment of the relevant debt secured by the lenders' mortgage. Therefore, lenders will usually agree to issue a quiet enjoyment letter in favour of the charterer if requested, although they also often use it as an opportunity to try to secure additional rights of their own.
For example, to ensure that a charterer maintains the charter and continues to pay hire, lenders will often require that:
- the charterer notifies them of an owner's default under the charter promptly on its occurrence; and
- the charterer grants the lenders a certain period within which to remedy such default before the charterer is entitled to terminate.
In addition, lenders may seek to obtain a contractual step-in right for themselves or their nominee in a default situation, giving them the right to:
- step into the shoes of the owner under the charter and receive hire directly from the charterer; or
- sell the ship (subject to the underlying charter remaining in place).
Since there is no industry standard form of quiet enjoyment letters, the extent to which these additional owner protections are built into the wording of a quiet enjoyment letter are up for negotiation between the parties. Thus, the final agreed wording will ultimately depend on the respective bargaining power of the relevant parties.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
