This article originally appeared in the Winter 2017 issue of the St. Louis Bar Journal
Whether parties are looking to sell one vessel or 1,000 vessels, well-written documentation setting forth the parties’ negotiated and agreed-upon terms is essential. While a vessel transfer may be accomplished with a simple bill of sale, most parties choose to formalize the transfer with a comprehensive purchase agreement that includes customary contractual provisions. A well-written agreement anticipating and addressing the potential issues, in addition to what the clients thought were the “business terms,” will provide guidance in resolving any disputes and in the long run reduce the chances of litigation.
This article discusses key provisions found in most vessel purchase agreements and provides drafting tips for the transactional attorney involved in vessel acquisitions. The second part of the article addresses various issues that frequently arise during the financing of vessels, whether as part of an acquisition or as part of a stand-alone financing transaction.
The central document governing the purchase and sale of a vessel or vessels is the purchase agreement. A typical vessel purchase agreement looks very similar to any other asset purchase agreement and generally includes standard provisions such as closing logistics, representations and warranties, covenants, conditions to closing and closing deliverables, and indemnification, as well as general miscellaneous contractual provisions such as governing law, integration, amendments, etc.
Listed below is a brief summary of provisions generally present in vessel purchase agreements. Depending on the size and nature of the overall transaction, one or more of these provisions may be limited in scope or perhaps eliminated if unnecessary to the closing.
Vessel financing, whether necessary in connection with a proposed acquisition or for an owner’s cash flow purposes or other capital needs, is generally structured as either a loan transaction or a lease transaction. In a traditional loan structure, the vessel owner retains title to the underlying vessels, and grants the lender a lien on the vessels to secure the loan. In a lease transaction, the lender (lessor) takes title to the vessels, and simultaneously leases the vessels to the lessee. With either structure, the borrower or lessee may immediately charter or sub-charter the vessels to a third party.
In both vessel lending and leasing transactions, lenders will normally conduct a certain level of pre-closing diligence. Listed below is a brief summary of those items that are frequently required to be provided to the lender prior to closing:
To document a vessel loan, most lenders will utilize their customary forms of loan agreement, promissory note, security agreement, guaranties and other standard ancillary documents. The security agreement for a vessel takes the form of a preferred ship mortgage. Similarly, leases will be documented by customary forms of lease agreements (commonly a charter), guaranties, and ancillary documents, including an assignment of the purchase agreement, as noted above for vessels under construction, or a purchase agreement if a sale/leaseback transaction.
For a vessel that is not documented with the Coast Guard, but is subject to a state certificate of title statute, an owner will need to grant to the lender a security interest by signing a security agreement with an appropriate granting clause. The lender’s lien is perfected by notation of the lien on the certificate of title. For any Coast Guard documented vessel, a lender must file the preferred ship mortgage with the NVDC to perfect its lien in the vessel. For all vessels, notwithstanding the documentation status, the lender should require execution of a general security agreement by the owner and the filing of a corresponding UCC financing statement to pick up personal property pertaining to the vessel, such as equipment that may not be deemed to be part of a vessel, accounts receivable and contract rights.
In the case of a lease, the lessor must document title to the vessel (not just a lien) in its own name with the NVDC. The charter (or lease) between the lessor and lessee is not eligible to be recorded with the NVDC, but similarly to other equipment lessors, precautionary UCC financing statements may be filed against the lessee with respect to goods that may not be otherwise be covered by the NVDC filing and reference the vessels for purposes of identifying related assets.
With respect to charter agreements, management agreements and construction agreements, in particular the lender may require a separate document to collaterally assign these agreements to the lender. In addition, the lender may seek the acknowledgment and consent of the third parties (e.g. the charterer, management company or shipyard/builder), to the assignment by the owner of these agreements. The third party consents serve to provide the lender a means to step into the owner’s shoes to enforce the owner’s rights under such agreements as well as receive direct payment of any revenue generated in favor of the owner from such agreements.
Because of the complexity and size of the underlying equipment and the involvement of governmental agencies like the Coast Guard, buyers, sellers and lenders are confronted with unique considerations when entering into vessel acquisition and financing transactions.
In this article, we provided an overview of certain documentation considerations the parties on each side of a vessel acquisition transaction should make, as well as a summary of certain requirements often imposed by the lenders backing such an acquisition. Careful documentation during all stages of an acquisition and financing not only facilitates a successful transaction; it also ensures that all parties are protected if a dispute arises later down the line.
 This article focuses on purchase and sale transactions involving the buyer and seller of existing vessels. For a transaction covering vessels under construction by a builder, a comparable agreement signed by the builder and buyer should be prepared, negotiated and executed by the parties. Provisions similar to those discussed in this article are often present in vessel construction contracts.
 For Coast Guard documented vessels, the CG-1340 form Bill of Sale is recommended.
 Typically used for transferring related charters and other intangible assets.
 With a few limited exceptions, a buyer of a vessel must be a U.S. citizen (46 U.S.C. §50501 et. seq.) to engage in coastwise trade (46 U.S.C. §12112).
 Diligence considerations may include a specific reference to a physical inspection of the vessels by the buyer as well as a review of the seller’s records associated with the vessels and any charters.
 Sample disclaimer of warranties by seller: “The buyer acknowledges and agrees that the sale of vessels and the other purchased assets hereunder shall be ‘as is, where is’ and with all faults. Except as expressly set forth in this Agreement, Seller has not made, shall not be deemed to have made, and it hereby disclaims, any representation or warranty, express or implied, now or hereafter, as to the condition, size, design, capacity, operation, seaworthiness, maintenance, value, marketability, merchantability or fitness for use or for a particular purpose of the vessels or any other representation or warranty, whatsoever, either express or implied with respect to the vessels.”
 This includes all federal, state, local and foreign registration, property, ad valorem, or other taxes, assessments fees and charges imposed by any governmental body. The seller is also liable for income taxes resulting from the sale of the vessels.
 Transfer taxes generally include goods and services, sales and all use, transfer or similar taxes, fees or duties assessed by any federal, state or local taxing authority arising out of the distribution, sale, transfer or assignment of assets, and/or any related fines, penalties and interest that are imposed in connection therewith, whether assessed to the buyer or the seller but excluding any taxes based on or measured by the seller’s income.
 “Claims” are often defined broadly to include all liabilities, obligations, losses, damages, settlements, claims, actions, suits, penalties, actual costs and expenses (including, without limitation, reasonable fees and expenses of counsel).
 Certain financing structures may be preferred. Lease transactions, for example, often result in advantageous tax treatment for the parties. Owners and lenders should consult with their respective accountants, tax advisors and legal counsel regarding any proposed structure.
 For ease of reference, and because in most respects they act and function similarly in these transactions, we refer to both lenders and lessors as “lenders.”
 Vessel appraisers may use one or more of the following approaches to valuation: 1) The cost approach (the price a buyer will pay should equal the cost to acquire a substitute asset of equivalent utility); 2) The income approach (present value of future economic benefits) and/or 3) The sales comparison approach (appraiser analyzes comparable sales of similar assets). It is important to note that most lenders will not lend against the full appraised value, but instead require an equity cushion, depending on the creditworthiness of the vessel owner and/or the charterer/operator. Appraisals for leases assist in the determination of a fair market value purchase price.
 Abstracts of Title (CG-1332) and certified Certificates of Documentation (CG-1270) are requested through the National Vessel Documentation Center.
 See Section 9-311 of the Uniform Commercial Code.
 The United States Code pertaining to the filing and recording of mortgages and related instruments is 46 U.S.C. §313. The applicable federal regulations are found in 46 C.F.R. Subparts O, P and Q, Sections 67.200-245.
Cherie Bock represents financial institutions and borrowers in various secured and unsecured lending transactions, including many different types of financings for the maritime industry. Cherie is a former bank examiner and analyst with the Federal Reserve Bank of St. Louis.
Ruthanne Hammett has over 25 years of experience in a wide variety of commercial finance transactions, including secured, unsecured, syndicated, working capital, acquisition and lease financing transactions. She is an active member of the Equipment Leasing and Finance Association and an elected member of the American College of Commercial Finance Lawyers.
Margie Krumholz has over 30 years of experience representing borrowers, lenders, lessors, and lessees in financing transactions, particularly in the maritime industry. She has worked on many complex financing structures, including transactions that have multiple tiers of debt secured by thousands of vessels. Margie serves as Chair of the Marine Financing Committee of the Maritime Law Association of the United States and is an elected member of the American College of Commercial Finance Lawyers.
Note: The authors would like to thank Spenser Owens, Benjamin Swofford and Allison Spence for their contributions to this article.
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