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Home > Legal & Financial > Mortgage On Vessels

Mortgage On Vessels

A mortgage is a real right on a movable or immovable property made liable for the performance of an obligation; that means,  a lien in a property created as a form of security for a loan or payment of a debt and terminated on payment of said loan or debt. The borrower, who offers the security, is the mortgagor, and the lender, who provides the money , the mortgagee.

The name is derived from Old French (literally : dead pledge, since at common law failure to repay on the due date of redemption formerly resulted in the mortgagor losing all his rights over the property.

Movable goods as the ship, has traditionally been susceptible to being mortgaged, being a normal credit mechanism to facilitate its construction, as well as normal credit obtaining system by the shipping and yachting industry. The institution, is in  Spain regulated in the ancient the Spanish Naval Mortgage Law from  1893.

As a contract is perfected between creditor and mortgagor , it refers  on the ship with all its belongings and for its validity a written form is required, which may consist of a public deed, agent or broker policy or simple document private.

The mortgage determines a preferential right to its holder granting the power to collect its credit with priority to other creditors, although respecting the special order of preference of credits. In turn, the maritime mortgage carries a right of persecution, directly and immediately subjecting the ship on which it falls to the fulfilment of the obligation for whose security and guarantee it is constituted.

The naval mortgage is constituted through Public Deed  and must be registered in the corresponding registry. The ship’s mortgage includes its rig, equipment and machines, unless otherwise agreed. The mortgagee has the right of preference over the mortgaged vessel and, also as in the real estate mortgage, has the right of persecution.

The naval mortgage action prescribes to the ten years counted from the date in which it can be exercised.

The main and principal international regulation of privileges, mortgages and vessel embargoes is contained in  the International Convention for the unification of certain rules relating to maritime liens and mortgages, 1926,  also called Liens Convention. The Brussels Convention of 1967 develops the first one and it is interesting to to point out that the wording includes both Mortgages and “hypothèques” (in French language) as the mortgage in Common Law has different legal nature and structure than in continental Law. In Common Law, the mortgagee acquires  property legal title over the vessel but the possession is kept by the mortgagor;  and so in case of fulfilment and payment the property is granted back to the debtor; but in case of unfulfillment the pledge “dies” for the debtor and the creditor acquires besides the legal title of the property also the effective possession( the so called repossession).

The Brussels Convention  considers mortgages constituted according to the national law of the ship valid, provided that they are registered in a public register located in the port of registry or in a central office. In 1967   main innovations incorporated by the convention of Brussels of 1967, in this respect as for example:

1) abolition of any link between the scope of application and the nationality of the encumbered vessel;

2) greater determination and increase of the requirements for the recognition of mortgages by the contracting states;

3) adoption of clear rules of private international law to determine which law is applicable in subject of validity, publicity, graduation of mortgages and in matters of executive procedure;

4) limitation of the scope of application of the convention to sea navigation vessels.

However as the vessel is a movable good, and thus easy to escape  sailing, the institution of the  mortgage in the nautical and yachting  industry is not so extended as it should  – or as in the shipping and fishing  industry – and it is difficult to find banking entities that are open to deal with them.

Carlos Espinosa – Solicitor & Tax Adviser

+34 627 41 32 01