Maritime Law Center

    Mike Vaughn, Attorney at Law
    1198 Pacific Coast Hwy, D347
    Seal Beach, CA 90740
    Phone:  562-592-9350


Our firm works with individuals, corporations, shipping companies and universities in selling and acquiring, transferring and evaluating vessels in all parts of the world.

Chartering as a Financing Alternative

There are a variety of ways to finance the acquisition of a ship. The most common is to obtain a loan for part or all of the purchase price and make an outright purchase. However, due to the nature of the marine business, many financing institutions are reluctant to finance ship purchases unless the buyer is a very well known and secure client.

One alternative is to charter the vessel under a variety of terms that will allow you to purchase it at the end of the contract or by application of charter payments could allow you to own the vessel at the end of the charter period.

Charters are primarily time or voyage contracts and bareboat or fully found charters. By definition, a charter is nothing more than a rental of the vessel under various terms. A true bareboat charter is the renting to you of the "hardware". This means that the owner charters or leases to you only the vessel itself. You must provide crew, fuel, insurance, dockage, routine repair and maintenance. The opposite is a fully found charter in which the owner provides all of these things, ordinarily with the exception of fuel.

A time charter is for a set period of time, beginning on a certain date and ending on a certain date. A voyage charter provides for a voyage from one port and ending at another port regardless of time.

An owner who wishes to make his vessel more attractive for sale, may offer the vessel as available for charter for a set period of time, with a certain amount down and a purchase for some additional amount at the end of the charter. He is in fact financing the sale to the buyer, himself.

The reason he may prefer handling the transaction in this manner, rather than selling the vessel, transferring title and taking back a First Preferred Ships Mortgage is that if the buyer defaults, it is much easier for him to reclaim the vessel. If he is holding a mortgage, he must go into court, arrest the vessel and offer it for sale. This will cause the vessel to be tied up in litigation. Seizing the vessel because of the charterer's failure to make payments is much quicker and easier and will result in the vessel being out of service a much shorter period of time.

A buyer who wishes to purchase under a charter will face the same problems as one who applies for a loan from a financing institution. He must convince the seller of his ability to pay. One way to entice the owner is by offering additional security other than the vessel itself. A second mortgage on real property, stock or other securities or co-signers who are very solvent may persuade the owner to go forward with the transaction.

The buyer may also anticipate a substantial down payment. This binds the buyer to the sale. If he defaults on his charter payments he loses his down payment as well.

The buyer must be aware that a charter of this nature is very much like a contract to purchase real estate. The buyer must meet all of the terms of the charter, before he may execute his right to purchase. This may mean that if the buyer fails to make a payment due under the charter, he may lose all of the money invested in the project.

In preparing a charter of this nature it is important to have the documents reviewed by your accountant and attorney. One important reality of the market is that no owner will turn over his million dollar ship without a great deal of faith in your ability to perform.

In many cases, the owner may require that you employ some or all of his crew. The fact that his captain or engineer is on board may satisfy him that the vessel will be properly maintained and operated. Each contract must be tailored to fit the needs of the buyer and seller.