HM Insights

The Shetland blog: key considerations when buying or commissioning a new vessel

Tony Cameron, Partner in the Banking & Finance team at Harper Macleod, shares his insight into what those preparing to buy or commission a new vessel need to consider.

Our team regularly advises clients in Shetland & beyond in relation to buying, selling or chartering vessels of all descriptions, and also those looking to commission a new vessel. From our experience of guiding them through the process we've picked up some key points that anyone looking to purchase a vessel should bear in mind.

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Considerations when buying

Whatever your reason for buying a vessel, there are fundamental details which need to be considered before doing the deal. These include:

  • arranging for an initial inspection;
  • carrying out due diligence – including an inspection by a marine surveyor reporting on the vessel's condition and valuation; and
  • finalising heads of terms: price and deposit; time of sale; place and method of delivery.

Entering into a build contract

There are globally recognised forms which regulate the position between a builder and buyer but every situation is unique and buyers shouldn't just rely on the standard contracts. There are significant risks involved in commissioning a vessel, including:

  • quality of build – although vessels are built to minimum criteria as assessed by the classification society, the society does not assess workmanship. The buyer or their representative will be able to attend the shipyard to approve plans and drawings, and inspect progress during construction;
  • performance – the buyer should ensure that they are represented at sea-trials and tests to ensure that if the vessel doesn't meets their requirements it will be the builder's responsibility to remedy defects;
  • delay in construction – buyers should always have a contingency for delivery being delayed outwith the terms of the build contract;
  • termination of the contract – generally, the buyer under a build contract can terminate if the vessel fails to meet the specified criteria, or if the vessel is not delivered within a certain period of time following the contracted date;
  • insolvency – a buyer should not proceed without the shipbuilder providing a refund guarantee (usually from a bank) at the outset of the build, whereby the buyer will get their money back if the vessel is not delivered; and
  • cross Border – the buyer and the builder may be based in different countries and different legal jurisdictions so it is important for a buyer to ensure that the build contract is appropriate under all relevant jurisdictions.

Financing the acquisition

Rarely will someone be able to acquire or build a vessel without secured finance of some kind. Lenders will carry out their own due diligence on the vessel or may rely upon that carried out by the buyer. This will enable them to decide if (i) they are able to finance the acquisition (ii) the maximum that can be secured against the vessel (the "loan to value"); and (iii) what covenants and conditions are attached.

All lenders will impose a number of conditions and these should be considered in detail. Some conditions will restrict the buyer's ability to pursue their own business decisions however these, in the main, will be insisted upon by the lender and any failure to meet these conditions (particularly financial ones) can be an indication that a buyer could struggle to service the debt. In our experience, early engagement of funders in the process is wise, to ensure that any requirements they have are factored into the documentation and timelines.

Get in touch

Each set of circumstances will be different and taking legal advice at an early stage will often help to highlight any key and unique commercial points at the outset.

This article originally appeared in the Shetland Times