Navigating charterparty conditions and financing friction: The quiet power of letters of quiet enjoyment

LQE: Comfort to the charterer but risk to lenders

An LQE is a contractual undertaking by the financier (mortgagee) that it will not interfere with the charterer’s quiet enjoyment of the mortgaged vessel. LQEs have become a staple in modern shipping transactions, particularly in long-term time charters. They provide charterers with a degree of certainty that their use of the vessel will not be disrupted by the mortgagee, even in the event of the owner’s default. But as CHLOE V illustrates, LQEs are not without cost—especially for lenders.

The Court affirmed that issuing an LQE would have materially curtailed the bank’s enforcement rights—particularly its ability to arrest and sell the vessel. In the court’s view, the bank was under no obligation to compromise its security for the commercial benefit of the borrower.

Feasibility of charterparty conditions

The judgment also underscores the risks of embedding lender-dependent conditions into charterparty negotiations. The LQE clause in the proposed Koch charterparty was a “subject” that had to be lifted before the contract could be concluded:

"LETTER OF QUIET ENJOYMENT

IT IS A CONDITION OF THIS CHARTER THAT OWNERS / THE VESSEL’S FINANCIERS CREDIT SUISSE WILL, IF REQUESTED BYCHARTERERS, PROVIDE A LETTER OF QUIET ENJOYMENT COVERING THIS CHARTER, WITH TERMS OF THE LETTER BEINGACCEPTABLE TO CHARTERERS IN THEIR REASONABLE DISCRETION.” 

The owner’s failure to secure the LQE rendered the charter inoperative.

This raises a critical point for shipowners: when charterparty performance is contingent on third-party approvals—especially from mortgagees—owners must ensure that such conditions are realistically achievable. Otherwise, they risk overcommitting and underdelivering, with potentially catastrophic consequences.

From a legal perspective, the court drew a clear distinction between the owner’s contractual obligations under the charterparty and the lender’s rights under the loan documents. The fact that the charterparty was conditional on an LQE did not, in itself, impose any duty on the lender to issue one. The Court considered the LQE’s status as a pre-condition to the charter to be a red herring.

Mortgagee rights: Commercial prudence over obligation to cooperate

Perhaps the most significant takeaway from CHLOE V is the court’s robust affirmation of the mortgagee’s right to act in its own commercial interest.

In CHLOE V, under the terms of the facilities agreement, and as is commonly found in other ship financing facilities, the shipowner was required to obtain the financier’s approval before entering into certain charter commitments for the vessel:

“Save for the Charter and except with approval by the Majority Lenders, the Borrower shall not enter into any charter commitment for the Ship, which is:

(a) a bareboat or demise charter or passes possession and operational control of the Ship to another person;

(b) capable of lasting more than 12 months (including by virtue of any optional extensions);

(c) on terms as to payment or amount of hire which are materially less beneficial to it than the terms which at that time could reasonably be expected to be obtained on the open market for vessels of the same age and type as the Ship under charter commitments of a similar type and period; or

(d) to another Group Member.”

The shipowner accordingly obtained its financier’s approval and the financier initially provided in-principle agreement to issue the LQE in favour of the prospective charterer, but the financier subsequently informed the shipowner that it would not be in a position to issue the LQE.

The Court found that the provision requiring approval for a charter commitment represented situations where the financier’s security in the vessel might be exposed to increased risk. In this regard, the purpose of the provision as to impose restrictions on the shipowner, solely for the protection and benefit of the financier as mortgagee. Unlike the shipowner, the financier had complete freedom to contract: the financier is and was at liberty to issue an LQE at any time.

The Court considered that any discretion involving approval from the financier would be more in the nature of an unfettered discretion or absolute right and accordingly would not be subject to the Good Faith Term, the Reasonableness Term and the Wednesbury Term, all being different formulations describing the duty espoused in Braganza v BP Shipping and another [2015] 1 WLR 1661 (“Braganza”) – the Court referred to this as the “Braganza duty”. As to the Prevention Term, the Court took the view that it could not be implied into the financier’s decision not to issue an LQE; even if it did, the implied term had not been breached. The Court consequently decisively rejected the shipowner’s arguments that the financier unreasonably withheld approval and that there were breaches of implied duties.

On the facts of the CHLOE V, the Court determined that the bank’s refusal to issue the LQE was not only lawful — it was commercially rational; and further that there was no duty on the financiers to give reasons for refusing to issue an LQE. The court found that the bank had legitimate concerns about the borrower’s financial health, the sufficiency of charter hire, and the risk of a security shortfall.

In a world where distressed shipping assets are not uncommon, this judgment reinforces the principle that financiers are not quasi-fiduciaries. They are entitled to protect their security, even if doing so frustrates the borrower’s commercial arrangements.

Key takeaways

1. For Financiers: Notwithstanding the Singapore Court’s robust affirmation of the mortgagee’s right to act in its own commercial interest, it would be best for financiers to ensure that loan documentation preserves absolute discretion and also to maintain clear internal policies on LQE issuance. Courts are likely to uphold such discretion if exercised rationally and in good faith, while clear internal policies would prevent situations where in-principle approval may be incorrectly granted.
2. For Shipowners: Secure the necessary pre-approvals from financiers wherever possible, prior to concluding charterparty negotiations. If an LQE is a dealbreaker for the charterer, secure lender buy-in early—or be prepared to walk away. Consider provisos for situations where financier approval cannot be obtained: Is there alternative comfort that a charterer can accept, or would the financier be willing to grant further cooperation with additional security provided?
3. For Charterers: An LQE may not always be granted by a financier. Where possible, negotiate flexibility in the LQE clause or explore alternative forms of comfort that may be more palatable to lenders.