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South Africa: Unintended consequence of ship leasing

30 August 2023
– 4 Minute Read


One of the grounds of justification for the extension of the South African admiralty regime to permit ‘associated’ ship arrests is that all ships in a fleet should be fair game in situations where they are owned or controlled by a single identifiable individual or shipping company.

What was certainly not intended by the South African legislature was that a ship financier might provide the ownership link for the possible arrest of any of the ships in a financed fleet. Nevertheless, this is precisely what has emerged with the rise of ship leasing as a major source of financing in the global market.

Finance lease structure

The typical finance lease structure is relatively straightforward. Rather than obtaining finance from a traditional lender to acquire a vessel – where funds are advanced to an owner under a loan facility and secured by a mortgage – the leasing house purchases the vessel (usually through a special purpose one-ship owning entity) and enters into a sale and leaseback transaction with the borrower.

Contractually, the transaction takes the form of a long-term charter, with the intention that the borrower services the debt through hire payments and, at the end of the term, takes ownership of the vessel. In the ordinary course, the borrower takes the vessel on bareboat charter basis and, for all intents and purposes, controls all aspects of the operation of the vessel, as if the asset is its own. That would usually include being responsible for all operating costs and liabilities.

Arrest regime

In the context of the South African arrest regime – where the bareboat charterer incurs debt in the course of trading the leased vessel – a creditor is entitled to arrest the offending vessel under the Admiralty Jurisdiction Regulation Act for claims against the bareboat charterer.

This is because the bareboat charterer is ‘deemed’ to be the owner of the vessel for the period of the charter. In addition, the creditor is also be entitled to arrest any other vessel which is ultimately owned and/or controlled by the bareboat charterer or its parent. This is consistent with the ground of justification for the associated ship arrest discussed in the opening paragraph. Thus, all the vessels within the same shipowner’s fleet are fair game for debts that the ship owner has incurred.

Ordinary time charter anomaly

An anomaly arises, however, in circumstances where the financier – in addition to leasing vessels in its portfolio on a bareboat charter basis – also engages in operating some of its vessels on an ordinary time charter basis. This results in the registered owner (usually through its managers) assuming, for example, the operational obligations for trade debts and other liabilities of certain vessels.

In circumstances where the lessor, as registered owner, incurs an indebtedness in its own name and finds itself in default (or is possibly facing a damage claim), every other vessel which is ultimately owned or controlled by the leasing house becomes susceptible to an associated ship arrest, even those vessels which are on bareboat charter to unrelated third parties. The implications are significant if one considers that some leasing houses own hundreds of vessels on their books.

When such an arrest occurs in South Africa, it is likely that an unrelated third-party bareboat charterer will bear the brunt of the arrest and will be faced with the dilemma of settling the debt on behalf of the leasing house or putting up security (if available) to obtain the release of the vessel from arrest as quickly as possible.


While it is unclear how many leasing houses in the market are engaged in operating a portion of their portfolio maritime claims which are enforced in South Africa against the financier owner through an associated ship arrest can have serious financial consequences for unsuspecting third-party borrowers, not least because the affected party faces the immediate prospect of losing hire while it tries to resolve the arrest in South Africa. There may be recourse ultimately for the associated ship lessee against its lessor under the terms of the bareboat charterparty, but the immediate risk, pressure and expense following an arrest remains.

This article was originally published by Lexology here.