Sale and leaseback financing of vessels: how it works and what to watch

The basic structure

In a sale and leaseback, a shipowner sells its vessel to a leasing company and immediately charters it back. The original owner becomes the lessee and continues to crew, operate and employ the ship, while the leasing company becomes the registered owner and receives hire over the lease term.

Leases are often documented on the BIMCO BARECON bareboat charter, heavily amended, although some lessors now use their own standalone lease forms. English law is commonly chosen to govern these documents.

Sale and leaseback is now a mainstream source of ship finance. Singapore practice guides describe it as common in Singapore, with Chinese leasing companies especially active in the market.

Why a lease is not just a loan

The key legal difference is ownership. A lender takes security over a ship the borrower owns; a lessor owns the ship and the lessee only has the right to use it. If things go wrong, a lender enforces its mortgage and security, while a lessor relies on its rights as owner under the lease. Both can found claims in the Singapore admiralty court.

This can work in the lessor's favour. English law protects a borrower's right to redeem its mortgaged asset and places duties on a mortgagee selling a ship. Those protections are not given to a lessee in the same way, so a lessee's share of any sale proceeds, and the way the lessor must conduct a sale, generally depend on what the lease says.

One exception is relief from forfeiture, a discretionary court remedy that can protect a lessee from losing the ship over a default where the lease is essentially about securing payment. It is more likely to be available where the lessee has a purchase option or obligation and has paid a substantial part of the price, but it cannot be relied on.

Points for the lessee to raise

Because legal title sits with the lessor, the lessee takes risks that a borrower does not. Commentators suggest the following deserve attention, ideally at term sheet stage:

• Lessor liens: a covenant that the lessor will not create or allow liens on the ship from its own activities.
• Lessor insolvency: limits on the lessor's other activities, and a right for the lessee to terminate on a lessor default or insolvency.
• The lessor's own financing: a quiet enjoyment agreement from the lessor's lenders, and a promise that their security will be released when the lessee buys the ship.
• Transfers: limits on the lessor selling the ship, transferring the lease or changing ownership of the leasing company.
• Support: a guarantee or other support from the lessor's parent where the lessor is a single-purpose company.
• Flexibility: voluntary early termination, change of flag and control over the settlement of claims covered by the lessee's indemnities.

Purchase options and termination sums

Most finance-style leases give the lessee an option, or impose an obligation, to buy the ship back during or at the end of the term. The price, timing and conditions should be clear, as should what happens to the lessor's own mortgage when the purchase completes.

Leases also set out a termination sum payable if the lease ends early after a default. How that sum is calculated, and whether the lessee receives any surplus if the ship is sold for more, is a matter for negotiation. Liquidated termination sums can also raise questions under the rule against penalties.

Charters and quiet enjoyment

If the ship is on a long-term time charter, the charterer will often want comfort from the lessor and the lessor's financiers that it will not be disturbed. A 2025 Singapore High Court decision shows that a financier is generally free to refuse a letter of quiet enjoyment unless it has agreed to give one, so this should be agreed with everyone involved before the charter is fixed.

Getting advice on your lease

This guide is general information. Lease terms vary widely between lessors and markets, and the tax and accounting treatment can affect the structure. Ask a lawyer to review the term sheet and lease documents for your particular transaction before you sign.