Maritime liens in the purchase of boats

Maritime liens in the purchase of boats

One of the questions that most concerns those who are going to buy a ship is whether, when acquiring it, they may be liable for possible debts of the seller related to the boat, such as mooring fees, crew wages or taxes. In what cases and under what conditions should the buyer be liable for such debts and in what others cannot they be claimed from the buyer? This question is solved by the so-called maritime liens.

When is the buyer liable for debts related to the boat?

Maritime liens are a category of payment obligations that arise as a result of the activity of a ship, and whose creditors enjoy special protection for collection. That is, only if a debt owed by the seller or previous owners is guaranteed by a maritime lien can it be claimed from the buyer.

These privileges exist because of the need to provide certain guarantees to the creditors of shipping operators, since, due to the international circulation of vessels and the multiple agents involved in their operation, such creditors could encounter significant difficulties in claiming the sums owed to them.

What are maritime liens?

Maritime liens are figures similar to implicit legal mortgages on real estate, that is, they are debts that encumber the vessel without the need for registration in any registry, and that can be incurred not only by the owner of the vessel but by the demise charterer, manager or operator of the same. These liens protect the creditor in that they allow him preferential collection in the event of forced sale of the vessel, as well as seizure in the event of non-payment.

Currently, this concept is regulated in the International Convention on Maritime Liens and Mortgages, 1993 (ratified, among other countries, by Spain and Germany) and, in Spain, in the Spanish Law on Maritime Navigation (LNM).

The most important characteristics of maritime liens are the following:

  • Effectiveness “ope legis”: Unlike a ship mortgage, where the guarantee is created contractually by the parties to secure a claim that would otherwise not be secured, maritime liens arise in the course of trade, i.e., it is sufficient that the claim exists and is one of those listed in the Convention.
  • Priority: Maritime liens have a collection preference over other creditors if the debtor does not have enough assets to face their debts. They enjoy priority even over mortgages and other registered charges and encumbrances, and no other claim can take precedence over them.
  • Right of pursuit: Maritime liens follow the ship notwithstanding any change of ownership, registration or flag, as long as they are not extinguished or the term of the guarantee has not expired.
  • Hidden nature: Maritime liens exist without any publicity. They do not need to be registered to be effective, and therefore may exist even if the registry shows that the ship is free of registered encumbrances.
  • Enforcement: The creditor can, without the need for prior declaratory action, directly initiate compulsory enforcement of the claim, i.e., request a forced sale of the ship. The forced sale of a ship for non-payment of a maritime lien is extremely fast and efficient.

Maritime liens are listed in article 4 of the Convention:

  1. Wages and social insurance contributions of the crew of the vessel by virtue of their employment on board;
  2. Compensation for loss of life and personal injury (occurring whether on land or water) in direct connection with the operation of the ship;
  3. Reward payable for the salvage of the ship;
  4. Port dues (including mooring fees and port taxes), canal and other waterway dues and pilotage dues;
  5. Claims based on tort arising out of physical loss or damage caused by the operation of the vessel other than loss or damage to cargo, containers and passengers’ effects carried on the vessel.

What tax debts does the buyer have to pay?

As can be seen, the list of maritime liens does not include the taxes levied on the vessel or its activity, so that the buyer is not liable for VAT or Registration Tax due by a previous owner (but is liable for Transfer Tax, since the Spanish law does expressly establish the liability of the asset for the payment of this tax). It is a different matter if the buyer must pay the Registration Tax due to the loss of the right to the charter exemption.

Privileges have the order of preference with which they are listed in the same Convention, as indicated above, regardless of the moment in which they have arisen. However, claims regarding procedural costs arising out of the arrest or seizure and subsequent sale of the vessel, as well as concerning expenses of removal of the sunken ship in Spain, take precedence over all other claims.

What terms must be observed when claiming maritime liens?

Because of the legal uncertainty that such a hidden charge entails for third parties, maritime liens have a limited lifetime: the guarantee extinguishes after one year from the date of its emergence (except in the case of wages and salaries, for which the period commences upon the creditor crew members’ discharge from the vessel), so once this period has elapsed, they can no longer be claimed from the new owner. In addition, the forced sale of the ship by the courts of a State party to the Convention, and in accordance with the requirements of the Convention, also extinguishes maritime liens. Of course, this cannot be understood as extinguishing the debt secured by them, which shall expire according to the law applicable to it.

What can be claimed through the defect’s liability action?

What happens if, once the vessel has been purchased, a third party claims a maritime lien that arose prior to the purchase, and requests the seizure or compulsory execution of the vessel for collection? In this case, the buyer must pay the debt, and may claim it from the seller through the defect’s liability action. Since the LNM does not specify anything in this respect, the provisions of the Civil Code apply, so that the buyer, during the period of one year from the purchase, can terminate the contract or demand compensation from the seller; after that year, he can only demand compensation within one year from the day on which the maritime lien is discovered.

However, since the damage suffered by the buyer due to the existence of an unknown maritime lien and by the forced sale of his vessel may even be higher than the value of the boat, higher contractual penalties can be agreed in the purchase contract in the event that a third party asserts a claim in connection with the purchased vessel, and even guarantees such as a bank guarantee can be stipulated.

What should be considered before buying a boat?

For all these circumstances, and considering, above all, the strength and hidden nature of these liens, it is important to take them into account before buying a ship. As we explained in our article “Buying and selling a second hand yacht”, before signing a purchase or deposit contract, it is 

essential to carry out a due diligence to ensure that the boat is not encumbered by maritime liens, since, if not, we could be faced with a claim for debts owed by the seller or previous owners. If this analysis results in maritime liens, it is advisable to require the seller to pay them or to provide a guarantee in case a maritime lien is claimed from the buyer.

It is therefore important that the review of the documentation and the drafting of the contract be carried out by lawyers specialised in this field, in order to avoid the buyer the risk of claims based on maritime liens.