Superyacht lawyer Mark Needham offers advice to yacht managers when they are asked to sign a manager’s undertaking and subordination agreement.
Mark Needham is a specialist superyacht and luxury asset lawyer.
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IT WAS ALEXANDER POPE, ONE OF THE greatest English poets of the eighteenth century, who said “Fools rush in where angels fear to tread.” In the context of yacht related financial transactions, it is a phrase that is well worth bearing in mind if you are the manager of a yacht, and a bank asks you to surrender some of the legal rights
you have in connection with the yacht. It is likely that the yacht’s owner will put pressure on you to sign whatever documents the bank puts in front of you, but a prudent manager should proceed with caution and check up on just exactly how the bank’s requirements might impact on your business. There is almost always scope for negotiation, and plotting the right course through this complex exercise can reduce the risk to you, whilst not holding up your owner’s
finance arrangements. A win-win. To set the scene: when a yacht owner has decided to take finance against his yacht, it is almost inevitable that the finance house / bank will, quite reasonably, require a security package to be put in
place securing their interest in the underlying asset until such time as the loan has been repaid. Often, this security package consists of
(1) A legal mortgage over the yacht;
(2) A deed of covenants which are collateral to the mortgage (in essence a list of things that the owner will and won’t do whilst the finance is in place or else the bank may seek to repossess the yacht);
(3) An assignment of the insurances and, critically for the purposes of this piece; and
(4) A manager’s undertaking and subordination agreement.
It is the last of these – the manager’s undertaking and subordination agreement – that yacht managers must, in this writer’s opinion, carefully negotiate and consider before signing on the dotted line. The subordination agreement should operate singularly to make it clear that the bank’s interest in the yacht takes priority to the managers. That, of itself, is not necessarily problematic – after all, the bank will typically be lending tens of millions to the owner.
However, all too often banks and those advising them, go much further than this and this is where problems can arise.
Here is some guidance:
Managers should refuse to sign any agreement which contains a clause which negates the efficacy of their management agreement. For example, if an undertaking has been included which requires the manager to agree not to “institute any legal proceedings in any jurisdiction against the yacht or against the owner” then this type of clause effectively renders the management agreement redundant – if you can’t enforce a contract, what is it worth?
Secondly, managers should be aware of any outstanding monies owed to them by the owner prior to entering into a subordination agreement. For example, sometimes the reason that owners seek bank finance is to assist with short term cash flow. If this is the case, the managers and other suppliers may be owed a month or two month’s management fees, all of which the owner promises will be discharged upon drawdown of the loan. If this is the case then managers need to be careful when agreeing to clauses that restrict their right to claim or to compete in an insolvency situation – a simple solution is for a clause to be included in the head loan agreement providing for a direct payment to be made by the bank to the managers upon drawdown thereby discharging the debt.
Thirdly, it is common for banks to ask managers to agree “not to do or omit to do or suffer anything to be done which might be contrary to or incompatible with the obligations undertaken by the owner under the loan agreement.” It might sound obvious, but if the bank is asking for this, then as a manager you should insist on being provided with a copy of the loan agreement and given an opportunity to review it – it will be lengthy, so this should not be left to the last minute. The bank’s lawyers should also let you see copies of advanced drafts.
Finally, with regard to the yacht’s insurances, most managers are named as a co-assured on the insurance policies. Care should be taken to ensure that a carve out is included for the protection & indemnity policy – just because the bank is lending money to the owner, this shouldn’t mean that you, as the manager, lose the benefit of being named as a coassured for third party risks.
In short, diligence when entering into documents connected with the financing of yachts is strongly advisable. In my experience, most owners will agree to cover the cost of managers obtaining legal advice before entering into the undertaking – so there really is no excuse for becoming one of Mr. Pope’s fools!