Maritime Blog

Amendments to the Marshall Islands Maritime Law and Regulations: Pre-Signing Mortgage Instruments

Written by Michael S. Timpone | Sep 29, 2023

Background

The Republic of the Marshall Islands recently amended its maritime law and related regulations. Specifically, Section 302 of the Maritime Act of the Marshall Islands (the “Maritime Act”) has been revised to allow that certain mortgage instruments – those that provide they shall only become valid and effective upon recording with the maritime administrator – shall in fact be valid and effective only upon such recording with the maritime administrator.

How did mortgage instrument recordation work in the past?

A Marshall Islands ship mortgage is a contingent grant of title over the vessel covered by such mortgage, and as such, most practitioners interpreted the law to require that a Marshall Islands ship mortgage could be validly granted over a vessel if, at the time the mortgage was executed, (i) the grantor (i.e., the mortgagor) held title to the vessel, and (ii) the vessel was correctly described and registered under the laws and flag of the jurisdiction which governed the mortgage.

Moreover, while Section 303 of the Maritime Act held that “[a] valid mortgage, whenever made, which at the time it is made includes the whole of any vessel … shall have a preferred status in respect of such vessel as of the date of its recording,”1 does allow a Marshall Islands ship mortgage to be executed in advance of its filing, in order to ensure the validity of the mortgage at the time it was granted it was crucial that the mortgagor held title to the vessel. Accordingly, where a mortgagor was purchasing a secondhand vessel or taking delivery of a newbuilding, the Marshall Islands ship mortgage could not be executed in advance of the purchase/delivery because the mortgagor did not yet hold title in the vessel.

What is the practical implication of this change?

With this change in law, mortgage instruments which provide that they become valid and effective only upon recording may now be executed in advance of a proposed filing date, i.e., those that contain a “savings clause” which would state, for example: “except for this provision, no other provision of this mortgage shall be valid or effective until this mortgage is filed”, even though the mortgagor at the time of execution may not hold title to the vessel.

This change impacts the prior practice that, in order for a mortgage to be valid, it must be signed only once the mortgagor owned the vessel and said vessel was properly registered in the jurisdiction governing the mortgage. Now (at least for instruments so providing) those caveats must be true upon the recording of the instrument, but not upon its execution.

The shift in practice may allow for greater efficiency. In an increasingly digital world, this new flexibility may also serve to facilitate more efficient closings for clients, as signatories may not necessarily need to be available on a closing day for execution and acknowledgment formalities. Documents with the relevant provision could be prepared and lodged in advance, requiring only an email alerting the maritime administrator that recording should take place. This may also give financing institutions, which often have to advance loan proceeds ahead of a delivery/purchase, more comfort that they will, at closing, have a perfected security interest in the primary component of their collateral. That said, the industry has not yet fully absorbed or implemented these new policies, and it remains to be seen how best practices may change moving forward.

Where can more information be found on this topic?

These amendments to the Marshall Islands law and regulations are effective as of April 10, 2023. Electronic copies of the amended Marshall Islands maritime law and regulations are available on IRI’s website.

Questions?

Seward & Kissel boasts three experienced Marshall Islands-qualified attorneys who can assist on a vast array of Marshall Islands legal issues. If there are any questions, please contact Mike Timpone or Kurt Plankl.

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1 Emphasis added