The UAE's National Transport Authority (the "NTA") has recently published its new regulations ("Regulations") for larger private yachts, bringing much needed clarity and depth to the existing local regulatory structure. The NTA gave consideration to the existing international conventions but has confirmed that it did not believe such conventions adequately addressed the larger size segment of private yachts that are now regular sights in local marinas within the UAE i.e. "those above 24 meters not intended for commercial use, without any restriction with respect to the number of persons on board, not the maximum size of the yacht."(Article 1.1)
The Regulations deal almost exclusively with the operation and fitting out of the yacht itself, with sections covering issues such as buoyancy and stability (Part 2), structural integrity (Part 3), pollution prevention (Part 5), navigation and control (Part 7), life saving (Part 9) and manning (Part 11). The Regulations also touch upon issues regarding the ownership of UAE flagged yachts in relation to their scope of application. The Regulations apply to all types of new UAE registered private yachts of 24 meters or over in length engaged in international or domestic voyages, the keels of which are laid or at a similar stage of construction on or after 1 July 2010 (Articles 1.2.1 & 1.2.2) as well as existing UAE registered private yachts (Article 1.2.3).
These new Regulations are a clear indication of the UAE's ambitions to increase confidence and bring transparency to a burgeoning business sector. The Regulations, however, do not apply to yachts engaged in commercial trade or those available for lease (Article 1.1). So what exactly is the present situation for new players to the country who are looking to set up a charter business?
According to the UAE Maritime Code (Federal Law No. 26 of 1981), the requirements for registration on the UAE Registry are currently as follows:
- completion and submission of the application form obtained from the Ship Details Department;
- Ship Building Certificate for new ships or certified Contract of Sale;
- duly attested Ship Deletion Certificate (if it is not new); and
- the yacht must be classified with one of the approved supervision authorities for at least the past five years.
Once the application has been approved and following the publication of an announcement in two local newspapers, the yacht will be issued with a 60 day temporary registration. If no objections are raised within the 60 day period, the registration will be considered permanent and the official Certificate of Registry will be issued accordingly. These requirements (for any type of yacht) have not been changed as a result of the issuance of the new NTA Regulations.
A UAE citizen or national or a qualified foreign maritime entity registered with an address in the UAE can register a yacht for commercial use with the UAE Registry, renewable on an annual basis. The terms "citizen" and "national" include corporations, limited liability companies, partnerships, limited partnerships and associations of individuals, in accordance with UAE laws (Articles 1.4.2 & 1.4.3). Whilst this may seem straightforward, in accordance with Article 14 of the UAE Maritime Code (Federal Law No. 26 of 1981) only a UAE National or UAE National-owned company is permitted actually to own a yacht flying the UAE flag and/or lease this yacht for commercial charter (Article 16, UAE Maritime Code). This means that any foreign-owned vessel hoping for charter business in the UAE has to be at least 51% owned by a national of the UAE. This may not be desirable in all circumstances.
For an expatriate looking to set up a yacht charter business in the UAE the yacht ownership issue presents a tricky situation when it comes to financing the purchase of any yacht. In order to operate here, the vessel needs to fly the UAE flag which is not always acceptable to international mortgage lenders. Elsewhere in the world, a standard requirement of such a financing package would be that an encumbrance is placed on the ship's register, thus giving the bank a priority right. Whilst a mortgage or pledge is a well recognised financing vehicle under UAE law, as far as we are aware, a mortgage may only be registered against a UAE-flagged yacht when it is 100% owned by a national of the UAE or a UAE national-owned company.
Since it is commonplace for a yacht available for charter to be only 51% owned by a UAE national, the most widespread solution we have seen to this problem is for financing to be sourced from a local bank which is aware of the limitations of the local laws and, where security over the vessel is required to be given by an individual to the bank, the bank may use various forms of security including a pledge over movables and post dated cheques. At present, failing to honour a cheque is a criminal offence under the UAE Penal Code, Article 401. Where the mortgage is given to a local LLC or a free zone entity, in our experience the bank would normally secure this type of loan through a pledge over movables, a business mortgage against the company's trade licence1 and post dated cheques.
The UAE is keen to create an attractive shipping registry akin to those of Malta and the Isle of Man. If this is to become a reality, then the types of ownership issues addressed in this article will need to be overcome. There are rumours that the government of Abu Dhabi is working on an Amended Maritime Code, possibly with this aim in mind. If this is indeed true then you are advised to watch this space!
1. There is presently a question mark as to how enforceable a business mortgage subject to federal law would be against a free zone entity
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.