Ship and Aircraft Finance Under German Law

How ship and aircraft finance differs from other asset finance

Ship and aircraft finance under German law follows special rules because ships and aircraft are registered assets that move across borders. For ordinary movables, German law offers only the possessory pledge and the security transfer of title.

For ships entered in a German ship register and aircraft entered in the German aircraft register, two statutes create registered security rights instead: the ship mortgage (Schiffshypothek) under the Act on Rights in Registered Ships and Ships under Construction (Schiffsrechtegesetz, SchRG) and the registered lien on aircraft (Registerpfandrecht) under the Act on Rights in Aircraft (Gesetz über Rechte an Luftfahrzeugen, LuftFzgG). Both are modelled on the land mortgage and give lenders priority recorded in a public register.

The German maritime finance market has contracted since the shipping crisis of the late 2000s, but German banks, KG investors and export credit agencies remain active, and many owners still manage fleets from Hamburg, Bremen and Leer. Aircraft finance in Germany concerns airlines, lessors, business aviation and, increasingly, helicopters and drones used commercially. In both sectors, lenders combine the registered security with assignments of charter or lease income, insurances and earnings, and with pledges over the shares in the owning special purpose company.

Ship mortgages under the SchRG

The SchRG applies only to ships entered in the ship register of a German court (§ 1(1) SchRG). Sea-going ships are entered in the register of sea-going ships, inland vessels in the inland ship register, both kept by local courts. Title to a registered sea-going ship passes by mere agreement between owner and acquirer (§ 2(1) SchRG), whereas title to an inland vessel passes only with registration (§ 3 SchRG).

A ship can be charged so that the creditor may seek satisfaction from it for a specific sum to secure a claim, including a future or conditional claim (§ 8(1) SchRG).

Unlike the land charge, the ship mortgage is strictly accessory: the creditor's right is determined solely by the secured claim. It is created by agreement and registration, the register entry must show the creditor, the amount of the claim and the interest rate (§ 24(1) SchRG), and it extends to the ship's accessories owned by the shipowner (§ 31 SchRG). Because of its accessory nature, syndicated ship financings use a security trustee structure with a parallel debt or an abstract acknowledgment of debt, as in other German secured lending.

Ships under construction

A ship mortgage can also be created over a ship under construction at a shipyard, once the keel has been laid and the hull is clearly and permanently marked with a name or number visible until launch (§ 76 SchRG). This allows pre-delivery financing for newbuilds at German yards. For newbuilds at foreign yards, lenders typically rely on refund guarantees from the yard's banks and on assignments of the shipbuilding contract instead.

Registered liens over aircraft under the LuftFzgG

An aircraft entered in the German aircraft register (Luftfahrzeugrolle) can be charged with a registered lien that entitles the creditor to seek satisfaction from the aircraft for a specific sum (§ 1 LuftFzgG). The lien can secure future or conditional claims (§ 2 LuftFzgG) and is created by agreement and entry in the register of liens on aircraft (§ 5(1) LuftFzgG). That register is kept by the local court in whose district the Federal Aviation Office (Luftfahrt-Bundesamt) has its seat (§ 78 LuftFzgG), which is the Braunschweig local court.

A registered lien can be extended to a spare parts store, so that spare parts brought into the store at the time of the extension or later are also covered, unless they never became the owner's property (§ 71(1) LuftFzgG). Spare parts removed from the store before they are seized are released (§ 71(2) LuftFzgG).

Where an aircraft subject to a registered lien that appears in the register is sold, good-faith acquisition free of the lien under the general rules of the Civil Code is excluded (§ 98(1) LuftFzgG). Engines are a weak point: they are frequently swapped between aircraft and lessors, and lenders often take separate security over engines through security transfers and engine-specific agreements.

Foreign aircraft and international conventions

For foreign aircraft, the LuftFzgG recognises certain rights created under the law of the state of registration, including purchase rights, possession under leases of six months or more and contractual non-possessory security, provided they were validly created and recorded there (§ 103 LuftFzgG). These rules give effect in Germany to the Geneva Convention on the International Recognition of Rights in Aircraft of 1948. Whether the Cape Town Convention and its Aircraft Protocol apply to a transaction depends on the states connected with the aircraft and the debtor; lenders should check the current status lists maintained by the depositary for each jurisdiction involved rather than assume coverage.

Maritime liens and ranking risk

Ship financiers must price in maritime liens. The German Commercial Code grants creditors of certain claims the rights of a maritime lienholder, including crew wages, port and pilotage dues and personal injury claims arising from the operation of the ship (§ 596(1) HGB). These creditors have a statutory lien on the ship that can be pursued against any possessor (§ 597 HGB), and it ranks ahead of all other liens on the ship, including registered ship mortgages (§ 602 HGB). A maritime lien expires one year after the claim arose unless the ship is arrested within that period and later sold in enforcement (§ 600 HGB).

Lenders mitigate ranking risk through covenants requiring the owner to pay crew, port and supplier claims promptly, regular reporting on outstanding liabilities, insurance that covers crew and third-party liability, and the right to take over the ship's management if arrears build up. In aircraft finance, the equivalent risks come from unpaid air navigation charges, airport fees and repairers' claims, which can lead to detention of an aircraft in some jurisdictions.

Earnings, insurance and export credit in ship and aircraft finance

The registered right secures the asset, but lenders in ship and aircraft finance are repaid from earnings. Security packages therefore include assignments of charter hire, lease rentals and earnings accounts, assignments of hull and machinery, war risk and protection and indemnity insurances, and pledges over the shares in the owning company. Charterers and lessees are asked to acknowledge the assignment and to agree to quiet enjoyment arrangements, under which the lender undertakes not to disturb the charterer's or lessee's use of the asset as long as it performs.

Export credit plays an important role for new ships and aircraft built or equipped in Germany. The Federal Government provides export credit guarantees, known as Hermes cover, which are administered on its behalf and protect lenders against political and commercial risks in buyer credit financings. Such cover comes with its own documentation requirements, premium payments and claims procedures, and the covered loan agreement must reflect them. Other European export credit agencies offer similar products for their national suppliers, and multi-sourced financings may combine several of them.

Documentation checklist for ship and aircraft finance

A typical German-law ship and aircraft finance closing involves more parties than an ordinary secured loan. The following items regularly appear among the conditions precedent:

• A current extract from the ship register or the aircraft register showing ownership and existing encumbrances, and evidence that prior mortgages or liens will be deleted at closing.
• The mortgage or lien deed with the registration consent in the required form, filed with the competent register court.
• Assignments of earnings, charter or lease receivables and insurances, with notices to and acknowledgments from charterers, lessees and insurers.
• A share pledge over the owning company, notarised if the owner is a GmbH, and pledges over earnings and retention accounts.
• Technical and valuation reports, class certificates for ships and airworthiness documentation for aircraft.
• Where applicable, the export credit agency's cover documentation and confirmations that its conditions are met.

Timing matters: registration at the competent local court can take time, so closings are often structured with funds held in escrow until the register confirms the new entry, or with the notary confirming that the application has been filed and no conflicting application is pending.

Enforcement and insolvency

A ship mortgage or registered aircraft lien can be enforced only by way of forced execution (§ 47 SchRG; § 47 LuftFzgG). The forced sale of registered ships and aircraft follows the Act on Forced Sale and Receivership with special provisions, and the ship or aircraft can be arrested to prevent it leaving the jurisdiction. Private sales, which are common in other maritime jurisdictions, are not available as a unilateral enforcement method under the registered security itself, so lenders often combine the registered right with a share pledge over the owning company or agree a consensual sale with the owner in a workout.

In an insolvency of the owner, the lender has a right to separate satisfaction from the ship or aircraft. Charter parties and leases are mutual contracts subject to the administrator's right to elect performance or rejection (§ 103 InsO), and clauses that exclude or restrict that right in advance are ineffective (§ 119 InsO). Cross-border situations add questions about where main proceedings can be opened and which law governs rights in rem; our insight on cross-border insolvency under the EU Insolvency Regulation explains the framework. For the wider security toolkit, see German security packages for lenders.

How TRW & Co helps

We advise lenders, owners, lessors, investors and export credit-backed financiers on ship and aircraft finance under German law. We draft and register ship mortgages and registered liens on aircraft, prepare assignments of earnings and insurances and share pledges, and review charter parties and leases for financing and enforcement risks. In distressed situations we analyse enforcement options, arrest strategies and the effect of insolvency proceedings, and coordinate with counsel in other jurisdictions where the asset trades. We also advise on the wider loan documentation. This page is general information, not advice on a specific asset. To discuss a financing, please contact us.