In the case of Golden Sunsets Navigation (UK) Ltd v Lloyds Portfolio Leasing Ltd [2010] EWHC 703 (Comm), where the sale of a ship at the end of a finance lease gave rise to a tax loss for the lessor, there was no provision in the lease on its correct interpretation allowing the charterer to claim the amount of that tax benefit.

The claimant (G) sought payment under the terms of a ship finance lease to which it had become a party by novation. Under the terms of the lease, as novated, the defendant lessor (L) let the vessel to G as charterer for a primary period of 15 years with the possibility of further periods thereafter. Charter hire was payable in accordance with the terms of the lease and the attached financial schedule, with a specified sum payable on the delivery date, followed by a further 29 semi-annual instalments and a final “balloon” payment. The financial schedule provided for adjustments of the rate of hire by reference to certain assumptions and for payment of termination rental under clause 6.2 of the schedule. Just before the end of the primary period G gave notice in accordance with the terms of the lease declining the option to extend the chartering of the vessel for a further 10 year period. That brought the charter of the ship to an end at the expiry of the primary period. The vessel was then sold for £45 million. The sale gave rise to a capital gain by L but that was entirely sheltered by indexation allowance. A balancing charge arose, upon which tax became due to the Revenue, in respect of capital allowances that had previously been given to L, to the extent that the vessel was sold for more than the tax written down value. Under the lease L was bound to pay G 99.5 per cent of the net sale proceeds as a rebate of charter hire. That rebate was tax deductible by L and could be applied by it against the balancing charge and other taxable revenue items and the sheltered capital gain. The overall effect was that L had an unutilised tax loss of some £2.9 million, which, when grossed up, amounted to the figure just in excess of £4 million claimed by G. G contended that it was entitled to payment of the tax benefit under clause 6.2.4 or clause 6.2.6 of the financial schedule as the result of a revised cash flow report which should have been produced on the lease coming to an end and which would have taken account of the tax benefit arising to L leading to a reduction in the net sum payable by G in respect of rental.

HELD: (1) The lease drew a clear distinction between expiry and termination. The notice given by G was not a notice of termination but a notice which brought about the expiry of the lease by effluxion of time at the end of the primary period. Termination rental was only payable where there was a termination. Clause 6 of the financial schedule was only concerned with termination and not with the expiry of the primary period by effluxion of time, as occurred in the instant case as a result of service of notice by G. The clause 6 provisions for calculation of termination rental did not arise therefore, as the very terminology suggested. If rental had been calculated and paid in accordance with clause 2 of the financial schedule, as adjusted by clause 4, there could be no further rental to pay. Termination rental di0d not arise as there had been no termination.

(2) What went into the cash flow reports and therefore into the calculation of sums to be paid could only be that for which the lease and financial schedule provided. If the lease by its express terms provided for specified matters to be dealt with outside the terms of the cash flow reports and there was no provision for inclusion of those amounts in the cash flow reports as well, then those matters did not fall to be dealt with in the context of adjustable hire payments or termination rental. On the face of the lease, there was express provision covering the treatment of a sale and proceeds of sale, including the rebate of charter hire in the amount of 99.5 per cent of the net proceeds, whilst there was no express requirement for such matters to be reflected in the cash flow reports or the adjustments of hire under clause 4 of the financial schedule or in the termination rental provided for by clause 6 of the schedule. If the net proceeds of sale exceeded the original cost then G benefited because it received the 99.5 per cent rebate of that figure, but if, for whatever reason, that did not shelter L from a liability for the capital gain, G had to indemnify L against that tax liability under clause 18 of the lease. If, however, L by virtue of an indexation allowance was sheltered from liability for the capital gain, and then made the rebate payment and thus incurred a tax loss, there was no provision in the lease by which G could lay claim to any part of it. L obtained a tax benefit but that fell outside the terms of any of the cash flow reports and nothing in the lease or financial schedule required that benefit to be shared with G under a clause 6.2.4 calculation of termination rental.

Judgment for the defendant.