Golden Sunsets Navigation (UK) Ltd v Lloyds Portfolio Leasing Ltd

A contractual finance-lease mechanism must be construed from the language and structure of the particular lease. Commercial or accounting descriptions of finance leases cannot create an implied entitlement to tax benefits or impose a general profit cap.

Where a lease distinguishes expiry by effluxion of time from termination, a notice preventing renewal does not trigger provisions applicable only to termination. Express provisions dealing with sale proceeds, rebates and tax liabilities are not brought into a cash-flow adjustment mechanism where the contract excludes them or makes separate provision for them.

The claimant, as charterer under a novated ship-finance lease, claimed payment of a tax benefit arising after the vessel was sold at the end of the 15-year Primary Period. It relied principally on clauses 6.2.4 and 6.2.6 of the Financial Schedule, contending that a Revised Cash Flow Report should have included the tax consequences of the sale and the resulting tax loss.

The defendant contended that the claimant’s notice under clause 7(B) caused the Primary Period to expire by effluxion of time, rather than terminating the lease, and that the lease made no provision for sharing the tax benefit. The issues were whether a Termination Rental was due and, if so, whether the tax benefit fell within its calculation.

1. Disposition. The claim failed. Judgment was entered for the defendant, with costs following the event.
2. Expiry distinguished from termination. The notice under clause 7(B) prevented continuation into the Secondary Period. It caused the Primary Period to expire by effluxion of time. It was not a Voluntary Termination Notice under clause 8(A). The lease consistently distinguished expiry from termination under clauses 8, 12 and 16. Clause 6, including the Termination Rental provisions, therefore did not apply.
3. Sale proceeds excluded from the cash-flow mechanism. Even if clause 6.2.4 had applied, its express exclusion of the receipt of sales proceeds, together with the separate provisions governing sale, the 99.5 per cent rebate, the 0.5 per cent retention and tax liabilities, prevented those matters and their tax effects from entering the Revised Cash Flow Report. Clause 6.2.6 did not assist because no relevant assumption was subsequently falsified.
4. Construction of tax assumptions. The references in clauses 3.3.3 and 3.3.4 to a balancing charge concerned withdrawal of the First Year Allowance or Writing Down Allowances, not the balancing charge arising on sale. Those allowances had not been withdrawn. The sale-related balancing charge was separately addressed by clause 18(G)(vi).
5. No implied profit cap. The court rejected an approach based on an a priori assumption that a finance lease must ensure that the lessor receives no more than its assumed after-tax profit take-out. The parties’ rights depended on the express terms of the Lease and Financial Schedule. Those terms gave the lessor the benefit of the tax loss generated by the sale and rebate, without requiring it to be shared with the charterer.