Shoosmiths LLP
  February 8, 2006 - England

Buying and Selling a Yacht – What to Look Out For

Purchasing a yacht should be a pleasurable experience given that the craft in question is most likely to be used for the owner’s leisure pursuits. Yachts, however, whether they are second-hand, new, large or small, have one thing in common. They are expensive. However, many purchasers whether they are paying £10,000 or £1,000,000 are sometimes less cautious than perhaps they should be when buying what is in effect a “toy”. The leisure industry has historically, by its very nature, organised itself along fairly informal lines and that is shown in agreements to buy yachts, with many folk, and even yacht brokers, not using any proper form of agreement. This is something that is slowly changing mainly because of the advent of new regulations pertaining to yachts and in particular yachts for commercial charter, and also because, as the prices of these luxury items increase, the legal ramifications of something going wrong becomes more prevalent. What then are the important points a purchaser should consider when buying a new or used yacht and what are the pitfalls the unwary can fall into? The New Yacht – This should be a fairly straightforward process, from viewing the yacht in much the same way as you would view a new car, making a decision to purchase and then entering into agreement with the builder or distributor. Ownership of the boat is not in dispute but the process can be more complex if one is purchasing the yacht to order rather than buying a stock or production boat, for instance a Beneteau is in effect “off the shelf” rather than built to order. Most builders/distributors provide a contract, but these contracts should be considered carefully as in many cases (unless a basic standard form agreement such as the RYA one is provided), they are weighted in favour of the builder. Important points to note are that the price is fixed; whether a delivery date is fixed or “flexible”; is there a provision for sea-trial and a provision for an inspection prior to delivery. One of the biggest problems when buying a new boat, and especially if one is contracting to buy a yacht that is to be built, is the issue of paying money to a builder without necessarily having a tangible asset in return. A builder would of course prefer the full price upfront, however, this is not an option for a purchaser for the simple reason that if a builder went into receivership or liquidation, the customer with funds in the builders account has little protection save being an unsecured creditor. Most build contracts include a deposit and then stage payments during build. There are two options realistically for a purchaser, one is for ownership of the boat to remain with the builder until delivery (not advised unless a bank guarantee is provided) and the second is for ownership (title) to pass early on in the build, the latter being more common, to protect the customer’s investment. A careful check of the contract “before” signing is a must. An important but perhaps more confusing issue is to whom do you contract? This may be straightforward if you contract directly with the builder, for example Sunseeker International, but if you are buying say a Beneteau you are more likely to be dealing with a distributor or agent (very different animals) and as a consequence you may have no legal recourse against the builder if something goes wrong. Another point to consider when you are presented with a contract. Further aspects to consider with a new yacht are to ensure the builder’s insurance adequately covers the yacht whilst being built (especially if title has passed). If not the customer should arrange insurance. Sea trials are important on a non production boat and this should be incorporated into the contract. As with most new products regulations abound. All new yachts must be built to comply with European Directives and be CE compliant with technical data books supplied with the yacht. If a yacht is to be used for charter it must comply with the relevant Code of Practice for commercial use. The contract should cover these requirements. VAT is a wide and complex area and can become as issue on a yacht if the owner wishes to have delivery abroad out of the EU or indeed if a yacht is to be imported from the builder abroad. For an EU resident intending to use his boat in EU waters, VAT is payable and a VAT receipt should be obtained from the builder. In many EU jurisdictions Customs can demand clarification of the VAT status of the yacht. If a yacht is to be exported a customs form must be completed (Sail Away) by the builder and customer before delivery. With VAT the moral is if in doubt seek advice. Finally with new yachts consider registration either on the Part III (SSR) or Part I. If finance is being obtained some lenders insist upon Part I registration in order that the bank can register their interest. It also provides proof of ownership (as of date of registration) and certainly assists the process when selling. A new yacht will have to have a tonnage survey during build prior to obtain Part I registration so this should be considered with the builder so that registration can be affected on or soon after delivery. The SSR is more informal but has no legal standing. The Used Yacht – One can buy and sell a yacht without formal paperwork as a verbal agreement between two parties constitutes a binding contract in law. Unfortunately, of course, without any form of documentary evidence the transaction and any problems following purchase or sale can be fraught with difficulties for obvious reasons. It is important, therefore, to use one of the standard forms available or indeed instruct a marine solicitor to ensure the transaction proceeds smoothly and according to plan. Whether purchasing from the owner or a yacht broker (who like an estate agent acts for the seller), the most important things to consider are the condition of the yacht; whether or not VAT has been paid and whether the seller actually has the right to sell the boat in question. Unless the yacht is being bought as a restoration project or the buyer is well aware of her condition the advice is to always enter into an agreement that is “subject to survey” within the terms of the contract. A survey undertaken by a reputable surveyor can prevent a lot of heartache later. With such contracts even once a deposit has been paid if the survey picks up problems not disclosed the contract price can be re-negotiated or indeed the contract terminated and the deposit returned. It is also important to ensure your surveyor has insurance just in case he misses something which is found after the yacht is bought. Surveyor members of the YBDSA and IIMS have to have insurance as a requirement of membership. As with new boats VAT can become an issue to the detriment of the new boat owner. A purchaser should ensure that the seller can produce evidence of VAT payment on the yacht (builder’s certificate, Bills of Sales, Builder’s invoices and VAT receipts) or indeed evidence that there is an exemption from VAT due to the age of the yacht although this is currently under scrutiny (deemed VAT paid status under age related relief). In a proper contract this will be set out to protect the purchaser. If the seller cannot produce paperwork to confirm VAT has been paid, proper title and ownership it is really a risk the buyer must face if he/she proceeds, especially if customs here or within the EU pay a visit. A yacht that is Part I registered would have recorded at the registry if there is a mortgage on the boat (although there is the possibility of unregistered mortgages) so it is also worth checking this otherwise you may also get a visit from a finance company who may have the right to take the boat you have just bought. A good contract may not prevent this occurring but it does give one the right of action against the seller. Most of the points covered here can be incorporated into a reasonably concise and standard contract. These agreements can be obtained from yachting organisations or if the transaction is more of a one- off or not straightforward, there are specialist yachting lawyers who can assist in all aspects of sale and purchase. Given the nature of the beast there can never be full security for a prospective purchaser buying a used or a new yacht but by considering the non-exhaustive points above and following the guidelines mentioned one should be reasonably confident of a smooth transaction. Buying a yacht whatever its age, is usually a major investment and hopefully a pleasurable experience. By taking fundamental care (as one would when buying a house, i.e. survey, contract and perhaps legal advice) you can make this process reasonably secure, leading to a favourable conclusion, which is getting your new “toy” onto the water.