Contracts & Brokers

A BUYERS BRIEF
A PROFESSIONAL PERSPECTIVE ON KEY CONTRACTING ISSUES
&
HOW THE BROKERAGE RELATIONSHIP WORKS, Etc.

I. INTRODUCTION
II. HOW THE YACHT BROKERAGE RELATIONSHIP WORKS
III. WHAT ARE YOU LOOKING AT IN THE VARIOUS ADVERTISING MEDIA WHEN YOU SEE A YACHT FOR SALE?
IV. THE BUYER HAS ULTIMATE CONTROL OF THE BROKERAGE RELATIONSHIP
V. THE CONTRACTING PROCESS
VI. SURVEYORS
VII. FINANCING & INSURANCE
VIII. CONCLUSION

I. INTRODUCTION:

The luxury yacht represents mans expression of the highest and most complicated blend of art and cold hard engineering, a blend that lends an almost animate nature to this objet d’Art. It is generally the most expensive widget that one ever buys personally during a lifetime. And, because of its almost animate nature and the fact that it is a complicated piece of machinery that floats about the world carrying human life, this toy represents both a source of great pleasure and, at the same time, a potential for some risk. The search for and purchase of this toy should be a most serious and conscientious endeavor that is guided at every step in the process by a knowledgeable and professional perspective.

The process is far more demanding with respect to paying attention to the details of protecting ones own interest than is the purchase of ones home. The process can be easy and professionally orchestrated, a great pleasure in and of itself. Or, it can be a frustrating and troublesome event. Key to which it becomes is (i) knowledge on the part of the Buyer of how the process should work and (ii) the decision on the part of the Buyer to bring into the process professional expertise to represent his specific interests, both with respect to knowledge of yachts and knowledge of the negotiating, contracting and closing process.

The following is a brief review of some of the key elements to the equation. This analysis is written neither as a thorough dissertation nor as a means of thoroughly educating a Buyer to all of the parameters of the process of protecting their interests. Rather, it endeavors to highlight for the Buyer key issues of which they often are unfamiliar. It is our hope that, once a Buyer is familiar with the following key elements, he will then be stimulated to associate himself with various types of professional disciplines, including experienced brokers who understand the complications and subtleties of the art of the negotiated deal and experienced maritime attorneys, all of whom would themselves be charged with knowing the parameters related to protecting the Buyers interests and act aggressively to apply these parameters.

II. HOW THE YACHT BROKERAGE RELATIONSHIP WORKS:

The yacht brokerage industry works in a somewhat similar fashion as the residential real estate brokerage industry, but there are critical distinctions. A Seller will list his yacht for sale with a brokerage house, giving them either a Central Listing Agreement or an Open Listing Agreement. A Central simply means that the Seller agrees to negotiate the sale of his yacht only through this particular Central brokerage house and that any other brokers who wish to present an offer must present it to the Seller through the Central brokerage house. An Open simply means that the Seller authorizes the particular brokerage house to sell his yacht and agrees to pay a certain commission if that brokerage house brings a Buyer, but it also means that the Seller is not limited to any one broker and can deal directly with any other broker.

With respect to the commission structure, the system is simple. Under a Central arrangement, the Seller agrees to pay a certain commission percentage based on the gross sales price of the yacht. This commission is then split between what is called the Listing Broker and the Selling Broker. The Listing Broker is the brokerage house that has the Central Listing Agreement with the Seller and the Selling Broker is the brokerage house that has actually found and is bringing the Buyer to the deal. Most Central Agents hope that they are both so they dont have to split their commission. Under an Open arrangement, the Seller agrees to pay a certain commission to that particular brokerage house if they bring a Buyer. But, once again, the Seller may deal with any broker he wishes and may grant any number of brokerage houses the authority to offer his yacht for sale.

The paramount issue related to the Buyers perspective is that under either arrangement Agency Law dictates that all of the above referenced brokers represent the interests of the Seller, not the interests of the Buyer. And, it is key to understand that the Selling Broker, or the broker that is actually the one who has found the Buyer and is dealing directly with the Buyer, still owes his allegiance to the Seller, not the Buyer. This general law of agency can be easily changed with respect to the Selling Broker, but it must be done by formal agreement. It is very problematical to endeavor to change the law of agency with respect to a Central Broker since his Central Agency Agreement defines him as the agent of the Seller.

A Buyer who is dealing directly with a brokerage house that has a Central Listing Agreement with the Seller or has an Open Listing Agreement with the Seller is dealing with a broker who represents the interests of the Seller, not his interests, unless there has been some formal arrangement to the contrary.

Thus, it is important for the Buyer to initially make a decision about how he wishes to proceed with the process of searching for a yacht and what type of broker he wishes to work through in dealing with a potential yacht of interest and its Owner. Generally stated, the brokerage industry is broken down into three types of brokers for the Buyer to choose from: (i) the Listing Broker (the Central Listing Broker), who represents the interests of the Seller directly under the terms of the Central Listing Agreement, (ii) the Selling Broker who is bringing the Buyer to the deal and might at first blush appear to be representing the Buyer but who, by Agency Law, represents the interests of the Seller based on being a sub-agent under the terms of the Central Listing Agreement and (iii) a Buyers Broker of the Buyers own choosing who by formal arrangement with the Buyer publicly represents the interests of their Buyer singularly. When dealing with a broker, it is important that the Buyer know under which type of arrangement he is operating and specifically who is going to represent the Buyers interests. Under an often-occurring circumstance in this industry, no broker actually represents the interest of the Buyer. But, such can be easily controlled by the Buyer simply based on his own knowledge and choice.

III. WHAT ARE YOU LOOKING AT IN THE VARIOUS ADVERTISING MEDIA WHEN YOU SEE A YACHT FOR SALE?

Generally speaking, brokers advertise yachts for sale through (i) yachting magazines in the back sections dedicated to the brokerage industry, (ii) a multi-listing system called BUC and its online platform called BUCnet.com and (iii) another multi-listing system called YachtWorld.com.

When one sees an advertisement for a particular yacht in one of the magazines under the name of a particular brokerage house, it can mean one of three things with respect to the agency issues discussed above. The yacht could be advertised under a Central Listing Agreement between the Seller and that particular brokerage house, in which case that brokerage house would be formally representing the interests of the Seller. Or, the yacht could be advertised under an Open Listing Agreement between the Seller and that particular brokerage house, in which case that brokerage house would be formally representing the interests of the Seller. Or, it could be advertised by a brokerage house that has no relationship with the Seller, in which case that brokerage house could represent the interests of either the Seller or the Buyer depending on agreements of the parties.

When one sees a yacht listed on BUCnet.com, that particular yacht is listed with BUCnet.com only by a brokerage house that has a Central Listing Agreement with the Seller. Therefore, the brokerage house is in a formal agreement to represent the interests of the Seller.

When one sees a yacht listed on YachtWorld, it is a different matter. YachtWorld is an open listing system wherein any brokerage can list any yacht. Therefore, the brokerage house that is advertising a particular yacht could be doing so under a Central Listing Agreement, an Open Listing Agreement or no agreement with the Seller, at all.

IV. THE BUYER HAS ULTIMATE CONTROL OF THE BROKERAGE RELATIONSHIP:

Bringing the substance of Section II and III together, there are two key elements. First, it is important for the Buyer to understand and formally control the nature of his relationship with any broker in terms of whose interests the broker is going to represent. And second, the industry is orchestrated based on a very open system for marketing of yachts. Any competent broker can, on behalf of his client, gain access to any yacht advertised in any of the three above mentioned primary mediums of yacht advertising and can conduct the process of negotiating and purchasing any yacht seen by his client in one of these mediums. Therefore, when a Buyer sees a yacht that he is interested in, he can decide whether he wishes to execute the effort to consider a particular yacht for purchase through (i) a Central Listing Agent who represents the Seller, (ii) through a Selling Agent operating as sub-agent under the Central Listing Agreement who represents the Seller unless he has contractually and publicly agreed otherwise or (iii) through a Buyers Agent who has no direct relationship with the Seller and specifically is charged with representing the Buyers interests.

The bottom line is that the Buyer can by his own volition control his own destiny with respect to whether he has a broker who is specifically representing his interests. And, no matter how the Buyer might have been introduced to a particular yacht and no matter who might be advertising a particular yacht, the Buyer can elect whom he wishes to deal with and whom he wishes to represent his interests. In essence, the Buyer chooses what broker he wishes to present his formal contract offer through and the formal contract should specifically reference the agency responsibilities of all brokers who are participating in the deal. The broker that brings the formal contract offer controls the deal and the Buyer controls which broker brings that contract.

Therefore, the Buyer can specifically elect what type of brokerage environment in which he wishes to operate. Some measure of common sense says that the Buyer should consider specifically selecting a broker that he has confidence in with respect to (i) the brokers overall professional abilities, (ii) his knowledge of complicated luxury yachts, (iii) his knowledge of the market in detail, (iv) his expertise in the art of the negotiated deal, (v) his knowledge of the intricate parameters of structuring contracts and the closing process, and (vi) his dedication to aggressively represent the interests of the Buyer.

V. THE CONTRACTING PROCESS:

Though the process is somewhat similar to the residential real estate world, the negotiating for and purchase of a yacht is a far more complicated deal. With a home, you generally see the house, contract for it, send someone out to look around for termites and someone to check the washing machine, turn the deal over to a closing attorney who does 10 of these deals a day, get some financing and insurance and come to closing.

A yacht is a complicated piece of machinery and there are three key elements to protecting the interests of the Buyer: (i) a sophisticated broker with expertise in luxury yachts who specifically represents the interests of the Buyer, who has a professional understanding of the subtleties of the art of the negotiated contract process and who has the dedication to apply his expertise aggressively, (ii) a mature and complete purchase contract that truly protects the interests of the Buyer and (iii) a closing attorney with maritime expertise who represents the Buyer.

The issue of a sophisticated broker who represents the interest of the Buyer is self-evident. What is not self-evident is the need for a mature purchase contract. Often, the brokerage industry uses standard form contracts from one of the various Yacht Broker Associations. These contracts rarely protect the interests of the Buyer adequately. The following is a list of some of the key issues that should be covered in any contract but are often not covered in standard forms:

Clear definition of the rights relevant to the deposit, including interest coverage and conditions for return of deposit, and provision that the deposit should be held not in a brokers escrow account but in a trust account of a major law firm that has maritime expertise.
Clear definition that the contract is subject to the rights of the Buyer to (i) a Buyers Sea Trial, (ii) a Surveyors Sea Trial and (iii) an out of the water Survey.
Clear definition of what the sea trials and survey will consist of, where they will take place, when they will take place, what notices must be given relevant to the sea trials and survey, who has the responsibility with respect to the movement of the yacht to, during and from the sea trials and survey and who covers the various costs. And, there must be provision for adequate time after survey but before the date for Buyers acceptance or rejection of the vessel for the Buyer to get receipt of the Survey and to have time for analysis of the Survey.
Clear definition that the surveyor is in the sole employment of the Buyer.
Clear definition that the contract is subject to the acceptance by the Buyer of the vessel after all sea trials and survey, which acceptance is at the sole discretion of the Buyer and there should be clear definition of specifically how and when acceptance or rejection is to be made.
Clear definition of the Buyers rights of access to the vessel to accomplish inventory.
Clear definition of the rights of the parties in the case of default of the Seller and in the case of default of the Buyer.
Clear definition of the Sellers duties with respect to title, including clearance of title, payment of expenses of clearance and failure of title. There should be definition of the Sellers covenant to produce all requested documents and to execute all requested documents that the Buyers closing attorney reasonably requests in accomplishing closing and definition of when and where the documents are to be produced and who is responsible for costs of document drafting and closing fees.
Clear definition of the place and time of closing and the terms of payment required at closing.
Clear definition of when, where and how delivery of the vessel is to be accomplished, including coverage of any expenses of delivery.
Clear definition of where the risks of loss or damage lie prior to delivery and definition of any duties to repair prior to delivery.
Clear definition of who pays various potential taxes and assessments, including sales and use taxes and there should be provision for rights relevant to duty owned, duty paid and potential duty draw back.
Clear provision for warranties of the Seller that survive closing, including defense of title and any liens or assessments due against the vessel and, where appropriate, capture of personal liability of beneficial owners of a corporate or trust Seller for contract warranties and covenants.
Clear definition of what equipment goes with the vessel and condition of the vessel and equipment at delivery.
Clear provision for the Buyer to assign the contract rights at his sole discretion.
Clear provision for jurisdiction and venue with respect to any litigation and coverage of attorneys fees.
Clear definition of the roles of the various brokers and their rights under the contract.

VI. SURVEYORS:

The Surveyor issue is simple. In the last 10 years the Surveyor industry has substantially developed to where it is now a very professional and mature resource for Buyers. Simply put, get a good Surveyor and you will get a good survey which provides you a very professional assessment of all details related to the condition of the vessel.

Any competent broker can provide a Buyer with a list of the known professional Surveyors. But, it is important for the Buyer to establish his own direct relationship with the Surveyor of his choice and to engage in-depth discussion with him about what he will do, how much it will cost and what the limitations of his survey will be.

VII. FINANCING & INSURANCE:

Both with respect to financing and insurance, a very mature industry has developed over the last 10 years to service the needs of the Buyer. With respect to financing, the environment is very similar to the residential real estate world, in that the financing terms both long and short, down payment requirements and interest rates are similar to mortgages on residential real estate. With respect to insurance, it is simply a matter of contacting any one of numerous large insurance carriers and agents who operate on the international level in the maritime field. It is very important to place coverage with an organization that is a primary player in the luxury yacht insurance arena. They understand the peculiar requirements involved with expensive toys that float all over the world and when it comes time to make a claim, life will be more pleasurable if one is dealing with experts.

Any competent broker can provide a Buyer with a list of reputable sources for both financing and insurance.

VIII. CONCLUSION:

This Brief is not meant to sound like preaching. It is meant to communicate thoughts that are key to an informed Buyers perspective, thoughts that are often not known by Buyers and rarely communicated by the brokerage community. Therefore ~

Be proactive! Dont simply fall into a relationship with a broker because he happens to be advertising a particular yacht that caught your eye. Any competent broker can provide a Buyer with access to almost any yacht in the world. Exercise an inquiring mind and engage any potential broker in a discussion of issues that indicate to you whether he is of the character and experience level that will support protection of your individual interests as a Buyer. Control of whether the search for the proper yacht will be a pleasurable and protected event starts with your choice of broker and the Buyer can control who represents his interests if he understands how the brokerage system works.

Be proactive! Dont simply take any Surveyor. Exercise an inquiring mind and engage potential Surveyors to the same diligent degree that engagement should be had relevant to a potential broker.

Absolutely engage an experienced maritime attorney to represent your interests in the closing process. No matter how knowledgeable the Buyers broker is, the maritime attorney brings a perspective that is simply not the function of the broker.