A Buyer’s Brief
I. THE CONTRACTING PROCESS:
Though the process is somewhat similar to the residential real estate world, 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:
- A sophisticated broker with expertise in luxury yachts who specifically represents the interests of the Buyer
- A sophisticated broker 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,
- A mature and complete purchase contract that truly protects the interests of the Buyer and
- 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,
- A specific provision that the deposit should be held not in a broker’s 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 Buyer’s Sea Trial, (ii) a Surveyor’s Sea Trial and (iii) an out of the water Survey.
- Clear definition of what the sea trials and survey will consist of, including (i) where they will take place, (ii) when they will take place, (iii) what notices must be given relevant to the sea trials and survey, (iv) who has the responsibility with respect to the movement of the yacht to, during and from the sea trials and survey, and (v) who covers the various costs.
- There must be provision for adequate time after survey but before the date for Buyer’s acceptance or rejection of the vessel for the Buyer to get receipt of the written Survey Report and to have time for analysis of the Survey Report.
- 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 Buyer’s rights of access to the vessel to accomplish inventory prior to closing of the purchase.
- 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 Seller’s duties with respect to tender of clear title, including clearance of title, payment of expenses associated with clearance of and failure of title.
- Clear definition of the Seller’s covenant to produce all requested documents and to execute all requested documents that the Buyer’s closing attorney reasonably requests in accomplishing closing and definition of when and where the documents are to be produced and
- Clear definition of 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 prior to closing of the purchase.
- Clear provision for jurisdiction and venue with respect to any litigation and coverage of Attorney’s fees.
- Clear definition of the roles of the various brokers and their rights under the contract, including the provision that the closing attorney will disburse brokerage commissions at closing of the purchase directly to the brokers, in accordance with written commission split agreements.
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.
The Buyer should also be aware that some brokers will direct a Buyer to a Surveyor who is very friendly to brokers, in terms of getting a deal closed.
III. 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. 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.
This Brief is not meant to sound like preaching. It is meant to communicate thoughts that are key to an informed Buyer’s perspective, thoughts that are often not known by Buyers and rarely communicated by the brokerage community. Therefore ~
- Be proactive!
- Don’t 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.
- Determine specifically who the broker thinks he represents.
- If a broker says he will represent both the Seller and the Buyer, go somewhere else.
- Control of whether the search for the proper yacht will be a pleasurable and protected event starts with your choice of broker.
- The Buyer can control who represents his interests if he understands how the brokerage system works
- Be proactive! Don’t 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 Buyer’s broker is, the maritime attorney brings a perspective that is simply not the function of the broker.