Some pointers to consider in your contract of sale.
The market in second hand yachts is buoyant and expanding. But this kind of sale brings with it its own particular issues that a cautious purchaser should consider carefully before signing on the dotted line. Senior associate Alex Teji of Hill Dickinson’s specialist yacht team looks at the elements that make up a standard sale and purchase agreement and identifies the key points of which anyone buying such a vessel should be aware.
The first line of enquiry should be the key commercial terms. These will include the price, the deposit - usually 10% of the sale price payable within a few days of signature of the agreement, the named stakeholder - advisedly one of the party’s lawyers or an independent and reputable escrow agent - details of the sea trial, survey and delivery dates, and the location where the vessel will be handed over. The latter point is important as this can have tax implications and advice is needed to avoid attracting unnecessary additional expense.
The purchaser must consider two main issues: the physical condition of the yacht, and the relative ‘health’ of the title. The seller should provide a warranty not only that he/she has both the title and the right to sell the vessel, but also that it will be free and clear of all debts and encumbrances (such as mortgages, outstanding debts for goods and services, and crew wages ). All of these must be paid in full before the sale is completed and the buyer will require an indemnity against any loss should this not be done.
As to the physical condition of the vessel, the buyer will typically require both a sea trial and a condition survey. The sea trial normally precedes the condition survey and is conducted at the seller’s expense. It is essential that the buyer either attend the sea trial or, more likely, nominate an expert to attend. On common forms of contract failure to do this will mean that the buyer will forfeit the right to unconditionally reject the vessel and terminate the contract at its discretion.
The condition survey is an important mechanism which allows the buyer the option to check the vessel’s condition, but thought should be given in the contract as to the buyers rights in the event that any defects are discovered.
After the sea trial and condition survey, the seller will usually be required to give an undertaking not to use the vessel and bears the risk of any loss or damage to the vessel until completion of the sale. If anything happens that renders the vessel an actual, constructive or compromised total loss before completion, the agreement usually provides for termination in such an event and the deposit must be returned to the buyer with interest (less any expenses relating to the condition survey).
If the buyer fails to pay the deposit, the seller generally has the right to terminate the agreement and may also claim losses and reasonably incurred expenses at a specified rate of interest. If the buyer fails to pay the balance of the sale price on completion, again the seller has the right to terminate the agreement upon which the deposit becomes forfeit and, after deduction of any costs incurred in relation to the sea trial and the condition survey, the balance (plus interest) may be divided between the seller and the broker.
The seller is generally responsible for paying any taxes, duties or other government levies arising from the sale of the vessel and will also be responsible for obtaining any necessary permissions to make the sale, but this is an important consideration when first negotiating the commercial terms and then enshrining them into the contract.
Both the seller and the buyer should each provide an indemnity to the other in relation to any claim by a broker, not party to the agreement, that it has been involved in the sale on behalf of either party and is therefore entitled to payment of fees.
The agreement should also specify both the law that governs it (English law is the preferred standard in the industry due its proven and robust legal system), and the jurisdiction where any dispute is to be resolved, e.g. by arbitration in London.
Finally, one important matter to consider is that of confidentiality. It is standard to agree that the parties shall keep all aspects of the sale confidential from third parties beyond those who may otherwise be involved (such as legal advisers, banks, government authorities etc.). However, on completion it is usual for brokerage houses to wish to announce the sale. If the buyer and/or seller do not wish to have this information made public then this should be provided for in the agreement. As the broker/s will also be party to the agreement this is a matter for careful negotiation.
Buying a second hand yacht is an attractive option for many would-be yacht owners, but such a transaction requires consideration of a number of issues that do not apply to a first time build contract and expert advice is essential to ensure that the agreement of sale adequately covers the interest of any potential purchaser before they commit themselves to acquiring such an appealing, but costly asset.