I am buying a yacht in California from a private party without a broker, and the seller’s attorney drafted a two-page purchase agreement. I am a little concerned about whether the agreement adequately addresses the issues that are relevant in this kind of transaction since the agreements that are used by yacht brokers are typically six or seven pages long. I am sure that a lot of the provisions in the longer contracts are designed to protect the broker, but what are some of the issues that I should be looking for in a shorter contract? Also, the seller has asked that I pay a deposit, but he wants to hold the deposit himself rather than depositing the funds in an escrow account. That idea makes me a little nervous since the deposit would need to be returned to me if I reject the boat after it is surveyed. Is there some way that I can protect those funds?
Our reader included a copy of the contract with his letter, and his concerns are legitimate. Yacht brokers typically provide standard form contracts for the transaction, and this is one advantage of using a broker in a yacht purchase transaction. Those contracts may be lengthy, and some of the provisions are in fact designed to protect the broker, but the advantages associated with the use of a form contract far outweigh the disadvantages.
Form contracts have been developed over many years by attorneys who work in a particular industry, and the forms have been tested many times in court. A transaction that is not covered by a form contract may use a contract that was pieced together from various other agreements or haphazardly modified to fit a transaction that it was not intended for. The language of these modified contracts is often so ambiguous that litigation is almost certain to follow if there are any problems at all with the transaction.
We won’t go into the specifics of our reader’s contract, but we can address the provisions that should be included in every vessel purchase contract. Our reader was specifically concerned about the handling of the deposit, so let’s start with that issue, and the related question of how the contingencies such as a sea trial and a survey are handled.
A deposit serves several purposes. It shows the seller that the buyer is serious about the offer, it compensates the seller for removing the boat from the market during the inspection period, and it provides a legal basis for the buyer to compel the seller to complete the transaction after the inspections are completed. The deposit is typically retained by the seller as “liquidated damages in the event that the buyer breaches the contract, but this is where things get complicated. What exactly constitutes a breach of contract by the buyer? What are the circumstances under which the buyer may terminate the contract and recover the deposit? These points must be carefully spelled out in the purchase contract.
The deposit is held by the buyer (or the broker) during the contingency period to allow the buyer to inspect the boat and satisfy other contingencies, such as arranging for financing. What exactly are the contingencies, and what are the deadlines for satisfying the contingencies? How are the inspections conducted? What if the boat is damaged in the course of a marine survey or sea trial? How and when does the buyer need to communicate the findings of he survey to the seller? These are issues that must be addressed in the purchase contract.
Holding a deposit for a yacht purchase in escrow may be problematic. Licensed escrow agencies are reluctant to accept funds for a yacht purchase because they are not familiar with the title transfer and lien-recording procedures for vessels. Yacht brokers in California are authorized by statute to hold funds in trust in connection with a yacht purchase transaction, but this option is not available in a private-party transaction without a broker. If the parties are represented by attorneys, they may be able to use an attorney trust account, but this can be expensive. Regardless of who holds the funds, instructions for the release or transfer of those funds must be spelled out clearly and unambiguously in the purchase agreement or in a separate escrow agreement.
A well-drafted purchase agreement also must include provisions for the seller to transfer title, free of liens and encumbrances, to the buyer, and it must provide relief to the buyer if undisclosed liens or other title problems are discovered after the sale. And the agreement must provide for a host of other details. When, where and how will the boat be delivered to the buyer? Who is responsible for property tax assessed for the year the sale takes place? What forum will be used to handle legal disputes?
This is, of course, not a complete list of the issues that need to be addressed in a yacht purchase transaction, but it should be evident that a two-page contract will not cover everything that needs to be addressed. A yacht purchase is a complicated transaction, and the purchase contract provides a road map for the parties to help navigate those issues. Buyers and sellers should consult with an experienced attorney if the transaction is conducted without the assistance of a broker.
David Weil is licensed to practice law in the state of California and, as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (weilmaritime.com) in Long Beach. He is an adjunct professor of Admiralty Law at Loyola University Law School, is a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. He is also one of a small group of attorneys to be certified as an Admiralty and Maritime Law Specialist by the State Bar of California. If you have a maritime law question for Weil, he can be contacted at (562) 438-8149 or at firstname.lastname@example.org.