I am buying a boat in partnership with a good friend, and we have a few questions about the legal consequences of a boat partnership. I assume that our partnership would not be legally enforceable without a written partnership agreement, but what issues should we address in that agreement?
Contrary to our reader’s assumption, a partnership for the ownership and operation of a recreational yacht does not need to be in writing. But a never-ending stream of decisions must be made for the purchase, operation and sale of any boat, and a written agreement will provide guidance to the parties on how to make those decisions.
We always conclude this column by suggesting that readers should contact an experienced maritime attorney regarding their particular issue, and that advice is particularly true in the case of a boat partnership. A “vanilla” or “boilerplate” agreement may cause more problems than it solves, and it is not possible in this column for us to address all of the issues that face a boat partnership.
With the above warning in mind, we can nonetheless offer a few observations. The most important issues surrounding a boat partnership can probably be divided into four categories: the ownership entity, the purchase and sale of a partner’s interest or in the entire boat, the use of the boat and the division of operating expenses.
By the phrase “ownership entity,” I am referring to whether the owners will be partners or whether they will form a corporation or limited liability company (LLC) to own the boat. These entities would have no true business purpose and, as such, they will probably not insulate the owners from liability, but their structure may offer other advantages.
For example, the purchase and sale of interests in a boat-owning company may be simplified since the ownership of the boat itself will remain unchanged (i.e. the company will continue to own the boat regardless of who owns the company). Also, the bylaws or operating agreement may be customized to address vessel ownership issues, and there may be tax advantages at the time the boat is eventually sold.
The disadvantages to owning a boat through a corporation or LLC include the requirement to perform certain administrative procedures and expenses on a regular basis, including the payment of annual fees to the state, and possible disclosure requirements that accompany the sale of a corporate security that may not apply to a conventional boat sale.
Whether the boat is owned through a specialized ownership entity or not, the purchase and sale of a partner’s interest in the boat must always be anticipated. The economic challenges that we all deal with on a daily basis may lead one partner to a decision to sell before the other partner is ready, but the other partner is not in a position to buy the interest.
Should the departing partner be allowed to sell to a third party? If so, will the remaining partner have a “veto power” over that sale if he is not comfortable with the third party’s financial condition, boating experience or personality?
A well-drafted agreement will address these issues. On the other hand, the lack of a plan to address these issues may lead to litigation.
Verbal arrangements for the use of the boat and the division of operating expenses are usually less contentious than the ownership issues discussed above, since these issues are more apparent — and, as such, they are often addressed at length by the partners before the purchase. But issues arise, nonetheless.
Regarding the use of the boat by the partners, it is of course common to allocate use according to each partner’s respective interest in the boat. And most boat partnerships include an understanding regarding the use of the boat on popular boating days, such as holidays.
But what if one partner takes advantage of his allotted time regularly, while the other partner rarely uses his full allocation of time? Should operating expenses and maintenance be adjusted? Regardless of the answer to that question, a written agreement would allow for the issue to be addressed without a dispute.
Similarly, failure to keep accurate logs may cause disagreements over fuel and maintenance expenses. Unexplained minor damage may lead to a dispute over responsibility for the repair.
The list can go on forever and, as such, even a written agreement can’t address everything. But it can provide general guidance on the resolution of disputes over issues that were not specifically addressed.
Our reader did not specifically mention this, but a lot of boat partnerships are operated with only one of the partners listed on the title or registration. This may be done because of marina or slip rental restrictions, or because the partners want to avoid the possible assessment of sales or use tax, or simply because they are too lazy to add a new name to the title. Whatever the reason, it’s a bad idea.
At a minimum, if ownership is not taken in a corporation or LLC, all partners must be listed on the boat’s ownership documents, regardless of whether the partners prepare a written agreement. Failure to do so invites litigation between the partners, in the event of an accident or a dispute over expense allocation, and the boat will add to the grief of everyone involved in the event of a death of a partner.
The issues surrounding a boat partnership are always complex and possibly contentious, even in the best of circumstances. A written agreement will, if properly drafted, reduce the chances of a dispute in the future, because it acts as a roadmap for the relationship.