Legal considerations before buying a Superyacht

Having taken the decision to make a major investment in a yacht a number of important decisions must be taken to plan for successful and stress-free ownership and operation in future years. Discover what questions should owners ask themselves and what legal aspects need to be considered at the outset?
 
Do I buy in my personal name or do I buy through a company?
Registering the yacht in the name of a company, whether located onshore or offshore, to own and operate a yacht, not only provides some privacy to the ultimate owner, but will also limit liability in the event of a claim, when compared to the alternative of registering the yacht in the name of the individual owner. The use of a suitable yacht owning company may also facilitate legitimate tax mitigation, as well as providing asset protection and estate planning.

Yachting professionals frequently advise owners to set up a Single Purpose Vehicle, ‘SPV’, on the acquisition of the yacht, for the owners to enjoy the benefit of limited liability and not to jeopardize their other asset and business.

Do I buy a new or a second hand yacht?
Yachts will either be bought or sold as new builds or on the pre-owned second-hand market.

In the case of a yacht purchase as a new build the terms of the sale and purchase (and the documentation to be supplied) will be covered by the detailed contract including the detailed technical specification of the yacht.
 
On the purchase of a pre-owned second hand yacht, the main commercial terms will, typically, be agreed through the yacht broker. A Memorandum of Agreement (“MOA”) will usually be signed by the parties reflecting the agreed terms. The MOA is a legally binding agreement executed by the parties to buy and sell the yacht. Accordingly, it is highly recommended that the parties seek legal advice before entering into the MOA to ensure they are protected and they buy the yacht they want.
 
Several standard forms of MOA are available. The most commonly used for yachts is the Mediterranean Yacht Brokers and the Royal Yachting Association forms. For larger yachts an amended version of the Norwegian Sale Form (typically used for commercial vessels) could also be used.

New build
If you buy a new yacht you definitely need the expertise and advice of a maritime lawyer to review the design and build agreement and possibly a technical manager to coordinate the work of the designer, naval architect, builder and external suppliers.
 
Type of builds:
Three categories of yachts can be identified within the new yacht market: production yachts, semi-custom yachts and custom yachts.

Production yachts are generally cheapest and fastest to deliver. There is very little margin to personalise the yacht. The sale and construction contract is typically presented to the buyer in a standard form and there is very little margin for variation or negotiation.

At the other end of the scale, custom yachts are built in most cases completely according to the yacht-owner requirements. A close collaboration and regular visits to the yard during the design and construction of the yacht will be required by the owner and his team. Seeking assistance from a qualified surveyor or project management company is recommended to ensure the project proceeds on time and on budget.
When ordering a new build, and more specifically a custom or semi-custom yacht, reviewing the provisions of the building contract is a MUST.

Clauses to consider:
  • Specification and plans:
especially if the yacht is of a non-standard design with specific requirements in terms of design, quality and performances and its interior fittings and layout. These terms will generally be included in a schedule annexed to the main contract.
  • Contract price / variation in the costs
  • Payments:
In most cases the first instalment of the purchase price will be payable as a down payment before construction starts. Subsequent instalments will then become due following completion of particular stages of construction (i.e. keel laying, hull completion and launching) confirmed by a classification society surveyor with a final instalment due on delivery or on particular dates regardless of the stage of construction reached.
  • Sub contracting / suppliers (ie: engines and navigation systems)
  • Failure to meet performance criteria
  • Risks (yard insurance during the construction)
  • Security (refund guarantees for the owner / payment guarantee for the yard (personal guarantee or bank guaranty))
  • Trials
The contract should specify the trials and tests to be carried during and following construction and the buyer should be entitled to have a representative present who can comment on the construction, in addition to the Classification Society.  
  • Documentation and Delivery
The contract will need to specify both the time and procedure for the delivery of the yacht and the documentation that will be provided by the builder upon delivery, in exchange for the final instalment of the purchase price.
  • Warranty period
  • Default
  • Dispute resolution
Arbitration remains the favoured procedure in contracts of this type and an arbitration provision will be agreed in most circumstances.
  • Choice of law

Second hand yacht: 
You see the yacht, you like it, it seems in good condition….often it is a “coup de Coeur”.
Make sure though, before you buy that the key matters below have been considered to avoid bad and expensive surprises:

Survey: ‘I saw the yacht, it seems in good condition, the Seller told me that she is in perfect condition, why should I appoint a surveyor to confirm the same?’
An extra cost? Yes, but the survey would save a lot more hidden costs in the future. Always appoint a surveyor to carry out a pre-purchase survey or what we call a condition survey and sea trial. You need to know exactly what you are buying and have an idea of the likely level of future costs you will face. If the yacht is in perfect condition, fine at least you will be 100% sure, if she is not…. you will either be in a position to negotiate her price or negotiate so that the defects and above all those defects affecting the seaworthiness of the yacht are fixed at the Seller’s costs before you take delivery.

Review of the MOA / Documentation and Delivery
The contract will need to specify both the time and procedure to be followed on delivery of the yacht and the documentation that will be provided by the Seller upon delivery in exchange for the balance of the purchase price.
  
 Ensure that the contract covers the points below:
  • Price and mode of payment (usually 10% down deposit on signature and the balance on delivery in exchange of the documentation agreed)
  • Special conditions (ie: the purchase is subject to obtaining suitable finance, defects identified and accepted by the Buyer without the possibility to renegotiate the price, …)
  • Sea trial and condition survey  (to give more protection to the Buyer than the “as is, where is basis” clause)
  • Dates for the sea trials and conditions survey, acceptation and/or rejection of the yacht and delivery;
  • Place of delivery
  • VAT status of the  yacht
  • Methods of rejection of the yacht
  • Defects and consequences as far as deposit paid by buyer, payment of the broker’s commission, cancellation and damages are concerned
  • The Law applicable to the contract

Ensure that the main documents below are listed and originals will be delivered on completion:
  • Inventory (listing all engine, deck and interior elements which are included in the sale that are  available on board and which are to be agreed and signed for before delivery)
  • Bill of Sale
  • Builder certificate and if available previous Bills of Sale
  • Yacht certificates (will depend upon the flag, vessel size, type of registration, tonnage  and whether the yacht is classed or not)
  • All log books, plans, blueprints, handbooks, manuals, technical documentation, instructions etc. concerning the yacht and her equipment that are currently in the possession or control of the Seller, which will be transferred on board the yacht
  • A general assignment of all current warranties for the yacht and its equipment and components;
  • Corporate documentation showing that the company is in good standing etc.
  • Minutes, Shareholders Resolutions and Power of Attorney for the purchase/sale and delivery
  • VAT paid certificate or statement from the beneficial owner of the Seller confirming the date on which the yacht entered the EU under Temporary Admission for pleasure yachts or the import document for commercial yachts -as may be applicable
  • Invoices for the tenders, jet skis and other toys that are sold with the yacht
  • Personal guarantee, ideally from the Ultimate Beneficial  Owner guaranteeing the yacht’s title and lien free status (it might be difficult to obtain but a guaranty must be obtained)
  • Transcript of the Register, issued a few days before delivery showing that the vessel is free from registered encumbrances
  • If the yacht is classed, class confirmation issued a few days before delivery, that is free of any recommendations or notations
  • Confirmation from the yacht’s registration authority that there are no outstanding fees or other charges owed to the Registry in respect of the yacht
  • Crew release letters confirming that they have no claims against the Seller  
  • Undertaking for the deletion of the yacht if deletion certificate is not available on delivery
  • Commercial invoice
  • Protocol of delivery and acceptance
18.05.2017

The information is for general purposes only and should not be relied upon as a legal advice. Specific guidance should always be obtained on ownership structuring, registration and operation of a yacht.
 
For more information contact Janet Xanthopoulos, Yacht Ownership & Administration Dpt Manager, Rosemont Yacht Services  at  j.xanthopoulos@rosemont-yacht.com