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Boat Purchase 101 - Some Things You Should Consider (Seriously, You Really Should!)

Wednesday, December 13, 2017

In this series of short basic articles we'll be highlighting some areas that should be on the forefront of a purchaser's mind when purchasing a boat/ship/yacht/vessel to avoid turning something that should be an exciting exercise, into a frustrating nightmare.

Get it in Writing

Whilst it is virtual certainty that sellers and purchasers of larger, more expensive, technical vessels will view a well drafted agreement as an absolute necessity, this doesn't always run true for purchasers of smaller vessels, who may see it as an unnecessary complication and 'just want to get the deal done'.  At the risk of stating the obvious, it is a far easier task handling a contractual dispute where the terms have been reduced to writing.

Just like boats, vessel sale and purchase agreements come in all shapes and sizes ranging from an in-house contract to the Norwegian Saleform and MYBA standard form agreements.

An agreement doesn't have to be a contractual version of Tolstoy's 'War and Peace' but should clearly record in reasonably plain language what the parties have agreed to and how the deal will proceed (or not).

Although the circumstances and technicality of every sale will be different, there are some common contractual provisions that should be in every agreement as a departure point, such as:

Parties:  It is quite common for a purchaser to initially be described as an individual or company and then at a later stage to nominate an alternate party/entity as the purchaser.  It is equally common for parties to forget to include a nomination clause or even simple drafting such as '…and/or nominee' in the agreement which may necessitate a variation agreement downstream to rectify matters.  Moreover, inclusion of the seller's full details will assist in due diligence investigations to determine whether title to the vessel can legally be passed at settlement;

Vessel Details:  This should at the very least include the vessel's name and registration number (if registered) to assist in legal due diligence (see my upcoming article Boat Purchase 101: Legal Due Diligence);

Deposit:  Typically 10% of the purchase price, held in trust by the seller's solicitors (or the broker as stakeholder) and released to the seller at settlement, or the purchaser if the deal doesn't proceed.  It is a good idea to outline who pays any bank charges;

Conditions:  Typical conditions include -

  1. Finance Condition (Bank/Second Tier/Vendor): It will be important to ensure that there is sufficient time in which to satisfy any finance condition.  This sounds obvious, however, financiers are not always keen on lending money in respect of vessel purchases (they can sink!) and may have a raft of requirements that must be satisfied prior to finance being approved.
  2. Insurance: Oftentimes this will dovetail into the finance condition (if applicable) as the financier will want to ensure that there is some guarantee (in addition to a ship's mortgage) that they will be repaid should the vessel be deemed a total or constructive loss. Typically, if the underwriter won't insure the vessel, finance is likely to fall over. In assessing whether to provide cover, the insurer will usually require a condition survey which may take some time to organise particularly if they require dry-docking.  Note: whilst similar, it is not necessarily a good idea to rely on the insurer's survey as opposed to a pre-purchase condition survey as the two tend to have different focuses.
  3. Sea-Trial: Typically this is for a fixed duration at the seller's cost, and an opportunity for the purchaser (and his team) to see her in operation.
  4. Condition Survey: Usually includes a desktop (see my article Boat Purchase 101: Technical Due Diligence) along with a physical survey. The extent of the physical survey will largely depend on the type, size and age of the vessel and may include a diver's inspection, in-water survey, or dry-docking.  It will be important that the contract include a realistic deadline for survey to be completed as necessary facilities/personnel/surveyors may have limited availability.
  5. Legal Due Diligence (see my upcoming article Boat Purchase 101: Legal Due Diligence): This is not commonly included (but can be) as a clause in a sale and purchase agreement and commonly occurs in the background from the moment the agreement is signed.

'As is, where is':  It is almost commonly accepted that the purchase of second-hand tonnage is on an 'as is, where is' basis, subject to any warranties provided for in the agreement.

Warranties:  This is often the most contested area of the sale and purchase agreement.  Common warranties provided by the seller (who is in the best possible position to provide these given its history with the vessel) may include:

  1. Vessel sold free of mortgages, encumbrances, charters, debts etc and that title will pass free of same;
  2. Seller legally entitled to sell and if owned by a corporation has complied with any internal corporate requirements (ie directors/shareholders/trustees resolutions/minutes); and
  3. The vessel will be delivered in the same condition as she was at time of inspection (fair wear and tear excepted).

Delivery:  Date and place of delivery should be included.  Consideration should be given to who will pay for the vessel to be delivered ie vessel berthed in the Viaduct, Auckland, but to be delivered to Fort Lauderdale, Florida.  Although circumstances may dictate that delivery and settlement take place on different dates, typically delivery and settlement happen contemporaneously.
As with the conditions outlined earlier in this article, it is imperative to avoid technical breach of contract by either party that both seller and purchaser work together to set realistic timeframes in respect of delivery times/dates to account for unforeseen circumstances.

Inclusions/Exclusions:  Oftentimes drafting around inclusions/exclusions goes along the lines that everything is included unless specifically excluded!  Customarily, personal effects of the seller (and master/crew) and items on hire are excluded, however, consideration should be given to comprehensively listing both inclusions and exclusions to avoid disputes.

Fuel:  Included/Excluded? It is customary for fuel/bunkers to be dealt with separately from the vessel purchase (and invoiced separately), however, inclusion of a provision dealing with fuel ie price (market or actual net price) along with a mechanism for determining quantity on board at time of settlement ie either both parties attend and tanks dipped or independent party attend to this, is a wise idea.

Documents:  The volume of documents to be inspected or handed over at time of settlement will be driven by the size, type of vessel and any flag state requirements.  Settlement documents usually include:

  1. Bill(s) of Sale: This acts as title to the vessel and is extremely important;
  2. Certified Transcript of Register Entry (if Registered): Typically issued on or a day prior to settlement as evidence that (i) the vessel is still owned by the seller, and (ii) no mortgages have been lodged between the time of signing the agreement and settlement;
  3. Evidence that any necessary corporate processes have been followed ie director/shareholder/trustee Resolutions (if owned by a company/trust);
  4. Certificate of Deletion from Register (if changing flag, and if applicable); and
  5. Tax invoice for the vessel and bunkers (if commercial sale).

Payment:  Where parties are in different countries, and particularly if the purchase price is being paid in a different currency (ie USD in New Zealand) parties should consider payment of the purchase price upfront to a solicitor's trust account with appropriate undertakings to hold/release same strictly in accordance with the agreement.

Settlement Mechanism:  In today's shrinking global village it is extremely common to have seller, purchaser,
broker(s) and vessel in completely different locations (and time zones) at time of settlement.  Accordingly, it becomes increasingly important that all parties work together in a pragmatic, flexible manner to reduce the inevitable tension that arises around settlement time.  Use of technology such as Skype should be embraced where appropriate with a clearly understood and simple settlement mechanism in place to reduce stress.

Dispute Resolution:  Unfortunately things can and do go wrong, and a well-drafted dispute resolution clause is an absolute necessity to resolve disputes as quickly and effectively as possible. The options in the marine space for arbitration/mediation tend to veer towards either local arbitration (ie using the Maritime Law Association of Australia and New Zealand arbitration rules or equivalent) or having either London or Singapore as the seat of arbitration (place where arbitration conducted).

Whilst the above is most certainly not an exhaustive list of provisions that should be in a vessel sale and purchase agreement, it should at least provide a basic guideline. This article is not intended to be relied upon as legal advice, but rather to highlight some important areas that should be considered when purchasing a vessel. If you are considering a vessel purchase feel free to contact us and we will be more than happy to assist.

Please kindly direct any enquiries to:

Forrester Grant on (09) 966 3611 (fgrant@mcveaghfleming.co.nz)

© McVeagh Fleming 2017

This article is published for general information purposes only.  Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice.  If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.

 

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