The nuances in yacht owner profiles can have a massive impact on the legal framework surrounding ownership, but during the life cycle of a yacht whether a new build or during its operation also needs skilful advice from those in the know
he need for expert advice surrounding the overall ownership of a yacht has never been more important. Yachts are getting larger and therefore the amounts of money involved in the life cycle of a yacht are on the
Ownership is also on the rise and whether private or commercial, the ownership structures and overall running costs are becoming more complicated but luckily the industry has teams of legal experts on hand to make sure all the ‘T’s’ are crossed and the ‘I’s’ are dotted. ONBOARD has hunted down the specialists in this field to ask them about the most common questions they are asked by those involved in the purchase and overall running of a superyacht. The list of questions is long and diverse and very dependent on who the initial question comes from.
Dominic Bulfin, Director at Bargate Murray confirms this, “As advisors to many superyacht owners and yards, we field a very diverse range of queries day to day. These might include queries relating to charter itineraries, crew issues and general operational support. Repair/refit is always a regular topic with many of our clients’ yachts undertaking some form of yard period most years as well as the more major periodic survey works. Of course the escalation of the war in Ukraine this year has given rise to a significant number of queries and concerns from clients of all nationalities.”
As previously mentioned, yacht ownership is on the rise and this is confirmed by Edouard Mousny, Partner at Gordon S. Blair, “Over the past twelve months, the most noticeable yacht market trend feature lies in the increase in the demand for the new build or second-hand superyachts due to the rise of High-Net-Worth Individuals and their increasing preference or predisposition to own such yachts for leisure and recreational activities or engaging in luxury tailored tourism.”
Naturally a hot topic at the moment is the impact of the Russian sanction. Partner at HFW, Jay Tooker amplifies this point, “A particular focus has been the way sanctions have affected EU shipyards building yachts for Russian customers. The contracts were signed perfectly legally before the Russian invasion but delivery of these yachts is now prohibited under EU regulations (although the interpretation differs somewhat between northern and southern member states). It is questionable whether these regulations are hitting the real target. Obviously, oligarchs with connections to the Putin regime should be and are being prevented from enjoying their spoils; but shipyards are also suffering as their production lines are blocked and their working capital is tied-up in yachts that they cannot deliver, and these shipyards have hundreds of employees most of whom have families. It’s a difficult balance.”
The intricacies of purchasing a second-hand boat are probably more complicated than one initially thinks. This is highlighted by Martin Malinowski, founder and partner of Upwind Legal and is a large part of their advice to clients, he expands on this with a recent case study.
“The structure perspective remains important. VAT-structures, commercial use and Temporary Admission remain topics that are often asked for. Moreover, domestic taxes like the Spanish ITP and clearing boats used under Temporary Admission becomes an often asked question for closings of second hand boats.
“The classical closing in ‘international waters’ may turn out to be ineffective and cause respective discussions/issues with the Custom Authorities. In any event we experience that Custom Authorities not only become more strict but also have a very ‘open eye’ of what is going on in their area of competency. We had a yacht stopped in the middle of the night between the Balearic Islands as the Authorities thought that a closing took place in International Waters beforehand (which was not the case and not the intention). The consequences probably would have been severe if indeed the authorities would have found a Protocol of Delivery and Acceptance and issued Bill of Sale on board evidencing that a transfer of ownership just took place.” Malinowski continues with a warning and a valid reason for getting professional advice, “We still see many suggestions for closing locations in the market for VAT-paid boats, which would immediately forfeit the status of the boat being in free circulation. Consequently, there are many factors (documentation, location, etc) to be determined and coordinated before performing a closing.”
In this buoyant market Partner at HFW Andrew Charlier adds, “From a sale and purchase perspective it is noticeable that buyers are increasingly looking to protect themselves in a seller’s market with limited inventory and competing buyers – binding Letter of Intent (LOI), exclusivity arrangements etc. We recently saw a buyer offer a small non-refundable deposit/payment in return for full right of rejection after survey.”
A niche area of uncertainty but one that has certainly been on the rise in the past year has been that surrounding crypto-currency. Bulfin elaborates, “In the past year we have seen a noticeable increase in queries concerning crypto in the context of yacht sale and purchase and construction. Recent fluctuations have reignited the scepticism many feel towards crypto, but we are certainly seeing a growth in well diversified crypto investors who are now serious players in the superyacht ownership and charter scene.”
Of course it is not just owners that are looking for representation and advice, many others within the industry reach out for assistance and legal advice. Partner at Gordon S. Blair Mousny, explains, “While dealing with captains of yachts, being employees of the owner or of a yacht management company, the issues at stake mainly deal with labour and social security scheme matters. We also accompany yacht brokerage companies by organising and planning the legal structure of their involvement both in terms of commissioning and in the scope of tasks and responsibilities. As such, they also are seeking advice in the perspective of assisting them in the context of the harmonisation of the yacht industry practice, which now mainly relies on the influence held by the Mediterranean Yacht Broker Association (MYBA) in the yacht industry.”
Staying with brokers, Bulfin says, “Queries from brokers are typically, and understandably, focussed around the shape of a potential deal. Although we often also hear from brokers looking to iron out issues between, for example, charterers and owners where there is a disagreement that can’t be immediately resolved between the parties.”
The legal advice is not always about the money, there are also far more practicable and operational questions being fired at these legal experts. “Typically when a captain reaches out to us it is because they need urgent, practical advice,” says Bulfin. He continues, “For example, we had a situation once where a captain called during a yard period with concerns that if action wasn’t taken immediately his yacht would fall victim to overspray from an upwind vessel about to be repainted with no environmental protections in place, and we gave that advice without delay.”
With the ownership of superyachts on the rise, it is vital that these new entrants receive the right advice. Tax and VAT regulations are at the forefront according to Mousny, “While advising our client on pre-purchase and new build yacht-related matters, the first subject matter is to select the most adequate flag State of registration for his/her yacht.” He continues, “The intended use of the yacht is also of utmost importance most notably while contemplating the treatment that the yacht will be subject to from the Maritime Authority of the flag State or while appraising the tax implications related to the acquisition and the operation of the yacht, both in terms of VAT regulations and corporate income tax.”
Protection of these new owners is paramount for the industry as a whole, if they receive the right advice and enjoy the ownership journey then it can only be a good thing for the industry. Bulfin confirms this, “For many new yacht owners, what they are really looking for is a non-partisan professional advisor to guide them through the process of purchasing their first yacht to try to avoid making errors due to inexperience. We have also seen all too often first-time-buyers being hurried into deals without the right team of advisors around them.”
Due diligence concerning new build or refit yards is also paramount to protect the owners’ interests and even though we’re seeing an upsurge in the industry as a whole, global economic situations are not positive at times. Edouard Mousny confirms this is a vital part of their relationship with an owner, “Our first crucial consideration in respect of our clients is to assist them while selecting the shipbuilder with whom the shipbuilding agreement will be concluded. To that end, we usually investigate and audit the financial creditworthiness and professional reputation of the contemplated shipbuilder.”
Ensuring a smooth new build or refit project will always come down to a clean, well defined and concise contract and this is where our legal eagles come in to play. “The standard of shipyard build contracts varies dramatically. Many of the more prestigious yards’ standard terms are relatively fair to the buyer/owner, but there is still always substantial scope to improve the terms, both in the client’s interest, but often in the mutual interest of both parties. As important as the underlying contract is, the associated specification is also key, as without it there is little point in having a commercial agreement,” explains Bulfin.
In the past two years we’ve seen many of these contracts tested to their limits. Quentin Bargate, Founder and CEO of Bargate Murray says, “Force majeure has been a hot topic, most notably with COVID-19, but also more recently with the knock on effects of the war in Ukraine. Prior to COVID-19, many force majeure clauses hadn’t really been tested. Now we are in a position whereby most force majeure clauses drafted previously have been tested in the real world, and those which have been drafted since March 2020 are specifically drafted to account for pandemic risks such as COVID-19.”
Staying with new builds Andrew Charlier adds, “The main questions from clients for new build projects are linked to ensuring that the project is being followed correctly by a technical adviser, and dealing with bumps along the road (delays, change orders, etc.). We are increasingly encountering resistance from certain shipyards to dealing with sales brokers for new builds.”
Whether we’re talking new build or refit, warranties are always going to be a hot topic and this is where owners really need an expert with a sharp pencil to oversee the contract negotiations, however, there are acute differences in the contract for a new build or second hand yacht. Gordon S. Blair’s Mousny explains more, “In the context of newly built yachts, both scope, content and duration of financial and legal or tax warranties must be negotiated with the shipbuilder. If some warranties are either implied or imposed by law, such as, under European law, against hidden defects, contractual warranties are also of crucial importance and must be negotiated with the shipbuilding contractor. The main controversial warranty aspect of a newly built yacht lies in the warranties related to the technical performance of the yacht to be negotiated with the shipbuilder.”
With many new entrants coming into the market, the second hand market is experiencing a boom time, but concerning warranties, this is quite a specialist area. Edouard Mousny elaborates, “In respect of second-hand yachts, the main issues relating to the warranties pertain to the assignability of the subsisting shipbuilder’s and third-party’s contractors’ warranties since they are, by nature, limited in time. The other aspect which is the object of negotiations between the seller and the buyer relates to the contractual ‘seller’s warranty’ whose main purpose is to protect the buyer from any unexpected legal, tax or financial risk arising after the completion of the acquisition but originating from any event that took place before said acquisition.”
Julia Wiechell, founder and partner from Upwind Legal also adds, “In the second hand yacht market, the client’s main concerns are pre-existing defects, encumbrances on the boat and its VAT status. These need to be evaluated before the closing with due care. Julia’s colleague Martin Malinowski concludes, “Also disputes whether defects are actually warranty items or whether warranty works were sufficient, are to be properly governed in a contract.”
For Bargate a popular warranty issues surrounds that of paint quality. “Typical issues concern whether a defect is covered, whether that defect has been notified to the builder in accordance with the terms of the build/refit contract, whether a latent defect is covered, the list goes on. Paint quality is a rich source of potential disputes, so ensure you pay close attention to these clause in the Specification and ensure they are approved by a paint specialist.”
Overall as an industry we need to manage client expectations. Once our friendly brokers have made the deal, it is time to bring in the big guns and make sure the contractors are fit and proper.
Spend the time in the initial stages making sure every step of the buying process and ownership journey is nailed tight leaving no room for ambiguity. Protecting everyone from the owner to the shipyard and suppliers is paramount.
If the owners are happy and enjoying their yachts, this gives the whole industry a better reputation and let’s face it, in the end this means we all keep our jobs.