What Regulations Apply to a Bareboat Charter Yacht Owner?

I own a 48-foot motoryacht that I would like to offer for charter to offset my costs of ownership. Unfortunately, the regulations that govern this kind of operation seem arcane and decidedly unfriendly to small boats like mine. I have looked into more “creative” approaches to chartering, such as fractional ownership and bareboat chartering, but I have not been able to find much information about how those businesses should be structured. Can you help?
I am often contacted by boat owners who are looking for “loopholes” in the Coast Guard regulations that restrict the use of a vessel as a charter boat. Charter businesses must consider a long list of other issues too, ranging from city permits and liquor licenses to operator licensing and insurance. But the regulations relating to the vessel itself often present a series of threshold questions that must be answered before the first ad is posted for the new business.

The United States is one of many nations that protect their domestic transportation industries through “cabotage” laws. These laws require the transportation of passengers or cargo between U.S. ports to be performed aboard “U.S.-flagged” vessels (vessels registered under the laws of the U.S.) and U.S.-built vessels.

Many small recreational vessels afloat in the U.S. are foreign-built. A foreign-built vessel may not legally carry passengers for hire in this country unless the owner obtains a waiver of the restriction from the U.S. Maritime Administration (MARAD). This restriction is not related to the number of passengers the boat may carry.

Any boat that carries at least one passenger for hire must be built in the United States or obtain a MARAD waiver. In practice, we see a lot of foreign-built boats that operate as charter vessels with a limited number of passengers aboard, but those boats are, nonetheless, violating the law. The Coast Guard simply has not made enforcement a major priority.

The next issue concerns the passenger count. Coast Guard regulations (46 C.F.R. sec. 2.01-7) allow a vessel measuring less than 100 gross tons to carry up to six paying passengers without undergoing a rigorous Coast Guard inspection (the limit is increased to 12 passengers if the boat measures more than 100 gross tons). These “six-pack” charters offer a relatively inexpensive avenue for small vessels to be used in a charter business, since they can avoid the expensive Coast Guard inspection process.

Faced with these construction and inspection restrictions, many charter boat companies either operate “below the radar” or, like our reader, they look for loopholes to get around the restrictions. The most commonly used loophole is a bareboat charter.

A bareboat charter (also known as a “demise charter”) is a lease arrangement where the charterer takes on all of the rights and obligations of ownership without actually transferring title, and the owner is generally protected from liability against third parties.

Bareboat charters are common in the world of commercial shipping, where complex tax and international vessel registration laws may encourage a lender to take ownership of a ship rather than to simply record a mortgage. Like most principles of maritime law, bareboat charters were developed to manage the safety and commerce of ships at sea, but they are equally applicable to recreational boats.

A bareboat charter has the effect of shifting the possession and control of the vessel — and liability for injuries to third parties — from the owner to the charterer. It is attractive to charter boat operators because the charterer is treated as an owner. Since an owner may bring as many guests and friends aboard as the vessel may safely accommodate, the operation is not subject to the construction and Coast Guard inspection regulations discussed above.

Unfortunately, to create a bareboat charter, the owner of the vessel must completely and exclusively relinquish possession, operation, maintenance, command and navigation of the boat to the charterer. Many owners are uncomfortable with that idea. But if the owner is allowed to manage or operate the boat in any way, it is not a “bareboat” charter and the operation is subject to the construction and inspection regulations.

The most common mistake made by people who seek to use this structure as a loophole is that they require the charterer to use a specific captain and crew, or to select from a very short list of captains and crew. A true bareboat charter arrangement does not allow the owner to designate a captain and crew.

Our reader is also considering a fractional ownership structure. This may seem like a bad idea, since he is looking for “creative” ways around the chartering regulations rather than partners to participate in the ownership of the boat. However, we have seen boat owners adapt this structure to a charter business by selling a “temporary” ownership interest in the vessel or in the company that owns the vessel.

This structure calls for the true owner to repurchase the ownership shares from the customer at the conclusion of the voyage. The Coast Guard, however, has seen through this trick and they have deemed these schemes to be thinly disguised charters and, therefore, are subject to charter regulations.

We can argue about whether the restriction against the use of foreign-built boats in charter operations is reasonable in the context of a small boat that is used for harbor and coastal cruising. However, the limits on passenger count and the related Coast Guard inspection requirements are driven strictly by safety concerns, and the Coast Guard takes those issues very seriously. Contact the Coast Guard or an experienced maritime attorney for more information.

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2 thoughts on “What Regulations Apply to a Bareboat Charter Yacht Owner?

  • June 2, 2017 at 6:43 am
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    Thank you so much for simplifying maritime law. My husband and I enjoyed your articles while boating in California, and although we have now sailed around the world, we still find your articles interesting and applicable to all kinds of boating situations. We sincerely hope that you will continue to offer your sage advice to readers.

    Reply
  • October 12, 2017 at 9:28 am
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    My wife and I bought a 1994 Catalina 270LE in May of 2017. We have been thinking of ways to maximize the investment and receiving $ from people who are interested in using the vessel seems a good way to go.
    My idea is I would like to create a group (selling monthly/yearly memberships) to get some income, then use that income to pay slip fees, insurance, maintenance/repairs/upgrades, etc. I want to retain full ownership but in exchange for $ offer people use of the vessel for sailing or overnight stays.
    I am also very excited about the systems on the vessel, mechanical, electrical, etc. I have already done some repairs and upgrades and it is very fun to learn new skills. I would also like to offer as part of the membership “work share days” that people can come join in and help make the vessel better. (Just bought Nigel Calder’s “Boat Owner’s Mechanical and Electrical Manual” and I am looking forward to going through each system on our vessel, I thought others might enjoy it as well!)

    Are there any recommendations for format? A LLC? A private group of friends? I am not thinking of making a lot of $ with this, my initial thought was “members” could put down $1,000 as a deposit to cover deductible from insurance in case of accidents and then around $250/mo (the cost of a single day charter most places I’ve looked) for 6 half days (or 3 full days) each month.
    Our monthly expenses since May average about $650 (though they might be closer to $750 if we got more insurance coverage for extra operators) so if we had 2 members it would reduce our costs and if we had 3 members sharing it would almost completely eliminate costs to us (aside from time).

    The current issues I see are:
    1.No certification/licensing so I can’t do a passenger for hire type setup. (Nor do I have any diesel mechanic, marine electrician or other official craftsman qualifications so I can’t say the work sharing days are any kind of education, just an informal gathering of people wanting to rely on their own abilities to learn and apply basic principles)
    2. Slip is rented on lease w/ my wife and her parents as listed owners so idk if others could stay overnight under harbor rules and regulations.
    3. If members stole anything off the boat, I have no idea how we would hold them accountable. There are lots of loose items like safety equipment (pfds, headlamps, first aid, epirb/beacons, and more), tools, spare hardware, sails, etc. Worst case scenario they could strip the vessel and plead ignorance.

    Any thoughts on how I could start this group legally, ethically and with low liability to myself and the others (members) I would share time on the vessel with is greatly appreciated!

    Safe sailing to everyone!

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