California Escrow Law (Cal. Financial Code section 17000) requires anyone who holds money in connection with the sale of real or personal property to be licensed as an escrow agent, unless they fall under a specific exemption. Yacht brokers may be exempt from the escrow licensing requirement, but our reader is interested in a transaction without a broker.
An escrow agency can’t be formed overnight. Applicants must submit audited financial statements showing substantial assets, the company’s managers and employees are subject to thorough background checks, bonds must be filed with the Department of Business Oversight, and all company offices must be staffed by a manager with at least five years of responsible escrow experience.
Parties to a real estate transaction may therefore use licensed escrow agencies with a high degree of confidence, but traditional licensed escrows typically do not handle yachting transactions.
Real estate transactions are usually memorialized on standardized form contracts and the sequence of events for the transaction tends to follow a fairly routine path. The escrow agency may therefore process funds and paperwork without the need to hire a lawyer for every transaction, which in turn allows them to charge a reasonable fee.
In contrast, yacht purchase and sale transactions are rarely “routine.” The lien recording and perfection rules, title recording procedures, and purchase contingencies may all be very complicated and are in any case substantially different than what is found in real estate transactions. As such they do not fit within the common business model for an escrow agency. Title paperwork in a yacht purchase transaction is therefore often handled by a vessel documentation service, while in California the funds are usually held in trust by the yacht broker.
Vessel documentation services do an excellent job with the paperwork processing aspect of a yacht purchase.
Reputable vessel documentation services belong to a trade organization called the American Vessel Documentation Association (AVDA), and their members can be identified through the AVDA website at http://americanvessel.com.
Unfortunately vessel documentation services are not licensed to escrow funds. However, yacht brokers in California are exempt from escrow licensing requirements because they are authorized to hold funds in trust under the provisions of the California Yacht and Ship Brokers Act. The real problem therefore is with private party transactions or transactions in other states where yacht brokers are not regulated.
Escrow options for buyers in transactions with no licensed broker are quite limited. The parties in such a transaction may ask an attorney to hold the funds in trust, but unfortunately attorneys don’t work for free. They will likely charge an hourly rate which will include the drafting or review of escrow instructions as well as the processing of receipts and disbursements, which may pencil out to several thousand dollars.
The parties in a transaction without a licensed escrow or yacht broker may want to consider whether they need to escrow funds at all. The only real issue in most transactions is the handling of the deposit and the question of whether it is refundable. Depending on the transaction both sides may save time and money by proceeding without a deposit.
In the end the best solution is probably to work through a licensed yacht broker, but if that is not possible an attorney experienced in yacht purchase and sale transactions should be consulted.
David Weil is licensed to practice law in the state of California and, as such, some of the information provided in this column may not be applicable in a jurisdiction outside of California. Please note also that no two legal situations are alike, and it is impossible to provide accurate legal advice without knowing all the facts of a particular situation. Therefore, the information provided in this column should not be regarded as individual legal advice, and readers should not act upon this information without seeking the opinion of an attorney in their home state.
David Weil is the managing attorney at Weil & Associates (weilmaritime.com) in Long Beach. He is an adjunct professor of Admiralty Law at Loyola University Law School, is a member of the Maritime Law Association of the United States and is former legal counsel to the California Yacht Brokers Association. He is also one of a small group of attorneys to be certified as an Admiralty and Maritime Law Specialist by the State Bar of California. If you have a maritime law question for Weil, he can be contacted at (562) 438-8149 or at firstname.lastname@example.org.
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