Releasing the Deposit: Buyer Backs Out of Boat Transaction

How long does a yacht broker need to keep a deposit in his trust account before he can release it to the seller? My boat is listed for sale with a broker, and I accepted an offer that was made by a buyer over six months ago. The buyer said he was happy with the sea trial and survey, but then he changed his mind and backed out of the deal. He thought he should get his deposit back, but it was pretty clear to me that he breached the contract. I thought we might end up in a lawsuit, but the buyer seems to have backed off. Unfortunately, the broker has been unable to reach him and no one has heard from him for months. What are the rules for releasing the deposit under these circumstances?

The short answer to your question is this: Assuming the contract calls for payment of the deposit as ’liquidated damages’ in the event of a buyer’s breach, there is no minimum period. The deposit is lost immediately upon the occurrence of a breach by the buyer. Most of the contracts used by brokers today do include the appropriate reference to liquidated damages. You mentioned that the buyer breached the contract, so there’s your answer. The buyer has lost the deposit. The bigger question, however, is whether in fact there was a breach by the buyer.

You indicated that a dispute had developed before the buyer disappeared, but that it was pretty clear that the buyer had breached the contract. Are you sure? Is it possible that there was no breach? Your broker is not an attorney, and as such he is technically not in a position to reach a legal conclusion regarding whether one of the parties breached the purchase contract.

From a practical standpoint, it may be possible that the actions of the ’breaching’ party are so clear and undisputed that a broker is able to make a determination without any legal advice. Nonetheless, if there is any ambiguity regarding the breach, brokers may expose themselves to liability if they disburse the funds to either party before they resolve the dispute or remove the ambiguity.

Many yacht purchase agreements include a provision that allows a broker to ’disburse funds as broker in good faith sees fit,’ but I would not want to rely on that clause to insulate the broker from liability if he makes a mistake. Some purchase agreements are drafted to reduce the ambiguity by requiring a buyer to sign a ’Final Acceptance’ at the end of the contract. In those cases, the buyer’s deposit may be at risk only if he or she has signed that provision.

If the buyer is entitled to the return of the deposit and the broker is unable to find him or her, the broker is placed in an uncomfortable position. The funds need to stay in the broker’s trust account until the buyer shows up. If the buyer never shows up, the broker is still not entitled to simply keep the money or give it to the seller. At some point, whether the parties are still in the picture or not, the broker may resolve this through the courts by filing of an ’interpleader’ action. This procedure allows the broker to get out of the middle of the dispute by turning the entire matter over to a judge. And ironically, the broker may be able to use the disputed deposit to pay his legal fees for the interpleader.

To summarize, if the breach is absolutely clear and the contract has a liquidated damages clause, there is no ’waiting period’ for the deposit. The buyer gave up the deposit when he or she breached the purchase contract. In the case of a good faith dispute between the parties, or if the question of a buyer breach is not absolutely clear, the broker exposes himself to liability from one of the parties if he disburses the funds to either side. In the end, the safest route is to contact an attorney who is familiar with these types of transactions.