In the interest of full disclosure, I will note that we have done a lot of legal work with yacht brokers, and as such, I may be a little biased. But we have also represented quite a few buyers and sellers in transactions without brokers that ended up in litigation. In my experience, the risk of litigation is significantly higher for boat sales that proceed without the involvement of a yacht broker, unless the parties both hire attorneys before the deal closes.
California and Florida both require yacht brokers to be licensed by their respective states. In California, brokers are regulated under a consumer protection statute known as the Yacht and Ship Brokers Act, and the regulatory framework includes testing, periodic inspections and trust account auditing by the California Department of Boating and Waterways. A “private sale,” or a transaction that proceeds without a broker, is not subject to regulation by any state agency, unless a crime has been committed. And, even if one of the parties complains of criminal activity, these types of crimes tend to fall toward the bottom of a prosecutor’s list of priorities.
A licensed broker who is a member of one of the various broker trade groups (the California Yacht Brokers Association, for example) will likely use a set of form contracts prepared by experienced maritime lawyers that have been used in thousands of transactions. A deposit tendered by a buyer will be held in a broker’s trust account and subject to audit and regulation by the state. Conversely, a buyer and seller who work without a broker may “cut and paste” a purchase contract from the Internet, which is likely to be ambiguous or inadequate, and one of the parties will hold the deposit subject to his or her own interpretation of the escrow agreement.
The parties to a private sale may risk litigation with their broker if they purposely structure the deal to cut out the broker and save the commission. Even if they wait until the expiration of the listing period, the broker may have a claim if he or she can prove that the buyer was introduced to the boat through the broker’s efforts, or if the broker can prove that the buyer purposely interfered with the listing agreement.
With these issues in mind, let’s take a look at the specific proposal described by our reader. In his offer, the buyer suggested that the seller would make money because of the attractive interest rate in the financing arrangement, and that he would save money because there would be no bank to require a survey.
I should first note that the survey is invariably paid by the buyer, so there is no cost savings to the seller by this proposal. More important, the buyer’s suggestion that the seller provide financing can probably be traced to the buyer’s failure to qualify for conventional bank financing. This should raise a significant red flag.
The offer described by our reader also suggested that the reader should retain title while the buyer makes payments. This is almost always a bad idea. The boat owner may find himself liable for the negligence of the buyer in the event of an accident, and he may find that his insurance coverage is void if he misrepresented the nature of the transaction to his insurance company. The proper approach to a loan on a vessel is to transfer title to the buyer and record a “preferred ship mortgage” with the Coast Guard.
The problems noted in this proposal would probably have been picked up if the offer had been made through a qualified, experienced and reputable broker. The broker has a fiduciary duty to his or her client to discuss the risks of pursuing a “creative” offer such as this, at which point the seller will be better prepared to make an informed decision.