What Happens When a Seller Backs Out of a Boat Sale After a Grounding?

I am a licensed yacht salesman in California, and I am representing a boat owner under an “open” listing agreement for the sale of his boat. We were approached by another yacht brokerage with a potential buyer, and the parties eventually entered into a purchase contract. The buyer completed all of his inspections and signed off on all contingencies, but before closing the owner’s friend ran the boat aground. The boat suffered considerable damage in the incident, but upon learning that the repairs would be pretty straightforward the buyer agreed to go forward with the purchase if the repairs were completed in a timely manner. That would have been great news, except that the owner has decided that he does not want to sell the boat. We are now facing three issues. First, the buyer wants to force the sale to go forward. Second, since our listing agreement requires the owner to pay our commission if he backs out of an enforceable contract, we feel that we are entitled to our commission. And finally, the people from the other brokerage claim that they are entitled to a share of that commission since they brought the buyer to us. Can you help?

The case described by our reader is interesting because it is the reverse of what we often see when a boat is damaged during the course of a purchase. We are more often faced in those cases with a buyer who wants to back out of the deal and a seller who wants to force the deal to go forward. But regardless of which party is having second thoughts, the answers to these questions are found in the agreements between the parties.

In this case, we need to review three separate contracts: The purchase contract that was executed between the buyer and seller, the listing agreement between the seller and his broker, and the cooperative brokerage agreement that provided for the commission split and other terms between the two brokers. These contracts can take many forms, but there are certain constants that tend to find their way into most yachting industry contracts, regardless of who the author was.

The purchase agreement will typically include a provision that requires the seller to deliver the boat to the buyer in substantially the same condition as on the day of the buyer’s offer, except for ordinary wear and tear. A significant event such as a grounding, a partial sinking or a fire will generally allow the buyer to back out of the deal. But it does not automatically allow the seller to back out of the deal.

If the buyer agrees to take the boat “as is,” without requiring repairs, the seller would most likely be in breach of the purchase contract if he decides to back out of the deal. However, if the buyer required the boat to be repaired, a court would likely find that the substance of the agreement had changed so significantly that both parties would be released from the contract.

In this case, our reader indicated that the buyer wanted to go forward if the “repairs were completed in a timely manner.” That’s a pretty big “if,” and it is clear that the buyer will not accept the boat “as is.” As such, the seller will probably not be found to be in breach of the contract if he backs out of the deal.

The obligations of the broker and the seller in the listing agreement are tied closely to the language of the purchase agreement and the evolution of the transaction. Most listing agreements include a provision where, if a buyer is found who is ready, willing, and able to buy the boat under terms that are agreeable to the seller, a commission is owed to the broker by the seller — even if the transaction is never completed.

Here, the buyer executed a purchase agreement where he agreed to buy the boat in its “as-is” condition, but the condition of the boat changed as a consequence of the grounding. As noted above, if the buyer agrees to buy the boat anyway, without requiring repairs, the seller would likely be in breach of the purchase contract, and therefore would owe a commission to the broker, if he backs out of the deal. But in this case, since the buyer required the boat to be repaired, the seller probably did not breach the purchase contract when he backed out — and, as such, he would not owe a commission to the broker.

The cooperative brokerage agreement (often referred to as a “co-op”) controls the relationship between the two brokers, and the form of this contract as it is used by different brokers will vary considerably. Our reader is facing a claim from another broker, who believes that the seller breached the purchase contract by backing out of the transaction and that the brokers should share the commission, just as they would have if the transaction had been completed.

We would need to review the contracts that were actually used in this transaction to make a definitive statement regarding the rights of both brokers, but the buyer’s broker is probably not entitled to any kind of a commission in this case. First, as discussed above, it does not appear that the seller breached the purchase contract. Second, even if there were a breach, most cooperative brokerage agreements require payment to the buyer’s broker only when a boat is actually sold.

Vessel purchase and sale transactions can get complicated in a hurry, when an unexpected event such as a grounding intervenes or when one of the parties changes his or her mind. The rights of the parties under these circumstances may vary considerably, depending on the language of the underlying contracts, and the advice of a qualified attorney should be sought before things get out of hand.