How to Buy a Superyacht
Posted: Jan. 12th, 2009 | By Benjamin Maltby
Superyachts are the summit of success. They offer adventure, comfort, privacy and security. But ownership means responsibility, and, potentially, liability. Of course, you don't have time for steep learning curves, and some will try to exploit this. Benjamin Maltby, an English barrister and Director of independent superyacht consultants MatrixLloyd, provides a little guidance for those thinking of joining the élite fleet.
What is a Superyacht?
Yachts over 24 metres in length are generally considered to be superyachts. Why such a precise division? Because above this size the rules and regulations really start to kick in, crew must be employed, and the whole adventure becomes a little more exclusive. Thankfully, charter income can contribute significantly towards running costs and some vessels have been specifically built to be profitably chartered.
Choosing Your Superyacht
Superyachts are the embodiment of the truly successful individual's personality. They should genuinely reflect the owner's character if he or she is going to truly enjoy time spent onboard. Sailing yachts have a more natural feel at sea and can be raced competitively. Motor yachts provide more space, can be faster and built to more individualistic designs. There exists a warm-hearted rivalry between the two camps. At this scale, there is little difference in running costs.
As an aspiring owner, you may have spent at least some time chartering a superyacht, and will have an idea as to the sums involved. Yet new owners should still be realistic as to how much they are prepared to invest. A good rule of thumb is that you should expect to spend 10% of your vessel's value each year in running costs. It's common to start with a modest vessel, and progress to something larger every few years.
New or Existing?
Superyachts are not built on production lines. Your input will be sought at every stage. They are also complicated, with much to go wrong. Owners like to push back technological and aesthetic frontiers. Unproven combinations of materials and concepts are often incorporated. The results are awe-inspiring, but teething problems can take time to be resolved. Superyachts often take years to build. Buying an existing vessel gives you immediate use, and a subsequent refit can soon provide individuality and a box-fresh feel.
Having Your Superyacht Built
Having spent some time leisurely researching the market, you may know which builders and designers will be capable of delivering your dreams. Builders may offer you their "standard" contractual terms. With this amount of buying power, these terms, which may favour the builder in ways you may not have thought possible, will need amending. For example, legal title may not be allowed to pass until completion, meaning that your (substantial) deposits paid before that time may be lost if the builder goes out of business.
There is no point finding a designer who pens the perfect superyacht, which the builder then interprets in his own cost-cutting way. The specifications must be highly detailed. Further, a separate interior designer will be instructed, as well as a naval architect and independent technical surveyor: a lot of voices. The contracts with these parties should be incorporated into a single build agreement, to ensure all sing from the same hymn sheet.
Builders must adhere to a complex array of regulations. This will depend on where the vessel is to be used, whether it is to be chartered and which country's flag it will be sailed. The contract must reflect these requirements in exquisite detail. Modifying a superyacht afterwards can be particularly expensive.
It's not just the total cost of the project which must be agreed. The builder may need instalments paid to cover the cost of materials. Far better, though, to pay following the completion of various stages, to encourage the builder to stick to the schedule. The builder will also need to factor-in fluctuations in materials costs and exchange-rates, to prevent surprises later on.
The builder will often employ outside suppliers and sub-contractors for the trickier parts of the process. This is normal and does not mean that the builder is incompetent. The builder should, however, always remain liable for any of the suppliers or sub-contractors' mistakes. It is also important for the builder to have paid the suppliers for materials as soon as possible to prevent anything being reclaimed later.
Builders' yards are hazardous places. The yard should be obliged to carry insurance against your superyacht being damaged or destroyed even before it hits the water. Meanwhile, you should have the option of a refund on payments made to the builder, or for the insurance payout to be used to repair both yard and project.
If the builder goes bankrupt during the build - it happens - the builder will be obliged to repay any instalments. But you will be at the end of a long queue of creditors. Far better, then, to have this obligation backed by a bank guarantee. Alternatively, you can have legal title to the half-built superyacht, but the builder may then ask you for a guarantee against not paying the remaining instalments.
As no two superyachts are ever identical, their performance in terms of speed, noise levels, vibration and range, are difficult to predict - even with today's computer-aided design techniques. So it's normal to agree a fixed sum as compensation which the builder must pay if the performance criteria aren't met but still fall within certain limits, but still allow you to pull out if even these limits aren't met. Quibbling over discrepancies is an expensive business, involving expert witnesses. It's also difficult to put a figure on your disappointment. The builder will also be able to insure more easily against the design not working as expected.
Sorting matters out with a builder after the final instalment has been paid can be difficult. It is crucial that all the correct documents relating to legal title are presented before payment is made. Otherwise your new superyacht cannot be registered and you will not be allowed to sail anywhere. The place of delivery may also have tax implications, and must be agreed. The newly completed vessel will have to be formally tested, at sea, to make sure that the performance matches the specification. For this you will need to appoint an expert representative with the right qualifications and testing equipment.
Given the complexity of the project and the importance of things happening at the right time and in the right order, delays are possible. Best to agree in advance how much delay is acceptable, and how much money will be deducted from the instalments when larger delays occur. Otherwise, arguing over this can be expensive.
Not all your new superyacht's inevitable little faults will come to light during the trails. Only over time will all the equipment and systems will be used in varying weather conditions. The builder should guarantee materials and workmanship for a period of warranty - typically around a year - after delivery. Once again, the builder will need to put up security in the form of a bank guarantee, or have the last instalment withheld until the end of the warranty period.
Buying an Existing Superyacht
The usual place to start is the broker. Like estate agents, brokers promote superyachts in the market and provide guidance on price. Their descriptions, however, are usually without guarantee.
Unlike a house, it is perfectly possible to buy a superyacht without any legal formalities. The dangers of doing this are incalculable and a detailed agreement must be drawn up. The contract to buy and sell, covering all the ifs and buts, is contained in a single legally binding document called a Memorandum of Agreement (MOA), which is signed by both parties. 10% of the purchase price is normally paid straight away, with the balance only being paid once the superyacht and the all-important documentation have been formally handed-over to you at the agreed time and place.
The two other keys documents are the Bill of Sale, which formally records the transfer of legal title from buyer to seller, and the Protocol of Delivery & Acceptance, which sets out the exact time and date of the transfer - to ensure that insurance cover is seamless.
It is entirely up to you to check exactly what is being bought. This means having the superyacht surveyed, out of the water, by a qualified and insured surveyor. If satisfactory, this should be followed by a sea trial. As these stages are expensive, the MOA needs to describe the parties' rights and duties when issues are raised, including your right to pull out altogether.
The MOA should list all the equipment which is to be included in the sale: not just safety and navigation equipment but linen, crockery, and works of art. Superyachts can also carry vast quantities of expensive fuel and engine spares, which you should ensure do not make their way ashore before the sale completes.
As surprising as it may seem, superyachts can be "arrested" and sold if the owner doesn't pay anyone who has supplied goods or services to that vessel. It's as if the vessel itself owes the money. Such debts stay glued to the superyacht even after having been sold to an unsuspecting buyer. Although some debts, such as mortgages, can be seen by looking at the superyacht's entry in the relevant registry, most debts aren't listed anywhere. Crucially, the MOA must state that the vessel will be handed over free of debts. Guarantees against these liabilities, from a reliable guarantor, are also a must as the actual seller will usually just be an offshore shelf company with no other assets.
The MOA should cover other matters such as the documentation needed to enable a smooth transfer of legal title. Further, as charters are usually booked many months in advance, it's important to make sure that you, not the old owner, will receive the charter fees, and that you are happy with the terms of the charter itself.
Although using one of the standard MOAs saves re-inventing the wheel, some favour you and others the seller. Given the complexities of superyacht ownership, using an unamended contract can lead to disaster, and bespoke terms must be agreed.
Financing a Superyacht
Should you require financial assistance - most do - several banks are now happy to finance the purchase of both new and existing vessels. A proportion of the loan and interest repayments can be delayed until the end of the loan term and paid using sale proceeds or by refinancing. Aside from just handing the money over to you, for security's sake the bank may wish to buy the superyacht itself and charter it to you, with your charter fees repaying the loan.
As the principal security will be superyacht itself, the lender may want, for example, a say in which country you keep and register your vessel. The bank may also require charter money directly to it, insurance payouts to be paid to it first, and for further insurance in case the superyacht's insurance becomes invalid. Your vessel must normally be maintained to certain standards, with surveys and independent valuations carried out annually. The bank may still take an interest in you personally, perhaps requiring a personal guarantee and an undertaking that your net worth remains at a certain level.
Value Added Tax
If you want to keep your superyacht in European Union waters, you may have to pay Value Added Tax, ranging from 15% to 25% of the vessel's value depending on the country. Although the principles are the same, all the EU countries interpret and apply VAT differently. Generally, VAT is normally payable in the EU country through which the superyacht is first brought into the EU. Once VAT has been paid in one EU country, this should (in theory) be good enough for the all the other tax authorities. So it's possible to bring the vessel into the EU through the country with the lowest rate. Removal of the superyacht from the EU for a particular period of time resets the clock and VAT must be paid again.
Having the correct paperwork on board to prove the superyacht's VAT status is vital if arguments with customs officials, possibly leading to the confiscation of the vessel, are to be avoided. If this is going to be an issue, the VAT status should be made a term of the sale contract, and a bank guarantee provided just in case the seller is mistaken.
Thankfully, there are ways of avoiding VAT. For a start, superyachts built by a certain date, and moored in the EU on a certain date, are relieved, although proving where it was moored years ago can be tricky. Also relieved are vessels registered outside the EU, owned by a non-EU resident and only used temporarily in the EU. Temporarily means for 18 months in any 24 month period. An individual is resident in the EU having spent more than 185 days a year there.
It is also possible to effectively neutralise the payment of VAT where the superyacht is being chartered, by setting up a company as purchaser in the Isle of Man, which for VAT purposes is part of the EU. It is not necessary for the vessel to be sailed to the Isle of Man.
Going to court takes time and money, and entrenches positions. Far better to accept in advance that honest disputes may arise and agree how these are going to be resolved. The parties should agree for small technical issues to be referred to an independent surveyor, and for larger disputes to go to arbitration. Either way matters are resolved in private, which may be appreciated by high-profile publicity-shy buyers.
Parties can choose which country's law will govern the purchase. As buyer, using the law and courts of a country other than that where the builder or seller is based is a good idea. The most common and least controversial choice is English law: in fact, most cases dealt with by the English commercial courts involve parties with no connection with England. The resulting body of previous cases, built up over hundreds of years, also provides more answers without having to litigate.
All vessels must be registered with a certain country, and wear that country's maritime flag known as an ensign. Most superyachts fly the "Red Ensign", which means registering the vessel in the United Kingdom or one of a small group of Commonwealth countries including Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, Jersey and the Isle of Man. The reason for this is that the Red Ensign safety standards are very high, adding to your vessel's resale value and prestige. Beyond the Red Ensign group, other nations such as the Marshall Islands have adopted many of the same regulations, while working with the United States Coast Guard to make sure US red tape for visiting superyachts is minimised.
Registering in a reputable jurisdiction also provides the consular assistance and naval protection of that country, and gives port officials one less reason to inspect your vessel to ensure safety regulations are being complied with. Insurers and financiers may insist on certain countries' flags, to help ensure that the highest regulations are being applied to their liability. There will be tax implications inherent in any choice.
Although relatively rare in the restful world of superyachting, accidents do occasionally happen. Insurance spreads risk and brings certainty. There can exist, however, opportunities for underwriters to walk away from claims. You need to make sure that underwriters have no excuses when it comes to the crunch.
You must disclose anything which might influence a prudent underwriter when considering whether to take on the risk, and if so what the premium should be. Thankfully, not everything needs to be disclosed. Anything which diminishes the risk, or which is already known or presumed to be known by the underwriter, need not be revealed. Breach of this duty allows either party to treat the insurance contract as if it had never been made in the first place. This is different from most other contracts, where the principle of buyer (or seller) beware applies.
The most common reason for underwriters refusing to pay-up following a claim is that they consider the assured to have been in breach of a warranty. These are strict undertakings to do or not to do something, which must be adhered to exactly, even where it does not actually affect the risk. Not all policy clauses are warranties.
You need to think about where the underwriter is based. Should an underwriter become insolvent following a large claim, you could be left high and dry. Some countries do not regulate underwriters' finances effectively enough.
Mooring Your Superyacht
Mooring a superyacht, especially in the more prestigious Mediterranean ports and harbours is a major expense. It can make sense to purchase moorings, but given the unusual nature of such property, it is vital to get expert advice to check exactly what is being bought and what charges may still be levied by the marina managers, and what the tax implications will be for both you and your vessel.
Managing Your Manager
As well as having to pay fines for breaching regulations, or even having your superyacht detained, you can be subject to criminal liability where safety regulations have been breached. By being enforceable directly against your vessel, sanctions can sidestep corporate and trustee owning structures. So nearly all owners use the services of shore-based managers. In fact, international safety regulations require superyachts over a certain size to have management ashore. Although the relationship between you and your manager will be set out in detail in the management agreement, the use of managers can still leave you liable for non-compliance with the law if the relationship is unbalanced.
When buying an existing superyacht, it makes sense to take on the existing crew who will be familiar with the vessel. In fact, given the difficulties and expense involved in taking on new crewmembers, the time taken for the crew to familiarise themselves with any new vessel, and the fact that the superyacht will often need to be delivered to you, it may be a good idea to make the signing new contracts with the old crew a condition of the purchase.
Formal crew contracts will be required and these should list hours of work, benefits and travelling expenses to prevent misunderstandings. Crewmembers may prefer to be the employees or contractors of the manager rather than the owner, especially as they may have known the individuals at the management company for many years. Should the worst come to the worst, it is also best that the manager is responsible for terminating a contract of employment, or reassigning a crewmember, to prevent relations between the owner and the remaining crewmembers being soured.
You, or your manager, must ensure that the whole crew meets the standards of training and medical fitness required by the superyacht's flag state. Manning levels must also be satisfactory. Ensuring that the crewmembers have a sufficient command of a common language is not just matter of practicality, but a requirement.
Although they're expensive, superyachts are, after all, just extravagant toys. This may explain why some people don't take the right advice from the start, and experience problems or disappointment later on. Purchase, ownership and operation all give rise to a matrix of rights and responsibilities.
Until fairly recently, superyachting was virtually unregulated. Recent safety and security concerns have changed all that, especially where the vessel is chartered. This has made the pastime fantastically expensive - a major attraction in itself. Some within the industry still take an inappropriately relaxed attitude to rules and regulations, and are happy to walk away and leave the owner to pick up the pieces when things go wrong.
Buying a superyacht is the start of an incomparable adventure. With the right guidance from the start, all will be plain sailing. Independent superyacht consultant MatrixLloyd SL provides a unique one-stop service to help you buy, manage and enjoy your superyacht with complete peace of mind.
This article does not provide, or replace, legal or financial advice.