Contract for Buying a Boat
The foundation of any boat sale and purchase transaction is the boat purchase contract. This legal document sets out the various rights and obligations of the respective parties and serves as the primary means of allocating risk. In other words, the parties negotiate and bargain over who should bear the burden of a particular risk and then memorialize that agreement in a written contract. As a result, a good boat purchase contract should be an accurate reflection of the parties’ agreement governing important issues such as the price, how much money is to be held in escrow, the closing date, what happens to the deposit if the transaction falls through and when or if there is recourse for either party in the event of a dispute.
From the perspective of the seller, a sound and enforceable contract is imperative for (a) effectively assigning risk to the buyer in the unfortunate event that the vessel has a defect, and (b) maintaining the highest degree of purchase price certainty. It is well understood that if upon survey and sea trial the vessel is found to have an undisclosed defect, the buyer will be entitled to rescission. The purchase contract can, and should, limit the extent of the seller’s obligation to cure. In addition, the seller can protect his purchase price by allocating risk to the buyer. For example, if the buyer will not deliver the balance of the purchase price at closing, the parties can agree that closing will occur with the seller holding the deposit pending the buyer’s approval of the survey results. If the buyer delivers the balance of the purchase price, then the deposit is applied against the purchase price. On the other hand, if the buyer fails to deliver the balance of the purchase price, the deposit is forfeited to the seller.
From the buyer’s standpoint, a sound and enforceable contract is general fairness . There are many "standard" purchase contracts which provide rather lengthy descriptions on what constitutes material defects or damages to the vessel. Depending on the particular form, a vessel may have been damaged by age and use, and/or may be well-worn in several regards, while still being in good condition, or otherwise fit for use. The parties can, and often do, negotiate the definition of what constitutes a material defect or damage to the vessel. This ensures that the parties have a common understanding of what conditions must be repaired to "cure" the condition or issue, as compared to damage which need not be repaired as a condition of performance.
While the negotiation over the purchase contract should consider all conceivable issues, one of the most difficult areas for a party to negotiate is the flip side of the same coin – when should the seller be liable for pre-closing defects of the vessel? A seller’s liability for pre-closing defects is usually in three contexts: (1) pre-contract/purchase contract liability; (2) breach of express representation/warranty concerning the condition of the vessel; and (3) breach of implied or unwritten representations and warranties. Pre-contract/purchase contract liability depends on the statement made, its content, and whether the seller intended to induce reliance from the buyer. In addition, breach of express representations and warranties extends for issues that are both pre and post-closing: if the seller breaches an express representation and warranty, the buyer can recover damages without having to show the seller knew, or should have known about the defect. As a result, the buyer can receive a monetary recovery for pre-closing defects that the seller did not know about. But as with all contracts, negotiating the terms should serve the interests of both the buyer and the seller. After all, it often takes two to renegotiate a seller’s right to indemnification.
Crucial Points in Buying a Boat Contract
Whether you have a lawyer or not, it is often helpful to have a list of some of the basic elements of a boat purchase contract. Here are some fundamental requirements:
- Buyer and Seller Information: In a properly drafted agreement, the buyer and seller will be fully identified by name, address and contact number including email if available. If the seller is a corporation, then the corporate name, state of incorporation, and its corporate officer who has authority to sign should be identified.
- Boat Specifications: The boat should be fully identified in order to avoid later conflicts. Identifying details include the manufacturer, model, year, hull number, length and location. If available, the boat’s registration or documentation paperwork should be referenced.
- Terms of Sale: The price, deposit, deposit due date, balance due date, conveyance method, and financing terms should all be discussed. Even if seller is financing or taking a second mortgage on the boat, the terms and conditions need to be spelled out in clear detail. If the boat has an existing loan, the terms of the discharge should be addressed.
Legal Aspects of Buying a Boat
Delving into the legal considerations that need to be addressed in the boat purchase contract can save you headaches down the road. It’s not a step to be overlooked, as the contract may determine your recourse if a dispute arises. Legal issues applicable to a boat purchase contract include, for example, compliance with applicable local laws and regulations, title transfer and warranties.
Compliance with Applicable Local Laws and Regulations
The boat seller should have a clear understanding of his or her obligations to you and authorities, including sales tax collections (if any), as well as registration, documentation or other requirements for the boat or boating equipment in your locale and those in any other areas where the boat will be used. It is a good idea to hire an experienced attorney who practices boating law in the area in which the boat will first be registered to help you with these troublesome issues. The laws regarding transfer of ownership and registration vary by state, country and even federal jurisdiction.
Purpose of Title
Ownership of the boat is transferred from the seller to the buyer by the transfer of a valid title document. As the new owner, the buyer is required to take all reasonable steps to transfer the title document within a reasonable period of time and is responsible for obtaining a new registration for the boat, where required by law.
Warranties
Typical contractual warranties provide that all equipment sold with the boat is in good operating condition and was working as of the date of the execution of the contract. If something happens to the equipment after the contract is executed, the buyer generally assumes the cost to repair it. As a compromise, the parties may agree to share the cost of repair, but this is unusual. The parties also can provide as part of the warranty that the seller will be responsible for the cost of repairing identified pieces of equipment during a certain number of days or hours of operation after the date of the contract.
In addition, when a boat is sold, federal and state law require that the sale conform with the Uniform Commercial Code (or similar state commercial law) which requires sellers to make implied warranties of merchantability and fitness of purpose. Implied warranties are automatic contractual warranties required by law that exist even if they were not mentioned in the contract. By statute, when a seller sells a boat for a price more than $500, there is an implied warranty that a usable vessel will be delivered free from defects that substantially prevent use by the buyer.
If the seller is aware of any defect, such as a leaky bilge or engine, he is obligated to disclose such defects to the buyer. Any nondisclosure is a breach of contract committed by the seller, but generally only if it pertains to something that an average person would not readily discover.
Pitfalls to Avoid
Buyers and sellers often make mistakes in purchasing or selling their boats. We’ve all heard the joke about "whether the boat is seaworthy" perhaps sounding more like a question than an answer when a spouse asks if its seaworthy. Joking aside, in the context of a boat purchase agreement, I see two common mistakes boat buyers and boat sellers.
A good place to start when identifying common mistakes is the Bill of Sale. In Florida, a Bill of Sale is not required to purchase or sell a boat. But it makes sense to obtain one, if only for your own protection . When you obtain a Bill of Sale, make sure it specifies the boat’s hull number, manufacturer’s name, model year, length, condition, the seller’s name and address, the buyer’s name and address, and a description of anything personal (as opposed to real property) being sold with the boat.
The second common mistake I see in boat purchase agreements is the omission of a contingency for the buyer’s right to have the boat and its motor(s) inspected in advance of closing. Even if the closing is conditional on the buyer’s right to inspect the boat, its motor(s), and title, buyers are often so eager to close the deal that they waive their right to inspect the boat to obtain an early closing. Such situations often lead to poor negotiating positions for buyers, disputes, and loss of their money.
Negotiation Tips
Strategies for Buyers
When it comes to negotiating terms that work in their favor, buyers have a variety of tools at their disposal. They can start by offering a price that is below the market rate for the type of boat they are interested in purchasing. If this is combined with a check on the taxes and benefits for which the seller might qualify (see Government Incentives section) and an assurance of creditworthiness (see Financing Section), it can serve as a solid starting point. The buyer may also wish to build in contingencies. For instance, a buyer and seller might agree on an extended contingency period during which the buyer can back out of the sale with negotiated penalties if the buyer is not able to sell the boat for some amount or is not able to obtain finance. Alternatives to cash, such as barter, can also be used as part of the deal to help it move forward.
Strategies for Sellers
Like buyers, sellers can add incentives to the deal in the form of part-payments or barter payment methods (see Financing Section). They can also include conditional items such as first-right-of-refusal clauses, which allow the seller to retain ownership if the buyer cannot sell the boat within the agreed time frame.
Consult a Marine Attorney
While it is often prudent to attempt to resolve a contract dispute with a seller on your own, in certain circumstances, you may have no choice but to file suit. In these situations, the best place to start is to speak with a maritime attorney or other qualified legal counsel. A maritime lawyer has experience handling many different types of disputes and will be familiar with any special procedures that pertain to your situation . He or she can advise you on whether filing a lien might be a wise course of action. And if you have the misfortune of getting into a contract dispute with the U.S. government, your attorney will be able to offer direction regarding some of the special rules that apply to cases involving federal interests.