RSS feedsSuperyachts are yachts longer than 24 metres. At this sort of size, certain rules and regulations apply, a crew must be employed and the whole adventure becomes expensive – and exclusive. The good news is that charter income can contribute significantly towards the running costs, with some vessels being chartered profitably. They can take years to build, but buying an existing vessel gives immediate use, and a refit can soon provide individuality and a box-fresh feel.
Building a superyacht
The key document is the build contract. The yacht’s specifications must be set out in great detail, reflecting a complex array of regulations. The newly completed vessel will also have to be formally tested at sea, for which a qualified expert representative will have to be appointed. The builder should guarantee materials and workmanship for a warranty period.
It is crucial that all the correct documents relating to legal title are presented before the final payment is made. Otherwise a new superyacht cannot be registered and will not be allowed to sail anywhere. The place of legal delivery may also have tax implications, and must be agreed.
Buying an existing superyacht
The usual place to start is a broker, but using one is not strictly necessary. It is also possible to buy a superyacht without any legal formalities, but the dangers of doing this are incalculable. The contract to buy and sell is contained in the memorandum of agreement. Typically, 10% of the purchase price is paid straightaway.
It is up to the buyer to check what is being bought. The superyacht must be surveyed and a sea trial undertaken. The memorandum of agreement must describe your client’s rights, including the right to pull out, and list all the equipment included in the purchase. Crucially, the memorandum of agreement must state that the vessel will be handed over free of debts.
Financing a superyacht
If your client requires financial assistance, several banks are 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 handling the money, for security’s sake the bank may wish to buy the superyacht itself and charter it back, with the charter fees repaying the loan.
As the principal security will be the superyacht itself, the lender may want, for example, a say in which country the vessel is kept and registered. The bank may also require charter money to be paid directly to it, insurance payouts to be paid to it first, and for further insurance in case the superyacht’s insurance becomes invalid. And the bank may still take an interest in your client personally, perhaps requiring a personal guarantee and an undertaking that their net worth remains at a certain level.
Value added tax
If the superyacht is to be kept in European Union waters, VAT may have to be paid, ranging from 15% to 25% of the vessel’s value, depending on the country. Generally, of course, VAT is 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 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.
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 of VAT, although proving where a boat 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.
It is also possible effectively to 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.
Disputes
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.
Registration
All vessels must be registered with a particular 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 UK 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 the vessel’s resale value and prestige.
Resting assured
Although relatively rare in the world of superyachting, accidents do happen. Insurance spreads risk and brings certainty. There can exist, however, opportunities for underwriters to walk away from claims.
You must disclose anything that might influence a prudent underwriter when considering whether to take on the risk and, if so, what the premium should be. Anything that 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.
It is important to consider 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 a 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 your client and their vessel.
Managing the manager
As well as having to pay fines for breaching regulations, or even having a superyacht detained, the owner can be subject to criminal liability where safety regulations have been breached. By being enforceable directly against the vessel, sanctions can sidestep corporate and trustee-owning structures. As a result, 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.
Crew control
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 crew members, it may be a good idea to make the signing of 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. Crew members 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.
Standards of crew training and medical fitness, as required by the superyacht’s flag state, together with manning levels, must also be satisfactory. Also, ensuring that the crew members 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, but 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.
However, 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.
Benjamin Maltby is a director of independent superyacht consultants MatrixLloyd SL
