It is always difficult to predict how long a boat will stay on the market after it has been listed. A boat can sell immediately or it can sit on the market for months, or even years. As a result, both parties, and particularly the seller, should prepare for closing well before a transaction occurs. Buyers oftentimes become uneasy about a purchase because the seller does not have their affairs in order. There are steps the parties can take to guarantee a smooth process.
Sellers should ensure that they have original copies of their title documents, whether it is a state certificate of title, US Coast Guard Certificate of Documenta-tion or certificate of registry from a foreign jurisdiction. US-documented and foreign-flagged vessels are required to keep their relevant ownership certificates on board at all times, so this shouldn’t be an issue for them.
However, state titles are frequently lost or misplaced. It is especially common when dealing with larger transactions involving additional tenders or jet skis. For example, a seller might be able to provide the ownership documents for a yacht or sport-fishing vessel, but the titles to the tender and other personal watercraft go missing. Depending on the jurisdiction, it can take up to a week to receive duplicate titles, so it is important for those documents to be organized ahead of time. Otherwise, a seller might find himself in breach of contract for failure to provide the proper documentation at closing.
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In other situations, the seller might not have the original title due to a lien on the vessel. Just as with automobiles, banks and other lenders typically retain possession of state titles. On the other hand, mortgages and liens are simply recorded against documented or foreign-flagged vessels, so the lender does not retain any ownership documentation. Regardless, I always suggest our clients call the lienholder or bank well in advance of the closing and establish a direct contact in the event they have a question, need a document or require a payoff amount. Lenders can make transactions much more time consuming and complex, so it greatly reduces the stress level when a contact is made who can be easily reached.
Perhaps the most common issue we face prior to closing is the mismanagement of corporate matters for vessels owned by a company. At closing, the parties must be able to prove the ownership entity is in good standing and identify the members, managers, shareholders or officers. Without such information, a party cannot ensure that a transaction is properly authorized by a company.
We have run into an assortment of issues related to ownership, management structure and the status of an entity itself. Each situation creates its own set of problems, which can be timely and costly to our clients. As a result, it is important to compile all corporate documents well in advance of closing, be sure annual reports or the equivalent have been filed with the proper jurisdiction, and that all relevant fees have been paid.
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Entity Formation by the Buyer
It is relatively standard practice in the marine industry to allow a buyer to assign the terms of the purchase agreement so that an entity can take title to a boat at closing. With that being said, it is still important to read the terms of a purchase agreement to ensure that it allows an assignment of the contract. Just because it says “or assigns” on the top of the page in the preamble does not necessarily mean a contract is indeed assignable.
A buyer should start the entity formation process before they accept a boat. It can take up to two weeks for an entity to become active, and a seller does not have to wait for a buyer to have the formation process complete. This becomes even more important if a buyer is financing a boat because a bank will want the ownership and management structure before it will approve the funding. This also applies to marine insurance and anything else relevant to a vessel that must be in the name of the owner.
Parties to a transaction should never give even the slightest reason for the other to back out of a deal if they can help it, which is one of the simple keys to a successful transaction. Every deal is different and some are more complex than others, but it will always be a less stressful process if all parties discuss the basic steps previously outlined well ahead of closing time.