Despite reported drops in yacht brokerage sales in recent weeks, the orderbook for newbuildings is going to be keeping builders busy well into 2025. Building slots in yards are scarce and we are seeing an interest in buying yachts under construction (perhaps for a higher price than the original buyer agreed with the builder). This is not an entirely new trend but there are a few issues and potential stumbling blocks that need to be considered before proceeding with a sale.
How can a buyer under a building contract sell the yacht while it is under construction?
The yacht could be sold in the following two ways:
- Novate the building contract – The builder, the seller (the original buyer) and the new buyer enter into a novation agreement whereby the seller is replaced with the new buyer in the building contract and the contract continues with the new buyer assuming the buyer’s obligations under the contract from the time of the novation onwards. The novation agreement may contain the purchase price or payment terms agreed between the seller and the new buyer. Or alternatively, those terms may be dealt with in a separate agreement between the seller and the new buyer.
- Cancel the building contract and enter into a new one – The builder and the seller can agree to cancel the building contract, whereupon the builder may refund any sums already received from the seller. The builder would then enter into a new building contract with the new buyer.
Does the building contract allow the sale of the yacht before delivery?
This needs to be checked before proceeding. The building contract may require the builder’s express consent before it can be novated in the name of a new buyer. The contract may also prohibit any change in the beneficial ownership or control of the buyer unless the builder consents – this means that, if the seller is a corporate entity, that corporate entity cannot simply be sold to a new buyer without the builder’s consent.
If the builder consents to the sale and the novation, the parties can proceed accordingly, and a novation agreement can be drawn up as an addendum to the building contract.
If the builder does not consent, the seller and the new buyer still have the following options:
- The seller and the new buyer could consider entering into a Memorandum of Agreement (MOA) prior to completion and delivery of the yacht under the building contract. This may not be an option if entering into the MOA would amount to a breach of the building contract. The MOA may be worded in such a way that it does not breach the building contract but, in any event, this option may not be desirable for either the seller or the new buyer because (for example) the seller would remain party to the building contract and the new buyer would be entirely reliant on the seller to complete and take delivery of the yacht.
- The seller could complete and take delivery of the yacht under the building contract and then sell the yacht to the new buyer under an MOA.
Can the new buyer take the benefit of the post-delivery warranties of performance and quality under the building contract?
The short answer is yes, possibly.
If the builder consents to the novation of the building contract before delivery, the new buyer becomes party to the contract. The new buyer is legally entitled to the benefit of any performance and quality warranties and can pursue any claims arising from the warranties in their own name.
If the builder does not consent to the novation (or assignment) of the yacht building contract, the seller can still sell the yacht to the new buyer after delivery. But the legal entitlement to the warranties would not pass to the new buyer and the new buyer could not pursue any claims under the yacht building contract in their own name.
However, there is case law (such as the Linden Gardens case) to suggest that the new buyer could still effectively take the benefit of the warranties. If the new buyer wishes to make a claim under the warranties, they would have to effectively “step into the shoes” of the seller and pursue their claim in the seller’s name. This assumes that the seller is willing to assist the new buyer, share any relevant documents with them and allow the new buyer to pursue a claim in their name. Before proceeding, however, as a claim would be pursued in the seller’s name, the new buyer should agree to indemnify the seller in respect of any potential liability for legal costs arising from the new buyer’s pursuit of their claim.
- There are ways for a buyer to sell a yacht under construction – the key considerations are whether the yacht building contract permits a sale and whether the builder’s consent is required.
- Selling the yacht before it is completed and delivered without the builder’s consent can give rise to many issues – including a breach of the yacht building contract.
- If the seller sells the yacht after delivery under the yacht building contract, the new buyer may still have the benefit of the performance and quality warranties under the yacht building contract. But this would require the seller’s cooperation.
If you need advice on a yacht building contract or you are thinking about selling your yacht which is currently under construction, please get in touch with Richard Johnson-Brown using the below details.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.