Dancing with defects: managing pre-purchase surveys
'Managing pre-purchase surveys' at Superyacht Investor London.
In superyacht deals the dance between buyer and seller can be tense, like a transactional tango. And if there is one moment prone to a misstep it is the survey stage.
A buyer may be on the hook, having signed a contract, paid a deposit and conducted a sea trial, but the survey is the last chance to wriggle off.
Much like a pre-purchase inspection (PPI) on a business jet, the more surveyors look, the more they are likely to find. Any defects then become bargaining chips in future negotiations. Buyers are paranoid about problems and paying over the odds, sellers are desperate to maintain value or not lose the sale.
“The headache I see the most is a buyer overreacting to a survey report,” said lawyer David Maass, of Alley, Maass, Rogers and Lindsay on a panel at Superyacht Investor London. “That’s what leads buyers to make unreasonable requests and deals fall apart.”
Sign up for the Superyacht Investor newsletter
According to the widely used Mediterranean Yacht Brokers Association (MYBA) contract, a defect is an issue which in the professional opinion of a surveyor “renders the yacht unseaworthy and/or affects the operational integrity of the yacht or its systems or machinery”. If defects are identified, the buyer can negotiate a rectification or reduction in the price, or they can walk away with the deposit reimbursed.
“You want a clear answer, ultimately, to the $64,000 question: is it a defect or not?” said fellow panellist Alex Sayegh, a partner at law firm HFW. “Once you’ve crossed that threshold, then the whole negotiation is up for grabs again. You can’t reject for any reason. If you want to reject, your surveyor has to certify that you have a defect.”
‘Sleepless nights’
The problems tend to occur when a buyer lacks expert guidance on what is serious and what is possibly just required maintenance, according to Bob Allen, founder of the Florida-based Robert Allen Law.
“You really want to know what you’re getting into,” he said. “There’s no survey that’s ever been done that said everything was perfect.
“Buyers understand, if they’re advised by experienced people, that you’re going to have a survey list that’s long, but 95% of it doesn’t really matter. It’s just part of the normal maintenance of a yacht.”
WATCH: ‘Managing pre-purchase surveys’ at SYI London
Surveyor Richard Franklin, founder of Yacht Survey Partners said he is aware of the implications of his work, knowing that brokers and lawyers will be poring over his findings.
“We’re very careful in how we use the phrase ‘defect’ and that gives me more sleepless nights than anything else,” said Franklin.
“It always comes down to interpretation of the term ‘defect’ and trying to find something which is defensible as far as we’re concerned as surveyors.
“Sometimes there is a frustration that minor technical defects can actually be used as an excuse to bang out of a commitment to purchase.”
Alex Sayegh of HFW makes his point as Bob Allen (right) and Alasdair Whyte look on.
Allen compared the MYBA contract with the International Yacht Brokers Association (IYBA) version used commonly in the United States, which takes a different route. It operates in a similar way to American real estate’s “free look” approach.
“You put up the money, you take a look, you don’t like it, you don’t have to have a reason,” he said. “But as a reason, you don’t like the smell of the boat, you don’t like the colour of the wood. You brought your spouse, and they changed their mind. So it’s litigation avoidance, really.”
READ: ‘We lost the mast and sank within an hour’ – Gallay
Maass added that America lawyers required to use the MYBA MOA will “typically” include an addendum “to change the acceptance regime to something closer to the IYBA one”. He did, however, commend MYBA’s MOA for its structure for negotiating a conditional acceptance.
“You do the sea trial, you do the survey, you have a seven-day period to digest the results of the survey and decide how to react,” he said. “Then assuming you request either a price adjustment or pre-closing work, you have a further seven-day period to negotiate that with the seller.”
‘A question of phraseology’
The definition of “operational integrity” is another stumbling block. Allen added: “There isn’t a boat in operation that doesn’t have an issue with the operational integrity of some system. It’s just a question of phraseology sometimes. And then the position that the lawyer takes.”
Franklin offered the example of a busy, high-profile charter yacht with a pool filtration system that isn’t working.
“Does that affect the operational integrity of the vessel? Well, if the vessel [isn’t operating] as it is intended to operate, yes, it does,” he said.
Often there might be a number of issues on a vessel that fall below the definition of a defect, but when looked at as a whole are “indicative of a boat which has been poorly maintained and where the buyer is going to have a world of pain if it proceeds,” added Franklin. “In some ways it seems a little bit unfair that doesn’t give you an excuse to basically just reject,” he said.
WATCH: Every panel from Superyacht Investor London
Audience member Will Christie, founder of boutique brokerage Christie Yachts, told the panel that contracts can be used in a “cynical manner”, which is “not good for sellers and not good for the industry”.
He said he knew of brokers who encourage buyers to pay whatever price is being asked, with a view to negotiating hard when they get the survey report back.
“Sellers are in a very weak position at that point because if the boat comes back to the market, no matter what you say, people will assume something went wrong. And we work in a small market,” he said.
Still marketable
Christie suggested contracts should include a fixed monetary cap to fix all defects, such as €500,000, over which a buyer can walk away, barring a catastrophic issue with seaworthiness.
However, Maass wasn’t so sure that a more restrictive acceptance regime was helpful in the event of a boat being rejected.
“Then there really is a stigma because you know that the only reason the boat could have been rejected is because the defects exceeded an aggregate amount,” said Maass. “I think one of the benefits of a ‘free look’ contract is that you can’t read much into somebody moving on from a deal.
“There are all kinds of reasons why a yacht might not meet a particular buyer’s requirements but could still be very marketable to others.”
For Allen, the essence of commerce “is to facilitate it”. “I totally understand the value of the survey, it is absolutely fundamental, but not to lock people in,” he said.
Subscribe to our free newsletter
For more opinions from Superyacht Investor, subscribe to our email newsletter.
