Boat Purchase 101 - Legal Due Diligence

In the third article in this series we focus briefly on the second limb of due diligence that should be considered when purchasing a vessel namely, legal due diligence.

Due diligence in the legal sense tends to focus on two main lines of enquiry namely:

   
1. Will clear title to the vessel be transferred; and
   
2. Are there any hidden charges/claims which could surface post settlement or affect settlement.

Legal Title

Succinctly put, the beguilingly simple question to ask is 'Is the person/entity I've contracted with, legally entitled to sell me this vessel?'    

Sometimes (but not always) the answer to the question can be found by requesting a Certified Transcript of the Register Entry from the relevant maritime authority ie Maritime New Zealand, Australian Maritime Safety Authority, Maritime Cook Islands, Caymans etc where the vessel is registered, or by requesting a copy of the vessel's Certificate of Registration from the Seller.

The exercise becomes more complicated if the vessel is not registered (or required to be) or if the part of the Register on which she is recorded simply provides nationality (ie Part B in NZ) as opposed to definitive recognition of legal ownership (ie Part A in NZ).

If the vessel is unregistered or owned by a company then a purchaser should consider requiring proof of ownership from the seller. This could take the form of a prior sale and purchase agreement, tax invoice or historical Bill(s) of Sale (which may be required by the nominated Flag State in any event to demonstrate a clear chain of title from Builder to applicant for registration).

Whilst the Certificate of Registration is a quick way of determining whether the person/entity contracted with is entitled to sell the vessel, it does not provide a full picture of what may lie beneath the surface in respect of charges over the vessel.

Mortgages and Liens: Crouching Tiger, Hidden Mortgage

Secure Charges

As with any asset, an owner may have had to borrow money to finance her purchase or repair/refit/maintenance or even used her as security for another business loan, with the financier taking security over the whole of the vessel until such time as the owner has fulfilled its obligations under a loan agreement or similar.

Security over a vessel will usually take the form of a Registered Ship's Mortgage or a Financing Statement registered on the Personal Property Securities Register (at least in New Zealand and for vessels under 24m) or another register peculiar to the Flag State or registered owner's domicile or place of business.

The typical manner of determining whether there is a Registered Mortgage is to obtain a Certified Transcript from the Registry which should indicate if there is a mortgage, or not.  Note: not all registries operate in the same way, for example in French Polynesia, registered mortgages (hypotheque) are kept with the Customs Office at the port in which the vessel is registered.

Some of the consequences of purchasing a vessel with a registered mortgage include (a) inability to transfer registered ownership of the vessel and (b) strong possibility that the vessel may be arrested by the financier under the Admiralty Act 1973 (or similar legislation in other jurisdictions) in the event that the Seller has not notified or obtained the consent of the mortgagee to the sale, thus triggering an 'event of default' under the mortgage, all of which are likely to be avoided if a little due diligence is conducted!

Whilst not as powerful as a registered mortgage, where a vessel is either unregistered, under 24m or both, financiers (in New Zealand) often register a Financing Statement on the Personal Property Securities Register (PPSR).  Searching the PPSR is quick and cheap, but requires a little patience.    

Unlike motor vehicles and aircraft, vessels do not always have a 'serial number' or 'hull identification number (HIN)', which can make searching slightly frustrating, but nevertheless recommended.  Further details on the PPSR and how to search, can be obtained here http://www.ppsr.govt.nz/cms/searching-the-ppsr.

If the due diligence search uncovers either a mortgage or secure charge on the PPSR, it will be wise to ensure that the sale and purchase contract places an obligation on the seller to have the mortgage/financing statement discharged at time of settlement.

Hidden Charges (Liens)

As a departure point, maritime liens are an extremely complex area of Admiralty and an in depth consideration is outside the scope of this basic article. The brief discussion below is intended to simply highlight some basic points.

At the risk of stating the obvious, a vessel is a highly moveable asset capable of fleeing the scene of a wrongdoing (whether intentionally or unintentionally).    

In order to ensure that an offending vessel (or owner/operator) could be held responsible for their actions (or inactions) Admiralty devised maritime liens (traditionally being restricted to damage, wages, salvage, bottomry and respondentia) along with the ability of the 'plaintiff' to seek to arrest the vessel to obtain satisfaction for its claim.

In New Zealand (and many other jurisdictions) there is no register where maritime liens are, or can be recorded. What this means is that, if for example the seller of the vessel collided with another vessel, caused damage and either did not realise it and sailed off (or did so intentionally) the person with the damaged vessel has the ability (via Court process) to arrest the vessel to seek compensation for his loss, and there is no amount of due diligence that will uncover this!

This right (to arrest) is not extinguished if the vessel is sold and will 'follow the ship' irrespective of title changing (Note: maritime liens are only extinguished in limited circumstances ie Court ordered sale or total destruction/loss of the vessel).

As the seller is in the best position to know whether there are (or could be) any possible claims/liens (during its ownership) that might arise in the future, it is common and highly recommended that the sale and purchase agreement include warranties from the seller that there are no claims, encumbrances etc along with an indemnity that should any claims arise that relate to anything prior to settlement that this will be the sellers responsibility.    

This article is not intended to be relied upon as legal advice, but rather to highlight some important areas that should be considered when purchasing a vessel.  If you are considering a vessel purchase feel free to contact us and we will be more than happy to assist.

Please kindly direct any enquiries to:

Forrester Grant on (09) 966 3611 (fgrant@mcveaghfleming.co.nz)

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Maritime Law