Good Faith Deposits

With most failed yachting transactions, the biggest reason for litigation is determining who breached the agreement and what happens to the money that’s already changed hands – otherwise known as the “good faith deposit.”

The good faith deposit usually equals 10 per cent of the buyer’s offer. The deposit is placed in escrow when the prospective buyer puts an offer in writing for the yacht owner’s consideration. That offer sets forth the terms and conditions that result in a purchase and sale agreement.

Who holds the deposit?

The deposit should be held by a mutually acceptable third party, like the yacht broker or an attorney, but there are several options. 

Attorney’s Trust Account.  All attorneys maintain a trust account to deposit and disburse funds held for their clients.  These accounts are closely monitored by the state and the prevailing bar association.  Florida has a special program where an attorney’s trust account is insurable up to the total amount of the deposit even if the deposit is above the FDIC’s $250,000 limit.  Ask your law firm if their bank participates in this program.   

Broker’s Trust Account.  Most brokers maintain trust accounts to place, hold and disburse deposits. While California and Florida require low-limit fidelity bonds to insure deposits, most states do not require (broker) insured accounts or fidelity bonds backing deposits.

Joint Bank Account.  The parties simply agree to form a joint bank account to hold the buyer’s deposit, which assures his ability and willingness to complete the transaction. 

Escrow Service.  Most banks and real estate escrow companies hold deposits under an escrow agreement where the funds are insured by a fidelity bond or other security supervised by the state. However, these organizations are not usually familiar with maritime transactions and their fees range from a few hundred dollars to several thousand. 

The Yacht Owner. The buyer may make a deposit directly with the owner, and while this is common practice in the commercial sector, it’s most unconventional for yachting. If the parties have a dispute over the terms or conditions of the sale and the owner refuses to refund the deposit, the buyer has to hire an attorney and file suit.

Deposits and breaches

Regardless of who’s holding the deposit, the purchase agreement’s terms and conditions must be crystal clear as to how the deposit is treated upon default.  A bank, attorney or escrow service will require explicit escrow instructions signed by the buyer and the seller.  Those instructions will be followed to the letter in the event of a default.  

With so many deals going south in an uncertain economy, some pundits wonder if good faith deposits should even accompany an offer, but the fact remains that making a deposit protects both parties.

For the yacht owner, there are risks accepting an offer without a deposit.  If the buyer breaches the agreement and the deal collapses without a deposit, the owner is left with attorney’s fees, sea trial costs and all of the expenses incurred preparing the yacht for sale without a way to defray those expenses. 

A deposit separates lookers, who are dreamers, from real buyers. The deposit shows the buyer’s commitment to complete the deal.

No serious buyer will wince about placing a deposit with an offer. The buyer should already have his financing organized. He should be ready to deposit funds securing his right to purchase said yacht.

Placing a deposit actually protects the buyer because without an accepted offer backed by a deposit, the owner is free to accept another bid. After accepting an offer with a deposit, the yacht owner is legally obligated to sell that yacht to that buyer on those terms, even if the owner receives subsequent, better offers. 

The general rule is that nothing should happen until a deposit is made. Once the deposit is in place, revisions of the purchase and sale agreement, sea trials, surveys, financing agreements and other contingencies can usually be resolved. However, if any one of those contingency items remains unsatisfactory to a buyer who notifies the owner within the contractual time period, their deposit should be refunded by the escrow agency in full, immediately.

If there is a conflict regarding who is at default, the escrow agent must make one of two choices: to hold the deposit money until both parties sign a mutual agreement as to the disposition of the deposit, or to lodge the deposit with the local court.  Once the deposit is lodged with the court, the parties fight over who gets the money.

As a broker, if you accept a deposit, remember that you have a legal duty to act as a neutral third party during a default.  Don’t ever be pressured to distribute the deposit based upon your client’s wishes or demands. If you do so without mutual agreement by the other party, you can be sued.

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Danielle J. Butler is a Maritime Attorney and Partner at Hill, Betts & Nash, LLP.  Ms. Butler handles both transaction and litigation matters within the yachting and pleasure boating community. Hill, Betts & Nash, LLP was founded in 1898 as a general practice law firm. The Firm provides expert legal counsel on matters relating to world trade and transportation, commercial and tort litigation, insurance, surety, equipment leasing and financing, bankruptcy, admiralty and aviation law. Hill, Betts & Nash has offices in Fort Lauderdale and New York City. Visit: www.hillbetts.com

Ms. Butler may be contacted at +1 (786) 543 1141 or dbutler@hillbetts.com.