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This article is an extract from TLR The Private Wealth and Private Client Review - Edition 11. Click here for the full guide.
Over the past 50 years, few sectors have seen the growth and development that the superyacht sector has witnessed.2 While the existence of luxury yachts is not per se a creation of the past half-century or even the past century,3 the existence of, and demand for, luxury yachts by wealthy private individuals and families of the size, scale, complexity and comparative value most certainly is.
There are, perhaps, many points in time that could be characterised as the birthplace of the large luxury yacht industry. However, the conversion of the Canadian River class anti-submarine frigate, HMCS Stormont, into motor yacht Christina O4 by billionaire Greek shipowner Aristotle Onassis in 1954 would incontrovertibly rest comfortably among them.
Since 1954, the global superyacht fleet has grown consistently, with some reports5 estimating there to be in excess of 5,600 superyachts (yachts exceeding 24 metres in length) in existence as of 2019. The available industry data shows there to be an ever-increasing demand for larger yachts – in 1990, a 44-metre yacht would have put that yacht within the list of the top 100 largest yachts globally. Now, the average length of all yachts in-build has exceeded the 50-metre mark, with more than 40 superyachts in operation that exceed 115 metres in length. In addition, the past few years have seen a surge in orders and deliveries of long-range expedition and explorer yachts for purchasers looking to explore the far reaches of the planet.6 A number of those yachts were delivered in 2022 with the order books at the major yacht building shipyards remaining full. Throughout all of the above, English law has maintained a consistent foothold on the superyacht industry, with many international contracting parties electing to have their yacht construction contracts, sale and purchase agreements, refit, repair and conversion contracts, charterparties, management and crewing agreements and other core yachting contracts governed by English law and subject to a dispute resolution regime seated in London – often the London Maritime Arbitrators' Association arbitration.
Wealthy private individuals and families with ownership interests in superyachts are likely to have a considerable sum of money tied up in this increasingly complex and developing asset class. While we cannot possibly offer a complete guide to the law surrounding superyacht ownership within the confines of a single chapter, we hope to highlight some key legal considerations and common issues facing the industry in 2022–2023.
At the time of writing, the superyacht industry is experiencing a complex myriad of forces. The yacht charter market has had the coronavirus pandemic to deal with, with charterers having to navigate through an often-convoluted set of international travel restrictions and owners dealing with last-minute cancellations and rescheduling, though much less than previously. At the same time, the pre-owned yacht sale and purchase market is going through a boom, spurred on by high levels of demand for high-quality yachts and limited supply (with many commentators suggesting that yachts are the perfect isolation and environment control tool). The refit and newbuild market is following suit, but with the added complexities brought about by the plethora of new laws, export controls and restrictions brought about as a consequence of the war in Ukraine. Considerable focus is now on new propulsion technologies and zero carbon fuels, as the drive to decarbonise shipping gathers pace. This chapter accordingly addresses important, topical issues relevant to (1) yacht ownership, (2) yacht construction and (3) yacht sale and purchase.
II Superyacht ownership – but not as you know it: residential yachts and 'yacht liners'
Owner or lessee; lessee or licencee; landlord or tenant: different legal modes by which a person becomes entitled to use property – with different rights. In recent years, projects have been proposed in the luxury maritime sector where these sorts of distinctions have resulted in matters turning out to be rather more complicated than the relevant marketing material initially suggested. Whether fractional ownership of a well-appointed cruise ship, residential superyacht or 'yacht liner' offering concierge services, exclusive suites and a frequently changing location or a right to use suites or apartments on such a vessel on an exclusive basis for a defined period of years (without ownership in the registered owner of the vessel or the vessel herself), all these opportunities appear enticing but, in each case, closer examination of the proposals has proven critical, particularly concerning the security offered to potential end users for their investments and the structure of the proposed transaction.
Cruise ship and yacht construction contracts, like the majority of shipbuilding contracts, invariably have two parties – a builder and a buyer.7 In the vast majority of cases, title ultimately vests in the buyer on delivery. The ultimate end users will not, therefore, have any direct rights under the shipbuilding contract or be able to make demand under the refund or performance security procured by the builder for the buyer.8 The ultimate end users in many of the schemes we have seen are invited to make payments which are accordingly all unsecured and, as a result, carry a high level of risk, particularly as the buyer under the shipbuilding contracts is often a special purpose vehicle (SPV) set up to manage the construction of these luxury 'yacht liners'.
Properly advised end-user investors need to ensure that their investments are adequately secured. In this regard, the payment obligations of the buyer SPV under the shipbuilding contract must be properly understood. For instance, we have seen instances where the payment schedules for the investment from the end user do not align with the buyer's instalment payments under the shipbuilding contract and where the buyer SPV has no real ownership rights at all in the vessel under construction. Where, as is usual, the refund guarantee or guarantees provided to the buyer only cover the payments actually made by the buyer, there will then be a clear mismatch and risk for the end-user investor. Furthermore, on a successful demand by the buyer under the refund guarantee or guarantees following its termination of the shipbuilding contract, there needs to be a clear obligation to pass funds through to the end user. This may be difficult to achieve where the buyer has to finance some of the pre-delivery part of the contract price (where end users' investments do not wholly cover the amount required), as the buyer's financiers will ordinarily insist on an assignment of the benefit of the refund guarantee or guarantees. Separate security considerations may therefore need to be considered in that respect.
Moreover, ensuring that the validity period of the refund guarantee or guarantees is sufficiently long is of paramount importance. Market practice is for each to have an ultimate expiry date9 and it is a critical exercise before any completion that the financiers have satisfied themselves that the validity period of the refund guarantee aligns with the potential duration of the shipbuilding contract and its termination provisions. Particular attention should be paid to the effect of potential delays in completion which entitle the builder to an extension of the delivery date in the contract and any related long stop dates, as well as to ensure that the guarantee takes into account delays resulting from arbitration of any disputes. Bespoke provisions are sometimes agreed with the refund guarantor to provide for an extension or a replacement guarantee to cover this issue. Obviously, were any refund guarantee to expire prior to the earliest date that the buyer could terminate the contract (e.g., for delay), in the absence of any other security (perhaps from the builder's parent), the buyer SPV would be unsecured – and, in the absence of sufficient collateral security from the buyer, so would each end-user investor.
In conclusion, investors considering investing in luxury residential 'yachts' need to take professional advice at the earliest stage possible to ensure that they fully understand what they are buying into and the risks involved in participating. While many of the core yacht building concepts are relevant, the structure of each of these projects tends to be unique and a clear understanding of the sort of refund security available in the market, its usual terms and the usual amendments well-advised buyers seek, should be an important part of the review. Until relatively recently no standard form refund guarantee for use in shipbuilding projects was available, other than perhaps banks' own specimen guarantees, but in the commercial shipping sector, the Baltic and International Maritime Council (BIMCO)'s 2007 standard newbuilding contract included a specimen refund guarantee (in Annex A(iii)) which has proven useful as a reference. BIMCO has recently (2021) issued a specimen standalone refund guarantee for shipbuilding contracts, presumably to replace the earlier draft. As with all standard forms, there are various aspects that a buyer (as the beneficiary under the refund guarantee or guarantees) might seek to improve or clarify, but it is a useful resource, nonetheless.
III Next generation newbuilds – some of the current challenges
Considerations of space (and reader fatigue) limit discussion of current hot topics to one technical, one commercial and a regulatory issue.
i Decarbonising the maritime sector – solutions for zero emission sailing
The International Maritime Organization's goal of halving greenhouse gas emissions from ships by 2050 requires a proactive response from the international shipping community, which is certainly being reflected in current maritime construction projects across all sectors. However, with the move away from fossil fuels now an imperative and so much research and development into propulsion technologies and zero carbon 'e-fuels' currently underway, many owners have not found the choice of propulsion system or fuel an easy one to make as they finalise technical specifications for newbuildings. Yacht owners will be affected by these developments just as much as shipowners in other maritime sectors, indeed possibly more so, as the size of most yachts will, in most cases, preclude some of the solutions under consideration in the wider industry. Necessity, though, is said to be the mother of invention, so what appears impracticable today may not be tomorrow. Here is a brief review of some of the solutions being discussed (and implemented) in commercial shipping, some of which are already being used in, or considered for, larger yacht projects.
Full electric, batteries and hybrids
Fully electric propulsion is generally confined to smaller vessels operating in coastal or near-coastal waters. As a result, it is currently mainly encountered in the ferry sector, where the predictable, short, fixed routes on which most ferries operate make them suitable for electric operation. Although there is an increasing number of all-electric ferries, these remain relatively small vessels. Energy is provided from shore supply only and so is fully dependant on the charging infrastructure at the quay.
Batteries are also used by vessels which require significant redundancy to ensure available power demands can be satisfied. For instance, supply vessels in the offshore sector typically run many generators to cover immediate spikes in load or to cover machinery failure. Batteries can help avoid or mitigate these sorts of risks, with considerable savings in fuel and maintenance. This technology is also increasingly deployed in vessels such as tugs and fishing vessels, where short bursts of power are required. Such demand can be handled by batteries which are recharged in port or while a diesel engine is running. Application to the superyacht sector is obvious.
The most common battery technology deployed afloat uses lithium ion. While the price of these batteries is falling steadily, current lithium ion batteries do present some technical drawbacks. They are not particularly 'energy dense', although work is underway to try and improve their efficiency. There can also be significant weight and space requirements associated with their use, although they do bring an element of flexibility to ship design, as batteries are usually laid out using a modular system. System integration is vital and, as an emerging/developing technology, usually requires careful consideration of the relevant electrical subcontractor being proposed in any newbuilding or conversion project.
Away from fully electric configuration, hybrid arrangements, where the battery combines with a diesel engine, are more usual. Here the battery provides a given amount of stored energy which can either act as a reserve or be brought into use to even out power consumption (by 'peak shaving' and 'load levelling'), enabling the main engines to be run at reduced levels and improving the general efficiency of the machinery. Hydrogen fuel cell technology is also being developed at pace, although hydrogen production at scale remains a challenge for the wider economy. Hybrid solutions involving batteries and fuel cells are also being explored. In combination with a fuel cell technology, a battery can provide the requisite energy storage for the peak shaving and load levelling operations described above and also assist in ramping up the fuel cell's power output to satisfy operational demand.
Future fuels, 'e-fuels', zero carbon fuels – all synonyms for the compliant bunkers that are relatively shortly going to need to be commercially available to power ships, units, yachts and other vessels. The main fuels being talked about (talked up?) at present are fairly diverse and perhaps surprising to those who remember some of their chemistry lessons at school. Here is a brief overview.
Natural gas is the most common alternative fuel currently in use in commercial shipping – both liquified natural gas (LNG) and, to a lesser extent, liquified petroleum gas (LPG) fuelled vessels already operate. Natural gas helps reduce carbon intensity by around 15 per cent to 25 per cent and, as the engine technology exists and the regulatory framework is in place, it is viewed as an important bridging fuel to enable shipowners to achieve lower carbon emissions. Bunkering solutions are developing steadily, with greater supply now available than previously. However, a vessel using natural gas requires considerably larger (and more expensive) tanks compared with those using heavy fuel oil and, of course, specialist crew training is required to ensure safe handling. A problem can arise from 'methane slip', which refers to the gas emitted unburned because of insufficient combustion in the engines, which needs to be addressed in both fuel production and in engine development. The key point though is that natural gas remains a fossil fuel and will need to be replaced by renewable versions of LNG and LPG to be safely considered carbon-free. Much lauded as a genuine future fuel a decade ago, it is now seen as a transition fuel.
Methanol is also thought to have potential for deep sea shipping and could be developed to be carbon neutral. Some methanol tankers have been using their cargo as fuel for a while now, which has provided useful operational experience. However, while it is comparatively easy to produce, it will take years for supply to meet the demand from global shipping, as a result of which prices will stay high for the foreseeable future. Methanol also requires large fuel tanks and double wall piping systems, so may perhaps be seen as a 'big ship' solution. Interest is growing beyond the tanker sector, with the first container ships to use methanol on order, so it might have a future as a marine fuel once production is scaled up.
Ammonia from renewably sourced hydrogen is entirely carbon free. The relevant engine technology is almost commercially available too, with dual-fuel combustion engines expected in the next few years and associated regulatory rules already drawn up. However, the high toxicity of the chemical poses significant safety risks to those handling the fuel, both on board and when alongside bunkering, and, although it is carbon free, burning ammonia releases nitrogen oxide (NOx) emissions which require exhaust gas cleaning systems to be installed. As most ammonia is not currently produced from clean sources (most global production is for fertiliser), production of 'green ammonia' will need to be increased considerably to meet demand. However, with rigorous safety procedures, propulsion systems capable of controlling harmful emissions and a trained crew, this is considered to be a promising fuel in the quest to decarbonise shipping.
Hydrogen is, in theory, extremely simple to produce (electricity, water and electrolysis) and could/should play a crucial role in shipping because it is carbon free. It is most commonly used in fuel cells and can be used in combination with other fuels like ammonia or other zero carbon fuels. However, hydrogen ignites easily (and, when alight, can be hard to contain), so its use will require increased safety regimes on board and storage solutions will need to be large and are expensive. These factors make it more suitable for small coastal vessels, such as ferries, which can refuel regularly.
The maritime environment involves (among other elements) exposure to the wind and the sun, which can be exploited with equipment such as photovoltaic panels and rotor sails to help reduce fuel consumption. Various commercial and passenger shipping operators have incorporated such solutions, although incorporating this technology on any passenger vessel (particularly at the luxury end of that market) in a sensitive way is obviously one of the challenges facing the naval architect and design team.
Shipbuilding is a global industry with truly international supply chains. As such, some continuing disruption to logistics and manufacturing persists, as countries emerge from restrictions imposed over the last two years to tackle the covid-19 pandemic. In addition, inflationary pressure in many economies is adversely affecting the costs of goods and services, to which the effect of the war in Ukraine is contributing. It appears that shipbuilders and contractors in international shipbuilding projects are starting to demand price escalation clauses, particularly covering the price of some grades of steel. It was not unusual to find parties agreeing clauses addressing steel price fluctuations during certain points of the last shipbuilding boom (i.e., between approximately 2001 and 2008) as demand at times outstripped supply, but current events suggest a wider application to cover increased costs of other materials and even labour. In the circumstances, where these issues are raised, almost every resulting contract will be likely to have its own bespoke approach, in the near term at least. It may be that a truly fixed price construction contract is not achievable in the current market.
New UK sanctions regimes came fully into force under the Sanctions and Anti-Money Laundering Act 2018 (the Sanctions Act) at 23.00 GMT on 31 December 2020. Some of these regimes contain sanctions measures (for instance, asset freezes or travel bans) which apply in respect of persons or ships which have been designated or specified. The UK government publishes the UK Sanctions List, which provides details of those designated under regulations made under the Sanctions Act. The list also details which sanctions measures apply to these persons or ships, and in the case of UK designations, provides a statement of reasons for the designation. The UK Office of Financial Sanctions Implementation (OFSI – part of the UK Treasury) provides a consolidated list of persons and organisations under financial sanctions, including those under the Sanctions Act and other UK legislation.
Following its invasion of Ukraine on 24 February 2022, many countries imposed sanctions on Russia, including the UK, EU and USA. The stated purpose of the UK measures is to impose financial, trade, aircraft, shipping and immigration sanctions for the purposes of encouraging Russia to cease actions which destabilise Ukraine, or undermine or threaten the territorial integrity, sovereignty or independence of Ukraine.10 The UK regulations11 provide that the Secretary of State may designate persons by name for the purposes of the financial and/or immigration and/or aircraft and/or shipping and/or internet services sanctions if they are, or have been, involved in a relevant activity (as defined).
Accordingly, there it is now a legal requirement for all UK service providers, including lawyers, accountants and bankers, to consider all current and future transactions carefully to ensure compliance with these regulations. Where provision of services to a designated person is identified, a report must be made to OFSI. Limited service provision to a designated person remains possible, though only under the terms of a strict licence from OFSI. It is understood that similar regulations apply in EU Member States and the US.
UK anti-financial crime legislation12 already requires any service provider within scope of the relevant regulations, among other things, to arrange to be supervised by the appropriate regulator and to conduct thorough client due diligence on all its clients or customers, including obtaining transparency regarding the beneficial ownership structure in any transaction. The added effect of the regulations implementing the Russia sanctions means that any UK service provider must ensure that it can demonstrate that its compliance processes are effective, as the obligations to report matters (e.g., to OFSI) are time critical, with the threat of regulatory enforcement action and possible prosecution for non-compliance. Some suppliers are already seeking contractual restrictions on clients or customers making shareholder-level changes without full disclosure to them, with an 'exit route' for the supplier in circumstances where it becomes aware that these measures have not been adhered to.
IV Yacht sale and purchase: updated standard industry forms of contract
The last year has seen two significant drafting projects reach fruition with the publication of updated forms of contract for the sale and purchase of vessels in both the yacht sector and the wider maritime industry.
Perhaps one of the most notable developments in 2022 has been the Mediterranean Yacht Brokers' Association (MYBA)13's release of an updated standard memorandum of agreement for yacht sale and purchase, known colloquially as the 'MYBA MOA'.14 The last time the MYBA contract was updated was in 2008 and it is fair to say that a lot has happened since then, including the global financial crisis, the covid-19 pandemic, the invasion of Ukraine, the abolition of LIBOR as a benchmark interest rate and the ongoing maturation of the yacht industry. As such, the industry was well overdue an updated sale and purchase agreement. While a wholesale review of the MYBA MOA would take us beyond the confines of this chapter, below is a summary of the key changes brought about in the new MYBA sale and purchase contract:
Under the previous form of MYBA MOA, the inventory of what was or was not included as part of the sale of the yacht was something a seller was obliged to provide within seven days of contract signature. This was curious in many respects, with buyers often asking how it could be the case that they only get to see what is or is not included with the sale of a yacht after signing a purchase agreement (something rarely countenanced in the sale and purchase of property, aircraft or other chattels). We, as lawyers, often found ourselves amending the standard form to provide for a specific exclusion list with anything not mentioned on the exclusion list being included in the sale. The new MYBA MOA changes this, so that the inventory must now be agreed by the parties at the point of signing the contract. This reduces the scope for an inventory dispute to arise post-contract signature, as was the case under previous versions.
The new MOA has altered the notification requirements for a party seeking to rely on force majeure. The new wording makes that party's right to the benefit of a force majeure delay conditional upon the timely notice having been given. The MYBA MOA also provides that, where the completion date is extended by more than 30 days as a result of force majeure, the unaffected party shall have the right to terminate the MOA. This latter point needs careful consideration, on a deal-by-deal basis, as it will not always be appropriate for such a right to exist. For instance, where yachts are to be delivered to buyers some distance from where they are lying at the time of contract signature, it may be unacceptable to allow the buyer to terminate the MOA for, say, weather delays preventing safe passage. A good example of this could be yachts that are in the Caribbean at the time of contract signature that are to be brought back to Europe for delivery.
The standard seller's warranty that the vessel is free of claims, liens and encumbrances has been extended to expressly to include a warranty that the yacht is not subject to a VAT liability or to any claims from charterers arising prior to the time of its delivery. This inclusion is likely to result in more time being spent negotiating the contract terms because of the need for the seller to be absolutely certain about the VAT history of the yacht. For newer, well-managed yachts, this may be less problematic, but for yachts which may have had a number of owners over the years, where VAT paid status was achieved many years ago, this warranty is likely to be problematic and the subject of negotiation. It is a welcome addition, but one that will not suit all situations, particularly as the age of the global yacht fleet continues to grow.
Seller use after sea trial survey
The previous MYBA MOA includes a restriction on the seller using the yacht after the buyer's sea trial. This restriction is intended to safeguard the asset from damage between sea trial and completion of the sale, meaning the buyer is able to place greater reliance on the sea trial and survey being an accurate depiction of the condition of the yacht at completion. The new MYBA MOA has updated this wording to make it clear that the yacht may be used following the buyer's sea trial to position her for the condition survey or for the trip to the agreed place of delivery. It would have been a curious argument for any buyer to make that this was not implied in the seller's delivery obligations in the old MYBA form but added clarification in the new form is welcome.
Developed survey/sea trial rights
The new MOA has addressed a number of issues relevant to the buyer's condition survey and sea trial rights. These include:
The buyer is now allowed to collect oil samples as soon as the deposit has been paid. This allows a buyer to send the samples off to the laboratory carrying out the oil sample analysis as soon as possible, reducing the likelihood of the buyer not having the sample results in its possession before needing to give the seller notice of acceptance or rejection of the yacht.
The contract also now expressly provides that, where the buyer rejects the yacht, it must pay the fuel costs incurred by the seller in positioning the yacht for the condition survey and in any operational trials carried out during such survey. This is a particularly contentious issue because there are many circumstances in which it would be entirely appropriate for the buyer not to bear these costs; for example, the yacht being rejected as a result of a non-disclosed defect known about by the seller. It is, in our view, likely that this clause will be deleted regularly by buyers negotiating contract terms with sellers.
ii Cruise ships and other large, bespoke luxury vessels
While the MYBA MOA is the most prevalent standard form used for the sale and purchase of yachts and other small pleasure craft, sales of cruise ships and other commercially operated luxury vessels are more usually conducted on the basis of the forms of memorandum of agreement for the sale and purchase of commercial tonnage, such as those published by BIMCO, the Norwegian Shipbrokers' Association, the Japan Shipping Exchange and the Singapore Maritime Foundation.
Since 1956, BIMCO and the Norwegian Shipbrokers' Association have jointly published the well-known Norwegian Saleform (often referred to as NSF), which has hitherto been regarded as the leading such standard form in use in the shipping industry. The most recent revision of the NSF was published in 2012, supplanting previous NSF versions from 1993 and 1987 as the form of choice.
However, for the first time, BIMCO has produced its own, completely new, memorandum of agreement for ship sale and purchase (codenamed SHIPSALE 22), which was published in April 2022 to widespread industry acclaim.15 BIMCO's SHIPSALE 22 looks set to become the leading sale document for commercial shipping and may, therefore, in time also be expected to be used, suitably amended, for sales of large vessels in the luxury sector as well, including superyachts.
At the time of writing, 2022 has been a slightly complicated year for the yacht industry with a lot of media focus and scrutiny falling upon it as a consequence of the war in Ukraine. We remain of the view that the long-term direction of travel for the industry is onward and upward and the advent of new technologies, new types of yacht and the industry developing with new contract terms tends to support that view. The data clearly shows that there is significant appetite for larger, more luxurious and more complex yachts. The key to ensuring that this is a trend that perpetuates remains ensuring that yacht owners and those who are starting their superyacht journey have a positive experience with their acquisition. This often comes from careful planning, diligence and emotional intelligence by those representing and advising buyers, owners, sellers and the wider group of industry participants.
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