Buying a new boat: Escrow account for deposit?

[Sticky Fingers]

I'm very close to completing a deal to buy a new boat (more on that when it's a done deal). It's a production AWB bought in the UK through one of that brand's main dealers.

Question is, what should I expect regarding the safety of my deposit funds between the time of order placement, and the physical delivery of my boat? Several months elapsed time, much could go wrong in that time period, not least the demise of the dealer. Anyone with experience of this? A third party escrow account handled by a solicitor or other trusted third party would seem ideal, but so far anything that looks like that has not been forthcoming.

 

[pvb]

I'm very close to completing a deal to buy a new boat (more on that when it's a done deal). It's a production AWB bought in the UK through one of that brand's main dealers.

Question is, what should I expect regarding the safety of my deposit funds between the time of order placement, and the physical delivery of my boat? Several months elapsed time, much could go wrong in that time period, not least the demise of the dealer. Anyone with experience of this? A third party escrow account handled by a solicitor or other trusted third party would seem ideal, but so far anything that looks like that has not been forthcoming.

You're right to be concerned. I bought my new Bavaria in 2014 from a Bavaria dealer in the UK, paying in full a couple of months before it was delivered. In hindsight, I was lucky to get it, as when I subsequently started to sue them for unpaid warranty work, they promptly ceased trading. At least, they ceased trading in the name of the limited company from whom I'd bought the boat, but continued trading in the same name but without "Ltd".

I certainly wouldn't pay a dealer or a boatbuilder today without getting a bank guarantee, which I believe is the only workable protection. An escrow account doesn't work, because the dealer has to pay the boatbuilder in full before it's built.

The Peters Opal fiasco is still fresh in some people's minds.

 

[Joker]

the whole area is full of pitfalls which are difficult to avoid.

Some years ago, I had a major problem with a boat I had bought from new. The builders denied responsibility. Under UK law, I couldn't sue them anyway – I could only sue the people I had bought the boat from. This was the UK agent.

After giving me the runaround for a considerable time (and considerable expense), I was effectively given the message that yes, I could sue, but since the company was a limited company with no assets, it would simply declare bankruptcy and walk away.

In the end, it depends how much people value their reputation. A reputable boatbuilder would not have taken the stance that it did, and a reputable agent would not have taken the stance.

(I sent the boatbuilder out of business by sending copies of all the survey reports to their agents in different countries.)

 

[ip485]

Always an escrow if you can, the problem is when the company would rather not have the sale than agree to the escrow. Doubtless in many cases they will use your money to cashflow their business. I guess sometimes you just have to take a chance, a chance by at least looking at their published accounts and forming a view on their solvency or otherwise. I also guess if the company does not agree there is a good chance they do need to use your money to cashflow their business as with proper terms of escrow it is as safe with a solicitor as with their bank (maybe safer!)

It is the same with brokers, personally with most brokers I would never hand over a deposit for a substantial sum (whatever your definition of a substantial sum is) and in a brokers case I see no good reason to do so.

FWIW it is always possible to ring fence funds in a client account with a letter of agreement from the bank. Why this isnt done more often and why "customers" do not insist is a surprise - after all we expect it of solicitors and accountants (well at least we should and many accountants do, and all solicitors are "undrewritten" by the law society.

 

[Tranona]

Ask for a Bill of Sale covering the money you are paying. The deposit goes to the builder, so can't be held in the dealers client account. However if they give you a Bill of Sale you have title to the deposit, and then pay the balance to the builder when the boat is built, should the dealer go bust. However, the dealer has very substantial financial backing and the risk of losing your deposit is very low - certainly lower than some other dealers I can think of!

 

[mainsail1]

I think it is a big problem. I bought five boats using escrow accounts only to find in the end that this method is not anything like as safe as I had thought. My view now is that I would only buy a new boat on the basis of a small deposit of a few thousand pounds before the boat is ready for me to collect. If the builder or dealer cannot live with that I would walk away.

 

[Tranona]

I think it is a big problem. I bought five boats using escrow accounts only to find in the end that this method is not anything like as safe as I had thought. My view now is that I would only buy a new boat on the basis of a small deposit of a few thousand pounds before the boat is ready for me to collect. If the builder or dealer cannot live with that I would walk away.

The new boat I bought 18 months ago was 20% deposit, balance when boat was complete. The timescale was short. Deposit middle of May, boat complete middle July. Finished on a Friday, documents faxed over next Monday, money transferred and part exchange boat BofS signed, delivered to the Hamble next Saturday.

 

[maby]

Before we bought our current boat, we were negotiating to purchase from another builder who was going to want a substantial deposit and the full sum significantly before delivery - to support their cash-flow. I was unhappy about this and told them that they would have to take out a bank loan to cover the cost of constructing it and could add the cost of the money to the price of the boat. They reluctantly agreed to this - if they could not get a bank to trust them, I certainly was not going to! As it happened, before we got round to completing the order we found a stock boat that completely met our needs and bought it cash - we handed over the payment the day that we took ownership of the boat on the water, ready to sail away.

 

[mainsail1]

The new boat I bought 18 months ago was 20% deposit, balance when boat was complete. The timescale was short. Deposit middle of May, boat complete middle July. Finished on a Friday, documents faxed over next Monday, money transferred and part exchange boat BofS signed, delivered to the Hamble next Saturday.

That sounds better than any of the payment terms I was offered on a Bavaria, which all included stage payments, but 20% of the cost of a new boat is still a large sum to loose if the dealer goes bust in dodgy circumstances (such as Opal Marine).
I wonder if they would accept 10% or no deal?

 

[michael_w]

What about a Banker's Guarantee? If it all goes pear shaped, you can walk away and not lose.

 

[Sticky Fingers]

Wow this is interesting. Maybe opened a can of worms here.... I've started the batting by asking the dealer how they will solve this requirement, and we'll see where to go from here.

 

[pvb]

I've started the batting by asking the dealer how they will solve this requirement, and we'll see where to go from here.

Yes, I did that too, and got comforting noises about sound history, unrivalled customer care, money always put into "client accounts", etc. None of this is relevant - if they decide to cease trading, the money disappears. Any deposit or stage payment sent to the boatbuilder will be subject to a contract between the builder and the dealer, not you, so you'll have no claim on the boat. I really believe that a bank guarantee is the only workable solution.

Wouldn't it have been nice , after the Peters Opal scandal, if the British Marine Federation had stepped in with a guarantee scheme so that boat buyers could order with confidence?

 

[Sticky Fingers]

...I certainly wouldn't pay a dealer or a boatbuilder today without getting a bank guarantee, which I believe is the only workable protection. An escrow account doesn't work, because the dealer has to pay the boatbuilder in full before it's built.

What about a Banker's Guarantee? If it all goes pear shaped, you can walk away and not lose.

.... I really believe that a bank guarantee is the only workable solution.

Wouldn't it have been nice , after the Peters Opal scandal, if the British Marine Federation had stepped in with a guarantee scheme so that boat buyers could order with confidence?

So, bank guarantees or performance bonds. New one to me - what is it in laymans terms? and how would it work to protect me in this case? I've done the usual Googling which as usual has helped a little....

 

[Sticky Fingers]

Ask for a Bill of Sale covering the money you are paying. The deposit goes to the builder, so can't be held in the dealers client account. However if they give you a Bill of Sale you have title to the deposit, and then pay the balance to the builder when the boat is built, should the dealer go bust. However, the dealer has very substantial financial backing and the risk of losing your deposit is very low - certainly lower than some other dealers I can think of!

Oh yes.

Bill of Sale. That's an interesting one. The balance in my case would be financed so the finance company pay that on demand a week or so before delivery.

 

[ip485]

Ask for a Bill of Sale covering the money you are paying. The deposit goes to the builder, so can't be held in the dealers client account. However if they give you a Bill of Sale you have title to the deposit, and then pay the balance to the builder when the boat is built, should the dealer go bust. However, the dealer has very substantial financial backing and the risk of losing your deposit is very low - certainly lower than some other dealers I can think of!
Read more at http://www.ybw.com/forums/showthrea...scrow-account-for-deposit#65Xhk1OQFVQODSZA.99

There are a lot of brave assumptions there.

How do you guarantee the deposit goes to the builder, and is the builder any more safe than the agent? You could have even more problems if the builder is in another jurisdiction.

How do you apply a Bill of Sale to an object that has yet to be made?

If the builder and or the broker goes bust you will have a whole raft of problems dealing with the Reicever, you may get something back eventually, but good luck and dont hold your breath. Having dealt with this sort of thing that is just my practical experience and invites a load of hassle when you will be wishing you were enjoying your new vessel.

As to bank guarantees its a great idea but sadly again will invite a great deal of hassle, and you will probably find you will not get it. Banks like guaranteeing relatively low risk transactions or higher risk transactions if the amounts are really worth their while - neither is probably the case with most agents or brokers who are unlikely to be PLCs, have thier accounts audit or be substantially solvent, and if they are then you dont need a guarantee.

To be fair the vast majority of transactions work out fine, and you do have to take a view, but make sure you have done as much homework as possible. There are some brokers that have been around for years, have more than one string to their bow, and a solid accounting record. The same is true of builders.

I have had a few days on the the famous builders pontoon going up to Chichester each year - who would have thought they would go bust, not once but twice so unfortuantely as we all know it happens.

 

[pvb]

So, bank guarantees or performance bonds. New one to me - what is it in laymans terms? and how would it work to protect me in this case? I've done the usual Googling which as usual has helped a little....

Oh yes.

Bill of Sale. That's an interesting one. The balance in my case would be financed so the finance company pay that on demand a week or so before delivery.

A bank guarantee can cost perhaps 1% or so of the amount guaranteed, and there are various types. As for your situation of buying on finance, I don't think this excludes you from risk; the finance company will pay the dealer prior to delivery, and if the dealer decides to go bust, the money disappears and you're still committed to pay it.

I reckon the main danger is of the dealer collapsing, rather than the boatbuilder. The dealers are often small, one or two man companies, operating out of rented premises, with no significant financial backing.

There was a lot of discussion in these forums following the Peters Opal scandal, and you can find this by searching. For starters though, see this thread - http://www.ybw.com/forums/showthread.php?137655-Lessons-learned-from-Peters-Opal-Bavaria-debacle

 

[Tranona]

The Peters Opal case is not a lot of help here as it revolved around their then "new" policy of placing new boat deposits in their client account which was also used for their brokerage business. This was designed to deal with exactly the issue being raised here.

However, the process of placing the money in the account was not handled properly (although it was for brokerage transactions). Instead of being paid straight into the account so that the money could be clearly identified as belonging to a specific customer, it was first paid into a general account and then transferred to the client account. This had the effect of breaking the link between the customer and the deposit resulting in the "trust" (a legal construct) on which a client account relies, not being established. Further complicated by the general account being overdrawn and the bank refusing to transfer the money anyway. The case was to establish whether this group of customers had any claim over the substantial funds that were in the client account.

The court found that because the conditions of the trust were not met they had no claim. Only those (mostly brokerage customers) who could show that their money went straight into the client account had a claim. As a consequence the YDSA and BMF changed their requirements for the structure of client accounts to ensure that each individual customer's funds could be clearly identified and so an individual trust is established.

So, if a dealer were to offer to keep the deposit in his client account, it would be secure. The difficulty is that builders are increasingly asking for payments to be passed to them, particularly if (like my boat) the boat is being built specifically for the customer, rather than a stock boat for the dealer.

In the past it was quite common, particularly for individually built boats to use a contract where title passed to the customer in line with stage payments. So the customer owned all the materials and part built boat up to the stage paid for. This enabled the customer to remove his property if the builder went bust as it was not part of the assets of the builder. Many people were "saved" by this mechanism, for example when Westerly went under. Model contracts of this type are available from BMF, YDSA and RYA. When I worked for a custom boatbuilder in the late 70's early 80's all our contracts were of this type.

Unfortunately now most of our boats are built on production lines and sold through dealers, such contracts are not easy to operate, particularly as production cycles are short - my boat took exactly one working week to build! Hence the low(ish) deposit which is effectively just booking the slot on the production line. However if the boat is being built in the traditional way and taking weeks or even months it is not unreasonable for the builder to ask for stage payments, in which case a different contract or a bank guarantee is more appropriate.

As a general observation, this is no different from buying a new car, particularly one with a waiting list where you have to pay a significant deposit with absolutely no security. Or buying furniture, or indeed any other consumer goods where delivery is in the future. You are an unsecured creditor. More people have lost money in well known failures of high street retailers than have ever lost money in the boat buying business. Sure, the sums for an individual may well be large, but the numbers who do lose money are very, very small.

 

[pvb]

As a general observation, this is no different from buying a new car, particularly one with a waiting list where you have to pay a significant deposit with absolutely no security.

Actually, I think it's very different from buying a new car. I've bought lots of new cars, usually built to order, including some high-value exotics, and I've never been asked to pay more than a token deposit of £1000 or so. More importantly, I've never been asked to part with the rest of the money before the actual physical car was sitting in the dealership awaiting my collection. That's very different from the typical boat dealer's approach.

 

[ip485]

So, if a dealer were to offer to keep the deposit in his client account, it would be secure. The difficulty is that builders are increasingly asking for payments to be passed to them, particularly if (like my boat) the boat is being built specifically for the customer, rather than a stock boat for the dealer.
Read more at http://www.ybw.com/forums/showthrea...account-for-deposit/page2#6ukVRF8Ug5BrUi1L.99

I am afraid again this assumes the other party behaves themselves. How do you know whether he keeps the funds in that account or how they ware used? It seems to me in an ideal world the dealer would let you have a copy of his agreement with his bank demonstrating a client account was ring fenced and you would electronically transfer your money to that account. Even then it seems to me you are reliant on the dealer leaving the money in the account, because he and only he has control over those funds. There is a fine line when things happen between a business going bust with no malintent, and with degrees of deliberate fraud. The trouble is an action for fraud is just as time consuming and difficult.

So far as the O/P is concerned it is for all these reasons I still feel short of an external escrow deposting funds without the goods is always a risk and there is no perfect solution.

 

[Sticky Fingers]

Yes. To be clear I've no evidence whatever of a problem in this supplying dealer but for us this amount (even the deposit) is not "small change", it's taken years to save it in our boat deposit fund, so I need to have confidence that the money is safe...

Maybe I'm worrying over much.