New Boat

[Grey Fox]

Good Afternoon, I have agreed to purchase a brand new boat. The builder wants a 25% deposit (£40,000) now to reserve build slot, the boat will not be started until the end of year with further stage payments. Is this normal ? What happens if the company cease trading? Seems a big deposit before construction even begins

 

[pvb]

Welcome to the forums!

You must be very careful indeed. If the builder goes bust, you'd lose everything you'd paid. The only safe solution is to ask the builder to arrange a bank guarantee for the amounts involved. In this way, if the builder defaults, the bank refunds you. Only problem is that if the builder's company is struggling, a bank is unlikely to give a guarantee, in which case you should walk away and find a different boat to buy.

You also need to be clear who is asking for the deposit. Is it actually the builder, or is it a dealer? If it's a dealer, you need to be doubly careful as they tend to go bust at the drop of a hat.

 

[Tranona]

Welcome to the forum
You have hit one of the big risks associated with buying a new boat. Yes, it is common to be asked to pay a deposit, although 25% is high, particularly for a start date so far ahead. However if the boat is in high demand it is not unusual.

As already suggested it is crucial to know exactly who you are paying the deposit to as this we help determine how best to protect your money. The basic position is that if you just pay the cash to the company and it subsequently goes bust you are an unsecured creditor and likely to lose it. If you are paying a dealer, it is not easy to get any form of security, so important to do due diligence to get an idea how financially secure they are. With some it is possible to get the deposit held in a client account until the boat is started, although the builder may insist the dealer pays them the deposit. When I bought a new boat last I paid 10% to the dealer, in May for a July build then 20% when the start date was confirmed, 20% at start of build and balance on completion. All to the dealer with no security other than most of the balance was my old boat which was transferred on completion. The only thing I was never happy with was my inability to get them to agree to witholding a %age until after commissioning, although in the end there were no problems. Although risky the important thing was that time scales were short and total time of exposure was less than 3 months. One theoretical advantage of dealing with a dealer is that they are in the UK and your contract is under UK law.

If your contract is direct with the builder you have more options. A bank guarantee is common with some builders, particularly Scandinavian, and it is worth also getting the contract in £sterling if you do not want to take on the currency risk. Some contracts are written such that work in progress passes to the buyer on stage payments so that you own the boat as it progresses with the final payment after commissioning and sea trials. This has the advantage of giving you something tangible should the builder get into difficulties rather than being an unsecured creditor, although actually getting your boat finished may be a whole new challenge.

Good luck with your purchase - exciting process and most go smoothly1

 

[pvb]

As already suggested it is crucial to know exactly who you are paying the deposit to as this we help determine how best to protect your money. The basic position is that if you just pay the cash to the company and it subsequently goes bust you are an unsecured creditor and likely to lose it. If you are paying a dealer, it is not easy to get any form of security, so important to do due diligence to get an idea how financially secure they are. With some it is possible to get the deposit held in a client account until the boat is started, although the builder may insist the dealer pays them the deposit. When I bought a new boat last I paid 10% to the dealer, in May for a July build then 20% when the start date was confirmed, 20% at start of build and balance on completion. All to the dealer with no security other than most of the balance was my old boat which was transferred on completion. The only thing I was never happy with was my inability to get them to agree to witholding a %age until after commissioning, although in the end there were no problems. Although risky the important thing was that time scales were short and total time of exposure was less than 3 months. One theoretical advantage of dealing with a dealer is that they are in the UK and your contract is under UK law.

A "client account" is no protection.

The fact that a dealer may be in the UK is no protection either - they can go bust in a flash!

 

[Tranona]

Yes it is - if it properly set up as all recognised brokers use. They are written such that the funds always remain the property of the buyer until dispersed in accordance with the conditions. The account is entirely sparate from the dealer's own business accounts. However new boat dealers rarely use client accounts for new boat transactions because it is the builder that requires the deposit. Most dealers are also brokers so are quite familiar with the effective running of secure client accounts.

While being in the UK is not in itself protection against the dealer going bust, there are advantages in being under UK law in the event of any dispute. Imagine dealing with a legal dispute in a third country, different legal regime and language.

 

[pvb]

Yes it is - if it properly set up as all recognised brokers use. They are written such that the funds always remain the property of the buyer until dispersed in accordance with the conditions. The account is entirely sparate from the dealer's own business accounts. However new boat dealers rarely use client accounts for new boat transactions because it is the builder that requires the deposit. Most dealers are also brokers so are quite familiar with the effective running of secure client accounts.

While being in the UK is not in itself protection against the dealer going bust, there are advantages in being under UK law in the event of any dispute. Imagine dealing with a legal dispute in a third country, different legal regime and language.

Wasn't the Peters Opal scam based on misuse of client accounts? How many people lost their money in that disastrous episode?

There's no advantage in having a contract in UK law if the company just decides to go bust.

 

[AngusMcDoon]

Wasn't the Peters Opal scam based on misuse of client accounts? How many people lost their money in that disastrous episode?

There's no advantage in having a contract in UK law if the company just decides to go bust.

Is it possible to get insurance against insolvency when buying a new boat and making advance staged payments?

 

[pvb]

Is it possible to get insurance against insolvency when buying a new boat and making advance staged payments?

Yes, it's called a bank guarantee.

 

[Tranona]

Wasn't the Peters Opal scam based on misuse of client accounts? How many people lost their money in that disastrous episode?

There's no advantage in having a contract in UK law if the company just decides to go bust.

I knew that would come up! Yes Peters Opal case (which was not a "scam") clarified how Trust law was applied to client accounts - but that was 15 years ago and since the law was clarified client accounts (at least for yacht brokers and dealers) are now structured in the way that I described and are secure.

Suggest you Google to get all the legal arguments.

On your second point, in the event you were an unsecured creditor would you rather be in UK jurisdiction. However disputes are not just about insolvency and always scope for other kinds of dispute when buying a new boat - ask those who bought Polish built boats and tried to take legal action there.

 

[Clancy Moped]

Is a deposit simply that, ie, a down payment to secure the build, it should not be used to fund the build and held in an escrow account? And now back into the real world........

 

[RJJ]

I certainly think you're within your rights to ask why...why does it need to be so much, so early? I've never bought a new yacht (only dinghies, several times) but I have comparable experience is with building work.

What's the economic rationale for any deposit? One criterion is: who is actually incurring cost and why? Is it
- to ensure you're serious in your intentions. In which case I'd say maybe 5% is enough. Or pay the 25% in escrow, so it's available, contracted, ring-fenced, but can't be spent by dealer or broker.
- to cover upfront cost of raw materials on your boat, which is reasonable - but seriously, 25% eight months in advance, sounds a bit much, and you can talk that down. Go into the detail - what are they ordering, when, does it have your name on it?

As somebody said, is it to the dealer or the builder? What are the dealer's costs, and why?

You're rightly wary of losing your money if something goes pop. You should also be wary of falling behind "par" i.e., if you've paid more money than they've done work. It reduces your leverage if you later on have dissatisfaction with build quality etc... 25% eight months ahead puts you a long way behind before you've even started.

I'd be hoping this is negotiable or that they (not you) can get it guaranteed to your satisfaction. If not, it sounds very much as though you're providing their working capital - you're paying for them to finish the boat that's due to roll out in November. If that's the case, your question becomes: how certain are you that there's somebody after you, to repay the favour? Because if sales then dry up....you're stuck with a half-build boat and probably struggling to show you own even that.

 

[pvb]

I knew that would come up! Yes Peters Opal case (which was not a "scam") clarified how Trust law was applied to client accounts - but that was 15 years ago and since the law was clarified client accounts (at least for yacht brokers and dealers) are now structured in the way that I described and are secure.

Suggest you Google to get all the legal arguments.

On your second point, in the event you were an unsecured creditor would you rather be in UK jurisdiction. However disputes are not just about insolvency and always scope for other kinds of dispute when buying a new boat - ask those who bought Polish built boats and tried to take legal action there.

The Peters Opal failure was a great opportunity for the British Marine Federation to introduce a guarantee scheme for stage payments. They did nothing.

Remember that Clipper, from whom you bought your boat I think, arose phoenix-like from the dregs of Peters Opal, with many of the same people originally involved.

Client accounts don't work for dealers, as they have to make stage payments to the manufacturer. The contract to purchase the boat is primarily between the dealer and the manufacturer. In the event of either going bust, the actual buyer is on his own.

An unsecured creditor in the UK is in no better position than anywhere else - he's lost all his money.

I would never, ever, trust another boat dealer or boat builder unless I had a bank guarantee.

 

[pvb]

Is a deposit simply that, ie, a down payment to secure the build, it should not be used to fund the build and held in an escrow account? And now back into the real world........

Escrow accounts don't work either.

 

[colind3782]

When I worked in the building industry, albeit a long time ago, it was usual to make stage payments to the contractor based on the value of work completed less 5%. The 5% was held for six months after completion to address any faults found. Why wouldn't that work for boats?

 

[ianj99]

Makes more sense to me to buy a good used boat unless you particularly want a customised or one-off design.
Unless of course you can afford to lose £40k if things go wrong.

 

[Tranona]

When I worked in the building industry, albeit a long time ago, it was usual to make stage payments to the contractor based on the value of work completed less 5%. The 5% was held for six months after completion to address any faults found. Why wouldn't that work for boats?

It does - or can. I used to work for a semi- custom boatbuilder and many of our boats were built under survey and/or for corporate clients. Our contracts were almost always structured in a similar manner. If you go direct to a builder it is much easier to negotiate such a contract - indeed in the dodgy period of UK boatbuilding (late 80s early 90s) even production builders were selling based on such contracts which were promoted by the then SBBNF. Many Westerly buyers were grateful for them, even if some ended up owning part finished boats which they then had to get completed.

The issue being raised here is that most new boats now are built by large conglomerates who only sell through independent dealers, so your contract is with the dealer. This has some advantages under consumer law (particularly the current EU derived law) in that it is the dealer's responsibility to deal with problems. The downside for the individual buyer is that the builder requires stage payments from the dealer so the latter has nothing to offer in the way of security for your payments, nor generally do they have the asset backing to offer bank guarantees.

 

[Tranona]

The Peters Opal failure was a great opportunity for the British Marine Federation to introduce a guarantee scheme for stage payments. They did nothing.

Remember that Clipper, from whom you bought your boat I think, arose phoenix-like from the dregs of Peters Opal, with many of the same people originally involved.

Very good reasons why a guarantee scheme did not work. It requires funding and the only source is from the members and as most members would not benefit it is a non starter. It may work in industries like home improvements where "scams" are common and guarantors (usually industry members organisations) can charge membership fees to cover the scheme and members know that without the scheme they would not be able to operate. When you look at the number of people who have actually lost in buying boats it is tiny compared with the number of boats sold.

Clipper did have many people from Opal - not surprising as Bavaria would want an experienced team, but the source of finance was totally unconnected being from a large conglomerate - as I say you need to do due diligence if you are buying a new boat. Very sound financially - perhaps why they have been operating successfully for 15 years or so, almost twice as long as Opal had the Bavaria dealership. Other big UK dealers are similarly well financed - it is the smaller ones selling less common boats that perhaps need more attention.

 

[pvb]

Very good reasons why a guarantee scheme did not work. It requires funding and the only source is from the members and as most members would not benefit it is a non starter. It may work in industries like home improvements where "scams" are common and guarantors (usually industry members organisations) can charge membership fees to cover the scheme and members know that without the scheme they would not be able to operate. When you look at the number of people who have actually lost in buying boats it is tiny compared with the number of boats sold.

Clipper did have many people from Opal - not surprising as Bavaria would want an experienced team, but the source of finance was totally unconnected being from a large conglomerate - as I say you need to do due diligence if you are buying a new boat. Very sound financially - perhaps why they have been operating successfully for 15 years or so, almost twice as long as Opal had the Bavaria dealership. Other big UK dealers are similarly well financed - it is the smaller ones selling less common boats that perhaps need more attention.

But you seem oblivious to the fact that any dealer, or indeed boatbuilder, can choose to go out of business overnight. How much money did buyers lose when Peters Opal collapsed? And what about those hopeful buyers of Oysters, or Discovery Yachts? Millions of pounds disappeared overnight.

I bought my new Bavaria from an approved Bavaria dealer, one of Clipper's sub-dealers. When they failed to sort out some warranty work, I paid another yard to have it done, and sent them the bill. They didn't pay, so I started a Small Claims Court action against them. A few days before the Court hearing, they declared that they had ceased trading, so my claim against them collapsed and I didn't get paid. But they hadn't actually ceased trading, they'd just let their limited company go under. They were still in business, same people, same premises, same phone number, same website address, just without the little "Ltd" at the end of their name. Complete sharks, and that's the sort of thing that the OP needs to be aware of.

 

[Birdseye]

Good Afternoon, I have agreed to purchase a brand new boat. The builder wants a 25% deposit (£40,000) now to reserve build slot, the boat will not be started until the end of year with further stage payments. Is this normal ? What happens if the company cease trading? Seems a big deposit before construction even begins

I got to that stage with the then Southerly Yachts when ordering a Southerly 35. Wasnt happy. Had a look at the accounts and found that the real assets of the business were in another company and the boatbuilding bit was running on near empty. Walked away. Sure I was premature in my caution but only by a year or so. I would have got my boat from them and at a damn good negotiated price - others not much later werent lucky.

Having a solicitor hold the balance is acceptable. IMO giving 25% to the boatbuilder simplky says that their operation is under capitalised. Walk!

 

[Tranona]

But you seem oblivious to the fact that any dealer, or indeed boatbuilder, can choose to go out of business overnight. How much money did buyers lose when Peters Opal collapsed? And what about those hopeful buyers of Oysters, or Discovery Yachts? Millions of pounds disappeared overnight.

What gives you that impression? - particularly as I have spent most of my life working in or associated with the marine industry. All I am saying is that the number of buyers who actually lose out is small, but very visible. In the whole scheme of things nothing like the millions lost through dodgy home improvements, furniture retailers going bust, holidays home scams and so on. The Oyster and Discovery buyers are generally not the losers because they are buying using the type of contract I described earlier - they would be mad not to do so - and that is what those builders work with. The losers there are usually trade suppliers, landlords, contractors, banks and investors. Almost always the boats are completed either by the administrator or whoever picks up the pieces. The losses tend to be limited to time delays and possible cost increases when negotiating with the new entity to complete the boat. By the nature of the production process for these semi custom boats the number of individuals affected at any one time is small.

The Peters affair was almost a one off and was far more complicated than most people realise. It has achieved a notoriety out of all proportion to the amounts of money lost by buyers. This is not to excuse the actions of certain people involved, but in fact the major actions taken that resulted in the court case were actually done in good faith in an attempt to protect the buyers' deposits. The fact that it had to go to the High Court for a ruling suggests that it was not as straightforward as some people like to think. It is also not well known that not one single brokerage client whose funds were held correctly in the client account lost. As I said you need to read the background, the court case and the ruling with an understanding of Banking and Trust Law to fully understand what went on.

I am sorry you had a bad experience with the dealer from whom you bought your boat - perhaps if you had bought it direct from Clipper you would have had the same exemplary experience that I had.