Building a superyacht is a time-consuming process. It’s measured in years, not months. With pre-construction planning and a shortage of building slots, it can take that long even before the first steel is cut and the keel is laid. But every now and then, projects come to a standstill halfway through. Someone commissioned the yacht, agreed on the specifications, and discussed the color of the onyx in the owner’s bathroom with the designer. Then their priorities changed, and they want to sell. Now the shipyard is left with a half-finished hull, creditors breathing down its neck, and no buyer.
Shipyards don’t like having abandoned hulls taking up space in their facilities and at their docks. The costs—and opportunity costs—add up every day. Sellers are usually motivated and become increasingly flexible on price as time goes on. In addition to skipping the line and paying less, you can also see what you’re buying as you walk among the bare metal structures—and modify the design if you wish.
Discounts vary greatly depending on where we are in the new-construction market cycle, ranging from a nominal discount to a price close to scrap value—and everything in between. However, one thing remains constant: distressed properties are rarely advertised on the open market. You have to know where to look. But the opportunities are there. Tempting, isn’t it?
Unfinished superyachts call for a thorough legal investigation
The first step is to assess the shipyard’s financial situation. The fact that a shipyard is struggling is not necessarily a reason to rule out the deal (many owners have purchased the shipyard themselves to ensure their boat is completed), but you have to proceed with your eyes wide open.
Next, an independent inspector must be commissioned to examine the workmanship and verify whether the boat was built by skilled craftsmen or by clock-watchers. The inspector must verify compliance with the contract and the boat’s status with the classification society—a matter of immediate interest to lenders and insurers. Classification societies are experts in the technical aspects of yacht construction and maintenance. Their primary function is to research, establish, and enforce standards for design, construction, and maintenance. If classification is overlooked, it will be nearly impossible to charter the vessel once it is launched.
Is it easier to start from scratch?
The obvious option is to buy what’s in front of you and hire third parties as needed to finish it. But unless the shipyard has also gone bankrupt, this isn’t the best course of action. The price of the original contract was negotiated at a specific point in time. If the shipyard has raised its prices since then, or if costs have increased, a new contract exposes you to renegotiation at current prices.
Shipyards also organize their construction schedules based on production capacity, subcontractor availability, and material orders already placed: a new contract may give the shipyard the opportunity to delay your delivery date. Penalties for late delivery, the scope of the warranty, and performance guarantees—all of these were already negotiated once, sometimes in a market favorable to the buyer. Starting over means renegotiating everything from scratch, and the shipyard is under no obligation to offer the same terms twice.
Pick up where others left off
An assignment or a novation (which are not the same thing, although they are often confused) allows you to step into the seller’s shoes, assuming the price and payment schedule of the existing contract, while paying the outgoing buyer a discounted amount that reflects the milestone payments already made.
Assignments typically transfer only the benefit of the contract (the right to receive the yacht), not the burden (the obligation to pay), and are therefore often prohibited by standard construction agreements. Novations are three-party agreements in which the builder, the outgoing buyer, and the incoming buyer agree that the old contract is terminated and a new one is created, with identical terms, between the builder and the incoming buyer, with the original buyer withdrawing without any residual liability. This is generally what both buyers and shipyards actually want.
A legal position, as well as a boat
And so, with novations, you’re not just buying a boat—you’re buying another person’s legal position. These are radically different things, and confusing them is how people lose fortunes. You inherit all the existing design decisions, quality issues, and potential disputes.
Let’s consider title to the property. Under a typical construction contract, ownership of the materials and the partially constructed hull is not transferred to the buyer piece by piece as they are installed, but rather at agreed-upon milestones—or perhaps not until delivery. This means that the semi-yacht under construction may not even legally belong to the person selling it. It could still belong to the shipyard.
This financial exposure is managed through the shipyard’s issuance of refund guarantees in exchange for each milestone payment. If the shipyard goes bankrupt, the payments made by the buyer up to that point should be refunded, but those guarantees are only worth what their terms specify.
Do they offer unconditional refunds, or do they come with complicated requirements? Also, can you be sure that the company offering the guarantee actually has the money to pay out if necessary? And finally, can they even be transferred to someone else, according to their own rules?
Unknown variables to keep in mind
In the past, mortgages could not be registered in a ship registry. Now, however, they often can. If the mortgage lender has not formally released its lien, you can pay the full price, obtain a bill of sale, and still find that the mortgage follows the boat, regardless of the sale. Obviously, this needs to be checked when there’s a port of registry stamped on the stern and a flag flying proudly, but not so much when all you have in front of you is an empty steel box.
Construction projects often come to a standstill because someone has run out of money, and when someone runs out of money, there are usually other people lining up with invoices. Suppliers who delivered exquisite sofas. Subcontractors who delivered teak decking that’s still wrapped in plastic in a corner. They may have retention-of-title clauses in their supply contracts, which allow them to show up and reclaim the items they haven’t been paid for.
Review the contractor’s liability insurance
The transfer of risk determines which party, at any given time, bears the loss if the vessel is damaged or destroyed. Although risk is normally transferred along with title, the construction agreement may provide otherwise. Construction insurance policies are taken out by and for the benefit of the original buyer and builder, and although co-insurance clauses may protect the new buyer’s interests, there may be gaps in coverage or disputes regarding the new buyer’s entitlement to insurance proceeds. Fire may be an insured risk, but what about damage caused by an earthquake or war?
And if a “total loss” occurs during construction or sea trials—whether actual (complete destruction) or constructive (beyond economic repair)—what are the options? Reconstruction, or is the contract terminated, thereby extinguishing the rights and obligations of all parties?
Measure twice, cut once
In short, a poorly managed off-plan purchase will leave you as just another creditor in line, the owner of a pile of unfulfilled ambition. But done correctly and with the right advice, buying a project can save you time and money—and get you back on your feet while your friends who commissioned new builds are still arguing with their designer over door handles.
This article does not provide or replace legal advice.
Benjamin Maltby is an attorney who helps clients purchase and own superyachts.
