The majority of yacht purchase offers are tendered with a deposit. As a buyer, you can better protect yourself by understanding who holds this deposit and what might happen to it in the event of a contract breach.

At the time a buyer makes a written offer to a yacht owner, the buyer is often expected to submit a good faith deposit of 10 percent. This deposit should be placed in a third party’s escrow account. It is commonplace for the buyer’s yacht broker or an attorney to hold the escrow funds.

When held by an attorney, the funds are placed into a trust account, not to be comingled with other client funds or used in a general account. Trust accounts are closely monitored by the state bar association in which the attorney holds their law license. For example, The Florida Bar has the authority to audit an attorney’s trust account upon notification of misappropriation of attorney trust funds. In addition, an attorney found to be in violation of The Florida Bar rules regarding attorney trust accounts may be fined, censured, suspended for a period of time and/or disbarred.

Most brokers also maintain trust accounts, but save for the FDIC protections afforded to a lending institution trust account, there are no other protections for the escrowed funds. A Florida licensed yacht broker is required to be bonded, but only up to $25,000, which, considering the large amount of the deposit in most yacht transactions, also does not afford much protection for the escrowed funds. Before lodging a deposit with a broker, the buyer should have a clear understanding of whom the broker is working for, as the broker could be representing both the buyer and seller in the same transaction. If a broker holds the buyer’s deposit, then regardless of whom the broker represents, the broker has a legal duty to act as a neutral third party concerning the deposit. If the broker is acting on behalf of both parties, then the buyer might want to consider electing another escrow agent.

Most purchase and sales agreements used by yacht brokers contain standard language appointing the buyer’s broker as the escrow agent. Therefore, if the buyer will be using someone other than the broker as the escrow agent, this language must be modified before submitting the offer to the seller. It is typical that a buyer’s written offer is drafted by the buyer’s broker and submitted to the seller’s broker without an attorney review. If the seller accepts and signs off on the buyer’s offer, then the parties have a binding agreement that can only be modified in writing as negotiated by both parties.

Other methods of holding a buyer’s deposit include both parties opening a joint bank account and having the buyer wire the deposit there; using an escrow service, such as a bank, to hold the buyer’s funds; or the buyer giving the deposit directly to the seller, which obviously leaves it much less protected should a dispute arise between the parties.

Regardless of how the deposit is made, the buyer’s written offer or purchase agreement needs to have clear terms and conditions about how the sale is predicated and how the deposit is to be treated upon a party’s default. The escrow agent will require explicit instructions that must be signed by both parties, and will follow those instructions concerning the disbursement of escrowed funds.

Most purchase agreements make an offer contingent upon a buyer’s personal inspection, survey and sea trial of the yacht. If any one of those items is unsatisfactory and the buyer notifies the seller within the contractual time period, then the escrow agent must immediately refund the buyer’s deposit.

With most failed transactions, litigation ensues to determine who breached the agreement and what becomes of the buyer’s deposit. If there is a conflict regarding who has defaulted, then an escrow agent should do one of two things: hold the deposit until he receives mutually-agreed-to written instructions signed by both parties, or lodge the deposit with the local court. Once the deposit is lodged with the court, the parties can fight over the deposit using attorneys.

Because the closing proceedings of most yacht transactions occur over a relatively brief amount of time compared with other business deals—within weeks from start to close—it’s essential to consider the legal significance of a deposit. Take a moment to understand what will happen to your deposit and ensure that it is being held in a secured escrow account.

Danielle J. Butler is a maritime attorney and partner at Hill Betts & Nash, Fort Lauderdale, Florida. She handles transaction and litigation matters for pleasure yachts and commercial vessels. She is admitted to practice law in New York, Florida and the District of Columbia. She may be reached at [email protected] and hillbetts.com.