Drafting the Warranty of Title When the Seller is a Legal Entity

Mar 08, 2017 Stephanie Kline - Robert Allen Law

Do you, the broker, typically prepare the Warranty of Title in your deals? If so, you probably use a “standard” form that you found online and you assume that it works. But beware, when the seller is a legal entity, the Warranty of Title clause in the IYBA (formerly FYBA) agreement has an additional protection for the buyer. A broker who is working with the buyer and who drafts this legal document for the seller’s signature puts
himself at risk if the document is not sufficient.

The requirement that the seller provide a Warranty of Title arises from paragraph 6 of the IYBA Purchase and Sale Agreement (“PSA”). The PSA states that the seller will deliver to the buyer a guaranty and indemnification that the seller is transferring “good and marketable title to the Vessel, free and clear of all debts, claims, maritime or common law liens, security interests, encumbrances, excise taxes, and any other applicable taxes, customs’ duties, or tariffs . . .” If the seller is a legal entity, the PSA adds an additional requirement that the seller’s beneficial owner(s) provide the same indemnification and guarantee.

The Warranty of Title is arguably one of the most important documents the buyer receives from the seller at closing because it protects the buyer against unrecorded liens on the vessel. Before closing, the buyer performs a lien search by ordering a transcript or abstract of title (depending on the flag of the boat), which shows recorded liens, such as a mortgage on the vessel. The seller must satisfy liens prior to or at closing. However, the transcript or abstract of title does not show unrecorded liens; for example, claims for unpaid crew wages, unpaid charges for repairs or materials, or personal injury claims – all of which could show up post-closing. Because these types of liens are asserted against the vessel (and not the seller himself), the buyer, after taking title, is responsible for paying for these liens or risks the arrest and judicial sale of
the vessel. 

The Warranty of Title serves to protect the buyer against such a situation. In it, the seller agrees to pay for liens existing up to the date of closing or to indemnify the buyer against any losses or expenses the buyer incurs as a result of such liens. When the seller is an individual, the Warranty of Title puts an actual person on the hook. When the seller is a legal entity, only the entity is on the hook. But what if that entity is selling its only asset (the boat) and is left as a shell company post-closing? Or what if the entity is dissolved post-closing? The answer is that
the buyer will be out of luck because that selling entity either has no assets to satisfy the lien or to pay back the buyer, or the entity simply no longer exists!

To avoid this situation, it is crucial that the Warranty of Title include a personal guarantee and indemnification from the legal entity’s beneficial owner(s) – i.e. an actual person. Determining whom the beneficial owner is, or if there are multiple beneficial owners, requires performing due diligence on the legal entity. Keep in mind that the due diligence process can become complicated when there are one or more holding companies involved.

As a broker, you don’t want your buyers coming back to you asking why they purchased a boat that has a lien on it and why they now have to pay for that lien and have no recourse against the seller because the Warranty of Title you provided was not sufficient. A broker who drafts the Warranty of Title himself takes on a huge risk.

It is always best to advise a buyer to obtain his own independent legal representation when purchasing a yacht. Because the Warranty of Title can be a complicated legal document, a lawyer should help draft it to ensure the buyer is receiving good title to the boat and is adequately protected against liens. A lawyer can also help in the due diligence process and in determining what entities and individuals need to sign the Warranty of Title.