These are challenging and uncertain times and we wanted to provide a briefing on some of the issues yacht owners may be experiencing during the current lockdown.
Do you have a mortgage over your yacht?
In New Zealand, we are yet to hear of any defaults being triggered by lenders to yacht owners as a result of the COVID-19 pandemic. However, yacht owners with borrowing secured against their yachts should be aware of the possibility that some lenders might, in due course, use this as an opportunity to look at whether a default has been triggered under the material adverse change (MAC) or financial liquidity provisions of their facility agreement.
A MAC clause covers unanticipated events which may affect a borrower’s ability to continue to service their loan or the financed asset, or the enforceability of the security. In a COVID-19 situation, a MAC default could potentially be triggered if a lender had evidence that the yacht owner would soon be unable to repay and service their loan and/or maintain the yacht in accordance with the loan covenants, either because the charter income has significantly declined or of a material change in the cash flow of the borrower. This could also trigger the financial liquidity provisions and it may require the borrower to make further deposits with the lender to increase it’s security.
We are in a constantly evolving situation. At present, banks are working with their customers to support them through these uncertain times and we would expect this to continue, for the short term at least; however, this may take a different turn if payment defaults increase. From our experience, it’s better to be proactive, if your circumstances have changed, and start the dialogue with your lender now.
Is your yacht currently undergoing a refit?
Check your contract, does it have a force majeure clause? There is a possibility that COVID-19 would be deemed a force majeure event under many refit and repair contracts. It is the yard’s responsibility to demonstrate the impact COVID-19 has had on each project, and to comply with all contractual notice obligations. Correctly giving notice is the first step. The yard will need to quantify the loss for each project and to show its attempts to mitigate any losses or delays. The best thing to do in this situation is to keep real-time, daily records of how each project is affected. Disputes are likely to arise only nearer delivery/re-delivery and having contemporaneous records of the delays caused and the steps taken to mitigate them will be invaluable to support any claim for permissible delay. Yards should be making every effort to keep their clients regularly updated, this helps to manage client expectations and will be more relevant as New Zealand moves to lower alert levels and non-essential work can restart.
Are you selling or buying a yacht?
If you are buying or selling a large yacht (24 metres or more), you may be using the internationally recognised MYBA form of sale agreement or a similar document. This agreement has a force majeure clause which will enable the contract to be extended for delays caused by “government act or regulation“. Other contracts are unlikely to have these similar provisions and disputes are likely to arise as buyers and sellers are unable to fulfil their contractual obligations, especially as inspections and physical deliveries are unable to take place. If in doubt, check your contract. We would recommend negotiating an extension to the agreement.
If you have any questions about COVID-19 and the issues facing yacht owners, please get in touch with our marine team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.