Let’s face facts – owning a boat is an exercise in expense. There’s the ever-rising cost of fuel, the marina, storage or transportation fees, registration, insurance, and the seemingly endless upkeep and maintenance costs. As a lawyer, I often come across clients who’ve fallen into the trap of buying into the boating dream without fully appreciating the true costs associated with long-term ownership. They’ve overextended their finances, ignored the effects of interest and depreciation, or underestimated the amount of repairs needed; in all cases ending up severely out of pocket. Yachtsmen frequently joke how their vessels are merely holes in the ocean in which to pour their money, and many a mariner will swear to the old saying that BOAT actually stands for ‘Break Out Another Thousand’.
As economic uncertainty continues to loom and cost of living expenses keep rising, it’s becoming harder and harder for some recreational mariners to allocate the necessary funds to keep sailing. When we consider that on average a boat in Australia is taken out just 14 days per year, trying to justify these ongoing expenses (especially to your significant other) can be quite a challenge. It therefore comes as no surprise that private boat sharing schemes and commercial syndicates are increasing in popularity. And while these certainly reduce the annual spend by splitting costs between several parties, joint-ownership can be a risky venture. It is therefore essential, like any contractual relationship, that you know exactly what you’re signing up for from the outset, as to avoid the added expense of having to seek out the services of a lawyer later down the track.
Basics of the Boat-Share
A boat-share is where two or more individuals decide to purchase a boat between them in the understanding that each will be entitled to a period of exclusive recreational use of the vessel. While these agreements are contractual in nature, they are by no means inflexible, nor do they require formal legal drafting to be effectual. A group of friends who simply pool their resources and buy a boat together would be bound to any verbal agreement made between them as to the terms and conditions of use. However this approach, while surprisingly common among mariners, offers little (if any) protection to the parties if there is a disagreement later down the track. This is especially applicable when not all owners have an equal share in the property. It is highly recommended that any verbal agreement, even between friends, be formalised in writing, signed and dated by all part-owners. This document should expressly state for how long each person gets the boat, over what dates, and under what conditions. It should address issues such as who is responsible for ongoing maintenance, berthing and upkeep. Also its advisable to stipulate what is to happen should someone damage the vessel, default on payment, wants to vary the agreement or sell their interest in the vessel.
The obvious downside of personal agreements is that the more owners, the more difficult it is to reach a satisfactory agreement between all parties, and later manage any problems that may arise. Indeed, if there are ten or more owners, it may in fact be a good idea to hold the property in a limited company and sell shares in the vessel. This company structure grants increased certainty for the shareholders, but comes at additional cost in setting up and administering such an organisation. In some instances, it may be easier to head down the pathway of the commercially managed boat-share.
Commercial Managed Boat-Share
A popular alternative to the private agreement is to purchase a share in a vessel directly through a management organisation, such as ‘Smart Boating’ or ‘The Cruising Club’. These companies do most of the heavy lifting for you; advertising and bringing together owners, providing ongoing maintenance and upkeep of the vessel and performing all the necessary legal and administrative work. They usually charge a yearly flat fee for this service, which, depending on the nature of the scheme, grants members a certain period of time each year in which to enjoy use of the vessel. However behind the outward simplicity of these schemes there often lies some hidden complexity, particularly in relation to questions of ownership.
Unlike chartering a vessel or buying into a timeshare, when entering into a boat-share scheme, you become one of the owners of the vessel. This has two main advantages; owners have a saleable interest at the end of boat-share agreement (usually a period of three years) and the vessel itself is likely to have been well maintained by all participants due to a sense of owners’ pride. However, unlike informal private agreements, you have very little bargaining power in a commercial boat-share and are subject to the conditions as stipulated by the managers of the scheme. Aside from the obvious precaution of carefully reading through any contract or similar document before signing (and seeking clarification for unclear or poorly worded clauses), you should specifically direct your attention to the ownership structure. There is an enormous variety of commercial schemes and syndicates, all using different and at times confusing language. Are you to be an “equitable shareholder”, a “tenant-in-common”, a “fractional owner”, or merely a “participant” in a boat-share scheme? To help cut through some of this lingo, both NSW Maritime and Maritime Safety QLD have produced separate guidelines in order to classify and register all legitimate boat-share schemes. It is worth noting there are substantial differences between the states, however the core principles remain the same.
According to guidelines put out by NSW Maritime, a boat-share exists only where an agreement is made between the owners of a vessel, granting them (and those they specifically invite on-board) exclusive use of the vessel for purely recreational purposes. If these criteria are satisfied, boats which would otherwise be deemed commercial vessels are granted a special exemption from compliance with the stricter regulations. This saves owners the expense of regular surveys and certification, as well as allowing many smaller vessels (under 50 feet in length) which are not manufactured to commercial survey, to be used in a boat-share arrangement.
According to NSW maritime, for a personal agreement to be applicable, an owner must be a natural person (ie: not a company) with a direct relationship with, or legal interest in, the vessel. Importantly, owners must also have the collective right to change or terminate a contract with any management company (subject to fees or penalties stipulated in the original agreement). Therefore a managing company cannot have a controlling share in the vessel, nor can they act unilaterally to remove ownership rights. Despite what the promotional material claims, if these basic ownership rights do not exist, there is not a registrable boat-share agreement.
However, more importantly the vessel must be used for purely recreational purposes. If the boat is used, even on just one occasion, for any purpose other than private recreation, it’s classed as a commercial vessel. This includes uses such as corporate entertaining, promotional activities and situations where either the owners or the management company allows the vessel to be hired out to a third-party. In NSW this would be enough to revoke the determination of the recreational nature of the boat-share agreement, forcing the owners to bear the substantial costs of compliance with commercial vessel regulations.
While sharing your boat with others may prove to be a cost effective way of gaining access to the waterways, the type of scheme entered must be considered carefully, so that your needs and expectations are met. Where a private agreement is considered, extra care must be taken not to fall foul of the rules and regulations that vary from state to state. Commercial agreements should also be carefully considered so that issues such as asset ownership and exit clauses are fully understood. Despite the initial set up difficulties, a carefully thought though boat share agreement gives you peace of mind, and means all parties can spend more time enjoying the vessel rather than spending time in their lawyer’s office.