That Sinking Feeling

Longtime client “Pete” called recently with a problem. He was selling his boat, and what he thought was a simple deal had started to go sideways. The situation resembled some scary car deals we’ve seen over the years.

Pete had found a buyer who was willing to buy both his boat and boathouse at a price that was acceptable. The buyer got his boat-broker friend involved to help document the deal. The broker wrote fairly simple documents for the deal, which everyone signed.

For unknown reasons, the boat sale would close in escrow, but the boathouse sale would be handled directly between the parties. At the broker’s urging, Pete signed off on the boat title and sent it to the escrow. He also signed off on the boathouse title, as well as two bills of sale, and gave all of those to the broker. The buyer inspected the boat and boathouse and was satisfied with their condition. However, the money didn’t come in on time. Understandably, Pete got nervous.

The worst outcome would be if the buyer paid for the boathouse but not the boat, since the boat was the tougher asset to sell. That was a possibility because the broker had written separate contracts, neither of which mentioned the other. To make things worse, there were no damages specified if the buyer failed to perform on either contract.

Pete tried to cancel the entire deal because of the lack of payment. That got an immediate email response from the buyer’s attorney, who insisted they had a firm deal that was too late to cancel, as the boathouse title had already been sent to the state for transfer. At this point it seemed Pete’s worst fears were materializing, and that’s when he sought legal help. Unfortunately, there was nothing much that could be done.

Happily, the buyer did eventually come up with the money and everything worked out. Pete only lost a few nights’ sleep over the deal.

This cautionary tale is a great example of what not to do as a seller. Here are some more suggestions about what you can do to protect yourself when you’re selling your car.

Lawyer up

If the car is valuable enough to matter, get legal advice from a capable attorney at the beginning. No one likes to pay legal fees, but it is far cheaper to prevent problems than it is to solve them.

The sale contract does not have to be long and complicated — in fact, concise and readable contracts are more likely to get signed — but it should cover all of the bases. Some of the key points are:

• Properly identifying the car and what is included in the sale
• Condition
• Establishing the sales price
• Establishing the terms of payment
• Making sure that the money is received before the title and the car are released
• Clarifying what happens if the buyer fails to perform

Identification and condition

You should clearly identify the car by make, model and serial number. You should also be clear about what, if any, accessories or spare parts are included in the deal. For example, consider a car with a replacement engine and the original sitting on a stand in the garage. If you sell the car, does the original engine go with it? That engine could be worth a lot of money in a separate transaction, but it could also add value if it goes with the car.

Condition is another source of conflict, especially with deals where the car is not seen or inspected by the buyer. The seller wants the contract to be crystal clear that the car is being sold in its “as-is” condition, with no representations or warranties given. But in reality, it is difficult to sell a car without saying something to the buyer about its condition. Understand that buyers remember every word the seller said — and believe the best, which can be different than what was meant.

Stating that the car is sold as-is helps, but it’s not a panacea. The buyer can still bring claims against a seller based upon conversations about the car. A sale agreement should do as much as possible to prevent the buyer from using these statements to force a refund after he decides he doesn’t like the condition of the car.

Following the money

The seller needs to know that the sale price has been paid in full before either the car or the title are released to the buyer. In today’s world, there are countless scams that can make you think that you’ve been paid when you haven’t. You need to know that the funds are real, fully collected and in your bank account.

Of course, the buyer wants the car and the title immediately upon having paid the sale price. The usual compromise is to use an escrow arrangement to satisfy both parties.

It can be difficult to find an escrow company that will handle car deals. A viable alternative is to use an attorney as the escrow agent, even if it is the seller’s or the buyer’s attorney. Making that a reliable technique requires clearly stated terms about what is going to happen, when and how. The typical sequence is:

1. The funds for the purchase are wired to the escrow agent and confirmed to be collected funds.

2. The seller gives properly signed title documents to the escrow agent.

3. The parties are now beyond the point of no return. The escrow agent is required to simultaneously transfer the funds to the seller and deliver the documents to the buyer, and the car then belongs to the buyer.

4. Finally, the car is released to the buyer. It is common for the car to be held by a neutral party (such as a mechanic) until the deal is completed and the escrow agent advises that it can be released.

Consequences

The sale contract should be clear about when the buyer is considered to have failed to perform and it should state or define a specific date that payment is due. That can be something like “three business days after the buyer’s inspection is completed.” But be careful, as even that sort of statement can be vague. If the timing is tied to the inspection, completion needs to be defined, or at least set a drop-dead date. Otherwise, the buyer could keep “inspecting” seemingly forever.

The contract should also make clear that the payment deadline is real, and not just an aspirational date. That is usually handled with a “time essence” provision, just as in a real-estate transaction. That means that the due date is the due date, and not just sometime soon after it.

If the buyer fails to perform, you can always cancel the sale, but that may not be a good enough solution. You may want compensation for your losses.

Under general contract-law principles, the seller’s remedy is to sell the car to someone else and then sue the buyer if the sales price is lower than what the buyer agreed to pay. This can get complicated. First, you have to sell the car to someone else in order to establish damages, which can take time and incur additional expense. If you sell the car for more than the buyer promised to pay, there are no damages to recover.

Usually, you can’t go to court to force the buyer to buy the car because cars are generally not considered unique enough to justify that remedy. But your contract can specifically allow you that remedy.

A common approach is to provide for a forfeitable deposit that the seller keeps if the buyer fails to perform. That’s a simple approach that gives you something for your trouble. But you have to be sure the amount of the deposit bears some reasonable relationship to your actual damages from the buyer’s failure to perform. If the deposit is higher, the law considers it a penalty, which is usually not enforceable. If it is considered a penalty, the court will generally not trim the deposit down to a reasonable amount but will require you to refund the whole thing.

This brings us full circle to the importance of having legal counsel up front. The old saying is true: An ounce of prevention is better than a pound of cure. ♦