The Docket

BUYING AN AIRCRAFT:

A SHORT GUIDE Giulia Mauri presents some of the main legal issues that prospective buyers will face when negotiating the contractual documentation needed to secure the purchase of their aircraft

PREPARATION The many aspects of aircraft ownership should be seriously considered before buying.

As all buyers are aware, the purchase of an aircraft is complex. It not only involves technical choices as regards the type and the specifications of the aircraft, but the purchase also involves prospective buyers being confronted with technical, tax and legal issues that require assistance from a team of specialists in this type of transactions.

Firstly, the contractual documentation and the issues raised by the relevant purchase will be different depending on whether the aircraft is bought new directly from the manufacturer or used from a third-party seller.

In addition, the contractual documentation will need to take into account whether the buyer needs financing to purchase the aircraft or if it is buying with its own funds. Therefore, the items to be consider will vary depending on the structure of the relevant purchase.

This article addresses the main issues to be dealt with in relation to i) the negotiation of a contract for the purchase of a new aircraft; ii) the negotiation of a contract for the purchase of a used aircraft; and iii) the legal issues linked to a possible financing of the purchase price.

Buying a New Aircraft

When buying a new aircraft, the buyer deals directly with the manufacturer of the aircraft. Each manufacturer has its own standard aircraft sale agreements that they use as a starting point for negotiations. Type Certification

The first element that needs to be addressed by a prospective buyer is to verify if the aircraft type that they wish to purchase has already been certified. Indeed, every time a manufacturer produces a new type of aircraft, this has to be certified by competent authorities (EASA or FAA) before it can be placed on the market and sold to clients.

If the aircraft has not yet been certified, the manufacturer will have to indicate in the list of aircraft specifications that those specifications are communicated for information purposes only, but that they will need to be updated when the aircraft obtains final certification.

When negotiating this type of deals with manufacturers, it is important to introduce an exit clause providing that, if certification has not been obtained by a specific cut-off date, the buyer may terminate the contract and obtain reimbursement of all amounts previously paid to the manufacturer.

Ownership and Absence of Liens and Charges

As the aircraft is bought new from the manufacturer, it is usually not necessary to carry out searches as to ownership and title. Indeed, the manufacturer is the first owner of the aircraft, which has not yet been sold to any third party. The aircraft sale agreement usually contains representations and warranties as to title and absence of liens or charges on the aircraft. At the moment of the sale, the manufacturer will issue a bill of sale in favor of the buyer certifying that title to the aircraft has passed to the buyer at the time of delivery.

Warranties

It is market standard that an aircraft bought from a manufacturer is sold “as-is”. This means that, once the aircraft is inspected and accepted, the buyer will not have any right to claim any damages from the manufacturer for apparent or hidden defects. It is, indeed, market-practice for a manufacturer to add a disclaimer to its contract providing that, except for a warranty of title, the manufacturer does not give any other warranty in relation to the aircraft or its future use.

Given this lack of contractual warranties, it is important to verify what type of post-sale warranties or technical support is offered by the manufacturer. Most manufacturers offer postsale support for the repair of defects or the substitution of parts. If the manufacturer of the aircraft is not (as it is often the case) the manufacturer of the engine(s), it is critical to obtain warranties or post-sale technical support also from the engine manufacturer.

Buying a Used Aircraft

Buying a used aircraft is more complex than buying a new aircraft. Indeed, many items that did not need a specific attention in the framework of the purchase of a new aircraft need to be addressed when buying from a third party.

Ownership and Title

The first fundamental item that must be verified is whether or not the seller is the owner of the aircraft. Several checks may be carried out to ascertain this, including the following: ❍ Obtaining all the original bills of sale allowing the buyer the trace back the various sales of the aircraft all the way from the manufacturer to the buyer via all intermediary steps; ❍ Carry out a search in the International Registry to verify if the aircraft has been or is registered on such registry; ❍ Verification of the current registration certificate of the aircraft. In certain countries (for example France), the aircraft is registered in the name of the owner and the registration cer

tificate represents title. A search on the relevant registry may therefore prove helpful; ❍ Insurances also offer specific protection (title insurance) against possible future claims against your title or the title of the seller on the aircraft.

In addition to the above, the seller will normally give specific representations and warranties as to the existence of title and the absence of liens or charges over the aircraft.

Delivery Conditions

Like new aircraft, also used aircraft are usually sold “as-is”.

When buying a used aircraft, it is fundamental to work with experienced technicians who are able to indicate an exact list of the documents that need to be supplied together with the aircraft and to draft an exact list of the delivery conditions of the aircraft. The more detailed the delivery conditions, the better.

During the pre-delivery inspection, the technicians of the buyer must (i) decide whether the aircraft complies with the delivery conditions and it may be accepted or (ii) judge whether there are discrepancies that can be rectified or that the damages are such that the aircraft cannot be accepted.

This last option must be explicitly provided in the aircraft purchase agreement. Indeed, if the buyer considers that it may decide not to accept the aircraft in certain specific cases (e.g. presence of corrosion, structural

RESEARCH Before one commits to a purchase, it’s essential to know the plane’s history.

IMPORTANCE It pays to put some effort into finding the right source of financing.

damage that has reduced the marketvalue of the aircraft, etc), such option to ‘walk-away’ must be indicated clearly in the text of the contract.

Escrow Agent

It is quite rare that an escrow agent is appointed when buying an aircraft from the manufacturer. Indeed, there is a certain reliance in the market on the reputation of the various manufacturers to return the deposit and amounts already paid by the buyer should the buyer decide not to accept the aircraft in compliance with the purchase agreement.

When dealing with a third party seller, it is market-practice to appoint an escrow agent to remove from the buyer and the seller any credit-risk on the other party until closing of the relevant deal and delivery of the aircraft to the buyer.

The appointment of an escrow agent may be done via a separate escrow agreement concluded by seller and buyer with the escrow agent or by having the escrow agent sign the purchase agreement.

It is important, when negotiating an escrow agreement, that the provisions of the escrow agreement mirror what is provided for in the underlying purchase agreement. Indeed, it is fundamental that, for example, the buyer is free to obtain the reimbursement of the deposit if and when the deposit needs to be reimbursed under the main agreement.

Financing

If the buyer needs to finance the purchase of its aircraft, two main options are currently available on the market: (i) a loan coupled with a Therefore, the flexibility of receiving financing often implies some limitations to the use of the aircraft. Limitations that may be negotiated with the relevant financier and tailor made to the planned use of the relevant aircraft.

mortgage or similar security on the aircraft (and possibly other additional charges) or a (ii) finance lease.

Whatever the type of financing chosen, the bank or the lessor needs to be involved in the transaction from the very beginning so as to avoid that the chosen bank or lessor decides to pull out and not grant credit at a late stage in the negotiations with the seller.

The involvement of a bank means that certain security on the aircraft and on other assets of the buyer will be needed. Most banks active in the financing of private aircraft consider the financing of the aircraft as part of their private wealth department. They will therefore treat the risk of financing an aircraft mainly as a risk on the client, coupled with an additional risk on the asset being financed.

Banks will therefore frequently request a mortgage (or equivalent charge) on the aircraft as well as a charge on the shares of the vehicle owning the aircraft and additional security on the bank accounts of the buyer. In contrast, a financial lessor will not need to take a mortgage on the aircraft since, from a legal standpoint, the lessor is the owner of the aircraft and it should be able to recuperate its aircraft even in case of bankruptcy of the lessee.

Relying on financing when buying an aircraft means that the bank or the lessor will include limitations to the use of the aircraft for example providing that the aircraft cannot be subleased, that the operation of the aircraft must be entrusted to a reliable operator pre-approved by the bank or the lessor; that the aircraft may only be flown in certain countries considered as ‘secure’; etc. Conclusion

Buying an aircraft is always an exciting time for prospective buyers.

Working with a team of qualified and experienced experts helps buyers to focus on their investment while leaving the professionals to deal with the technical, legal and tax complexities of such a purchase.

Attorney G iulia Mauri is Head of Aviation and Founder of KADRANT (www.kadrantlaw.com). She has more than 20 years’ experience in advising national and international clients on all aspects of aviation and transport-related transactions, including asset-finance and leasing, regulatory issues, carrier’s liability and litigation matters. She also acts as a mediator and is the co-founder of Mediation4Aviation, a mediation platform dedicated to the aviation industry. Giulia co-chairs the European and Legal Affairs Committee of the European Business Aviation Association and is an active member of the Industry Affairs Group of the European Regions Airline Association. Her Linkedin profile is accessible here: https://www.linkedin.com/in/giuliamauri-5741979/