The sale of an aircraft is a transaction that involves significant legal, financial, and operational considerations. Whether you are selling a single aircraft or an entire fleet, the process requires careful negotiation and documentation to ensure that all parties’ interests are protected. At YYZlaw, we specialize in guiding our clients through the complexities of aircraft sale agreements, providing the legal expertise necessary to achieve a successful transaction.
By outlining how the transaction will work, what is included in the deal and when it will occur, an aircraft sale agreement can ensure that the parties understand each other’s expectations, thereby reducing the likelihood of surprises, confusion, and misunderstandings.
Negotiating, drafting and executing an aircraft sale agreement can be a contentious affair. This article offers an overview of the negotiation and drafting processes. It is not, however, a comprehensive guide. To navigate this process smoothly, we recommend retaining experienced aviation counsel. At YYZlaw, we are here to help!
Letter of Intent
Most aircraft sale agreements begin with a previously negotiated and executed Letter of Intent (LOI). Although usually not binding, the LOI lays out the fundamental terms of the sale and can facilitate the negotiation and drafting of the aircraft sale agreement.
The LOI is typically drafted during a sensitive stage of negotiations between the buyer and the seller. At this point, both parties are still working to agree on the key terms of the deal. For the seller, this often includes items such as the purchase price, scope of the pre-buy inspection, and the timing and location of closing. An LOI helps align the parties’ expectations before they enter into the more formal sale agreement. `
Once the LOI has been signed, it is time to draft the aircraft sale agreement.
For new aircraft straight from the factory, the manufacturer will usually provide a draft agreement. In most other cases, however, it is common for the buyers to draft the agreement. Buyers generally have the greatest interest in ensuring that the agreement provides them with adequate protection, such as allowing for pre-buy inspections and ensuring the aircraft is delivered as agreed, hence why it is essential that sellers retain competent aviation lawyers to protect their interests in the drafting process.
KEY TERMS
The specific terms to include in an aircraft sale agreement will depend on the type and value of the aircraft. Each aircraft is unique, and its price, intended use, age and maintenance history of the aircraft and engines will influence the terms of the agreement.
For the aircraft seller, a sale agreement should comprehensively address all critical aspects of the transaction.
Identity of the Buyer
Identify what entity is purchasing the aircraft. This is often easier said than done. It is imperative that the Seller conduct due diligence and ascertain the identity of the buyer, as well as comply with all applicable country based and list-based sanctions.
Aircraft Description
Detail the aircraft’s model, make, registration number, and the serial numbers on the engines and aircraft. We usually advise sellers to list all spare parts and loose equipment in the agreement: doing so will not only result in a higher purchase price, but also prevent any disputes post-closing about what was or was not included in the transaction.
Purchase Price and Payment Terms
Specify the purchase price of the aircraft, including the deposit amount, any tax obligations, and the conditions related to payment (ex: if to be held in escrow). Sellers will want to specify in the agreement whether the deposit will be placed in escrow or be held by the seller, and under what conditions they may be refunded to the buyer. Moreover, the method of payment should be identified. For instance, if financing is involved, the seller will want to ensure that the full purchase price is paid before any liens are attached to the aircraft.
Taxes
Taxation is another important factor in aircraft sales. Depending on the location of the transaction, the sale may be subject to sales tax, use tax, or value-added tax (VAT). It is essential to understand the tax implications of the sale and ensure that all necessary filings and payments are made in compliance with local regulations. In the United States, for instance, many States permit “fly away” exemptions from sale/use taxes. YYZlaw can provide expert advice on the tax aspects of aircraft sales, helping our clients minimize their tax liabilities and avoid costly penalties.
Pre-Buy Inspection
Outline who will perform the inspection, its scope, and what defects must be repaired by the seller before closing. As a general rule, the buyer is usually responsible for the costs associated with the pre-purchase inspection, while the seller often pays the costs to resolve any defects. It is therefore important that a sale agreement limit whether the seller’s responsibility to repair is limited to airworthy discrepancies, or is extended to cosmetic and non-airworthy defects.
Aircraft Title and Lien Searches
Another key consideration in the sale of an aircraft is the transfer of title. The sale agreement must include provisions for the transfer of ownership from the seller to the buyer, including the necessary documentation and any regulatory approvals that may be required. The agreement should also ensure that the appropriate title searches and registrations are conducted in the applicable provincial security register, as well as on the International Registry. EscroAir, the only Canadian escrow company, can assist sellers by providing escrow services and International Registry expertise.
Choice of Law
When the buyer and seller are from different provinces or countries, it is prudent to include language in the sale agreement that specifies which law applies to the transaction if any disputes arise. Aircraft are mobile assets, so it is crucial to have agreed-to provisions regarding the choice of law and jurisdiction. Some laws tend to be more or less favorable, or import certain outdated procedural delays into resolving a dispute.
Default and Remedies
The agreement should outline what happens if the purchaser defaults, including potential deposit forfeiture and/or reimbursement for transactional expenses.
Closing
The sale agreement should provide a detailed outline of the closing process. The timing of the closing is crucial, as it marks the point at which the buyer assumes responsibility for any potential damage to the aircraft. Nowadays, many aircraft are sold through ‘escrow closings,’ where an escrow agent—typically based in Oklahoma City or Toronto—holds all the key documents and funds. Upon instruction, the agent wires the funds and files the necessary documents with the national aircraft registry and the International Registry. This process can be particularly complex when an aircraft is being deregistered from one civil aircraft registry and transferred to another. If the closing involves the discharge of a bank lien on the aircraft, the procedures for the receipt of funds and the release of liens also need to be clearly defined.
At YYZlaw, we understand that the sale of an aircraft is a complex and time-sensitive transaction. Our goal is to provide our clients with the legal support they need to navigate the process smoothly and efficiently. We work closely with our clients to draft, review, and negotiate sale agreements that protect their interests and ensure a successful outcome.
Whether you are selling an aircraft as part of a fleet reduction or as a private owner, YYZlaw is here to help. Our team of experienced aviation lawyers has a deep understanding of the legal and regulatory issues involved in aircraft sales and can provide the guidance and support you need to achieve a successful transaction.
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