Buying, Selling, Leasing Or Financing An Aircraft

Buying, Selling, Leasing Or Financing An Aircraft

Buying, selling, leasing, or financing an aircraft is a process that can vary in complexity depending on the value and type of aircraft involved. As the aircraft asset value or operational complexity increases, so does the need for aviation legal advice. However, it is always advisable to ensure that an aircraft is airworthy and free from liens and encumbrances during a purchase and sale transaction. The greater the value of the aircraft asset, the more important it is for there to be a clear understanding as to the rights and obligations of each party set out in writing. What we generally see with aircraft transactions and financings is that, the smaller the aircraft, the less rigour the transactions are subject to. Additionally, financing and leasing an aircraft will necessarily involve due attention to the presence of any liens which may undermine a lender’s priority security interest in the aircraft and its engine(s). Reviewing for the presence of liens requires an examination of the filings made against the aircraft and/or the debtor in the applicable provincial personal property security register (including Quebec’s RDPRM) and the International Registry of Moveable Assets (formed under the Cape Town Convention). In many of these transactions, management companies are involved and the need to i) deal with the presence of liens and ii) negotiate the contents of the agreement which governs the relationship with these management companies, arises.

Negotiating An Aircraft Purchase/Sale Agreement

The purchase and sale of an aircraft typically starts with the issuance of a letter of intent (sometimes referred to as a letter of interest) (LOI). Aircraft LOIs set out the base commercial considerations of the seller and purchaser in an aircraft transaction, including sale price, delivery conditions and inspection scope, if any. Additionally, parties may be able to include items such as closing timelines and closing location, however these items tend to be more fluid due to the dynamic nature of an aircraft transaction. It is always important to ensure that the contents of the LOI are as close to the commercial agreement as possible. From a negotiating perspective, kicking something down the line, which may prove controversial, will only serve to increase the parties’ costs for negotiating the aircraft transaction and could very well lead to the deal collapsing, despite the costs incurred by the parties.

In the vast majority of aircraft transactions, purchasers are required to place a deposit in escrow to secure the purchaser’s interest in proceeding with the purchase of the aircraft – these deposits are almost always declared to be refundable until the time that the parties agree on the terms of, and execute, the aircraft purchase agreement (also referred to as aircraft purchase and sale agreements). In some instances where the condition of the aircraft is readily available to the purchaser, or the sale price is heavily discounted, an aircraft seller may demand that a deposit be made non-refundable from the onset of the transaction. These situations are rare and should be approached with great caution.

Parties contemplating the purchase or sale of an aircraft must consider a variety of issues. These issues may include questions as to the scope of any pre-purchase inspection that will be permitted, including the ability of the purchaser, or its agents, to conduct a test flight of the aircraft.

Additionally, due to the mobile nature of aircraft, there can be varying degrees of taxation which may apply to a transaction. Closing a transaction, in some Canadian provinces, could result in non-refundable sales tax being payable on the aircraft purchase.

In our view, it is always advisable to engage the assistance of aviation counsel at the onset of any aircraft transaction to avoid these complexities further into the transaction. While aircraft brokers can be helpful in achieving commercial compromises between the seller and purchaser of an aircraft, it is ultimately the aviation lawyer that can simplify or hinder the progress of an aircraft transaction. In our view, time kills deals. Prompt, responsive and reasonable legal representation for the transaction parties will lead to the most cost-effective aircraft transaction as possible. YYZlaw provides legal advice and direct representation to aircraft purchasers, sellers, financiers, brokers, and aircraft management companies, ensuring that our client’s interests are accurately reflected in the ultimate agreement without weighing down the process with unreasonable expectations. Our capability to be a one-stop shop – from reviewing a LOI, ensuring validity of title and taxation and importation challenges are thoroughly dealt with, to negotiating, finalizing the relevant agreement and managing all documents through to closing – advice from a third-party expert, such as YYZlaw, can increase the efficiency of a transaction and provide assurance to all parties through to delivery of the aircraft.

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Negotiating An Aircraft Lease Or Finance Agreement

The purchase of aircraft assets involves a high upfront capital investment and companies may either require, or elect, to finance an aircraft purchase based on a variety of tax and capital liquidity considerations, particularly in a low interest rate environment. Depending on the risk profile and the lending institution, aircraft financing usually takes the form of either an aircraft lease or a collateralized loan. Certain financial institutions offer asset-based aircraft financing, while others assess an aircraft purchaser’s overall creditworthiness when making lending decisions. Regardless of the type of financing obtained for an aircraft acquisition, such financing will inevitably require consideration of the choice of law and the repossession and enforcement rights available to an aircraft financier. While insolvency and delinquency are not ordinary occurrences, these are perhaps some of the most important provisions in an aircraft lending/lease agreement that must be established, in addition to the economics of the deal. Other key provisions in an aircraft lease agreement are rent, reserves, maximum annual hours and return conditions. When purchasing an aircraft with financing, whether a lease or loan, restrictions may be placed on the aircraft, in question, and additional time may be necessary to complete the transaction. Careful consideration must be given to these fundamentals at the time of negotiating the lending term sheet to ensure the commercial intent is acceptable to both parties and can, therefore, be documented accurately in the aircraft lease or loan. YYZlaw has worked with a variety of aircraft purchasers and aircraft lenders and has extensive experience in both aircraft lease and loan negotiations. From reviewing term sheets, negotiating the agreement, ensuring appropriate PPSA/International Registry filings are completed, and issuing legal opinions which an aviation lender may require, YYZlaw helps our clients streamline their transaction process.

In nearly all aircraft finance or lease scenarios, it is advisable to adhere to the rights and allowances provided for under the Cape Town Convention, the basis upon which the International Registry of Mobile Assets is formed. Aside from registrations of international interests against aircraft objects and debtors, the Cape Town Convention has created IDERAs which are filed with Transport Canada and lodged against the national registration of the aircraft, preventing any changes without the lender or lessor’s consent. IDERA stands for Irrevocable De-Registration and Export Request Authorization which essentially empowers an aircraft lender or lessor to unilaterally request and receive deregistration of a Canadian-registered aircraft by Transport Canada, without need to demonstrate the approval of the registered aircraft owner.

PPSA / Quebec Searches

Canada is an operator-based registry with no owner information available for public viewing with the Canadian Civil Aircraft Register. It is, therefore, important to ensure that the proper provincial search is conducted prior to finalizing an aircraft transaction – these searches being just as important as an International Registry search and important to note that the regulations can vary by province.

A word of caution: it is advisable to avoid reliance on any search results issued by a non-Canadian aircraft escrow company. Invariably, in YYZlaw’s experience and review, every single one has failed to identify major liens legally attached to the aircraft being sold. While in most cases this will never become an issue, the one instance where it does, a purchaser of an aircraft and/or their respective financiers may be out millions of dollars. For Canadian aircraft transactions it is highly advisable to only rely on lien reports issued by a Canadian licensed lawyer. YYZlaw keeps current on the various provincial regulations and will provide a written report on each search conducted. Additionally, we can prepare any required non-interest letters or facilitate the voluntary reductions (Quebec) necessary to ensure conveyance of title to the aircraft, clear of filed liens and registered interests. Let YYZlaw help you take the guesswork out of the various provincial searches.

To assist those in search of aircraft financing products, we have prepared a listing of aviation lenders that provide products in the Canadian market. This listing is given without representation, preference, or endorsement as to the specific terms used by each aircraft lender. Our general practice in advising our clients in these aircraft finance transactions, is to ensure that the terms are fair and properly documented. We do not opine on specific lending rates that an aircraft lender may offer as they are based on underwriting processes that may differ depending on the aircraft, the creditworthiness of a client and the market conditions at the time.

International Registry

Operating under the Cape Town Convention and Aircraft Protocol, the International Registry of Mobile Assets (IR) provides for the electronic registration and protection of ‘international interests’, with priority being determined on a “first-to-file” basis. This applies to aircraft objects – namely airframes capable of transporting at least 8 persons, including crew, or goods in excess of 2750 kilograms, helicopters capable of transporting at least 5 persons, including crew, or goods in excess of 450 kilograms, and aircraft engines that have at least 1750 lb of thrust or its equivalent (jet propulsion) or have at least 550 rated take-off shaft horsepower or its equivalent (turbine-powered or piston-powered).   In addition to these size requirements the debtor, lessee, or seller, must be “situated” in a contracting state, which Canada is.

As with any other security interest, international interests must be registered in order to be perfected (as against the interests of all third parties). The aircraft or engine manufacturer’s name, the model designator, and the manufacturer’s serial number form the subject of each registration.

As the IR is monitored by the International Civil Aviation Organization and centralizes the recording of transactions, registration is considered best practice for purchasers, creditors, debtors, lessors, lessees, agents and others in protecting their financial and/or ownership interests in such an asset. For example, registering a contract of sale on the IR can provide a purchaser with priority against other validly granted, unregistered interests held by a creditor of the aircraft seller. Registration with the IR can also have a positive effect on resale values by providing a clearer picture of the ownership and title history. In order to demonstrate the priority of interests, the IR produces Priority Search Certificates, which provide a complete history of registrations upon searching against an aircraft or engine. Most registrations made on the IR are made on a consent basis. In other words, unlike PPSA registrations that can be made, a contract of sale or international interest-type registration require the other party to consent to the registration.

It is important to note that much consideration must be given to the formal requirements for an international interest and contract of sale.  YYZlaw keeps current on these matters and will provide the necessary guidance required, as relevant to your transaction.

Transacting User Entity Accounts
The first step for entities seeking to register interests in aircraft assets on the International Registry (IR) is to have a valid Transacting User Entity (“TUE”) account established on the IR. Only a TUE can be a named party in a registration. An entity must apply to become an approved TUE by completing the required application, consisting of a confirmation of entitlement to act form and documents showing the due registration or existence of the entity.  Each entity will need one administrator. The administrator may be an employee, attorney for or agent of the entity. All applications for approved TUE accounts are reviewed by the registry officials. Upon approval, the administrator of the TUE may register interests in aircraft assets on the IR. An administrator should be well versed on the duties associated with this appointment.

TUEs are valid for one year and, once established, the administrator manages the account by safeguarding its unique secure-access key. A TUE account is renewable each year, on notice, for a fee. However, it is not uncommon to allow the account to become dormant and reactivated on an as-needed basis. In this situation any existing registrations will crystalize and lay dormant until the account is reactivated. The timeframe to reactivate a TUE account varies from hours to a matter of days, depending on the IR’s workload.  However, it is a necessary step to confirm both parties in any aircraft transaction are approved TUEs prior to a closing, where an international interest or contract of sale is to be registered.

In Canada, the only service provider dedicated to assisting companies with aviation transactions, including the registration and administration of TUE accounts on the IR, is EscroAir Canada Inc. EscroAir, while closely affiliated with YYZlaw, abides by self-imposed confidentiality and transparency obligations in order to maintain separation between itself, as escrow agent and YYZlaw, as aviation lawyers.

Different types of searches can be conducted on the International Registry.

An entity search will confirm whether the entity is a TUE and its status – such as approved, disabled or suspended. It is important to ensure, prior to filing an International Registry (IR) interest, that the TUE is in an approved status.

A Contracting State search will show which States have ratified or acceded to the Cape Town Convention and Aircraft Protocol and view the declarations and designations of the respective Contracting State or States.

An informational search, using only the aircraft object’s manufacturer’s serial number, will indicate which priority searches should be completed on a specific aircraft object and ensures that a priority search cannot be conducted without first completing the wider information search. These searches produce a listing of any aircraft object matching, in whole or in part, the serial number of the aircraft object identified in the pre-populated manufacturer’s list, as well as any aircraft object that has been the subject of a prior registration, including if a registration was made using the manufacturer’s list or by free-text. The search results provide a snapshot of those specific aircraft objects that are on the IR manufacturer’s list or have prior registrations. This information can then be used to obtain the appropriate priority search certificates.

A priority search is performed against the manufacturer’s name, generic model designation and serial number. A “priority search certificate”, issued in response to a priority search and provided by the IR, reflects the official records of the IR with regard to an aircraft object. The priority search certificate sets forth the information relating to any registrations against a particular aircraft object, together with the date and time such registration was made, or it will confirm that no such registration has been made with regard to such aircraft object. Any registrations with respect to an aircraft object will be listed in chronological order on the priority search certificate.

A search of airframe and engines in an aviation transaction should be conducted prior to a closing in order to disclose any existing registrations against the specific aircraft object, confirm any required discharges have been completed prior to closing, if required, and post-closing to confirm any new registrations have been completed and are searchable, thus establishing the intended priorities under the Cape Town Convention.

YYZlaw has years of experience assisting clients with all facets and functions of the IR, regularly assisting with forming and maintaining Transacting User Entity accounts, filing contracts of sale and filing or discharging registrations of international interests, as well as obtaining priority search certificates to assist purchase, sale, lease or financing transactions of aircraft and engines. Our assistance and guidance provide clients with the satisfaction that their assets are secure and at optimum value.

Negotiating An Aircraft Management Agreement

While there are private aircraft buyers that are pilots as well as companies with existing in-house flight departments, aircraft management companies are increasingly relied upon to ensure the most cost-effective way to manage aircraft assets. These companies provide a variety of services such as managing the aircraft’s maintenance and operational requirements. Additionally, these companies generally employ the flight crew to operate the aircraft, particularly where the owner of the aircraft intends to make the aircraft available for charter flights on a commercial basis. Most, if not all, Canadian management companies have both private and commercial operating authorities.

Generally speaking, aircraft assets are required to be registered in the name of the entity with custody and control of the aircraft. Where a management company is involved, and the aircraft will be available for charter, the aircraft will be registered to the management company. To accomplish this, parties generally have an aircraft management agreement to capture detailed commercial terms between the aircraft owner and the manager. However, for the purpose of registering the aircraft in the manager’s name on the Canadian Civil Aircraft Register, the aircraft owner will usually enter into a short form lease arrangement which is filed with Transport Canada. This process can raise aircraft asset securitization issues, particularly in the event where a management company becomes insolvent and enters bankruptcy.

YYZlaw has assisted numerous aircraft owners in relation to their legal arrangements with the selected aircraft management company. We can act as a liaison between the purchaser and the aircraft management company, ensuring that the owner, acquiring the aircraft asset, fully understands their rights, fees, and obligations under such aircraft management agreement. These documents may also be referred to as aircraft services agreements. Careful consideration must be given to items such as maintenance of aircraft records, charter usage and associated administrative charges, aircraft storage obligations, aircrew employment and associated training and liability, aircraft maintenance, insurance, and term of the agreement. While some companies have, and wish to use, an established in-house legal team, advice from third-party aviation lawyers, such as YYZlaw, can increase the efficiency of a transaction. Consideration will also be required as to the appropriate PPSA/International Registry filings.

To assist those in search of an aircraft management company to meet their needs, YYZlaw has prepared a listing of the largest aircraft management companies in Canada. This listing is provided without representation, preference, or endorsement as to the specific terms used by each aircraft management company. As is our general practice in advising our clients in these aircraft management transactions, our role is to ensure the terms are fair and properly documented. We do not opine on specific management fees and rates an aircraft management company may charge, as they are often associated with the levels of service being sought. When it comes to aircraft management, it is important to remember that there is no such thing as a free lunch.

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Aircraft Records

Whether an aircraft owner or an operator, under a lease or management/services agreement, it is important to understand that maintenance records are the indicator of an aircraft’s health and must be strictly managed to protect the investment in the aircraft.  Poor maintenance of records will certainly diminish the value of an aircraft.  Maintenance record requirements are comprehensive and complying will definitely require a great deal of effort and diligence by the responsible party.  Transport Canada has strict regulatory requirements regarding maintenance records, and it is therefore important to ensure the aircraft and associated records are maintained by a highly qualified person.  There is an old adage – “an ounce of prevention is worth a pound of cure!”.

The first course of business in any purchase/sale agreement is a pre-buy inspection which is an in-depth review of the maintenance records.  Well-documented records will increase an inspector’s appraisal of the aircraft, whereas poor record-keeping may cause, among other issues, airworthiness concerns. If an aircraft has been damaged, it is crucial to have this history clearly and concisely documented.  Poor record-keeping may lead to the potential rejection by the buyer, or proceeding with the buyer demanding compensation, from repairs to a reduction in the purchase price.

Under a lease or management/services agreement – records management must be clearly documented to ensure the owner/lessor’s expectations are met when the applicable aircraft agreement commences, as well as the return conditions.

Other important considerations concerning aircraft records in a lease or management document, are ensuring that no “unauthorized parts” are being installed on an airframe or engine, as well as awareness and understanding of life-limited parts, as they may be defined in the applicable agreement, and the related recording procedures. The FAA implemented, some time ago, new rules relating to disposition of life-limited parts of which there are six acceptable methods for part control with the intent to deter installation of a life-limited part that has exceeded its limit.  One of such part control is the record-keeping system requiring that each and every time a part is removed from an aircraft that the life status has to be recorded or updated in such record-keeping system, whether by computerized or paper recording. An exception to this rule being for parts solely removed temporarily for maintenance purposes. It is, therefore, key to ensure that the procedure is clearly outlined in any agreement.

Escrow Services

Escrow agents assist in aircraft transactions by acting as an independent third party, safeguarding purchase funds and aircraft title, lien release and other-related documents. An escrow agent will provide each party with the confidence and certainty that their aviation asset is protected. A typical transaction involves the escrow agent working with a purchaser and seller, however, often times an aircraft financier will be involved as well.

In most aircraft purchase and sale transactions the aircraft purchaser/buyer will initially place a portion of the purchase price in the custody of an escrow agent – the escrow agent being one that is mutually acceptable to both the purchaser and the aircraft seller/vendor. This initial amount is referred to as a deposit. In some transactions there can also be incremental deposits of funds tied to various stages of an aircraft purchase transaction or, in some cases, certain portions of funds can transition from being fully refundable to non-refundable.

Deposit funds are held by the escrow agent, at the sole discretion of the remitter, until such time as written instructions, acceptable to the escrow agent, to otherwise hold or disburse the funds. Such instructions might include a binding letter of interest/intent (LOI) or an aircraft purchase agreement (APA). Deposits are often required by aircraft sellers to give them a sense of commercial certainty regarding the intention of a purchaser to complete the aircraft purchase transaction. Deposits can also provide for certain security relating to, for example, charges incurred by an aircraft seller for ferrying the aircraft to an inspection location as well as the costs of such inspection should the prospective purchaser of the aircraft fail to pay for the pre-purchase inspection. Often times, deposits are used to advance a deal when the details of the transaction have yet to be ironed out among the parties relating to such things as the aircraft delivery location and condition, the scope of the pre-purchase inspection, status of existing part and engine programs, etc. As most transactions can take anywhere from one to three months to complete, the parties can take comfort in the fact that a deposit has been submitted by the aircraft purchaser, and depending on the terms of the LOI, APA or other agreement among the parties, the deposit gives each party commercial confidence to continue devoting resources in order to complete the aircraft purchase and sale transaction.

Escrow Agents help to streamline the closing process involved in an aircraft transaction. Leading up to the day of closing (and as far in advance as possible), the escrow agent receives the documents required under the LOI or APA, usually in executed and undated format. In addition to receiving the documents, the escrow agent also receives instructions from the parties as to the disposition of funds and documents. The form of these instructions can vary from transaction to transaction and may be as informal as emailed instructions or more structured using irrevocable instructions or escrow agreements.

On the day of closing, or a few days preceding it, the purchaser will wire the balance of the purchase price and other agreed upon financial obligations into the escrow account. Escrow fees are usually split evenly among the seller and purchaser, although in some transactions one party may be responsible for paying the entirety of the escrow fees. Where the escrow fees are to be split, the purchaser’s funding of the escrow account will include half of the escrow fees and, at closing, the remaining half of the escrow fees will be netted from amount wired to the aircraft seller. At closing and in advance, as may be required by the parties, the escrow agent will confirm the documents and funds that are being held in escrow. When everything is in order the closing process can begin and the documents will be filed and distributed as necessary and wiring of the funds will be initiated in accordance with prior instructions.

EscroAir Canada Inc. (EscroAir), Canada’s first and only escrow company, was formed in 2019 to meet the ongoing needs in the Canadian aviation industry for escrow, aircraft registration and international registry services. While closely affiliated with YYZlaw, EscroAir abides by strict confidentiality and transparency obligations in order to maintain appropriate separation, as escrow agent, from YYZlaw as aviation counsel. EscroAir benefits from decades of experience dealing with aircraft transactions, both in Canada and around the world. EscroAir – simplifying aircraft transactions.

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