Considering a Painful Aviation Lease Lesson & Steps to Protect the Lessee

Presented by Steve Bentley – CEO of Sofema Aviation Services www.sassofia.com

Forthcoming Training Notification

Managing Aircraft Lease Agreements and Maintenance Reserves – 3 Days – Bangkok, Thailand November 25th to November 27th 2019

Introduction

The Lease Agreement is an onerous legal document which carries significant obligations, the term buyer beware should be understood at the pain of significant financial penalty with no escape – often the lessor (Operator) does not provide sufficient “due diligence” at the onset of the lease and during the initial maintenance acceptance expectations.

Practical Example – Case Study concerning Airline X and Lease Company Y:

Basic Information Lease Company Y places a B737-300 on a 5-year lease with Airline X.

Note that whilst this is an older aircraft, there is in place a “Hell or High Water Contract”.

A hell or high water contract (also known as a promise-to-pay contract) is a non-cancelable contract whereby the purchaser must make the specified payments to the seller, regardless of any difficulties they may encounter.

Hell or high water clauses bind the purchaser or lessee to the terms of the contract until the contract’s expiration.

Acceptance

The Operator (Lessee) duly inspects the aircraft and signs the certificate of acceptance accepting delivery and confirming it is in the ‘delivery condition’.

The Problem

Several days later the aircraft suffers a failure of the control cable for the right elevator which snaps!

Fortunately the aircraft lands, however further investigation reveals massive corrosion and 163 other defects.

The CAA subsequently withdraws the certificate of airworthiness and the aircraft is grounded.

Refusal to Pay

The Lessee stops paying rent claiming lease has been ‘frustrated’. (Do You agree on this course of action?)

At this point, the Lessor declares a default and sues Airline X.

Court – Decision

The court decided that the Airline X (Lessee) has assumed the risk of condition of aircraft.

Note – Under a net lease, every part of the aircraft is ‘at the sole risk of the lessee’ moreover it is accepted and commonplace for both parties to agree on a structure whereby

When a lessee elects to accept an aircraft on lease this included the exposure due to the risk of non-compliance with required delivery conditions which only become apparent later.

Acceptance Certificate – Legally Binding

The Court noted that lessee was free to perform any degree of inspection and indeed had the opportunity to inspect aircraft to determine compliance with the delivery condition.

The signed acceptance statement which was signed by the Lessee’s representative confirming the acceptability of the aircraft was accepted by the court as confirming the delivery met the compliance objectives was accepted as ‘conclusive proof’.

Lessons Learned

The Lessees are not obligated to accept delivery of aircraft unless it meets the contractually agreed ‘delivery condition’.

Clauses which you will find and need to understand in the Lease include the following:

· Lease disclaims all implied warranties as to delivery condition

· Ensure lease contains no express contractual warranties as to delivery condition

· Ensure disclaimer and certificate of acceptance contain ‘conclusive proof’ language that confirms that aircraft was in the delivery condition at delivery

Carefully review the required delivery condition in the lease to ensure

(a) it covers everything the lessee requires, and

(b) it is described using objective criteria to avoid disputes

(c) aircraft is properly inspected during the delivery process

Important Note – This is the only opportunity to have defects rectified.

Finally to note that the Lessee may refuse to accept delivery of aircraft unless it meets the delivery condition.

Sofema Aviation Service www.sassofia.com and Sofema Online www.sofemaonline.com offer regulatory and vocation training both online and within the classroom environment. for details or enquiries please email [email protected] or [email protected]