Aircraft Lease Agreements International Legal Requirements 1 2

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JULY 2005

Aircraft Lease Agreements International Legal Requirements



Types of aircraft leasing


Main types of agreement and other lease documentation; structures and cross-border transactions


Types of agreement


Typical lease provisions





Types of aircraft leasing

The Finance and Leasing Association (FLA), which represents a large proportion of the UK leasing industry, defines leasing in broad terms as: “..a contract between lessor and lessee giving the lessee possession and use of the specific asset on payment of rental over a period”. Further, it states: “lessor retains ownership of assets so that it never becomes the property of the lessee or any related third party.” The essential feature of leasing is the retention of ownership of the asset by the party who allows the other party to use it, a permanent separation of ownership and use. This briefing paper will concentrate on the three basic types of leasing arrangement in common usage in the UK and Europe. These are finance leasing, leasing with an option to purchase and operating leasing.

Finance leasing Both the UK Statement of Standard Accounting Practice (SSAP21) and the standard published by the International Accounting Standard Committee (IAS17) classify a finance lease as being one where substantially all of the risks and rewards of ownership of the leased asset are transferred from lessor to the lessee. Generally UK finance leases have the characteristics detailed below:

Leasing with option to purchase In the UK for a lease to receive taxable allowances the lease must not include a lessee purchase option. However, this is not true in many other countries where leasing is not taxed based and where leasing includes both hire purchase and lease purchase. For example, a US capital lease and a French finance lease are both leases with purchase options built in.

Operating leasing There is no detailed definition of an operating lease under the English law. Under an operating lease arrangement, the lessee requires the aircraft for a shorter period of time than its useful life. The lessor therefore retains a significant interest in the residual value of the equipment at the conclusion of the lease period which the lessor may subsequently realise by selling it to a second hand market. The lessor generally has no intention to recover all of its capital investment from the primary lease rental. The main characteristics of an operating lease are therefore as follows: •

the lessor may lease the aircraft several times to different lessees during its working life;

the lease period can be for a relatively short time compared to the life of the aircraft;

the lessor may carry the responsibility and cost for insurance, repairs and maintenance;

the aircraft is selected by the lessee and usually supplied by a third party such as a manufacturer or dealer;

the lessor may carry the risk of any loss or aircraft breakdown as well as the risk of obsolescence;

the lessor retains ownership;

the lessee carries the risk of obsolescence and has the exclusive right to the use the aircraft, subject to the conditions of the lease, which include a requirement for the aircraft to be maintained in good working order;

the lessor may have acquired the aircraft or it may be available to the lessor before the lessor has identified any prospective lessee;

the lessor is likely to have access to specialist technical knowledge relating to the aircraft; and

the risk and benefit of the residual value in the aircraft after the lease period remains with the lessor.

the term of the lease is likely to cover all or a substantial part of an aircraft’s working live;

a profit after all expenses are paid will be assumed to have been made by the lessor;

the lease agreement may contain provisions to ensure that the lessor carries no loss in the event of early termination of the lease; and

the lessee will deal with, and bear all cost of maintenance, repair and insurance.

The international accounting standard committee suggests the following approach to the specification of the lease. [See Exhibit 1]


Exhibit 1: Classification of a lease

Yes Ownership transferred by the end of lease term

No Yes Lease contains bargain purchase option


Yes Lease term for major part of asset’s useful life


Present value of minimum lease payments greater than or substantially equal to asset’s fair value



Operating Lease

Finance Lease

This chart has been prepared by the International Accounting Standard Committee Secretariat


Dry lease/wet lease Wet and dry leases are common terms in aviation for operating leasing with some element of services and maintenance in the agreement.

Dry lease This is the most common arrangement where an aircraft is provided to the lessee without any crew to operate it and where the lessee commonly takes on the obligations to maintain and insure it.

Wet lease Here a lessor may provide some or all of the services required to operate the aircraft such as flight crew


maintenance and insurance, but where the lessor at all times retains operational control of the aircraft. Whilst the lessor retains possession and operational control of the aircraft, commercial control of the aircraft (i.e. the right to sell seats/cargo capacity of the aircraft) is passed to the lessee. It should also be noted that wet leasing generally occurs between airlines and the aircraft is usually operated by the lessor for the lessee using the lessee’s flight numbers and, for commercial purposes being performed as if it were the lessee’s flight. This is very common in aviation where airlines sublet both aircraft and crews to other carriers often in the alternate high/low season between the northern and southern hemispheres. It is important to distinguish wet leasing from a charter arrangement where any operator operates flight(s) for a (usually) non-airline third party.

Main types of agreement and other lease documentation; structures and cross-border transactions

Simply put, cross-border aircraft leasing involves the lease of an aircraft by an airline in one country from a lessor domiciled in a second country with the participation of a lender whom might be from yet a third country. Cross-border lease financing involves the purchase of an aircraft by a tax paying investor (the lessor) and the simultaneous contracting by an airline (the lessee) for the use of the aircraft in return for specified rental payments of a specified term. Notwithstanding the ownership of the aircraft by the lessor, the lessee wants to be able to control and operate the aircraft in the same manner as it would if it was the owner.

The so called leveraged cross-border lease is a variation that introduces a third party lender into the transaction. The lessor, in conjunction with the lessee, will seek to finance 50% to 90% of the aircraft cost by borrowing the funds on a non-recourse basis from banks, insurance companies, engine funds and other lenders in the private or public market or seeking long term secured investment. While the lessor actually invests only 10% to 50% of the cost of the aircraft, it would be entitled to 100% of the tax benefits of ownership and thus can be said to have leveraged its equity investment by utilising the non-recourse borrowing. [See Exhibit 2]

Exhibit 2: Cross-border aircraft lease Sale of Aircraft

Aircraft Lease Agreement

Aircraft Seller

Lessor Aircraft cost

10-50% aircraft cost

Equity Investor


Lease Rentals

Net Cash

Debt Service

Non-recourse Lender

50-90% aircraft cost



Types of agreement

It is not possible to analyse all the different documents involved in leasing arrangements around the world but a brief outline of the key parts of a leasing transaction and what documentation may be generated may be helpful. The lessor will acquire the aircraft from the aircraft seller being either the lessee, a manufacturer or supplier. It is very important to make sure that the right to take title to the aircraft and the obligation to pay are transferred to the lessor.

interest in the lessor’s interest in the aircraft and the lease. This may be included in the loan agreement. Some lessors may require separate additional security in the form of security interests on other tangible property or receivables of the lessee. If credit support is required this may be either a guarantee or standby letter of credit. Alternatively, the manufacturer or supplier may be providing some credit support in the form of a buy back or recourse agreement.

Lease agreement

Participation agreement

The typical provisions of the lease agreement are discussed later in this briefing paper.

In the multi-party transaction, it is often convenient to have a single document in which each party can give representations, warranties and covenants to all parties. The common conditions precedent can be specified and the whole transaction pulled together. This is typical in the leveraged lease and will generally be helpful where there are more than two parties involved in a complex transaction subject to any tax sensitivities on presentational issues.

Security documents If third party debt is being provided there will be loan documentation in addition to the lease. There will also probably be a mortgage and an assignment or some form of security document giving the lender the security


Typical lease provisions

Aircraft leases tend to be lengthy and complex documents which are “tailor made” to suit the particular transaction in question, however most leases will contain certain common provisions. This section focuses particularly on the provisions of the typical aircraft finance lease, but such provisions will be found in substantially similar form in the lease agreement of any type of equipment.

Introduction to the agreement After the naming of the document, the first item that appears will be identification of the parties. The place of incorporation and the addressed of the registered or principal offices should be specified at this point. Having identified the agreement and parties, it is then usual to introduce the agreement by reciting the history of the transaction in brief outline. This is helpful to readers of the document at a later stage as it puts the transaction in a proper context.

Definitions When reading a lease agreement of any description, it is essential to understand the defined terms that are being

used in the document. To assist in reading a document it is helpful to have all the definitions located in one place and sensibly this should be at the front of the document.

Letting of aircraft The first provision of the lease agreement should be the letting or hiring of the aircraft by the lessor to the lessee. This provision will specify that the aircraft is being leased for the applicable term which needs to be defined. The aircraft that is being leased has to be defined. The definition will usually include a manufacturer’s serial number, the registration mark, the type of aircraft, the type of engines and engine serial numbers.

Conditions precedent There will generally be a list of conditions precedent which have to be satisfied before the lessor obligations arise. The content of the conditions precedent is very much a subjective matter for each transaction but will very often include the following: •

certified copies of the constitutional documents of the lessee;


certified copy of a board resolution of the lessee approving the transaction together with a list of authorised signatories; lessee’s financial statements and/or the audited accounts for the previous year/s together with confirmation that there has been no material adverse change in the financial condition of the lessee since the date of the last published audited accounts;

the accuracy of the representations and warranties given by the lessee and, if appropriate, any other parties;

that no event of default or an event which with the giving of notice or lapse of time would constitute such an event of default shall have occurred and continuing;

that all necessary governmental, regulatory or other relevant approvals and authorisations shall have been obtained;

that insurance cover in the form required by the terms of the lease shall have been effected;

that all required legal opinions shall have been delivered in a form acceptable to the lessor; and

that all taxes, fees and duties payable in connection with the execution, delivery, registration and filing of the lease documentation shall have been paid in full.

Other conditions precedent could include a payment of a Security Deposit in cash or as a letter of credit, and the first instalment of Rent by the lessee, the delivery to the lessor by the lessee of a lessee’s parent guarantee, completion of the acceptance flight and other test procedures with regard to the aircraft etc.

Rent From a lessor’s perspective this is one of the most important and fundamental provisions which, failing all else, should be precise and correct. Depending on the requirements of the parties and to some extent the term of the lease and the currency in which it is being funded the rentals might not be fixed but be on a floating basis tied to a variable interest rate such as LIBOR. A normal rent calculation will assume that payments are to be received on the specified dates. The reality is going to be different and it is therefore necessary to provide that if a payment falls on a day which is not a business day it will either be paid on the preceding or the next succeeding day which is a business day. Next is the “hell or high water” provision, so called because it requires payments to be made regardless of whether:

the aircraft is defective;

title of the aircraft does not reside in the lessor;

the aircraft has been confiscated or appropriated;

the aircraft has ceased to function or is not fit for the purpose for which it was acquired;

a change has occurred in the status of the lessor or lessee;

the enforceability of the document is constrained by an illegality, invalidity or any other constraint; or

there is any other reason whatsoever for not doing so.

Despite the draconian terms, these provisions are unlikely to be fully enforceable in all the circumstances they purport to cover. For example, it is arguable under English law that rent is not payable in circumstances where the asset which is leased has ceased to exist. A court is also unlikely to look kindly upon the lessor which has defaulted in its obligations but which is still trying to enforce the rental obligations of the lessee because of the provisions of this section. In addition, if the agreement becomes invalid or illegal this provision may not be enforceable, notwithstanding the presence in the agreement of a severability clause. A further incentive to the lessee to make payments on the due date will be contained in the default interest provision. Any payments whether of rent or otherwise will bear interest at the default rate higher than the implicit lease rate for the period during which the payment is over due.

Indemnification When analysing indemnity issues it is worthwhile to separate what are termed general indemnities from tax indemnities. The lessor and lender enter into the transaction on the basis of the lease being a totally net lease, thus the lessee must retain responsibility for all liabilities that may arise as a result of the possession and use of the aircraft. This is consistent with the concept of a cross-border lease as a financing vehicle with operational and economic control remaining with the lessee. Just as the lessee must provide and pay for the property and liability insurance relating to the aircraft, the lessee must protect the lessor and lender against claims brought by third parties which result from the possession and use of the aircraft. The purpose of the general non-tax indemnity clauses is to insulate the lessor and lender from claims that are not likely to have been brought if the lease has been structured as a traditional loan. Generally, indemnities will be phrased extremely widely and cover “…any and all liabilities, obligations, losses,


damages, penalties, claims, suits, costs, expenses, fees and disbursements of whatever kind and nature which in any way relate to or arise out of manufacture, design, financing, construction, purchase, acceptance, rejection, ownership, acquisition, delivery, non-delivery lease, sublease, preparation, installation, storage, maintenance, repair, transportation, transfer of title, abandonment, possession, rental, use, operation, condition, sale, return, importation, exportation or other disposition of all or any part of the aircraft.” The tax indemnity provisions however present a totally different set of issues. Here, the lessee cannot be as compliant in being willing to protect the lessor, in fact, for other than certain taxes to be discussed, the lessee should firmly resist accepting the tax risks associated with the cross-border lease. The lessor must be willing to accept that the lessee will not indemnify against taxes that are beyond the control of the lessee. The lessee should not bear the risk of the lessor losing any or all of its ownership tax benefits. Whether the lessor’s domestic tax authorities disapprove the structure of the lease or change the tax law retroactively, these risks should fall to the lessor. Therefore the lessor should bear all tax risks in its own country. The lessee can bear the tax risks arising outside of the lessor’s country with two main caveats. First the indemnity should include taxes that are in excess of the taxes that would have been imposed on the lessor if the cross-border lease was the sole transaction of the lessor being taxed. Second the indemnity should not cover any taxes arising in the lessee’s country that are due to the actions of the lessor.

Disclaimer of liability Another way lessor will seek to insulate itself from liability for the aircraft is by disclaiming any warranty or liabilities with respect to its merchantability, fitness for purpose, or compliance with the specification or description. From a lessor’s point of view, unless the manufacturer of the aircraft is also the lessor, the lessor’s attitude is that its involvement in the transaction is purely financial. It has not taken part in the selection or design of the aircraft and therefore should have no liability for it. Indeed it is usually the case that the lessee has selected the aircraft. The lessee shall request a manufacturer to give the warranties direct to the lessee and to give the lessee the right to claim under those warranties directly at least until an event of default has occurred.

Protection of Title As already mentioned one of the significant advantages of the leasing transaction is that title resides with the

lessor either all the time or where an option to purchase exists, until the conditions of the exercise of the option are fulfilled. As part of the lessor’s overall appraisal of the transaction, the lessor will focus particularly on its security over and ownership of the aircraft according to the degree of creditworthiness of the prospective lessee. It is vital therefore that the lessor acquires good and clear title to the aircraft in the first place. Once title has been obtained it needs to be retained. Therefore a lease agreement can be expected to provide certain covenants directed towards the protection of the lessor’s title to the aircraft. This will extend from a primary requirement to ensure so far as is possible that the lessor’s interest as lessor and/or owner are registered in the aircraft register (or any other applicable register) in the lessee’s jurisdiction and/or where applicable, that the place in which the aircraft is to be habitually based, a requirement that name plates specifying the lessor as owner and noting the holders of any security interest be affixed to the airframe and the engines of the aircraft thereby putting third parties on notice and reducing the risk of conversion. Another facet of the protection of the lessor’s title built into the lease agreement is the restriction on what the lessee can do with the aircraft. The lessee might be required to covenant that it shall not without the consent of the lessor sublease the aircraft or otherwise part with possession of it. The lease might also seek to restrict the area of operation to ensure that it does not go into either areas of high political or physical risk or areas where, for legal or other reasons, recovery of the aircraft is extremely difficult or impossible. There will be a restriction upon the lessee creating liens upon the aircraft other than certain permitted liens. In a number of jurisdictions a lien holder such as an aircraft operator or a repairer can acquire the right to detain and ultimately sell an aircraft for unpaid charges. The restriction on creation of the liens should extend to statutory liens whether for taxes or, for example, unpaid landing charges at airports. The agreement should also provide that during the term of the lease the lessor is entitled to go and inspect the aircraft periodically, not just to check that it is there, but also to investigate its state and condition.

Maintenance Obligations The lease should include a lessee’s covenant to maintain and repair the aircraft in accordance with the recommendations made by the manufacturer, the requirements of the relevant aviation authority and any additional requirements of the lessor. The maintenance covenants generally will not impose an obligation upon the lessee in excess of the standards to which an experienced and reputable operator of aircraft would


adhere. A lessee should not be restricted in its day to day business activities by virtue of the level of obligation assumed. The maintenance programme for most aircraft will provide that certain parts are from time to time likely to be removed or replaced. That is why leases contain complex replacement provisions, the substance of which is that until a part has been replaced wherever it is located it remains in the ownership of the lessor. It is also important to ensure that replacement parts are of at least a specified quality, utility and value compared to the parts removed.

Insurance Insurance is one means by which a lessor protects itself against potential third party liability exposure. Equally it is a way a lessee can protect itself against the risk it assumes by virtue of indemnification provisions. Another function of insurance is to provide financial compensation in circumstances where the aircraft becomes damaged or destroyed. The lessor is in turn able to look to the insurance process for maintenance of the value of the aircraft or the recovery of its investment. The lessor’s exposure at any time is generally measured by the stipulated loss value or “agreed” value which a lessee is required to pay upon the occurrence of a total loss. A total loss will be defined in the lease to include an actual, agreed or constructive total loss and any circumstances where the aircraft becomes irreparably damaged or incapable of use. The normal physical damage policy will exclude war risks. With aircraft it is usual to require that war risk insurance be taken out. As many of you will know, the war risks insurance market is very much in a state of turmoil following the events of 11 September 2001. Public liability insurance will also be required for the aircraft. Another area which needs to be studied carefully is whether the aircraft is to be insured on a group or fleet policy. Fleet policies are common in the case of aircraft operators. The policy should be checked to ensure that the aircraft in question is effectively separately insured and that the limits on the policy are not affected by claims relating to other aircraft covered by that policy. To provide the necessary comforts to the lessor that the insurance required has been procured, the normal practice is to obtain a written confirmation from the insurance brokers. In the London aviation market a standard form of endorsement (the present form is entitled AVN67B) has been developed and in general it is accepted by participants worldwide in the aircraft finance and aviation industry. The standard was introduced to avoid lengthy negotiations between insurance and lessors on the exact wording of endorsements. The wording of AVN67B is not necessarily ideal from a lessor’s point of view, but most underwriters will not accept amendments to this wording

unless an additional premium is offered. In so far as is possible, the lessor should always require that it remain as an additional insured with the lessee. Under AVN67B insurers will not include a loss payable clause but the endorsement accepts that, when the aircraft is on lease, the total loss proceeds will be paid as determined under the lease. Additional provisions which should be included in the policy and required in the lease include notice of any alteration to the terms of the policy and notice of cancellation of the policy. In this way, the lessor is given the opportunity for example to pay any defaulted premiums if that is the reason for the proposed cancellation or, if necessary, to arrange other insurance. The lessee may well wish to take out business interruption insurance which, whilst not usually a requirement of the lessor, may be prudent business practice. If a lessee is a particularly poor credit risk or involved in non-recourse project financing a lessor may require business interruption insurance. The lessor may also require that the policy be extended to cover the express indemnity provisions of the lease agreements specifically. However, this only provides a limited benefit since the endorsement is subject to the terms of the policy.

Representations and warranties Representations and warranties will be found in all financing arrangements. They have a number or different purposes but in particular they require the lessee to confirm the truth and accuracy of certain information provided by the lessee to the lessor on the basis of which the lessor has been induced into enter to the transaction. Inaccuracy in that information will entitle to lessor to sue for breach of representation and recover damages and, incidentally, may entitle it to call an event of default. A second purpose is simply to inform and to uncover potential problems at an early stage. The process of due diligence carried out by a lessee in verifying the contents of representations and warranties it is required to give, is extremely useful. The representations and warranties will usually address the issues below: •

The due incorporation and valid existence of the lessee together with confirmation of the authority of the lessee to enter into and perform the lease agreement and ancillary agreements.

The execution, delivery and performance of the lease has received all necessary corporate authorisations of the lessee and will not contravene any applicable law or agreements to which the lessee is a party or by which its assets are bound or affected.


No consents or registrations are required in connection with execution, delivery and performance of the lease agreement; or, to the extent that such consents or registrations are required, they are identified, expressed to be complete, obtained or made to be in full force and effect.

The lease and ancillary documents are legal, valid and binding obligations of the lessee.

There is no litigation, arbitration or administrative proceedings being contested or conducted which would have an adverse effect or material and adverse effect on the financial condition, business or operations of the lessee, or perhaps, but no always on the ability of the lessee to perform its obligations under the related lease agreement.

The financial information provided to the lessor has been prepared on a consistent basis and in accordance with generally accepted accounting principles.

The absence of taxes or duties upon the lease agreement by virtue of its execution, delivery and performance including the imposition of withholding tax on the rentals.

The ranking of the transaction in terms of priority with the lessee’s other unsecured indebtedness.

Confirmation that no event of default as defined or any event which with the giving of notice, lapse of time or relevant determination, would constitute an event of default, has occurred.

Confirmation that immediately before delivery of the aircraft, there has been no adverse change in the business or financial condition of the lessee.

There may be other representations and warranties peculiar to the transaction. Certain of the representations and warranties will be required to be repeated on the date of delivery of the aircraft and on each rent payment date. The lease also usually includes representations and warranties on the part of the lessor as to due incorporation and valid existence, corporate authority, legality, validity and binding effect and non-contraversion of other agreements. There is, however, usually some resistance on the part of lessor in giving these.

Other covenants The lessee will have an obligation to obtain and maintain in force and effect all necessary licences, permits and authorisations relating to the use and operation of the aircraft and perhaps to furnish copies to the lessor in respect of a particular transaction.

The lessee will also be required to covenant that it will pay all outgoings relating to the aircraft, whether they be taxes, fees, duties, fuel and lubrication expenses, insurance premiums and any other outgoings whatsoever arising out of, or in connection with, the use and operation of the aircraft. There will also be certain notification requirements for example the lease should provide that the lessee will notify the insurers of any loss or damage which is covered by the policy in accordance with the terms of that policy. There will also be an notification requirement about any circumstances which constitute an event of default, or which would or could constitute an event of default with a lapse of time, or the relevant notice or determination. There might also be a general covenant relating to the provision of information to the lessor concerning the location of the aircraft from time to time and possibly its use. For example, technical records with regard to the aircraft have to be maintained to retain the certificate of airworthiness and information concerning the hours of use are helpful in keeping a lessor informed of the position of the residual value of its aircraft. Another common covenant relates to the return of the aircraft on the expiration of the lease term. Such a covenant will apply if the lessee does not have a purchase option at the end of the term and title is not to pass to it. The basic obligation imposed upon the lessee should be to the effect that the aircraft be returned in the state and condition in which it would have been had the maintenance obligations specified in the lease been complied with. This basic obligation is, in operating leases, often added because the lessor wants to have the aircraft return in a condition which will make the aircraft easily remarketable. As a general rule of thumb, lessors want to be able to offer the aircraft to new lessees in a condition which will, in normal circumstances, allow the aircraft to be operated for at least 12 months without it requiring any major scheduled maintenance. The extent of the technical requirements of the return conditions will depend on the type of lease. An operating lease where the lessor will receive the aircraft back during its useful life will have very detailed technical requirements to ensure that the expected market value of the aircraft is preserved. In addition, the aircraft will have to be free of any liens or encumbrances whatsoever so that the lessor is able to dispose freely of the aircraft. Any technical records or service records should be returned with the aircraft. Another provision could require the lessee to redeliver the aircraft to any place within the same jurisdiction or possibly the same continent at the lessee’s expense. In addition to the basic restriction on creation of liens and security interests, the lessee will be expected to


assume an obligation to the effect that it is obliged to secure the removal of any lien, encumbrance or security interest that attaches to or is attached to the aircraft. In addition, the lease will provide that the lessee will not create or permit to exist over all or any part of its business or assets any security interests other than those specifically listed or to which the lessor has consented which run in point of priority and security ahead of the lease obligations. A lessee should argue to exclude from the scope of this section any past transactions, any purchase money, mortgage or security interest, financial obligations below a certain individual or aggregate limit, property which is purchased already subject to some security interest and any refinancing of this permitted transaction. The lessor may have addressed the net worth of the lessee and wish to see this maintained. The lease would therefore include a covenant on the part of the lessee to maintain a certain tangible net worth. As part of the same concept, the lease may well contain a provision restricting the lessee from merging with another corporation or assigning substantially all of its assets to another corporation whether by way of sale, lease or other means particularly if the lessor is looking primarily at the lessee’s balance sheet in entering into the transaction, or if dealing with a state-owned company. An absolute restriction, or restriction subject to the consent of the lessor, will often be regarded as an unwarranted intrusion of the lessor into the general business affairs of the lessee. The lessor will be expected to covenant that so long as the lessee continues to perform its obligations under the terms of the lease it shall be entitled to the quiet enjoyment, possession and use of the aircraft. Such a covenant may, in any event, be implied in some jurisdictions. The lessor is not likely to give more than this. If the lessor is a special purpose subsidiary the lessee may require the lessor’s parents to guarantee performance of this obligation.

Events of default

indemnity amounts or reimbursement of other outgoings. With respect to regular scheduled payments, it is a matter for negotiation as to whether or not any days of grace are given to a lessee (usually 3-7 days). In granting such grace periods it is important to include an obligation on the lessee for default interest for late payment. Breach of insurance obligations This is another vital event of default because a failure by lessee to effect or maintain insurance puts at very serious risk the lessor’s asset. Representations and warranties Another important event of default is if any of the representations and warranties, which were discussed earlier, prove to be incorrect in any respect If, for example, a representation that the lessee has all necessary approvals and consents required to operate the aircraft is incorrect the lessor will not want to continue with the lease and will want to recover the aircraft. Breach of any other obligation This event of default is intended to “sweep up” any other breaches by the lessee of the terms of the lease. Commonly, a lessor will allow a longer period of grace for these breaches, but a distinction should be drawn between those breaches which are capable of remedy and those which are not. For example, if a lessee has merged with a corporation and ceases to exist as a separate entity it is unlikely to be capable of remedy. The event of default should therefore specify that the period of grace applies only to events which can be remedied even though it may be imprecise as which those events are. A lessee will wish the grace period to run from the date it receives notice of such default. In addition the lessee might negotiate to restrict this event of default to material breaches or breaches of material obligations. Dispositions by the borrower

The events of default provisions are extremely important provisions in a lease. Generally, they apply only to the lessee and are intended primarily to protect the lessor and its asset, the aircraft. Typical events of default would include the following:

Sometimes a separate event of default will be included relating to the disposition by the borrower of a substantial part of its business or assets. A lessee should resist the use of the term “substantial part” because this could cover as little as 5% of its business and the word “all” or “substantially all” would be far more acceptable.

Payment default


The fundamental basis of the leasing transaction is that the lessee receives payment on specified dates and in specified amounts. The most important default is therefore payment default. A distinction in terms of the timing of the default can be established between regular scheduled payments and other payments such as

The next and again, a very important, event of default will deal with insolvency. Where the lessee becomes insolvent, or, if possible, in the steps leading up to, but before any declaration of insolvency, the lessor will want to be able to recover possession of the aircraft as soon


as possible since once insolvency occurs, the lessor will almost certainly cease to require any lease rentals and may well be unable easily to recover possession of its aircraft.

Remedies Having established what the events of default should be, the consequences of the occurrence of such an event or events need to be determined. Usually the occurrence of an event of default entitles the lessor at any time thereafter, whilst the event of default is continuing, to treat the lessee as in default and ultimately to terminate the leasing of the aircraft. The lease will identify a number of remedies which are available to a lessor following declaration of default but the efficacy of those remedies will depend to a large extent on the jurisdiction in which they are being enforced and the proper law of the contract. A typical finance lease will provide as one of the options to the lessor that, in addition to demanding all other amounts outstanding or claiming damages, it can demand a liquidated sum which in the case of medium and big ticket transactions will invariably be some form of specified stipulated loss or termination value. An alternative to the stipulated loss value or to specifying a form of or calculation of the amount due would be simply to leave the matter to be determined by the court in a claim for damages. As part of the default procedure the lessor becomes entitled to recover possession of the aircraft and at that point the lessee’s obligations relating to redelivery, storage etc come into play. The lessor will in addition to the right to demand payment of the liquidated sum also reserve either expressly or by implication the right to sell, release, hold, let and otherwise exploit the aircraft. A lessor would be well advised in a cross-border lease to seek local counsel’s opinion on the procedural constraints of enforcing the standard remedies provision in the jurisdiction of the lessee and the remedies section should be adapted accordingly.


Miscellaneous provisions A number of further provisions which are often buried at the back of the lease agreement are listed below. All of these have considerable legal significance particularly for the construction of the document. •

A provision confirming that the rights of the lessor under the agreement are cumulative and that rights can only be waived or varied expressly in writing may be included.

What is generally known as a further assurance provision may be included. The substance of this is that the lessee and perhaps the lessor agrees to enter into any additional documents and do whatever is necessary to give effect to the true intent and purpose of the document.

There may be a provision confirming that the lease constitutes the entire agreement between the parties and any provisions to it amendment.

A severability provision would provide that if any provision became invalid, illegal or unenforceable under any law and had to be severed from the rest of the agreement the remainder of the agreement would remain valid, legal and binding.

Notice provisions will set out the manner in which notices and requests under the agreement are to be given and the time at which they become effective.

Governing law and submission to jurisdiction, appointment of agents for service of process and agreement as to the manner of service are further provisions one might expect to find in a lease agreement.


For further advice on any matter, please contact: Nikki Wallace [email protected]

This publication is not a substitute for detailed advice on specific transactions and should not be taken as providing legal advice on any of the topics discussed.

© Copyright Field Fisher Waterhouse 2005. All rights reserved.

Field Fisher Waterhouse 35 Vine Street, London, EC3N 2AA t: +44 (0)20 7861 4000 f: +44 (0)20 7488 0084 e: [email protected]

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