Aircraft Purchase Agreements: Are you Paying Attention?

According to Stephen Hofer, President of Los Angeles-based Aerlex Law Group, not only does the aircraft purchase agreement set forth all essential commercial terms of the transaction, but it serves as the roadmap to guide all parties – particularly the seller, buyer, brokers and escrow company – as they navigate their way from the point of signature to the point of closing and delivery.

It is, therefore, vital to pay careful attention long before it comes to signing on the dotted line, he says. When the parties are ready to begin drafting a purchase and sale agreement, they will already have reached a meeting of the minds on the most basic points, such as what is being sold and the sale price.

Complications can arise in determining the delivery conditions, however. “In what condition, exactly, is the seller agreeing to deliver the aircraft at closing?” Hofer highlights.

“Sellers and buyers often have not focused on this issue at the time a Letter of Intent (LOI) is signed, so it’s up to the lawyers, working with their clients, the brokers, the technical representatives and sometimes the Pre-Purchase Inspection facility, to reach a clear understanding of the specifications the aircraft will satisfy at the moment the seller hands over the keys at the delivery location.”

Depending on how the purchase agreement is drafted, the precise language regarding delivery condition can sometimes cost one of the parties thousands, or even hundreds of thousands of dollars because it will help determine what constitutes a discrepancy or ‘squawk’, and who’s responsible for fixing it.

“Very careful attention needs to be paid to the contract at this stage of the drafting,” Hofer stresses. 

Aircraft Purchase Agreements Handle the Unexpected

The purchase and sale agreement is central to a transaction not just because it defines an outline of how a deal is to proceed, but because it also contemplates “just about any sort of event, nuance or occurrence that might take place – those that are expected and unexpected”, Janine K. Iannarelli, President of Par Avion Ltd, shares.

Provisions to deal with the unexpected are perhaps the most important element, she says, because there needs to be a means to deal with something like damage occurring to the aircraft in the course of the transaction.

Unexpected events could also involve financial difficulties that impact the buyer or seller and their ability to conclude the deal. Iannarelli says she has even seen deals fall apart because one of the parties has passed away.

“You have to have a means with which to unravel the transaction in a fair and equitable fashion, because you can’t just break a deal,” she highlights. Usually, a financial solution is involved: the forfeiture of the deposit (or part of the deposit), for instance, or specific damages depending on the reason for the default.

Remove Any Ambiguity From Your Aircraft Purchase Agreement

David M. Hernandez, Business Aviation and regulation sub-practice chair at Vedder Price, says that as an initial matter, the parties should hire a specialized aviation attorney to review an aircraft purchase and sale agreement.

The parties – with their attorney – should carefully review every sentence of the agreement, understanding the applicable risks associated with such a complex and expensive asset as a business aircraft.

“It’s particularly important to understand the deposit refundability, delivery conditions and location, inspection scope, and events of default, because each provision is extremely crucial to a successful transaction,” Hernandez elaborates. “Failure to understand the terms could result in a disastrous money-sucking legal nightmare.”

Some items can be ambiguous and easily misunderstood, Hernandez warns. These include deposit refundability, delivery condition and location, inspection scope, and events of default.

“Buyers always want an absolute right to refund their deposit at any time, while sellers want a non-refundable deposit immediately.”

Parties need to understand what the delivery condition of the aircraft will be – ‘as is’, airworthiness items fixed by seller, or everything fixed – because repairs are expensive, Hernandez notes, “and buyers don’t want to purchase a maintenance nightmare.

“On the other hand, sellers don’t want to spend [several] thousands of dollars fixing an aircraft they’re selling.”

Finally, the parties don’t need any ambiguity if something goes wrong and there is a dispute, so there should be comprehensive default provisions, Hernandez says. “Default provisions are often omitted, or simply given a cursory sentence or two, but when something goes awry, the aggrieved party doesn’t get a ‘do over’.”

Aircraft Purchase Agreements: Scrutinize Even the Standardized Terms!

Hofer thinks that sometimes the parties and their lawyers don’t pay enough attention to what’s often dismissively referred to as the ‘boilerplate’, and this can be a costly mistake. ‘Boilerplate’ refers to certain standardized terms and topics that appear in every contract, he clarifies.

The topics may always be the same, but the actual language can often vary significantly, so parties should pay just as much attention to these provisions as they do the deal-specific terms of the agreement.

Indeed, Hofer has seen situations where parties get into disputes after the contract is signed but before closing, or even post-closing, and the answer to the dispute is uncertain because the language in a ‘boilerplate’ section is too generic to resolve matters.

“A common example of this is in the breaches and remedies provisions, which generally only come into play if a dispute arises among the parties,” he says. “If a contract is really well drafted, there shouldn’t be any superfluous words or terms. Everything should have a meaning.

“The goal on ‘Drafter’s Mount Olympus’ should be to make certain that everything is clearly stated, easily understandable, and not subject to multiple interpretations.”

Tips for Avoiding Purchase Agreement Ambiguity Brian Macbean, Director, Credit and Sales at AOPA Finance, says he often recommends that the parties include a clause that makes the purchase contingent on financing. There are many details that go into financing an airplane, and it would be wise to include some of them in this type of clause, he says.

Examples include the value of the airplane as determined by the lender, a clean title history, airworthiness at the time of purchase, and the qualifications of the borrower if a pre-approval is not already in place. “Simply telling the seller you plan to finance the aircraft may not give you the ability to back out of the deal if the lender is unable to provide financing for some reason.”

He says it is also important to clarify the items included with the sale. For instance, there could be items in photos or attached to the plane during a test flight that the seller isn’t actually planning to sell, such as hand-held radios, GPS devices or extra parts.

“It’s best to make sure that the purchase agreement lists all the specific items to be included with the aircraft to avoid any confusion.”

The best advice will come from a legal professional with expertise in these kinds of contracts, Macbean says, noting that AOPA members with its Pilot Protection Services plan can access aviation attorneys who can review and provide guidance on purchase and sale agreements.

Building Solid Foundations for the Aircraft Purchase Agreement

Aaron Smelsky, Director of Sales Support at OGARAJETS, notes the importance of a solid Letter of Intent (LOI), which builds a strong foundation to generate the purchase agreement. “If the LOI is too short, or ambiguous, this can lead to long and drawn-out negotiations, which adds undue tension to start the deal,” he warns.

It is imperative that the entire purchase and sale agreement is a cohesive document, he says. It is a necessary tool to govern the transaction when something goes wrong, and facilitates a smooth transaction when things go right, and everyone is working together. “Having the proper definitions and roadmap for the transaction is critical to ensuring a successful closing.”

In particular, he notes the delivery conditions could make for a contentious situation. “Along with the definition of a discrepancy, it is critical to determine who is the ultimate arbiter. The inspection scope should be clearly defined along with the rejection language.”

Preston Holland, Chief Commercial Officer at FLYING Finance, says buyers must ensure they have provisions for extending their closing timelines. “We see some clients run into roadblocks that are reasonable and not foreseen, especially if you wait to start the financing process until the last minute. This could put you at risk for losing deposits, so ensure that you have ‘outs’ along the way.”

Hernandez adds that parties should hire an experienced team of aviation professionals – such as a broker, attorney, aircraft manager and perhaps an accountant – who have reviewed hundreds or even thousands of aircraft purchase agreements. Moreover, they should also use an escrow agent to close the transaction.

“Parties must understand the terms and conditions, and disclose any potential concerns, such as financing requirements, known maintenance issues, delivery requirements, tax/VAT or export control/sanction concerns.,” he concludes. “Surprises and aircraft transactions are an awful combination!”

More information from:
Aerlex Law Group: www.aerlex.com
AOPA Finance: https://finance.aopa.org
FLYING Finance: https://flyingfinance.com
OGARAJETS: https://ogarajets.com
Par Avion Ltd: www.paravionltd.com
Vedder Price: www.vedderprice.com