Questions to Ask Before Signing an Aircraft Lease

Lessees have different motivations for why an aircraft lease is right for them, so the questions they need to ask will vary depending on why they want to lease in the first place, says Mike Christie, Head of Sales, Americas at Global Jet Capital.

Confirming that the chosen structure will achieve your objectives is a good place to start, he adds.

Global Jet Capital is a major US-based provider of leasing (and other lending solutions) for business aircraft. These include operating leases, where the aircraft is owned by the lessor for the duration of the lease and handed over at the end of the term; finance leases, through which the lessee can take eventual ownership of the asset; and sale and leaseback arrangements, where an owner sells their platform to the lessor and then leases it back, enabling them to free up capital while retaining the use of the aircraft.

What are the Return Conditions at Lease-End?

One of the great benefits of a lease is the ability to simply return the aircraft to the lessor at the end of the lease term. It’s therefore very important to understand the return conditions and process of the lessor, says Christie.

“Do they use internal experts or outside contractors? Is the language clear on what is expected? Are there barriers that may make a return difficult or expensive?”

On top of this, you should ask about potential operational restrictions. Are there annual hour limitations, geographical restrictions or limits on chartering the aircraft? And it can also be insightful to ask the lessor about their commitment to leasing.

“Many providers will enter and exit the market based on their internal needs or market conditions,” Christie highlights. “A return or purchase at the end of term with a lessor who has exited the market can be more difficult.”

Janine K. Iannarelli, President of Par Avion Ltd, adds that a sophisticated lessee will understand that a lessor has several expectations that must be met.

“Most potential lessees understand what their obligations will be during the term of the lease but should also pay close attention to any requirements the lessor may have for the condition of the aircraft at the end of the lease (i.e. maintenance or cosmetic condition expectations) as well.”

Iannarelli says it is important for would-be lessees to consult legal counsel. Even corporations with in-house counsel should consider consulting a specialist aviation attorney, she notes. “There are aspects of the transaction that are very specific to aircraft and aviation, and that's where you would benefit from the expertise of an aviation attorney."

Can You Upgrade the Aircraft During the Lease Term?

A spokesperson for the National Aircraft Finance Association (NAFA) says lessees should ask what would happen if they wanted to change, or make changes to the aircraft during the lease term. “If it is an older aircraft, what if the lessee wants to make a major upgrade? Will the lessor be able to accommodate a change, and on what terms?”

All the terms and conditions require careful reading, the spokesperson says. As well as legal counsel, lessees should seek input from their aircraft operator (where relevant), maintenance provider, trust/escrow agent, and insurance and tax specialists. Each of these could offer a unique perspective.

For example, the NAFA spokesperson says, there could be questions around the aircraft’s records. “Who will maintain these records and how will they be stored and accessed?

“The lessor may require periodic inspection of the records and they will certainly be part of the aircraft return conditions. Trying to fix an issue with missing records could result in unexpected expenses. Therefore, consulting with your ‘team’ as to how they are managed could avoid an expense down the road.”

Highlighting the conditions precedent (CP) section of the lease which sets out the terms that must be met before the lease enters effect, the NAFA spokesperson adds, “While the economic and operational parts of the lease get a lot of attention up-front it is prudent to start working on the CPs early, because preparing the supporting documentation to meet these takes time and could delay the closing date.”

Questions to Ask of Yourself Ahead of a Lease

Not only should the would-be lessee determine the questions they need to ask lessors, but they should also ask the right questions of themselves. For example, it’s important to define the specifics of the aircraft the lessee wants to lease, says the NAFA spokesperson.

“Is the aircraft new or pre-owned? What is the make, model, age, hours, specs, prior ownership and any damage history of the aircraft? These parameters will factor into the aircraft’s current fair market value, forecast residual value, security deposit and lease rent estimates.”

Is the lease going to be affordable? The lessee should create an overall budget for the cost of the aircraft. The lease rent is just one part of the overall cost of using a business aircraft, which can also include management, hangar, insurance, maintenance, operating expenses and more.

“There are experienced advisors/brokers that can assist with the creation of a budget to mitigate the risk of surprise expenses. They can also guide you in selecting an aircraft with the best specifications for your usage,” the spokesperson adds.

Finally, lessees should be prepared for the due diligence phase of the transaction. There will be a lot of questions asked of the lessee, notes the NAFA spokesperson, surrounding areas like Patriot Act compliance, a complex sanctions environment, credit risk analysis for Know Your Customer (KYC) demands, the intended use of the aircraft, and more. So, lessees should be prepared for this.

Christie highlights that there are a wide range of questions for the would-be lessee to asks themselves, from the length of time they will need the aircraft to the potential impact of changes in their business needs or their lifestyle.

“Do I have the right deal team around me (a reputable aircraft broker/advisor, an experienced aviation attorney, qualified director of aviation or management company)? Do I have the infrastructure in place to operate the aircraft – if not, how will I operate the aircraft?" Christie asks.

Even with detailed advanced planning, a lessee’s mission for the aircraft can change during the lease term, he highlights. Lessees will want to know their options should they need to make a change during the lease term. “Some lessors provide more flexibility than others in handling a change in aircraft needs,” he concludes.

Questions About Leasing a Financed Aircraft

The aircraft used in leases are often themselves subject to a loan, which can introduce additional questions that can impact both lessor and lessee, according to L. Forrest Owens, P.A., Founder and Principal at Aviation Legal Counsel and a Global Licensed Aircraft Dealers Association (GLADA) board member.

First, he points to maintenance, which almost all lenders will require for the aircraft. “Routinely, the aircraft must be kept in an airworthy condition,” Owens highlights. “The specific covenants associated with aircraft maintenance in the loan documents should be reviewed to ensure that the...lessor and lessee can comply.”

If the aircraft is enrolled on a maintenance program, many lenders will need documented proof of maintenance program coverage for the airframe, engines and APU, he adds.

Next, he points to insurance requirements, which will be of particular importance to the aircraft lender: both the lessor and the operator of the aircraft must be capable of meeting these requirements, he explains.

Owens also highlights the annual hours limitations, noting that a lender may place limits on the annual hourly use of a financed aircraft. “Hourly restrictions are common in aircraft loans and should be known and contemplated both by the lessor and the lessee. It is common for there to be an hourly use limitation in the loan arrangement that may not be considered in a lease arrangement entered subsequently.”

And finally, Owens says it is important to ask if there are any restrictions on operations in terms of Part 91 and Part 135. “Some lenders will dictate a certain number of hours, or a percentage of total hours which may be used for commercial/charter use.

“In some instances, lenders will prohibit commercial/charter use. In other instances, commercial/charter use will be encouraged.”

More information from:
Aviation Legal Counsel: https://aviationlegalcounsel.com
Global Jet Capital: www.globaljetcapital.com
Global Licensed Aircraft Dealers Association: www.glada.aero
National Aircraft Finance Association: www.nafa.aero
Par Avion Ltd: www.paravionltd.com