Aircraft Lease Agreements International Legal Requirements 1 2

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
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
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
Ownership transferred by the
end of lease term
Lease contains bargain
purchase option
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 Lease
Aircraft Seller
Aircraft cost
Lease Rentals
Net Cash
50-90% aircraft
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.
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
the accuracy of the representations and warranties
given by the lessee and, if appropriate, any other
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
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
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.
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
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
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
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.
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
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 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
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
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
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
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
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
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
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
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
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
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
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
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.
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Field Fisher Waterhouse 35 Vine Street, London, EC3N 2AA
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