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THE CAPE TOWN TREATY

January 2006

Category: Business Aircraft – Ownership

Author: Keith Swirsky & Chris Younger

The Cape Town Convention on International Interests in Mobile Equipment or, as it is more commonly referred to; ‘The Cape Town Treaty’ (the "Treaty") is scheduled to take effect on March 1, 2006.

To date, eight countries have ratified the Treaty. The United States became a signatory to the Treaty on May 9, 2003 and ratified it on October 28, 2004. In addition to the United States, the other countries that have ratified or acceded to the Treaty to date are Ethiopia, Ireland, Malaysia, Nigeria, Oman, Pakistan and Panama. Therefore, owners and prospective owners of business aircraft registered in the United States and the other countries that have ratified the Treaty or will ratify it in the future (there are currently at least 20 additional countries that have signed the Treaty but have not yet ratified it) will need to become aware of the substantive provisions of the Treaty that may have an effect on them.

The Treaty consists of a Convention, which covers aircraft, aircraft engines, space objects and railway rolling stock, and a Protocol which applies specifically to aircraft and engines. The Treaty applies to aircraft certificated for the transport of at least eight persons (including crew); rotorcraft certificated for the transport of at least five persons (including crew) and engines of at least 550 horsepower (or the equivalent thrust).

The Treaty creates an international system of perfecting security interests and other similar interests in covered aircraft and engines as well as simplified and stronger methods of enforcing the rights created by such interests. Proponents of the Treaty and its provisions hope that the implementation of the Treaty and its eventual ratification by additional countries will lead to more certainty for lenders that will, in turn, lower costs of financing for the aviation purchase and lease of covered aircraft and engines and spur increased worldwide demand for such items.

Whether the intent of the Treaty will be realized remains to be seen. However, in the meantime, owners and prospective owners of covered aircraft and engines to which the Treaty applies must understand the provisions of the Treaty and the ways in which it will apply to them.

The Treaty establishes certain substantive laws relating to default by a borrower or lessee; remedies available to a lender or lessor; bankruptcy rules governing all parties; and a method of perfecting liens and other interests in covered aircraft and engines. The changes to substantive law contained in the Treaty are very similar to current provisions of U.S. law relating to the recording and perfection of security interests and leasehold interests in aircraft for sale and aircraft engines and the enforcement of the rights created by those interests (through repossession and similar enforcement remedies).

The Treaty establishes an International Registry and a procedure for perfecting an "international interest" in covered aircraft and engines. The International Registry will be solely electronic and Internet based and will be supervised by the International Civil Aviation Organization. The FAA has been designated as the exclusive portal through which all "international interests" in US registered aircraft to be recorded with the International Registry will pass.

Under the Treaty, in order for an "international interest" in aircraft or engines to be perfected, an electronic notice of such interest must be filed with the International Registry via the Internet. Security interests, conditional sales contracts and interests under a lease all constitute "international interests" under the Treaty. The Treaty also applies to other interests including certain non-consensual liens (like a mechanic’s lien).

Once the Treaty goes into effect, the seller or purchaser of covered aircraft and engines will need to ensure that a proper search of the International Registry is conducted by such person’s legal representative to determine whether any "international interests" have been recorded with the International Registry with respect to the aircraft or engines that are being sold or purchased by such person. In addition, the holder of any interest created in a purchase, conditional sales or lease transaction of covered aircraft or engines will need to ensure that such interest is properly recorded with the International Registry in order for it to be properly perfected as an "international interest."

From a practical standpoint, the procedure for recording such interests and obtaining and reviewing search results will probably not be much different from that currently utilized in undertaking such filings with the FAA and reviewing records of FAA searches because the filings will be similar in nature to those currently made with the FAA and because the FAA has been designated as the exclusive portal for filings of "international interests" with the International Registry pertaining to aircraft registered in the United States.

Therefore, although the Treaty’s impact on owners and prospective owners of business aircraft will not be apparent to most of such owners and prospective owners, compliance with the terms of the Treaty and the conduct of searches of the International Registry will be just as important as compliance with similar provisions of current U.S. law and the conduct of FAA records searches. The attorneys in the Aviation Group at Galland, Kharasch, Greenberg, Fellman & Swirsky are well versed in the intricate provisions of the Treaty including its effect on owners and prospective owners of business aircraft and are fully capable of providing additional information and guidance pertaining to these issues.

Keith G. Swirsky and Christopher B. Younger are both tax specialists concentrating in the areas of corporate aircraft transactions and aviation taxation. The firm’s business aircraft practice group, chaired by Mr. Swirsky, provides full-service tax and regulatory planning and counseling services to corporate aircraft owners, operators and managers. The group’s services include Section 1031 tax-free exchanges, federal tax and regulatory planning, state sale and use tax planning, and negotiation and preparation of all manner of transactional documents commonly used in the business aviation industry, including aircraft purchase agreement, leases, joint-ownership and joint-use agreements, management and charter agreements, and fractional program documents.

Mr. Swirsky and Mr. Younger can be reached at the firm’s Washington, DC office, 1054 31st Street, NW, Suite 200, Washington, DC 20007, telephone (202) 342-5251, facsimile (202) 965-5725, e-mail: kswirsky@gkglaw.com, cyounger@gkglaw.com

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