Avoid Disputes from Pre-Purchase Inspections

A Pre-Purchase Inspection (PPI) is a vital part of an aircraft acquisition, with an appraiser reviewing the aircraft to ensure there are no potential issues. However, it can be a complex process, particularly when problems are raised in areas that may not have been clearly defined.

With that in mind, how can buyers and sellers strengthen their hand when it comes to PPI negotiations?

George Kleros is Senior Vice President of Jet Support Services, Inc (JSSI) Advisory Services, which provides consulting and expertise on a range of areas from finance to maintenance. According to Kleros, the most prevalent disputes arise ahead of the PPI, when determining the level of survey to perform, as this can increase exposure for the seller.

In general, PPIs fall into one of three categories, he shares, depending on the complexity of the inspection. Level 1 covers a basic records review, ground operational functional checks of the systems in the aircraft, and exterior/interior visual checks.

Level 2 includes a detailed records review, opening and inspecting panels, as well as certain areas of the aircraft that are at higher risk of corrosion or water damage. Level 3 is the most thorough inspection.

But how can problems be resolved after the inspection is completed? This is usually defined in the Aircraft Purchase Agreement (APA), Kleros says.

The All-Important Aircraft Purchase Agreement

“It is important to clearly define the scope of the pre-buy survey and who is financially responsible for any discrepancies found to avoid conflict and delays,” Kleros stresses. “Generally, non-airworthy items are paid for by the seller and the buyer accepts cost responsibility for any cosmetic defects and noted items of concern that are still airworthy or serviceable.”

The APA should include exit language that defines the conditions for backing out of a deal without penalty, he adds. Examples include issues related to major corrosion or damage to the airframe or engines that was previously unknown; where the aircraft was misrepresented to the buyer when the APA was executed; where the buyer cannot meet the obligations or conditions of the APA; or when the time limit on decisions or thresholds are not met as stated in the APA.

Kleros recommends working with an experienced aircraft broker to ensure smooth execution of the process, adding that it could be helpful to perform a “prerequisites survey” prior to executing the APA which can confirm that the aircraft is represented accurately before deposits are put into escrow.

“Lastly, it is important to make sure both parties understand and agree to terms outlined in the APA to not waste time and money on both sides arguing about what should have been negotiated, clarified and agreed to upfront.”

Make Sure ‘Discrepancies’ is Defined

Janine K. Iannarelli, Founder and President of Par Avion – a business aircraft sales and marketing specialist – agrees that the aim is always to mitigate the potential for disputes emerging from PPIs. This is achieved through the APA.

“We have seen an evolution over time of the Aircraft Purchase Agreement where both parties agree on how discrepancies will be resolved within this final sales document,” she explains.

This begins with a definition of discrepancies – i.e., anything that falls outside of the tolerances established by the manufacturer and clearly spelled out in the respective maintenance manuals. Should a dispute arise, the parties default to the manufacturer’s published specifications for tolerances and limits.

However, there can be complexities, Iannarelli says, notably around ‘damage history’ and what this constitutes. This could include significant repair work to the aircraft – the wings or fuselage, for instance.

Even if the airplane is perfectly functional and safe, “if it was not discovered beforehand it generally causes a lot of angst for the buyer, because they have to consider how they now feel about the integrity of the aircraft”, she explains.

Additionally, the buyer will need to assess how such a discovery might impact the aircraft’s value (if at all). Even if the damage is less severe, “you want to have disclosure upfront so you don’t have these discussions during the course of the pre-buy,” explains Iannarelli.

Corrosion can be a particularly complex issue, Iannarelli highlights. While it is not an altogether uncommon discovery to have some degree of surface corrosion in aircraft, anything that may be considered major corrosion is a different matter.

“If it gets into ‘material damage’, that’s something where the parties could choose to walk away from the airplane,” she says. “Often a resolution to just such a finding is contemplated in advance vis-a-vis the Aircraft Purchase Agreement.”

When Further Negotiations May be Needed

Sky Aviation Holdings, part of Atlantic Jet Partners, provides jet sales and acquisition services. A company spokesperson also emphasized the importance of a clear agreement on how to proceed in the event of disputes that arise from the PPI.

“One common practice is to provide a price concession for certain findings,” the spokesperson suggests. “For example, if a windshield replacement is required but is not immediately available the seller might offer a cash allowance equivalent to the cost of the item instead of delaying the transaction.”

Again, the spokesperson highlights the necessity for buyers and sellers to have a clear understanding and agreement on the scope of the PPI, including a clear delineation of responsibilities.

Thomas W. Mitchell, Executive Vice President of Essex Aviation – provider of a range of aviation transaction and consulting services – notes that the inspection facility should be instructed to clearly identify and provide notations for any discrepancy. Indeed, the facility will want to have a clear understanding of the terms and conditions agreed to by the parties, he adds.

While it’s important to agree on the definition of ‘deliverable conditions’ in the APA, there are often findings that do not qualify as an airworthiness discrepancy, but due to access and practicality the buyer might request action is taken.

“In these cases, it would require a discussion and negotiation between the buyer and seller on whether the seller would allow additional work, and in most cases the added work would be a buyer cost,” Mitchell said.

“However, the level of inspection and corrective action is normally agreed to beforehand. The buyer has no automatic rights, and the seller has no obligation to agree to add tasks or unnecessary work to accomplish a defined pre-buy inspection,” Mitchell clarifies.

Some disciplines and practices are worthwhile from the beginning, he adds. For example, engaging technical consultants to perform a preliminary inspection after formalizing a Letter Of Intent (LOI), but before the PPI.

“An LOI that has been agreed to should replicate the primary terms of the eventual APA. Introducing new or modified terms in the APA that differ from the prior LOI can cause angst and a delayed pre-buy process,” he warns.

Hard and Soft Approaches to Aircraft Agreements James E. Cooling, Founding Partner at Cooling & Herbers, a law firm specializing in aviation, notes how the past two years have been a sellers’ market in which sellers could virtually demand anything.

These markets tend to favour what Cooling terms “hard” deals where the buyer can only request the return of their deposit for a very limited number of reasons, whereas buyers prefer “soft” arrangements where they can inspect the aircraft as much as they want and accept it at their sole discretion.

“[Often] A buyer was so anxious to get [the deal over the line] that they’d comply,” he says of the recent sellers’ market. “In some cases they would even waive Pre-Purchase Inspections just to get the plane.”

Now we’re returning to a more “normal” environment, Cooling says, with increased inventory on the market. This generally means a combination of the hard and soft approaches, where buyers are committed to buying the aircraft unless there are significant findings in areas like material damage or material corrosion.

Slow Down to Avoid Contentions

Skipping a PPI “because you found a once-in-a-lifetime deal” is often too good to be true, says Kali M. Hague, a Partner at Jetlaw, a firm of specialist aviation attorneys.

The best way to avoid a contentious PPI is to slow down, she says, and to have in-depth conversations with decision-makers from both sides of the transaction, often including flight departments or aircraft management companies, counsel, brokers, and CFOs or CEOs.

Hope is not a good strategy, she explains – it is important to establish open lines of transparent communication early in the deal to head off contention later.

“No one wants a deal to die, and most parties are willing to work outside of the four corners of the contract when there is trust and respect between the buyer and seller and their transaction teams,” she concludes.

“A good contract will set the parties’ expectations. But strong relationships successfully close deals.”

More information from:

Cooling & Herbers: www.coolinglaw.com
Essex Aviation: https://essexaviation.com
Jetlaw: https://jetlaw.com
JSSI: https://jetsupport.com
Par Avion Ltd: www.paravionltd.com
Sky Aviation Holdings: https://skyaviationholdings.com