Buying a Jet? Get your Letter of Intent Right!

Letters of Intent are common in pre-owned business aircraft transactions, enabling buyers and sellers to outline the broad terms of a deal. As simple as they sound, there are many potential errors for buyers to avoid, as Gerrard Cowan highlights.

Gerrard Cowan  |  08th January 2024
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    Gerrard Cowan
    Gerrard Cowan

    Gerrard Cowan is a freelance journalist who focuses on aerospace and finance. In addition to his regular...

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    How to write a great letter of intent to buy and aircraft

    Essentially, a Letter of Intent (LOI) offers the potential for a meeting of the minds between sellers and buyers on the major commercial terms of an aircraft transaction. Though it is typically non-binding, it is important to get your LOI right – for good reason…

    A good Letter of Intent sets an expectation that the parties will negotiate exclusively and in good faith with each other to try to reach the terms of a definitive aircraft purchase agreement, explains Jonathan M. Epstein, a Partner at law firm Holland & Knight.

    Ideally, the LOI is a relatively short document of two to three pages, written in plain English and covering a range of details. At the most basic level, it should set the purchase price and require a refundable good faith deposit to be placed with an agreed escrow agent, Epstein says.

    Additionally, the agreement should define whether the transaction will be a ‘hard deal’, meaning that after signing the purchase agreement the buyer can only reject the aircraft for limited reasons (such as the discovery of material damage history), or alternatively a ‘soft deal’ where the buyer can reject the aircraft after the inspection without cause.

    The LOI will also identify the general scope of the pre-purchase inspection and test flight, and set forth the condition that the aircraft must be in to accept delivery – for example, with “all systems functioning normally, current on all maintenance with no extensions, no material damage history, etc,” Epstein illustrates.

    On top of these requirements, it may address who will pay for ferry and test flights, as well as any unique issue that may derail the deal if not negotiated up front. It should expressly state that the LOI is non-binding, except for binding confidentiality provisions, and that it expires if it is not executed by a certain date, though providing for some exclusivity until terminated.

    Finally, it is important that LOIs contain ‘know your customer’ language, Epstein says, particularly in international deals, requiring the counterparty to identify their beneficial ownership.

    Why is it important from the buyer’s perspective to outline such details in the LOI? Epstein says it is a crucial first step. “With experienced brokers or technical consultants driving the process, the parties can quickly determine if they can reach agreement on key terms.

    “And once signed, the LOI provides a clear path for the lawyers drafting the purchase agreement and the brokers/consultants scoping the pre-purchase inspection.”

    Simple Aircraft Letter of Intent: Don’t Be Fooled

    While the LOI concept may appear relatively straightforward, there is a range of potential pitfalls for buyers. For instance, Epstein notes, there could be problems if the LOI fails to identify special circumstances that can affect the timing, costs, or risks for a party.

    If the aircraft is going to be imported or exported, the LOI should identify who is responsible for the costs of any special inspections for obtaining an export certificate of airworthiness, and the costs of any modification or equipment needed for a change of registry.

    “Often parties fail to address special timing issues up front – such as if delivery must happen by end-of-year,” he adds. “Similarly, they may fail to build in adequate time for the inspection, when slots for inspections may be limited.” 

    Stephen Hofer, President of Aerlex Law Group, sees the LOI as one of the most critical documents in an aircraft purchase or sale transaction, second only to the Aircraft Purchase Agreement (APA) itself. That’s because a properly crafted LOI should make it relatively simple to draft the APA. However, Hofer warns against an overly simplified approach.

    “I know there are many brokers who advocate for very simple LOIs – the so-called ‘cocktail napkin’ approach,” he says. “I have handled many aircraft acquisitions that were successfully closed over the years using the one-page LOI, but I am not a fan – in part because I’ve also seen would-be transactions crash and burn due to an inadequate or incomplete LOI.

    “If an LOI is too vague in its drafting or fails to address important issues, it won’t necessarily represent the ‘meeting of the minds’ that is required to create a legally enforceable contract,” he warns.

    “Sometimes this is only recognized after attorneys have started negotiating the APA, or perhaps even after the parties have already incurred significant expense to perform a preliminary visual inspection and initial records review, and placed a deposit into escrow.”

    “If the negotiations ultimately collapse – and they sometimes do – both sides will have wasted each other’s time to no ultimate benefit.”

    Hofer says that if clients and their brokers come to him before making an offer, he can work with them to clearly understand what they want to propose, and the terms and conditions they want in the LOI.

    “My LOIs are not written on cocktail napkins, but they’re not as long as War and Peace either. They’re just long enough, and specific enough to say what my client wants to say. A good, smart, experienced broker has nothing to fear and everything to gain from working with a well-written LOI.”

    Matt Potts, General Counsel – EMEA for Jetcraft, supports Hofer’s opinion that it’s important to avoid providing insufficient details, which could result in misinterpretation or a buyer and seller committing to something that wasn’t intended.

    “If either party knows of specific conditions or other requirements they may have for the successful completion of the transaction, it is imperative that these be included in the LOI,” he adds.

    “Whether that is a financing condition, specific inspection facility, or required timeframes, this should be incorporated. Regardless of whether it would usually be in an LOI, including known requirements and deadlines will prevent surprises during the aircraft purchase agreement negotiations, and will help ensure time and money isn’t wasted.”

    Don’t Skip the Aircraft Letter of Intent

    Stewart H. Lapayowker, Founder of Lapayowker Jet Counsel, P.A., a law firm that focuses its practice on aircraft acquisitions, sales and related regulatory matters, says there are many situations where there is simply no time to spend on an LOI and the parties go straight to an APA.

    For several reasons identified already, this can be expensive, and actually end up wasting – rather than saving – time. “If you don’t already have a roadmap (the LOI), it is possible that the parties will find they have very different ideas about what the deal is, and the drafting and negotiation of a purchase agreement takes them further down the rabbit hole,” Lapayowker warns.

    The biggest mistake that he sees is buyers signing an LOI “on the theory that it’s ‘just another LOI’”. On the contrary, an LOI is the trunk of the tree from which the branches and leaves of the transaction will spring, he adds. “If you have a rotten trunk, your apples are going to be sour,” Lapayowker elaborates.

    Sometimes the opposite is true. While an LOI must cover all the bases, a common mistake is making the document too long, argues Jet Tolbert, President of American Aircraft Sales. “The more complicated an LOI is, the more of a headache it is for the seller, when really the purpose should be to just get a general agreement.

    “No one wants to negotiate a long LOI to then go through and negotiate another long contract. If you can find the balance between too thin and too verbose, and just get it to where it’s palatable you’ll have a good and effective LOI.”

    Involve Your Team With the Aircraft Purchase Letter of Intent

    The best way to move forward is to work with a trusted corporate aircraft broker from a well-established firm, Tolbert highlights. “They’ll have the connections and know-how to make the right move, with the right type of LOI, and involve the attorneys at the right stages.”

    Janine K. Iannarelli, President of Par Avion Ltd and Chair of the European Business Aviation Association's (EBAA's) Associate Members Advisory Council, and Sales & Acquisitions Committee, agrees. She highlights that while the LOI is an important first step, it “does not bind the parties quite as tightly as one might think”.

    However, it has its own timelines for performance, and negotiations could easily fall apart if these are not met, she adds. For example, negotiations might stall over the need for the purchaser to post a deposit within a certain number of days of execution of the LOI, and then for both parties to have entered an APA within a certain time-period (usually within 7-12 days).

    Iannarelli reckons the mistake many buyers make is to not consult an aviation attorney for input on the LOI if they’re not having them generate the document.

    “Many a buyer crafts the document in-house or their broker prepares one, obtains a signature and only then turns it over to their legal counsel, who discovers that significant ‘asks’ have not been made,” she warns. “The introduction of significant changes into the APA could result in negotiations breaking down; either party may balk at what is perceived as an additional burden.”

    Iannarelli emphasizes the importance of lining up a team of experts before jumping into the marketplace, let alone making offers. This should include an experienced broker, legal counsel, technical advisor, escrow agent and a tax/financial consultant as needed.

    “Similarly, if the buyer is hiring a manager to manage the aircraft once acquired, getting their technical team involved early on can be beneficial – for example, in spotting specific technical requirements to address at the LOI stage,” Epstein adds.

    Be Clear on the Aircraft LOI’s Important Details

    Even if you have a trusted team on board, it’s vital for buyers to read their own LOI before it is sent out, warns Joanne Barbera, a Partner at Barbera & Watkins. Be sure to avoid mistakes that may appear minor but could have major consequences, Amanda Applegate, a Partner at Soar Aviation Law adds. She says her firm often sees LOIs that are missing key terms that the firm then needs to clarify.

    “Everyone thinks the purchase price is the most important detail, but I think the scope of the inspection and delivery conditions are equally important,” she elaborates. “Also important is if the deposit is going to be non-refundable upon signing the purchase agreement, or not until after the inspection is completed.”

    Take Aircraft Value & Market Dynamics into Account

    Another mistake that Barbera points out is not knowing or taking into account the market for the type of aircraft you’re pursuing. “Your LOI for a highly desirable and scarce aircraft is going to look different from an LOI for an aircraft with plenty of similar units on the market being offered at a similar price,” she explains.

    Kerstin Mumenthaler, Accountable Manager at AXIS Aviation Switzerland, emphasizes the importance of considering wider market dynamics, explaining that “the value of aircraft continually fluctuates”.

    Therefore, potential buyers should monitor market trends and residual values to ensure they are not overpaying for an aircraft or finding issues securing financing. “The LOI should reflect a realistic valuation of the aircraft,” he concludes.

    In Summary…

    The case should be clear that while the Letter of Intent is ultimately a concise, non-binding document it shapes and provides the foundation for the transaction that will unfold. Establishing expectations and requirements for both parties, the LOI is not a document to prepare without the aid of a team of experienced professionals, or due care and attention from all parties involved.

    More information from:
    Aerlex Law Group:
    American Aircraft Sales:
    AXIS Aviation Switzerland:
    Barbera & Watkins:
    Holland & Knight:
    Lapayowker Jet Counsel:
    Par Avion Ltd:
    Soar Aviation Law:

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