How to Resolve Pre-Buy Inspection Disputes (Part 1)

Buying a pre-owned business aircraft is an expensive, complex proposition, as you would expect when the purchase of such a sophisticated and valuable asset is involved. It becomes even more complex if key pre-purchase inspection issues are not agreed early…

For sellers and buyers of business airplanes alike, various pitfalls and technical issues found during an airplane's pre-purchase inspection can add substantially to the cost and time needed to close the deal. In some (though not many) cases, differences of opinion between the two parties or unexpected condition problems can cause the desired transfer of ownership to derail completely.

It is in the interests of both the seller of the aircraft and its putative buyer — and their respective intermediaries — to do their utmost to minimize the chances of a critical dispute arising between the two principals when the pre-buy inspection is performed. 

If such a dispute does arise during the inspection, it is equally incumbent upon the parties to do as much as they can to resolve the dispute amicably, or at least successfully.

The simplest way to ensure that a pre-purchase inspection dispute is resolved is to take steps to prevent it from arising at all. That’s best accomplished when the transaction principals and their representatives make sure that the purchase agreement is very comprehensive, detailing the agreed specifics of every facet of the deal.

These will include the identity of the inspection facility that will perform the pre-buy inspection; what the parties will accept as evidence the aircraft is fully airworthy; the expected duration of the transaction; and the remedies the seller and buyer can seek if the other principal defaults.

The contract will also include a host of other terms and conditions which will all bear on the deal being able to close successfully.

The Letter of Intent Stage

Negotiation of the basic terms of the purchase agreement should begin even at the initial Letter of Intent (LOI) stage of the deal, before the principals agree upon the definitive purchase contract between them, says Scott Burgess, Founder of Fort Lauderdale-based Aviation Legal Group.

One critically important point which must be specified in the contract is the identity of the facility which will carry out the pre-purchase inspection.

In agreeing which facility that will be, the deal’s principals must ensure that the facility is fully certificated to perform the inspection and to carry out any repair work required to render the aircraft airworthy under the terms of the agreement, Burgess adds.

This is all-the-more important when the acquisition involves the aircraft being de-registered from one country’s registry, and then put on another nation’s register.

For instance, if the aircraft is on the Mexican registry prior to its sale, but will be placed on the FAA registry in the US by its new owner, and the seller and buyer agree that the pre-purchase inspection is to be performed by a facility in the US, then both must ensure the facility is certified by the Mexican airworthiness authority to perform that inspection, and render the aircraft airworthy before it can be de-registered from the Mexican registry.

If the parties fail to ensure the facility is properly certified, later finding that it isn’t, then following the inspection the aircraft would be unable to return to service, since the Mexican authority would no longer consider it airworthy, Burgess warns. This would require the aircraft to be completely re-certified, at considerable cost and time to the seller.

However, in most cases, transaction principals make sure the facilities they select to perform pre-purchase inspections are properly certified by having OEM-authorized service centers carry out the work, says Jim Mitchell, an Executive Sales Director for Elliott Jets. 

And in many other cases, transaction principals choose large, highly reputable MRO shops to handle their pre-buy inspections.

With that said, it is still vital for transaction principals to confirm for themselves the suitability of the inspection facility they want to use.

“They need to do due diligence, in terms of obtaining references regarding the quality of the work [the facility performs], even if it is certified by the FAA,” Mitchell adds.

The Scope of the Inspection

Another fundamentally important item the purchase agreement must cover is the agreed scope of the pre-buy inspection. This can vary, and the primary implication of the agreed scope of the inspection is the consequent cost it will involve — and repairing any airworthiness discrepancies it finds — to the buyer and the seller, notes Burgess.

The buyer is responsible for the cost of the pre-purchase inspection — the buyer always has to pay the facility in advance of it being performed — and the seller is responsible for the cost of repairing any discrepancies found which need to be fixed in order to make the aircraft airworthy.

Pre-purchase inspection scopes can vary from a Level 1 inspection — costing the buyer about $15,000 and the seller potentially $20,000 in correcting discrepancies found — to a Level 4 inspection, says Burgess.

The much more detailed and comprehensive Level 4 inspection will cost the buyer about $110,000 (which again the buyer must pay for upfront) and could result in the seller facing repair costs as high as $300,000-$500,000, especially if the inspection finds substantial corrosion in any part of the airframe.

Most inspections typically run in the $25,000-$50,000 range, according to Mitchell. Owing to their potential exposure to high repair costs, sellers tend to prefer the scope of the inspection to be limited.

On the other hand, if buyers can afford the extra cost, they prefer the scope of the inspection to be more comprehensive, unearthing repairs which are hard to find, but are necessary to remedy to ensure airworthiness.

Both parties must ultimately agree to a given inspection scope, but are aided by the fact that most business aircraft OEMs have developed standard recommended pre-purchase inspection tasks, according to Lee Rohde, President and CEO of Essex Aviation, and an experienced aircraft technical inspector.

Rohde strongly recommends that each purchase agreement should include an exhibit in the form of a written, detailed proposal from the facility that will perform the pre-purchase inspection as to exactly what inspection work it plans to carry out.

He says it is also important for the contract to include agreed definitions of the scheduled maintenance work that has been performed and/or needs to be carried out on the aircraft in order for the sale to close — a condition that requires negotiation by the principals and their intermediaries.

In addition to specifying the scope of the pre-buy inspection to be performed (and covering the need for maintenance document inspection too, according to Mitchell), the contract must also identify any damage history attached to the aircraft, Rohde says.

It must detail any specific work the parties agree to have performed to inspect the previously-damaged areas, along with the associated repairs completed on those areas in order to make the aircraft airworthy previously.

While the terms and conditions specifying what must be inspected and repaired to ensure airworthiness can leave “gray areas”, Rohde says that if an issue arises over the scope of the inspection, the inspection facility will, in any case, have required both parties to execute the proposal containing the work scope the principals specifically agreed and the facility followed.

Once the inspection has been performed and the facility reports its findings, disagreements can arise between buyer and seller as to what constitutes a discrepancy that must be repaired, notes Burgess. 

If the parties remain unable to agree on the point, then the purchase agreement may default and the entire transaction unravel.

However, in most transactions, the parties agree for the inspection facility to be the deciding party in ruling on what is and is not an airworthiness-related discrepancy, says Rohde. This can help avoid potentially deal-compromising disagreements between buyer and seller on what the seller needs to have fixed in order to meet the airworthiness and delivery condition requirements of the transaction.

Continue Reading: 

How to Resolve Pre-Buy Inspection Disputes (Part 2)

How to Resolve Pre-Buy Inspection Disputes (Part 3)

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