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BUSINESS AVIATION & THE BOARDROOM - Europe-U.S. Aircraft Transactions (Part 2)

Once the European purchaser has identified the type of aircraft that fits its needs and has located a particular aircraft it wants to acquire from a particular seller, the negotiations begin. Jim Cooling explores the next phase of the process.

AvBuyer   |   25th January 2011
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Thoughts for the European Business Leader (Part II):
Considerations during the Acquisition Process
Once the European purchaser has identified the type of aircraft that fits its needs and has located a particular aircraft it wants to acquire from a particular seller, the negotiations begin. Jim Cooling explores the next phase of the process.

A Letter of Intent (LOI) is the preferred method to negotiate the basics of the purchase (price, deposit, basic delivery terms and conditions, removal of the aircraft from the market, and protection of a purchaser’s deposit). The LOI is not a binding contract. It documents the primary points of the negotiation until a detailed purchase agreement can be negotiated, often between legal counsel for the parties.

Usually the purchaser will want the LOI to provide that the deposit be refundable until a technical pre-purchase inspection of the aircraft is completed and accepted. The purchaser will want the assistance of a technical representative for this inspection. Not only will the purchaser then have a better understanding of the condition of the aircraft, but if the aircraft is to be registered in another country, the purchaser can determine what may be needed to qualify for an Export Certificate of Airworthiness to that country, or the requirements of that registration.

Also, before the pre-purchase inspection of the aircraft itself, the purchaser’s technical representative may conduct a preliminary “visual” inspection of the aircraft as well as a review of the maintenance records and logbooks. In the case of a new aircraft to be built to the purchaser’s specifications, the LOI may set forth the purchaser’s right to have a technical representative observe and inspect the aircraft during the manufacturing process.

The purchaser’s LOI may require a test flight before the pre-purchase inspection, and it should also set out a deadline for completion of the definitive purchase agreement. Once the LOI is signed and deposit made, the parties will negotiate the purchase agreement which is to become the binding contract of purchase.

PURCHASE AGREEMENT
The primary points in the LOI will be incorporated into the Purchase Agreement along with many other terms and provisions.

The purchase agreement terms should protect the refundability of the deposit until the conclusion and acceptance of the pre-purchase inspection. The pre-purchase inspection will be conducted, typically, by an independent inspection facility which reports directly to the purchaser or to both parties.

The purchaser will also require, in addition to its own due diligence in reviewing the aircraft records, certain assurances from the seller concerning the conditions of delivery. For used aircraft the seller should disclose any history of damage or corrosion on the aircraft, no matter how it may have been repaired, up to the time of closing. For US aircraft, the FAA maintains a number of records to be reviewed by the purchaser’s technical representative.

The seller may have the aircraft enrolled in various warranty and maintenance programs, and the purchaser will want to be sure these are transferable by the seller and paid up to the date of closing. The purchaser may want to have the right to assign the purchase agreement to an affiliated company for various purposes, and the purchase agreement should permit this.

For example, the purchaser may want to establish an owner-trust for registration purposes, or use another entity to take delivery for tax purposes, such as with a “1031 exchange” under U.S. tax laws. The purchaser may want to place ownership of the aircraft with a lender for financing purposes.

With new aircraft, the purchaser typically must make progress payments to the manufacturer in addition to the first deposit, as the aircraft is being built. With some newer designs of aircraft, the projected delivery date may be years in the future. During that time, the market may change dramatically, or the purchaser may encounter a change in its financial circumstances.

The manufacturer will insist upon a “liquidated damages” clause in the event the purchaser ultimately does not take delivery. This clause establishes a certain amount to be paid to the seller by the purchaser. The purchaser may be able to negotiate the conditions for payment or refund depending upon the timing and nature of any failure to take delivery. This clause may be coupled with “sole recourse” language stating that the purchaser shall have no other liability.

In case of delivery delays on the part of the manufacturer the purchase agreement may provide for liquidated damages in favor of the purchaser, or return of funds or other penalties. This is usually only an issue for new aircraft being purchased from a manufacturer.

The purchase agreement will specify deadlines for the manufacturer to make delivery, acquire type certification, conduct test flights and meet certain milestones in development/manufacture of the aircraft. Because aircraft are so mobile, the purchaser will want to be certain that the seller who will receive the money is able to transfer good title to the aircraft.

The purchase agreement should always provide that the purchaser will receive a Warranty Bill of Sale along with the seller’s warranties of good and marketable title. The purchaser will want an independent assurance of title from a title company or counsel’s opinion, when available. Title insurance may also be available, and the parties can negotiate who is to pay for it.

In a transaction with a U.S. seller, an overseas purchaser should consider pre-purchase inspection to be critical. The purchaser will want the right to reject the aircraft, and get a refund of the deposit if the aircraft is unacceptable for any valid reason. The seller should be required to at least correct problems that make the aircraft unsafe/illegal to fly. These are called airworthiness discrepancies, and the purchaser’s technical representative/inspection facility should find them.

If the purchaser intends to move the aircraft to another country after acquisition, the purchase agreement should require the seller to place the aircraft in proper condition for issuance of an Export Certificate of Airworthiness. For new aircraft, the desired country of registration is usually communicated to the manufacturer early enough that the aircraft when finally delivered will comply with all requirements for the Export Certificate of Airworthiness to that country.

Next month we will conclude our ‘Thoughts for the European Business Leader’ series with a look at Closing Transactions.

Read more about: Transactions

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