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ACQUISITION OF A BUSINESS OR PRIVATE JET:
The Asian Influence

The private jet market in Asia is expected to rise by 16 percent this year. Factors contributing to this phenomenal growth include the easing of airspace and air traffic control regulations in China- meaning faster flight approvals- more direct routings and usable airspace- especially at higher altitudes that afford private jets better weathers and greater fuel efficiency.

Asia is perceived to be a market where buyers prefer to buy rather than charter- and fractional jet ownership has yet to take-off in the region. Charter sales have increased recently- but the highest area of demand in recent times has been for the bigger jets.

So who is buying the aircraft? Certainly there is a strong trend in the Asian market for private purchases (and in many cases these purchases are for cash)- but there is still a growing trend for aircraft purchases for corporate use.

The statistics surrounding sales of jets and expected future sales suggest that the private or business jet’s popularity shows no sign of abating globally.

Choosing the Right Aircraft
From the outset as a business jet buyer- you will need to determine your requirements for an aircraft. What type of aircraft best suits your needs- and is it more cost effective to acquire a new or used aircraft- to buy a fractional share- charter- or a combination thereof?

Whether the goal of ownership is supported by corporate justifications or personal convenience- unbridled want rarely comes into play. Buyers will need an aircraft and an ownership structure that satisfies the majority of their regular travel needs- keeping time and costs efficiencies intact.

It is important to determine the size and flying range you will need. Complete a cost-benefit analysis before you opt for a private jet. Aviation experts suggest that 350 to 400 hours of flight time per year usually justifies full ownership of a jet. Otherwise- you should consider other alternatives such as aircraft charter- fractional ownership or jet cards.

Financing the Acquisition
A buyer will need to consider approaching a number of financiers- and understand the terms of the loan offer- the structure of the offer- and the security required by the Bank before making any firm commitment.

Financiers today are more open to financing into other jurisdictions than their own- and the competitive nature of the market means that it is possible to seek and agree a structure to suit a buyer’s own specific needs.

The China Banking Regulatory Commission has relaxed its rules on the incorporation of leasing companies allowing local and overseas banks to set up financial lease companies. Key to the success of new entrants into the market will be their understanding of the market- the cultural differences and the language barriers or challenges.

New or Second Hand (Used)?
Buying an aircraft should not be undertaken lightly – it can be time consuming and very costly. Getting the price right is crucial. Choosing the right broker or dealer is an essential part of the acquisition process.

Choose a professional broker with experience in the acquisition and sale of aircraft from procurement to delivery. Settle the high level terms of the acquisition with the broker from the outset to avoid expensive legal wrangling when it comes to the documentation stage.

In many countries there is an age limit on the aircraft that may be registered on the local registry and this is certainly true of China. Any purchaser wanting to place the aircraft on the local registers will need to bear in mind the age limit- and may find itself therefore looking in a newer and more expensive market range.

The purchase and sale of aircraft is generally governed by ordinary sale of goods law. Standard purchase agreements will include the commercial terms and conditions (price- delivery schedule- description of aircraft)- general terms (exclusion of liability- taxes and duties- warranties- assignment) and will append additional supporting documentation such as the bill of sale- warranty bill of sale- assignment of warranties and maintenance or support contracts and export licences. The acquisition process depends greatly on whether you are purchasing a new or second hand aircraft.

New Aircraft
New aircraft and associated equipment are usually purchased directly from a manufacturer pursuant to the manufacturer’s standard terms and conditions. The purchase agreement will incorporate a payment schedule setting out pre-delivery payments (PDPs) to be paid to the manufacturer up to the date of delivery of the aircraft.

It is possible to seek financing for the PDPs- but financiers will usually insist on security to cover the perceived additional risk in financing PDPs. Loans for PDPs will often be obtained by giving the financier an assignment of the buyer’s rights under the aircraft purchase agreement.

Buyers should insist on warranties from the manufacturer which may be assigned to future purchasers of the aircraft. These should warrant that the aircraft will conform to the detail specification and will be free from defects in materials- workmanship and design.

It is usual for the manufacturers to limit liability for any defects. The manufacturer will usually seek to disclaim all other warranties- express or implied and will seek to exclude all consequential or other damages.

Note: The manufacturer will try to seek to provide for a unilateral change to the delivery schedule in the event of any manufacturing delay. A buyer will usually try to limit the scope of this prerogative and in some cases may be able to negotiate discounts for heavy delays.

Second Hand Aircraft
Used aircraft purchase agreements tend to be less standardised than new aircraft purchases. In the second hand (used) market- many of the more professional brokers will encourage the use of a Letter of Intent (LOI) between buyer and seller.

The LOI sets out the terms of acquisition and is the basis on which the legal documentation is drafted. This includes a basic agreement as to price and deposit- place- date and location of delivery- the pre-purchase inspection process- and termination of the agreement if the sale does not proceed. The parties will then move to negotiation of an aircraft purchase agreement.

Price & Deposit
As a buyer- it is important to insist that any deposit paid and subsequently the balance of the purchase price is held in a secure account. Many buyers call for the use of an independent escrow agent who is appointed to hold and protect the purchase monies on behalf of the buyer and is instructed to release such monies to the seller on strictly defined terms.

The Pre-purchase Inspection
It is important for the buyer to agree the process by which it will be entitled to formally inspect the aircraft. The seller will want some degree of commitment from the buyer before it agrees to its aircraft being subjected to a full examination – this commitment can generally be met by way of payment of a deposit into escrow and execution of an LOI. The parties will then need to agree where the inspection should take place- who may conduct the inspection and what level of inspection is permitted.

Following the inspection a report is commissioned and agreed- listing any discrepancies which will need to be fixed- potentially leading to a renegotiation of the purchase price.

Seller/Manufacturer Warranties
The seller should assign to the buyer such rights as the seller may have under any warranty with respect to the aircraft. This should include all warranties- guarantees- service and support contracts and contracts for the aircraft- engines and Auxiliary Power Unit.

Interestingly we have found in the Chinese market that in many cases the buyers do not require the support contracts to be assigned to them where the contract is for the supply of parts – mainly because they are obliged by the CAAC to keep a minimum level of parts locally.

The seller will usually try to disclaim all other warranties and will include a statement to the effect that the aircraft is being delivered “as is- where is”- meaning the buyer must agree to accept the aircraft in exactly the condition and location it is. If this statement is accepted- the buyer should seek to carve out any areas of concern and at least ensure the aircraft is delivered with a certificate of airworthiness.

Governing Law
Both parties should insist on the agreements being governed by a stable and dependable jurisdiction with settled policies of law. In Asia- Hong Kong law tends to be acceptable and due to the fact that it tends to follow UK law- it is generally an acceptable choice for western financiers of aircraft into the region.

Registration of the Aircraft
All aircraft must be registered in an internationally recognised jurisdiction to provide proof of nationality and ownership. An aircraft assumes the nationality of the jurisdiction where it is registered and is therefore subject to the regulations laid down by the governing register. (Choice of jurisdiction includes considerations of legal tax savings; confidentiality and the protection and privileges offered by such registration.)

Choice of registration will be dictated by the residency (and tax residency) of the owner- in which countries the aircraft will be mainly used- whether the aircraft will be chartered to third parties or only privately used. Each jurisdiction has its own regulatory issues- some more lenient than others.

The buyer should insist on an export certificate of airworthiness for the jurisdiction in which the buyer intends to register its aircraft. If the aircraft is being sold out of Kansas- U.S.A. but is intended for the Chinese register- the buyer will need to seek an export certificate of airworthiness for China.

Insurance
Appropriate insurance cover in respect of the usual risks must be obtained. There is high potential of exposure to significant third party risks- and with potential liability for death and personal injury (sometimes running into millions of dollars) substantial cover is advisable. Speak to an insurance lawyer early on in the purchase negotiations regarding this.

Conclusion
The best advice is early advice. Equip yourself with a team offering aviation expertise to direct you. Initial outlay on getting the right structure and procedures in place will go a long way to preventing you having to unravel an unworkable structure and incur unnecessary associated costs.

More information from
www.gatesandpartners.com


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