If you ignore an aircraft title search and pocket the savings, what’s the worst that can happen? Quite a lot, according to Dave Higdon’s recent conversations with some of the leading aircraft title companies…
It baffles the industry experts why anyone considering a multi-million-dollar business aircraft would also consider taking shortcuts to save money. Nevertheless, some do – even trying to avoid the title search which typically accompanies the purchase of a business aircraft. But that could be a big mistake...
Purchasing a business aircraft without all information on its history puts the owner at risk of being unable to use the aircraft because, on paper, the aircraft’s ultimate ownership remains in question.
The title search is designed to protect both the buyer and seller from the prospect of a lien filed against the airplane, and to assure the aircraft title carries no encumbrances that could cloud title transfer or prevent a buyer from securing financing.
It’s a process that is worth its weight in gold. According to the aircraft title experts polled for this article, clearing a clouded title requires energy, time and resources – meaning expertise and money. “A messed-up title may be a deal breaker,” one closing agent explained. “Sometimes the issues are too much for the buyer, sometimes for the lender, and occasionally for both.”
Don’t Ignore the Issues
“The worst thing a buyer can do is ignore the issues and plow ahead with the acquisition without resolving the clouds,” the agent explained. While it won’t be possible to get financing for an aircraft with a clouded title, those who may believe they can proceed with the purchase, regardless, are those with the cash to buy.
“Those are always the people who are surprised to learn they may have problems selling the airplane eventually – all because they ignored the problems when they bought it.” Herein are the top tips from two highly regarded aircraft title service providers…
The Impact of Clouded Titles
To many a first-time aircraft buyer the costs and time involved in an aircraft title search can seem like an unnecessary interruption in a process the buyers expected to proceed more like an automobile purchase, according to Oklahoma City-based Wright Brothers Aircraft Title.
Though there are commonalities between buying a car and an aircraft, the aircraft transaction has more in common with buying a home or other real estate. The title search that some buyers may feel is wasting their time and money is the main step to protect the investment in that aircraft.
There exist many circumstances capable of clouding aircraft titles. For the current owner, any break in the chain of title risks creates complications and difficulties when trying to buy, sell, register or de-register their airplane.
By overlooking or ignoring the problems causing the clouded title the old owner can pass on the same problems and questions to new owners who essentially inherit what the past owner had failed to resolve.
Things can get worse than raising mere questions of legal ownership. While some new owners may be satisfied with letting the problem go unresolved, banks and financial companies typically balk at financing an aircraft without a clear title.
The smart money understands the potential problems with title defects and the problems they can create so that those issues can be addressed before closing. But clouded title issues are far from the only potential speed bumps on the drive to closing.
Beware of Liens
According to Wright Brothers Aircraft Title, an aircraft title can only be clear if it’s properly signed and recorded, with no unreleased chattel mortgages, security agreements, tax liens, mechanics’ liens, or similar items on record against the aircraft.
And, according to AIC Title Service, among the most common aircraft title issues encountered are old, unreleased security agreements or liens against the title. Such liens could be decades old.
With the passage of time, locating the parties involved in placing the lien on the aircraft can be difficult, particularly when you consider how banks and finance companies have merged over the decades, changed hands, relocated or failed – all of which can leave a smear on the aircraft’s title that is difficult to remove.
A lien is classified as “non-consensual”, meaning that it’s been placed by a party to which the aircraft owner owes money (such as the invoice for an annual or pre-purchase inspection). The party placing the lien needn’t obtain consent from the aircraft owner – but the owner of record needs the lien holder's consent to facilitate removal of that lien.
Here's where some buyers, frustrated by the process or the inability to find an involved party, may decide to proceed without taking the steps needed to resolve the security agreement or terminate the lien.
Of course, that buyer is again most likely to be a cash buyer. Once more, ignoring the issues can cause difficulty completing the next sale.
What are the Other Issues of Concern?
Brokers and dealers frequently counsel would-be buyers to avoid any surprises in the transaction process by having the existing title – on file with the FAA in Oklahoma City – thoroughly examined before signing a purchase agreement and writing a check for the earnest money.
Following are some of the other ways title clouds can arise: An error in documents can cloud a title. That error could be as minor as a missing or incorrect signature, inconsistent owner information on a bill of sale, or use of a title not recognized by the FAA.
Perhaps a break in ownership occurred by a missing bill of sale, dates being inconsistent with the aircraft's history, or a transposed character in the registration document.
As one closing agent told AvBuyer, “There's a lengthy list of potential title issues – a list long enough to vex even the most experienced examiners. Even at a company of experts in aircraft titles we come across issues none of us have ever seen before.”
Don’t Overlook the Title Insurance
Just as important as the title search is the title insurance made available in parallel with title search and clear-title services. When a bank or other entity finances an aircraft acquisition, the finance firm typically requires both a clean title – established by the title search – and title insurance.
That insurance step is one that some buyers are tempted to skip to save money – a bad idea, according to Frank Keating of AvSure Title Insurance.
In the past, aircraft transactions went through the process of obtaining the opinion of an attorney that the transaction was valid and secure.
With a lawyer’s opinion, Keating notes, any problems discovered are on the attorney or the attorney's firm, and if any of them are insolvent, you're insolvent.
“With insurance,” Keating notes, “you have a party who has to pay – it's more secure, backed by reserves. The thing we have to remember is that virtually all of us have title insurance on our homes and it's a must on commercial properties. “You certainly should have title insurance on your aircraft,” he concludes.