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

Having already established the importance of agreeing the facility to undertake a private jet pre-purchase inspection, and the scope of that inspection early in the process, we continue our discussion with some additional contractual matters relating to the Letter of Intent (LOI)...

According to Jim Mitchell, an Executive Sales Director for Elliott Jets, his company is finding that the parties to proposed aircraft sale transactions are increasingly specifying at the LOI stage what rights each principal has to reject the deal, and defining the circumstances that create those rights.

Probably the most important area of all, however — even at the LOI stage — is the definition of aircraft and engine internal corrosion and material damage, which, if found by inspection to be substantial, as defined by the terms of the contract, can cause the entire transaction to unwind, says Lee Rohde, President and CEO of Essex Aviation.

If the buyer and seller don’t reach agreement on the definition of material corrosion and/or damage the transaction will allow for before triggering default, this forms another hurdle the deal may fail to clear.

Not only can the finding of significant corrosion cost the seller $200,000-$300,000 to repair, but the repair will also take up to six months to perform, Mitchell says. Just as important, the entry in the aircraft’s logbook covering the repair will be so extensive that it will appear to any future buyer that the aircraft previously sustained significant damage, making it harder to sell.

Airframe and engine corrosion is one of the very few causes — and is probably the leading one — of used-aircraft sale transactions failing to close, he says.

Fortunately it is “fairly rare” for the pre-buy inspection to find an amount of airframe or engine corrosion so significant that it can cause the deal to unwind, he assures.

There are three major causes of corrosion in business aircraft. One is leaking of fluid from the aircraft’s lavatory. The second is frequent or prolonged operation in climatic environments containing high levels of salt and water (e.g. intercontinental, over-ocean flying). And the third is inadequate sealing of aircraft surfaces, which can cause corrosion in critical structural parts such as the vertical stabilizer spar.

Scott Burgess, Founder of Fort Lauderdale-based Aviation Legal Group says the purchase agreement should also cover whether or not the pre-purchase inspection will include borescope inspections of the aircraft’s engines and — if it has one — it’s Auxiliary Power Unit (APU). 

Borescope inspections allowed by hourly maintenance plans typically are limited to inspections of the front sections of the engine and its exhaust nozzle, and are intended to rule out the presence of foreign object damage, he explains.

Another important area the principals need to agree, and include in the purchase contract — and which Mitchell says crops up fairly commonly in situations where pre-buy inspections have identified repairs that need to be made — is whether any replacement parts required must be new or if the buyer will allow replacement with used, properly documented parts.

Allowing replacement parts at all, rather than specifying repairs be made to existing parts, is also a contract detail that can become a point of contention between seller and buyer, notes Rohde.

Approving the use of used, fully documented, serviceable parts as replacements can create massive repair-cost savings for the seller — more than half a million dollars in one recent case with which Mitchell was personally acquainted — but can prolong the duration of the transaction fairly significantly, given the time it can take to find suitable used parts.

Inspection Slots and Final Steps

In today’s overheated pre-owned aircraft market, all three experts interviewed for this article agree that one of the most important details of the deal — whether or not it is covered in the purchase agreement — is trying to obtain a slot in the near term for a certified facility to perform the pre-buy inspection of the aircraft.

No matter which facility is chosen, in today’s market it is very difficult — bar the unexpected cancellation of another inspection making a near-term slot suddenly available — to obtain an inspection slot within 60 days.

Mitchell notes that in the business-aircraft sales arena, a long-held maxim is that “time kills deals” — so being unable to find a near-term slot for a pre-buy inspection could potentially prejudice a deal being closed. Last but not least, the contract should detail the final steps of the transaction after the pre-purchase inspection has been completed, after any required repairs have been made, and after the principals have agreed that the aircraft condition terms of the sale have been met, says Rohde.

These last steps should specifically cover whether or not a post-inspection final test flight is required, and if any other positioning flights — other than the final delivery flight — are allowable, he says. If the aircraft has to be flown to another state or national jurisdiction for sales-tax reasons, the buyer usually bears the cost of that flight.

“The bigger theme is that, the more you lay out the specifics of what can and can’t happen, the better,” Rohde says.

It is the buyer’s responsibility — usually handled by the technical inspector the buyer hires — to perform the technical acceptance of the aircraft, and approve acceptance following the pre-purchase inspection and remedial repair process, according to Rohde.

However, “the larger percentage of sellers will be actively approving [required repairs] during the inspection,” he says, even though the seller isn’t legally required to approve anything until after the inspection ends.

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

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

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