In times like this that there has been a tremendous increase in wet leasing in the aviation industry, the discussion of the legal aspect of aircraft leasing has assumed a significant dimension. For many airlines in Africa and majority in Nigeria, the only way of meeting their aircraft needs is through leasing. The solicitor to a party in an aircraft lease negotiation has certain general and specific duties to perform.
It is important to state as a preliminary matter that the Solicitor to a party in an aircraft lease negotiation has a general duty of protecting his client’s interest throughout the negotiation preliminaries, documentation and finalization processes. In this connection, he must familiarize himself thoroughly with all aspects of the facts of the transaction and sight all documents and correspondents impacting on or related thereto. He must interview his client thoroughly to find out his commercial desire in entering into the negotiation and, against the background of his legal knowledge, evaluate the reasonable foreseeability of the fulfillment of such aspiration on the (legal) framework proposed by the other party. He must as a matter of utmost importance attend every “all parties” or other meetings called and assist his client with his legal knowledge in all deliberations.
This is to say that the Solicitor should be able to provide sound legal advice that will assist his client to understand the whole transaction and remove unreasonable obligations and duties on the part of his client. Similarly, he must be in touch with all the Solicitors connected with the negotiation and attend the meetings of all Solicitors especially where the lease or negotiation is of tripartite or multi-partite nature. For instance, in a situation where a bank is giving an indemnity or guaranteeing the compliance of the Lessee to the terms of the lease or even in the somewhat complicated cases of aircraft mortgage, lease combined with mortgage, second mortgage, sublease or sub-sub-lease. It is also desirable that the Solicitor should give general legal advice both oral and written on identified or contemplated knotty problems that may be encountered in documentation and procedural matters such as Licensing, registration, de-registration and notification of specific interest in Aircrafts to the appropriate regulatory bodies.
Before beginning negotiations of an aircraft lease I suggest that certain preparatory work be undertaken. We have discussed below 12 important issues to consider. These may all seem very basic to experienced attorneys but sometimes a review is helpful.
Compliance statutory requirements
As negotiation proceeds, the Solicitor involved will be generally responsible for ensuring that statutory requirements are complied with. He may have to determine from the Memorandum and Articles of Association of the Company whether the transaction is intra-vires or ultra-vires. He may be requested to issue a “letter of comfort” to the other party. These he may have to do after due enquiries and verification have been made. It is trite to say that negligent misstatement and willful or fraudulent misrepresentation are actionable against legal practitioners.
Transaction to be structured as a teamwork
It is important that the Solicitor makes it clear to his client that the transaction should be a team work. The old adage about too many cooks is certainly applicable to aircraft lease negotiations, particularly, high visibility transactions. It is certain that numerous experts would crop up during and at such negotiations or any other major business transaction. Having a project team makes communication between the parties easier, provides for a division of responsibility and utilizes the appropriate expertise. One suggestion in this regard is to make the team a multi-disciplinary one consisting of lawyers, aircraft engineers, operations, finance and management.
Determine the goals of your client
It is wise to advise the client of legal constraints and determine what goals the client wishes to achieve in the negotiations. The Solicitor involved in an aircraft lease negotiation should do well to advise his client that all aircraft leases are negotiable. This is despite what a lessor may advise to the contrary and notwithstanding that they are prepared by a lessor or its lawyers and the airline is told that they are closed provisions (i.e. not open to debate).
The legal direction of the transaction must be made clear
Too often negotiations are driven by ego or other irrelevant considerations. Experience has revealed that many airlines have encountered difficulties by not recognising early the need for sound legal guidance during the process. The responsibility of the Solicitor goes beyond merely drafting a document incorporating the terms agreed on. For example the staff should be made aware of the fact that internal communications are creating a record that may very well someday be embarrassing if not protected. They also must be made aware of the constraints imposed by the applicable laws.
Establish a list of the basic terms sought
Established clearly what basic terms are required in any lease entered into without which there will be no agreement. These are the parameters within which the negotiating team will work. The Solicitor would have to ensure that all the business agreement reached during negotiation between parties are reflected in the Lease. It can really embarrassing for your client to receive an engrossed/draft Lease Agreement which terms are different from the terms that were agreed during negotiation.
While the terms can cover any number of issues the following typically are considered:
i. Financial terms
ii. Liability issues
iii. Insurance requirements
iv. Security responsibility
v. Length of agreement
Who is negotiating and what is his level of authority?
Within any organisation there are levels of authority provided for the organizational structure. Authority may be delegated or be explicitly provided for. Before starting negotiations however the negotiating team should clearly understand the level of authority and what the representative of the Lessor can agree to. Usually any agreement is subject to final approval of the Board of Directors unless authority has previously been delegated. It is important for the negotiating team to know what the representatives of the Lessor can agree to without going back for instructions or approval. It is possible for instance that under applicable law, the consent or approval of a regulatory authority may be required to the transaction.
Set a timeline
Negotiation can be time consuming, unless well-arranged. Time is money and it is advisable to have a schedule for negotiations as well as the necessary approvals that are necessary for such agreements. Negotiations have been known to drag on for months unless the parties agree to a schedule to move them to closure.
Consider the termination events
Termination event is a critical provision in an Aircraft Lease Agreement in that it is usually given a restrictive definition to mean any event stated to be a termination event as provided for under the particular provision of the Aircraft Lease Agreement. An experienced Solicitor would ensure that the clause is not left out. This is important because it is suicidal to leave out such a sensitive clause or leave the termination events to the general provisions of the law. Objection should be raised to inequitable clauses in this area. Such should be negotiated out. Not to do so is to sow the seed for future trouble. A Solicitor should spend a reasonable time reading the clause, juxtaposing it with related provisions in other parts of the lease. The Solicitor may have to read between the lines.
It may also be important to take good care not to leave behind the provision on right on a termination. This is important as it is a fall-back provision. There was a very pathetic situation in which an overseas company in a de-registration matter in which a Nigeria sub-lessee Airline was in a grave situation. Under the terms, the airline agreed that it shall terminate forthwith upon notice from the head lessor of any termination of the head lease by reason of any event or default. There was no provision for the right of the lessee on termination. Inevitably, the sub-lessee had to suffer for the default. Legally, the agreement was valid, but the “stupid thing” was that it contained no provision for a right on termination of the agreement. The Solicitor in that case could be said to have setback or put under fire both the legal right and equity of the airline.
The issue of indemnities
It is customary for the lessee to undertake to indemnify and hold the lessor harmless from and against any and all loss of or damage to the aircraft during the lease period and agrees, irrespective of the reason for such loss or damage except in the cases of total loss in which the lessee has to reinstate, repair, or replace the relevant part(s) of the aircraft at its own expense so that the same are in as good an operating condition as previously existed.
The directors of the Lessor company, its officers, agents and employees should be properly indemnified against claims, actions, damages, losses, costs arising out of or related to the use, repairs or servicing of the aircraft under the agreement.
Return condition of the aircraft
Another fundamental covenant relates to the return of the aircraft at the expiration of the agreed term. Clearly, the primary consideration here is that the lessee should return the aircraft in the state and condition in which it would have been had the maintenance obligation provided in the agreement be adhered to. It is also important to look at the issue of the place of delivery. This should be stipulated in the agreement. Some measure of flexibility may also be introduced into the clause or provision on return condition. It is not un-usual for such a clause to contain provision like this; “Such other location as may be agreed”. It may also usually be agreed that re-delivery conditions and conditions under the Agreement are to be complied with. Lessor’s valid certificate of air worthiness and current maintenance record in a specified language may also be made a condition. The date of delivery, period of inspection and items to be inspected are agreed. Rectification at the cost of the lessee may be provided for.
There should be provisions for Arbitration, place and number of Arbitrators in the event of dispute as to the condition on redelivery. There should be a provision relating to delivery upon early termination. On must endeavour to state that we should always go beyond the lessor’s standard provision to negotiate into the return conditions provisions which protect the lessee against liabilities for reasonable or envisage-able “wear and tear.”
Leasing and quiet enjoyment of the aircraft
One of the most important provisions in a lease agreement is the provision on leasing of the aircraft to the lessee by the lessor. The provision will state clearly that the equipment is being leased for the term specified in the agreement. It is always important for the aircraft that is being leased to be properly identified. It is usual to identify the aircraft by the serial number assigned by the manufacturer, the registration number, type of aircraft and engine number.
When a Solicitor is drawing up an aircraft lease agreement, it is fundamental that a basic operative clause covering the obligation to lease and take on lease be inserted. It is unusual for a lessor to undertake anything other than the giving of quiet possession.
Representations and warranties are crucial and are common features of all standard lease agreements. Their purposes are diverse. The lessor must as a matter of utmost importance represents and warrants to the lessee that it has full right and power to lease the Aircraft on the terms of the Agreement and that for as long as the lessee continue to observe its obligations there-under and no event of default has occurred, the Lessee shall be entitled to the quiet enjoyment and use of the Aircraft free from interruption by the lessor or any person deriving title from it.
Sub-leasing
In all cases it should be possible for the lessee to sub-lease the aircraft. Airlines should be careful not to bind themselves to absolute non-subleasing clauses. There should always be some measure of flexibility. One negative trend that is getting popular is ‘biased drafting’. This is always in favour of one of the parties and the lessor most of the time.
This practice note does not pretend to provide an exhaustive list of all the usual head-ache but covers the areas which cause the main legal problems for an airline.