Aircraft operating leasing: a legal and practical analysis in the context of public and private international air law
Hanley, D.P.
Citation
Hanley, D. P. (2011, November 24). Aircraft operating leasing: a legal and practical analysis in the context of public and private international air law. Retrieved from
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Aircraft Operating Leasing: A Legal and Practical Analysis
in the Context of Public and Private International Air Law
Aircraft Operating Leasing: A Legal and Practical Analysis in the Context of Public and Private International Air Law
PROEFSCHRIFT
ter verkrijging van
de graad van Doctor aan de Universiteit Leiden,
op gezag van Rector Magnificus prof. mr. P.F. van der Heijden, volgens besluit van het College voor Promoties
te verdedigen op donderdag 24 november 2011 klokke 17:15 uur
door
Donal Patrick Hanley
geboren te Dublin, Ierland
in 1964
Promotiecommissie:
Promotoren: prof. dr. P.M.J. Mendes de Leon
prof. dr. D.H. Bunker (McGill University, Montreal, Canada) Overige leden: prof. dr. P.P.C. Haanappel (emeritus)
prof. dr. B.F. Havel (DePaul University, Chicago, USA) dr. T.L.M. Verdoes
© 2011 Donal Patrick Hanley
Printed by Station Drukwerk
ACKNOWLEDGMENTS
In undertaking a study such as this, I am very much aware of how interdependent we all are.
Nevertheless, writing is essentially an individual task: any errors that may be found herein are entirely my responsibility.
Of great help to me throughout, particularly in time of difficulty, has been reliance on the motto I first learned as a Jesuit schoolboy: Ad majorem Dei gloriam.
Firstly, I wish to thank my parents, for having suggested a career in the law to me, as well as classmates, teachers, professors, colleagues and superiors, past and present, for having inspired me to want to learn more and for invaluable advice on certain points.
Also, I wish to thank the libraries of Leiden University, Leiden, of McGill University, Montréal, and of the International Civil Aviation Organisation, Montréal for the use of their facilities during my research and Ms Paula van der Wulp and the staff of the International Institute of Air and Space Law of Leiden University for their assistance with the production and printing of this study.
Finally, but most of all, I wish to thank in a special way my wife, Helen, for her loving support
and patience with me during the long process involved in this study from start to finish.
do m’athair agus mo mháthair
Donal & Norma Hanley
i
Table of Contents
FOREWORD………...1
1 INTRODUCTION……….3
1.1 Context………....4
1.2 “Practical” v “Legal”………..7
1.2.1 “Practical”………...7
1.2.2 “Legal”………..……...9
1.3 Aim and methodology………...11
2 OVERVIEW……….17
2.1 Aircraft operating leasing and other forms of leasing and financing………....18
2.2 Structuring the lease……….24
2.3 The letter of intent……….27
2.4 The jurisdictional questionnaire………..30
2.5 The legal opinion………..31
2.6 The layout of the lease………..32
2.6.1 Parties……….32
2.6.2 Recitals………...32
2.6.3 Definitions………..32
2.6.4 Representations and warranties………..33
2.6.5 Conditions precedent……….33
2.6.6 Term and delivery………..33
2.6.7 Payments………33
2.6.8 Taxes………..34
ii
2.6.9 Warranties………..……34
2.6.10 Covenants………...34
2.6.11 Indemnities………...34
2.6.12 Insurances………..………34
2.6.13 Redelivery………..………35
2.6.14 Events of default………..………..35
2.6.15 Remedies………..………..35
2.6.16 Assignment………..………..35
2.6.17 Governing law………..………..36
2.6.18 Dispute resolution………..………36
2.6.19 Miscellaneous………..………..36
2.6.20 Execution………..……….36
3 THE AIRCRAFT OPERATING LEASE……..………38
3.1 Parties………..………..39
3.2 Recitals………..………40
3.3 Definitions………..………...41
3.4 Representations and warranties………..……….43
3.4.1 Representations as to present and past facts…………..………43
3.4.2 Repetition of representations………..………...43
3.4.3 Representations of law………..……….44
3.4.4 Warranties………..………...44
3.4.5 Conclusions………..………..45
3.5 Conditions Precedent………..………..46
iii
3.5.1 General conditions precedent………..………...………46
3.5.1.1 Payments………..………..46
3.5.1.2 Constitutional documents………..……….47
3.5.1.3 Corporate approvals………..……….47
3.5.1.4 Filings and consents………..………….47
3.5.1.5 Legal opinions………..………..48
3.5.1.6 Process agent letter………..……..48
3.5.2 Airline specific conditions precedent………...49
3.5.2.1 Certificate of insurance and broker’s letter of undertaking……..……….49
3.5.2.2 Certificate of registration………..……….50
3.5.2.3 Certificate of airworthiness………..………..51
3.5.2.4 Radio station license………..………51
3.5.2.5 Air transport license………..……….51
3.5.2.6 Air operator’s certificate………..………..53
3.5.2.7 Eurocontrol letter………..……….54
3.5.3 Waivers and Conditions Subsequent…………..………...54
3.5.4 Conclusions………..………..55
3.6 Term and delivery………..………57
3.6.1 Term………..……….57
3.6.2 Delivery……...………..……….57
3.6.2.1 Delay in or failure of delivery………..………..57
3.6.2.2 Failure to meet delivery condition before delivery………58
3.6.2.3 Effect of acceptance of delivery………59
iv
3.6.3 Conclusions………62
3.7 Payments………63
3.7.1 Rent………..63
3.7.2 Security deposit………66
3.7.2.1 Security deposit rationale………...66
3.7.2.2 Charge over the security deposit………67
3.7.2.3 Commitment fee……….68
3.7.2.4 Market reality……….68
3.7.3 Maintenance reserves……….68
3.7.3.1 Maintenance reserves rationale………..68
3.7.3.2 Charge over maintenance reserves……….69
3.7.3.3 Supplemental rent………..70
3.7.3.4 Limited reimbursement obligation………...70
3.7.4 Standby letters of credit and guarantees………71
3.7.4.1 Standby letter of credit………...71
3.7.4.2 Guarantees………..73
3.7.5 Late Payment……….73
3.7.6 Conclusions………74
3.8 Taxes………..75
3.9 Manufacturer’s Warranties………..76
3.10 Covenants………..78
3.10.1 Lessor’s covenants………..78
3.10.1.1 Quiet enjoyment……….78
v
3.10.1.2 Reimbursement from reserves and other payments………...79
3.10.2 Lessee’s covenants……….79
3.10.2.1 Maintenance………...80
3.10.2.2 Liens……….82
3.10.2.2.1 Mechanics’ liens……….82
3.10.2.2.2 Eurocontrol and similar liens………...86
3.10.2.2.3 Emissions liens………...91
3.10.2.2.4 Tax liens………...93
3.10.2.3 Chicago Convention and registration……….97
3.10.2.3.1 Owner only registration……….100
3.10.2.3.2 Owner or operator registration………...102
3.10.2.3.3 Owner and operator registration………..103
3.10.2.3.4 Operator only registration………...104
3.10.2.4 Possession and replacement of parts and engines………...104
3.10.2.4.1 Possession………...105
3.10.2.4.2 Replacement of parts………...105
3.10.2.4.3 Replacement of engines……….…….106
3.10.3 Conclusions……….…….114
3.11 Indemnities………..115
3.11.1 Damage to the aircraft and other loss to lessor………115
3.11.2 Liability for damage to third parties………115
3.11.2.1 Liability to non-passengers………...115
3.11.2.2 Liability to passengers………...119
vi
3.11.2.3 Product liability………....130
3.11.2.4 A note on public international air law instruments………...132
3.11.2.4.1 Tokyo Convention………132
3.11.2.4.2 Hague Convention………...134
3.11.2.4.3 Montreal Convention of 1971………...134
3.11.3 Negligent entrustment………..135
3.11.3.1 Extension to aircraft operating leases………...136
3.11.3.2 United States federal law………138
3.11.3.3 AAR cases………139
3.11.3.4 Liability insurance and indemnities………...142
3.11.4 Conclusions………142
3.12 Insurances………..144
3.12.1 Liability insurance………...144
3.12.2 Hull insurance………..147
3.12.2.1 Agreed value………148
3.12.2.2 Determination of total loss………...148
3.12.3 Deductibles………..149
3.12.4 Reinsurance and cut-through clause………149
3.12.5 Termination of insurances………150
3.12.6 Conclusions………...150
3.13 Redelivery………152
3.13.1 Redelivery in redelivery condition………...152
3.13.2 Timely redelivery……….152
vii
3.13.3 Non-compliance with redelivery condition………...154
3.13.4 Residual value guarantees………155
3.13.5 Records………156
3.13.6 Conclusions………..156
3.14 Events of default………..157
3.14.1 Payment………158
3.14.2 Breach of other obligations………...158
3.14.3 Insurance………...158
3.14.4 Bankruptcy………...158
3.14.4.1 US Bankruptcy Code………...159
3.14.4.2 Cape Town Convention………...160
3.14.5 Conclusions………...162
3.15 Remedies………...163
3.15.1 Repossession………164
3.15.2 Rome Convention 1933………...167
3.15.3 Cape Town Convention………...168
3.15.4 Geneva Convention………..169
3.15.5 Subleasing………169
3.15.6 Deregistration………...170
3.15.7 Deregistration power of attorney………...171
3.15.8 Article 83 bis transfer………...171
3.15.9 IDERA………...175
3.15.10 Indemnity Claim………...177
viii
3.15.11 Conclusions………178
3.16 Assignment………...179
3.16.1 Absolute assignment………179
3.16.2 Assignment by way of security………180
3.16.3 Conclusions………181
3.17 Governing law……….182
3.18 Dispute resolution………...184
3.18.1 Contractual agreement……….184
3.18.2 Third Parties and forum non conveniens……….186
3.18.3 Conclusions………..187
3.19 Miscellaneous………..188
3.19.1 Time of the essence………..188
3.19.2 No waiver……….189
3.19.3 Entire agreement………..189
3.19.4 Waiver of sovereign immunity………190
3.19.5 Conclusions………..192
3.20 Execution……….193
4 CONCLUSION………...194
4.1 Overall conclusions……….195
4.2 Recommendations………...198
4.2.1 Article 83 bis of the Chicago Convention………198
4.2.2 Cape Town Convention and IDERA………...200
4.2.3 Eurocontrol, emissions and similar liens……….201
ix
4.2.4 Standardisation of documentation………203
4.2.5 Lessor’s liability for acts of the airline (Montreal Convention 1999)………….204
4.2.6 Lessor’s liability for acts of the airline (Tokyo Convention)………...206
4.2.7 Hell or high water………206
4.2.8 Conclusivity of acceptance………206
4.3 Final Words……….208
ANNEXES………..208
Annex 1 Typical Operating Lease Structure………...209
Annex 2 Typical Leasing Structure for Japanese Registered Aircraft………210
Annex 3 Typical New Aircraft Operating Lease Financing………...211
Annex 4 Typical New Aircraft Operating Lease Financing for Japanese Registered Aircraft………212
Annex 5 Typical Jurisdictional Questionnaire Provisions………..213
Annex 6 Typical Lessee Legal Opinion Provisions………216
Annex 7 Typical Representations and Warranties of Lessee………...218
Annex 8 Typical Conditions Precedent to be satisfied by Lessee……….220
Annex 9 Typical Operational Covenants of Lessee………...222
Annex 10 Typical Events of Default………..224
Annex 11 OECD Understanding on Export Credits for Civil Aircraft, Annex I (Qualifying Declarations)………...226
Annex 12 Model Article 83 bis Agreement………...228
BIBLIOGRAPHY………...235
TABLE OF CASES………...245
x
TABLE OF INTERNATIONAL CONVENTIONS AND OTHER AGREEMENTS…….251
TABLE OF LEGISLATION………254
INDEX……….257
SAMENVATTING (SUMMARY IN DUTCH)………...261
BIOGRAPHY………...265
SUPPLEMENT: SAMPLE AIRCRAFT LEASE AGREEMENT………266
FOREWORD
The Feast of the Assumption, 2011
Man has always sought to reach the Heavens using his own ability. We see in The Holy Bible how men sought to build a city and a tower “the top whereof may reach to heaven”
1and we see how, the Lord decided, as a result, to confound their tongue and they ceased to build the city,
2thence called “Babel… That is, confusion.”
3Notwithstanding the failure of the Tower of Babel project, ever since, men have continued with their efforts to reach the Heavens throughout history until finally, in our day, air travel using aircraft and even space travel using spacecraft have become so commonplace that it is easy to forget how remarkable is this achievement.
The concept of leasing also goes far back through history - at least to Babylonian times
4- and has also developed since then until it is commonplace nowadays for aircraft. Bringing together both air travel and leasing is a somewhat more recent endeavour and the laws and practices surrounding both need to take account of one another. Perhaps, in this regard, a certain aspect of the confusion of Babel is seen today, given the many legal systems and legal provisions that can be very hard, if not sometimes seemingly impossible to reconcile, written, as they are, in many languages and not always taking into account one another.
It is the intent of this author that this study may serve to reduce that confusion and increase the common understanding of the legal and practical aspects of the aircraft operating lease and to clarify, at least to some extent, its place in the firmament of public and private international air law.
5This author’s motivation in tackling this subject lies in his surprise at how comparatively little has been written on it academically given its ever increasing importance and in his opinion, after more than twenty years of legal practice in the field, that there is an as yet undefined gap between law and practice in aircraft operating leasing. Parties to a lease should be aware of the law so as not to include unenforceable provisions in their leases.
Drafters of laws should at least be aware of practice when drafting laws that will affect such practice. Assuming that, having bridged any identified gaps between law and practice, leases contain only enforceable provisions, courts should swiftly and unambiguously enforce such provisions as drafted. It is a matter of never ending amazement to this author how often a party will, with the benefit of full legal advice, negotiate and agree to a
1 Genesis 11:4, Old Testament, Holy Bible, Douay-Rheims, 1610, revised by Bishop Richard Challoner, 1752.
2 Interestingly, we are not told that the tower itself was destroyed.
3 Id, 11:9.
4 Vide 1.1 infra.
5 The reader’s attention is drawn in particular to 1.3 infra, which sets out a detailed road map as to what lies ahead.
