The execution of an aircraft or engine sale agreement itself (including the sale of an ownership interest in an entity owning an aircraft or engine) does not generally result in a taxation, irrespective of the location of aircraft or engine and the seller’s domicile. Generally, the transfer of tax ownership upon completion of the sale agreement is relevant for income tax and VAT purposes.
It is not necessary for a sale agreement in respect of an aircraft to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, if legal proceedings are instigated before a German court, upon request of the German court, foreign language documents must be translated into German to be admissible in evidence in such legal proceedings.
In order to transfer title, the owner has to declare that it transfers its title to, and surrender possession over, the aircraft or engines; the acquirer has to declare that it accepts such title to, and establish possession over, the aircraft or engine. Transfer of title to an aircraft pursuant to German in rem law:
Examples for non-essential components and accessories are, as the case may be, engines, auxiliary power units or removable parts. Please note that there is no conclusive view as to whether an engine constitutes a non-essential component or an accessory. Pursuant to German law, the sale of the ownership interest in an entity that owns an aircraft or engine is not recognised as a sale of such aircraft or engine itself.
Under German conflict of law rules, transfer of title to an aircraft registered in a national aircraft register of a member state of the ICAO will generally be governed by the law of the jurisdiction of registration of such aircraft, unless there is – in exceptional cases only – a substantially closer nexus to the laws of another jurisdiction, or if the law of the jurisdiction where the aircraft is registered in turn refers to the laws of Germany (renvoi). The recognition of obligatory provisions in the bill of sale which are not related to the transfer of title must be assessed independently. If the bill of sale is expressed to be governed by a law not applicable pursuant to the above, German law might test the agreed wording as to whether it may suffice to cause transfer of title when applying German law. If the aircraft is not registered in a contracting state of the ICAO, and in the case of separate engines, the transfer of title will be governed by the lex rei sitae (Article 43 of the EGBGB).
If German law does not govern the transfer of title, German conflict of law rules will look at the jurisdiction of the laws which are applicable to the title transfer in order to determine if the bill of sale is sufficient. German law does not expressly regulate bills of sale and, thus, does not specify minimum substantive requirements applicable to bills of sale. However, a bill of sale should (i) sufficiently determine the aircraft, the engines, and any other part as well as the aircraft documentation, and (ii) contain suitable wording regarding the transfer of title.
Please note that the German Civil Aviation Authority (Luftfahrt-Bundesamt, LBA) requires a proof of ownership in order to register the aircraft in the German aircraft register (Luftfahrzeugrolle), held by the LBA, which can be established by a bill of sale.
It is not necessary for a bill of sale to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, upon request of the competent German court, foreign language documents must be translated into German to be admissible in evidence in legal proceedings before such German court.
A bill of sale cannot be registered or filed and is not subject to any consent from any government entity. However, the application for registration of a foreign owner in the German aircraft register (Luftfahrzeugrolle) requires the submission of proof of ownership, which in practice can be established by a bill of sale (with back-to-birth traceability, if applicable).
The disposal of an aircraft or engine by a party which is a tax resident in Germany basically triggers an income taxation of any capital gain from the sale – so-called unlimited income tax liability. Also, the disposal of an aircraft registered in the German aircraft register (Luftfahrzeugrolle) by a non-German tax resident results in a capital gains taxation in Germany, irrespective of where the asset is located – so-called limited income tax liability, but subject to double taxation treaties.
VAT should not be payable if the aircraft is designated to be used by airlines predominantly providing international commercial air transport. The taxation of the sale of an ownership interest in an entity that owns an aircraft or engine depends particularly on the type of entity sold (eg, partnership or corporation) and the individual structure of the sale. No stamp duties or transfer taxes are triggered by a disposal of an aircraft or an ownership interest in an entity that owns an aircraft in Germany.
Operating leases, wet leases, finance leases, and leases concerning only engines or parts are permissible and generally recognised.
A lease involving either a domestic party or an asset situated in Germany can generally be governed by foreign law, provided that a German court may give effect to German public policy and to overriding mandatory provisions of either German law or of the laws of any other country pursuant to Regulation (EC) No 593/2008 (Rome I Regulation), and must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.
Except for reporting requirements relating to inbound or outbound payments in excess of EUR12,500 (or the equivalent in any foreign currency) from or to a foreign lessor pursuant to the German Foreign Trade Ordinance (Außenwirtschaftsverordnung), there are no material restrictions imposed on domestic lessees making rent payments to foreign lessors in US dollars.
In the European Union, exchange controls between member states and between member states and third countries are prohibited. However, for statistical purposes all inbound or outbound cross border payments in excess of EUR12,500 (or the equivalent in any foreign currency) have to be reported by German residents (Inländer) to the German Federal Bank (Deutsche Bundesbank) within a time period of seven calendar days of such inbound or outbound payment pursuant to the German Foreign Trade Ordinance (Außenwirtschaftsverordnung). German law will give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.
In Germany, the mere physical execution of a lease agreement in Germany or the transportation of an executed lease agreement into Germany does not result in any taxation. However, income resulting from a lease is subject to taxation in case of a German tax resident lessor or, otherwise, if the aircraft is registered in the German aircraft register (Luftfahrzeugrolle) – subject to double taxation treaties – irrespective of an original or copy of a lease agreement being brought into Germany either physically or electronically. A leasing of an aircraft designated to be used by airlines predominantly providing international commercial air transport is usually exempt from VAT.
Generally, operating leasing by a German lessor does not require any regulatory approvals or licences from German authorities. The provision of German financing lease (Finanzierungsleasing) within the meaning of the German Banking Act (Kreditwesengesetz, KWG) within or into Germany can be subject to regulation under the KWG. The financing leasing of an aircraft under a financing lease will require a permit under the KWG subject to certain exemptions. Please note that the features of a German financing lease (Finanzierungsleasing) differ from those of finance leases pursuant to IFRS and may deviate from comparable tax rules. For other roles in an aircraft financing (eg, the lender) further regulatory approvals may be required (eg, a credit licence).
We are not aware of any aspects of German law that would require the inclusion of specific provisions in a foreign law governed lease agreement that would not typically already be included, except for certain restrictions on sanctions provisions driven by the anti-boycott rules in the German Foreign Trade Ordinance (Außenwirtschaftsverordnung) and in Regulation (EC) No 2271/96 (EU Blocking Regulation) that should be included if a German resident and/or European resident (as applicable) is party to the lease.
Gross-up provisions with regard to any withholding tax levied on payments by a party to a lease agreement are not prohibited by German (tax) law.
The terms of the lease can cover subsequent additions to the aircraft – eg, the obligation to replace parts and to some extent the transfer of ownership thereto.
As far as ownership is concerned, German law provides for mandatory provisions and under German conflict of law rules the choice of law is limited for in rem rights. Aircraft or engine leases typically contain provisions relating to the replacement of parts, and the alteration and modification of, and addition to, the aircraft as well as to the corresponding title transfer.
Title to an aircraft engine does not vest in the person holding title to an airframe merely by installation of the engine on the airframe. However, if the title to the airframe and the engine is held by the same person, and the engine is on-wing or temporarily off-wing, the German aircraft mortgage (Registerpfandrecht) granted over the airframe may extend to such engine.
The concept of a common law trust and of an owner trustee of a common law trust is not recognised under German in rem law, because a separation of legal title from equitable title is not compatible with the German concept of title. However, a statutory trust with an own legal personality and an owner trustee of such trust are recognised in their respective functions. The LBA is likely to disregard a common law trust arrangement and has occasionally registered the trustee as unrestricted owner in the past.
The purpose of the German Aircraft Register (Luftfahrzeugrolle) is to implement the rules in Part 1 – Chapter III of the Convention on International Aviation (the Chicago Convention), which is devised to maintain the safety of navigation of civil aircraft, but not to constitute or allocate in rem rights in the aircraft. The Aircraft Register notes the ownership interest of the holder of legal title to the aircraft as notified to the German Civil Aviation Authority (Luftfahrt-Bundesamt), but does not prove ownership, and the registration of a person as owner in the Aircraft Register does not establish any ownership interests. The interest of a lessor of an aircraft is not noted in the Aircraft Register.
An aircraft cannot be registered in Germany in the name of the aircraft operator if the operator is not the owner of the aircraft. The aircraft must be registered in the name of the owner.
There is no specific register for leases concerning aircraft or engines.
Neither a lease nor a lessor’s interest in or under an aircraft lease can be registered or filed in the German Aircraft Register (Luftfahrzeugrolle). However, an aircraft lease to which a German operator is a party requires approval by the German Civil Aviation Authority (Luftfahrt-Bundesamt) prior to the commencement of the services thereunder. In a multi-tier lease structure this rule applies to the entire chain of leases.
It is not necessary for a lease to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. As a matter of practice, the German Civil Aviation Authority (Luftfahrt-Bundesamt, LBA) accepts leases in the German or English language. If the lease is in a language other than German or English, the LBA may require the lease, or excerpts thereof, be translated and such translations be certified by a registered translator.
As an aircraft or engine lease cannot be registered, no taxes/duties fall due.
As a practical observation, private and corporate jets operated in Germany are often registered in the USA. Commercial aircraft operated by German airlines and habitually based in Germany are typically registered in Germany.
Generally, any document submitted to the German Civil Aviation Authority (Luftfahrt-Bundesamt, LBA) needs to be an original or a notarised (and, depending on its state of origin, apostilled or legalised) copy of such document and any document in a foreign language needs to be accompanied by a certified translation into German. As a general observation, registration processes with the LBA are more document-heavy than in other jurisdictions and the requirements and practice of the LBA should be adhered to meticulously in order to avoid any delays in the process.
A non-German tax resident lessor is basically subject to limited income taxation in Germany if the leased aircraft is registered in the German Aircraft Register (Luftfahrzeugrolle) irrespective of the lessee being domestic or not (subject to, and often reversed by, double taxation treaties).
A foreign lessor being a party to a lease agreement or to its enforcement does not generally result in a limited income taxation in Germany. The mere leasing of an aircraft or engine does not result in a foreign lessor being deemed to be tax resident, domiciled or carrying on a business in Germany. Rather, a foreign lessor's income from a lease is subject to income taxation in Germany if the aircraft is registered in the German Aircraft Register (Luftfahrzeugrolle), subject to, and often reversed by, double taxation treaties.
German law does not impose a general liability for the maintenance or operation of an aircraft or aircraft engine on the owner (unless it is also the operator) or lessor (if different from the owner). This can be different if the owner or lessor assumes control over the aircraft (eg, in the case of a repossession) or, for example, with a view to emission rights, if the operator is unknown (which appears unlikely in the case of commercial aircraft). The owner can be obliged to provide information as regards the aircraft and its use – for example, in connection with the registration status or emission trading obligations.
German law does not impose strict liability on the owner of an aircraft which is not the operator or on the lessor (if different from the owner). In exceptional circumstances an owner can be held responsible for any hazard or danger caused by the aircraft under general rules of prevention of harm and damages (police laws).
German law generally respects the owner’s title to the aircraft and does not allow for enforcement into the aircraft for the liabilities of a German lessee. There is the potential of a liability of an aircraft for Air Traffic Control charges or of the aircraft owner for emission charges, if the operator is unknown.
If the aircraft is registered in the German aircraft register (Luftfahrzeugrolle) the aircraft cannot be encumbered with statutory liens such as workman’s liens. The owner of an aircraft can potentially be held liable for Air Traffic Control charges if the operator is unknown. Different rules may apply to engine leases.
German law does not require that all or a certain fraction of the insurance coverage taken out by the operator with respect to an aircraft is underwritten by domestic insurers. The insurer must be permitted to do business in Germany. Owners and lessors customarily require that the insurance be underwritten by internationally renowned insurers.
The operator of an aircraft is obliged to maintain liability insurance that covers death and injury of passengers, delayed transportation of passengers, damage to, and destruction and loss of, transported goods, death and injury of third parties and damage and destruction of third parties’ property. The minimum insurance amounts are depending on the maximum take-off weight of the aircraft and are provided for by European and German laws. The German Civil Aviation Authority (Luftfahrt-Bundesamt) will only issue an operating permit for an aircraft upon, inter alia, proof of sufficient liability insurance coverage with respect to the aircraft. No similar minimum insurance requirements exist for property insurance with respect to an aircraft (or any part thereof).
German law does not restrict the portion of reinsurance coverage that can be taken out abroad. German operators usually do not take out reinsurance, but rather place the primary insurance with established insurers that are permitted to do business in Germany.
As far as we are aware, it has not been tested in courts whether cut-through clauses in German law governed insurance contracts would be enforceable under German law. It is not clear whether customary cut-through clauses would be upheld and honoured in an insolvency of the insurer.
Assignments of insurances and reinsurances are generally permitted under German law. Note, however, payment claims under liability insurance contracts cannot be assigned by the insured party, as it is the purpose of liability insurance to cover the affected person’s damage and therefore the affected person is the creditor of the claim against the insurer.
The lessor (as owner) retains legal title to the aircraft, while pursuant to the lease agreement the lessee has the right of use and quiet enjoyment of the aircraft, provided there is no event of default under the lease. Under these circumstances the lessor’s attempt to recover possession of the aircraft would be unjustified. To the extent the lease is governed by German law, the lessor has a statutory right to terminate the lease without a notice period for good cause (wichtiger Grund) such as a delay in payments or a material breach of contract or otherwise a contractual right to terminate pursuant to the terms of the lease.
Pursuant to German insolvency law the lessor may not terminate a lease after a petition for insolvency against the lessee has been filed with the insolvency court on the grounds of payment defaults or a general deterioration of the commercial situation and credit-worthiness of the lessee prior to such insolvency filing, and any such termination rights of the lessor in a lease would be unenforceable.
The aircraft does not have to be located in Germany at the time of the termination.
In general, there are, subject to restrictions on exports to prohibited countries, no restrictions on a lessor's ability to export an aircraft from Germany. However, for certain aircraft containing parts and certain technical components which could also be used for military purposes (so-called dual-use goods), an export approval will be required pursuant to the German Foreign Trade Act (Außenwirtschaftsgesetz) in connection with the German Foreign Trade Ordinance (Außenwirtschaftsverordnung, AWV). Export requirements are tighter for countries outside of the EU and especially restricted for certain countries listed in the AWV.
The lessor will usually obtain an export certificate of airworthiness to simplify registration of the aircraft in the new jurisdiction. An export certificate of airworthiness is obtained from the German Civil Aviation Authority (Luftfahrt-Bundesamt, LBA) following inspection of the aircraft. Additional consents, approvals or licences may be required from the LBA and the LBA will have to approve the ferry flight out of Germany.
The termination of the lease is not a prerequisite for the sale of an aircraft. The aircraft is not required to be in Germany in case or at the time of its sale.
The Lessor has no right to self-help under German law should the lessee not surrender possession to the aircraft following the termination of the leasing of the aircraft. So long as the aircraft is located in Germany, repossession must be accomplished by filing a suit in a German court and the subsequent enforcement of the court ruling through a bailiff (Gerichtsvollzieher). No further permissions beyond the ruling of the German court are needed to repossess the aircraft in Germany, while for operating the aircraft all customary requirements will apply. Any party that otherwise legitimately believes to have an in rem or security interest may intervene in the repossession proceedings.
Depending on the factual situation the lessor has the possibility to utilise faster provisional judicial measures, however, this possibility is restricted if the aircraft is used for certain purposes such as state or postal services, public transportation on scheduled routes, or if the aircraft is ready for take-off to a flight constituting commercial transportation of people or goods. An approval by the German Civil Aviation Authority (Luftfahrt-Bundesamt) is required to fly the aircraft out of Germany. If the aircraft is located outside of Germany, lex fori would apply to any repossession.
There are no specific courts in Germany that are competent to decide disputes regarding sales or lease of aviation assets, but the competent court has to be determined in accordance with general rules. In case of an enforcement of a German registered aircraft mortgage (Registerpfandrecht) the local court (Amtsgericht) of Braunschweig is competent to hear the case.
In Germany, summary proceedings (summarische Verfahren) are generally available for the enforcement of pecuniary claims, but not for the enforcement of any other right. In case of a simplified document proceeding (Urkundenprozess) in respect of payment obligation the court decides on the basis of the document(s) in question and the uncontested statements of the parties. A simplified judgment can be challenged by the defendant if the defendant prefers to rely on more complex and other evidence than the documents introduced during the simplified procedure.
By way of an interim relief, the competent German court may order an injunctive relief (einstweilige Verfügung) against the respondent pending final judgment, if in the absence of such injunction the right of the petitioner would be frustrated or the realisation of such right would be substantially aggravated. This means is not restricted to pecuniary claims. However, the competent German court would not grant ultimate relief before the case is decided on the merits. Exceptions may apply for ancillary items such as aircraft manuals.
German courts would generally uphold a foreign law as the governing law of an aircraft lease, provided that a German court may give effect to German public policy and to overriding mandatory provisions of either German law or of the laws of any other country pursuant to Regulation (EC) No 593/2008 (Rome I Regulation), and must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.
A submission to a foreign jurisdiction is generally accepted on the basis of Regulation (EU) No 1215/2012 (Brussels Recast Regulation), the Hague Choice of Court Convention, and/or the German Civil Procedure Code (Zivilprozessordnung). A German court must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.
A party to a lease is entitled to waive sovereign immunity either explicitly in the lease or implicitly by engaging in the legal proceedings before the competent German court without raising an objection (rügeloses Einlassen) of sovereign immunity. A blanket waiver of sovereign immunity does not necessarily include a waiver of consular immunity. A waiver of immunity by a German public entity may not necessarily be enforceable.
German courts will recognise and enforce:
A judgment can be obtained in any currency. A judgment for payment of money expressed in a foreign currency may be satisfied in euros at the exchange rate prevailing at the time of payment, unless the enforcement court decides that specific performance of the obligation to effect payment in the judgment currency has been agreed.
General limitations under German law with respect to punitive damages, compound interest, contravention of good morals (Sittenwidrigkeit), general principles of equity (Treu and Glauben) or German public policy (ordre public) have to be observed and provisions of a lease agreement in violation thereof may be unenforceable.
A lessor under an aircraft lease agreement has to pay regular income taxes on its income in Germany in connection with the performance or enforcement of such lease agreement if the lessor is subject to either unlimited income taxation (German tax residents) or limited income taxation (foreign lessors such as those having a permanent establishment in Germany or if the aircraft is registered in the German Aircraft Register (Luftfahrzeugrolle), subject to double taxation agreements).
Unless the relevant aircraft lease contains specific provisions in that regard, a lessor has to comply with statutory notice periods if it terminates an aircraft lease.
Commercial lessees would usually not be entitled to any immunity from suit, execution or attachment. There are, however, restrictions on the attachment of aircraft in scheduled service, operated by a lessee.
Germany ratified the United Nation Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention) and the German courts will recognise and enforce an arbitral decision if and to the extent it contains a final and binding decision which conclusively resolves the matter.
In an enforcement scenario the relevant issues and the requisite actions which have to be taken in order to safeguard the legitimate interests of the creditor depend on the specific circumstances of the case which may require the examination of the entire scale of legal areas affected, such as contract law, statutory law, insolvency law, aircraft regulations, etc. Hence, in an imminent enforcement scenario a creditor is well advised to retain legal experts with intimate knowledge of aviation law in general.
German law recognises legal concepts of assignment and novation. An assignment (Abtretung) is the transfer of legal title to the relevant rights, claims or receivables. In a novation (Novation), an existing right or claim is replaced by a new right or claim with the replacement right or claim having equal content as the replaced right or claim, except that the right or claim is established anew and any counterclaims, objections and the like arising from the relationship between the debtor and the (original) creditor would generally not be available against the replacing right or claim.
Due to the accessory nature of the German aircraft mortgage (Registerpfandrecht), upon novation of the claim secured by the German aircraft mortgage the mortgage lapses. Hence, further steps are required to establish a new German aircraft mortgage. In that case it might be impossible to avoid negative effects on the ranking of the aircraft mortgage. Similar concerns will apply to other forms of accessorial collateral (akzessorische Sicherheiten) under German law.
German law will apply German and European conflict of law rules to any finance or security document. Subject to limitations in certain circumstances and compliance with ordre public there is general freedom of choice of applicable law under contracts between commercial parties, including lease assignments and novations. In respect to security, the law governing the collateral (eg, a claim or tangible item) will typically determine the law applicable to any security interest over such asset. The submission to a foreign place of venue is typically permissible between commercial parties.
As regards in rem rights in aircraft, however, German conflict of law rules do not allow for a choice of law, but German law would apply to an aircraft registered in Germany. Under German law, the transfer of title to an aircraft registered in Germany to the new owner will be governed by German law regardless of the chosen law in the documents.
It is not necessary for an aircraft or engine lease assignment or novation agreement to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. As a matter of practice, the German Civil Aviation Authority (Luftfahrt-Bundesamt, LBA) accepts leases in the German or English language. If the lease is in a language other than German or English, the LBA may require the lease or excerpts thereof be translated and such translations be certified by a registered translator. Upon request of the competent German court, foreign language documents have to be translated into German to be admissible in evidence in legal proceedings before such German court.
An aircraft or engine lease assignment and assumption/novation does not require registration in the German aircraft register (Luftfahrzeugrolle). The operator has to submit a copy of the so transferred or novated aircraft lease agreement to the German Civil Aviation Authority (Luftfahrt-Bundesamt).
Depending on the specific circumstances, an assignment and assumption/novation agreement may result in an income taxation if the lessor is tax resident in Germany or subject to limited income tax (subject to double taxation treaties). VAT is triggered if the assignment constitutes a VATable supply or service and if no exemption applies. Usually, subject to the specific circumstances at hand, customary novation of an aircraft or engine lease agreement upon the sale and transfer of the relevant aircraft or engine can be structured to the effect that the novation itself does not trigger any German transfer or income tax.
In Germany, the transfer of a legal entity does not require or involve a transfer of the legal title to the assets held by such legal entity.
The German Aircraft Register (Luftfahrzeugrolle) is an owner register. The owner is entitled to apply for the deregistration of the aircraft. A form has to be completed and signed and submitted to the German Civil Aviation Authority (Luftfahrt-Bundesamt), which maintains the Aircraft Register, together with certain ancillary documents.
The aircraft owner’s application for the deregistration of the aircraft does not require the lessee’s consent. It is untested, however, if a lessee could take preventive action to hinder a deregistration on the grounds of the argument that the deregistration would constitute a breach of the owner’s obligations (eg, under a lease to the lessee). A lessee, operator or mortgagee on its own is not entitled to deregister the aircraft.
For the deregistration the owner or the owner’s legal counsel (if acting under a notarised and apostilled power of attorney) will have to present a duly filled-out form of deregistration, the original of the certificate of registration (Eintragungsschein), the certificate of airworthiness and the noise certificate (Lärmzeugnis). It is worth noting that the Eintragungsschein is to be kept on board of the aircraft and that therefore taking possession of the aircraft or at least the certificate of registration is a prerequisite to the application for the deregistration of an aircraft. If an aircraft mortgage is registered against the aircraft in Germany, the mortgagee’s written consent to the deregistration of the aircraft is required.
If the documents presented to the German Civil Aviation Authority (Luftfahrt-Bundesamt, LBA) are complete and in the appropriate form, registration should usually occur within one to two weeks, or faster if pre-discussed with the LBA. If the lease forming the basis for the use of the aircraft is terminated and the authority is informed thereof, the authority may take action by itself in order to prevent the further operation of the aircraft.
The German Civil Aviation Authority (Luftfahrt-Bundesamt) will not pre-assure the prompt deregistration of an aircraft to the owner applying for its deregistration.
There are no significant taxes chargeable in respect of the deregistration of an aircraft.
A deregistration power of attorney by the owner can generally be recognised. The power of attorney should be notarially certified and apostilled/legalised and translated (in certified form) into English or German. In the case of an owner which has its centre of main interest in Germany, upon the insolvency of the owner such power of attorney will cease to be valid.
The authority of the person acting for the owner when granting the deregistration power of attorney as well as the corporate existence of the owner (in case it is not a natural person) have to be demonstrated by acceptable documentation (including notarially certified and apostilled/legalised incumbency certificates, commercial register excerpt or other adequate proof).
A deregistration power of attorney to deregister an aircraft from the German aircraft register (Luftfahrzeugrolle) does not necessarily have to be governed by German law. However, its acceptance to the German Civil Aviation Authority (Luftfahrt-Bundesamt) might be enhanced if it is governed by German law.
Under German law a power of attorney expressed to be irrevocable is generally irrevocable except where there is no appropriate reason for the irrevocable nature or a good cause (wichtiger Grund) occurs justifying the revocation. Therefore, the irrevocability only leads to a limitation of the right of revocation, not to a general exclusion.
In principle, an export of an aircraft by the owner does not require the lessee’s consent. However, if the aircraft is to be deregistered at the same time, a mortgagee will have to consent to the deregistration. As between the owner/lessor and the lessee a deregistration and subsequent export may not be permissible if the lessee’s right of quiet enjoyment under the lease agreement continues to exist. A mortgagee will not be entitled to export the aircraft, but may only cause the sequestration of the aircraft and the forced sale by court procedure.
Upon application, the German Civil Aviation Authority (Luftfahrt-Bundesamt) will be able to issue a certificate of airworthiness for export. The documents required for application vary depending on the target country as well as the status of the aircraft. Since a certificate of airworthiness for export is only required in extraordinary instances, the time it will take to obtain an export licence will vary. Such certificate cannot be obtained in advance (eg, at inception of the lease or at registration).
There are no significant costs/fees/taxes chargeable in respect of the export of an aircraft in Germany.
For the purpose of deregistration, the owner is required to provide the original certificate of registration which is kept on board of the aircraft. Hence, access to and control over the aircraft may be a prerequisite if the operator is not co-operative.
Irrespective of the insolvency of the operator the German Civil Aviation Authority (Luftfahrt-Bundesamt) would not honour an IDERA in favour of the owner or financier of an aircraft, as Germany has not ratified the Cape Town Convention. As the German Aircraft Register (Luftfahrzeugrolle) is an owner register and the operator’s consent or co-operation is legally not necessary for an aircraft deregistration, no deregistration power of attorney is necessary for the owner to deregister the aircraft from the Aircraft Register upon the operator’s insolvency. A valid deregistration power of attorney from the owner to the operator would generally be honoured by the Aircraft Register provided that it is submitted as an original or as a notarially certified copy (notariell beglaubigte Abschrift); it would not survive the insolvency of the German owner, though.
Lease agreements concerning registered aircraft generally survive the opening of preliminary German insolvency proceedings as well as the formal opening of insolvency proceedings concerning the lessee. The insolvency administrator of the lessee has an extraordinary statutory termination right. The lessor is barred from terminating the lease agreement on the grounds of payment defaults or a general deterioration of the lessee’s credit worthiness that has occurred prior to the filing for the opening of insolvency proceedings. Upon termination of the lease agreement, the insolvency administrator generally has to honour the lessor’s and the owner’s rights in the aircraft and has to surrender possession of the aircraft to the lessor. Factual circumstances such as engine replacements, a lack of the necessary licences, of insurance coverage or of trained personnel may prevent or delay such redelivery.
During preliminary insolvency proceedings and provided that the insolvent lessee’s operations are continued, the insolvency court can order – at the request of the preliminary insolvency administrator – that the aircraft shall temporarily remain with the lessee irrespective of the termination of the lease agreement if the aircraft is of significant importance for the lessee’s operations. As a practical observation, insolvency administrators appeared to be co-operative in past cases, given the values at stake and the risk-adjacent nature of an aircraft and its operation.
The effects of the insolvency of the borrower under an aircraft financing depend on the collateral granted in that context. While the right to realise an aircraft mortgage would remain with the secured party, the realisation of any collateral in the possession of the administrator vests in the insolvency administrator, who would deduct a percentage fee and VAT (if any) from the realisation proceeds before turning them over to the secured party. In addition, access to the aircraft, the aircraft documentation and the engines (if off-wing) may de facto be impeded in an insolvency.
German law does not provide for a moratorium in connection with an insolvency of an entity that is not a financial institution or insurer. However, any enforcement measures taken against an insolvent borrower would cease automatically upon the opening of insolvency proceedings against the borrower as the right to realise collateral would generally vest in the insolvency administrator, who would then have to turn over the net realisation proceeds (minus a percentage fee and VAT, if any) to the secured creditor. The enforcement of in rem security over real estate, registered ships and aircraft, is exempt from this rule and may continue unless the insolvency administrator applies for its cessation.
Airlines can be subject to German insolvency proceedings in case their centre of main interest is in Germany. Each third-party creditor can apply for insolvency proceedings upon the debtor’s illiquidity (Zahlungsunfähigkeit) or over-indebtedness (Überschuldung) (ie, balance sheet insolvency together with a negative continuation prognosis for the operations). The directors of a company generally have to apply for insolvency in these circumstances as well (subject to a relatively short grace period) and may file for insolvency upon the company’s imminent illiquidity (drohende Zahlungsunfähigkeit).
Solvent liquidation of a company outside insolvency requires a shareholder resolution to that effect. Subject to certain requirements, secondary insolvency proceedings can be opened over branches or assets of foreign airlines in Germany. Following, and in reaction to, the outbreak of the COVID-19 pandemic the legislator has temporarily suspended until 30 September 2020 debtors' insolvency filing obligation on the grounds of illiquidity.
In the insolvency of a lessee of an aircraft, the lessor may repossess the aircraft upon the termination of the underlying aircraft lease agreement. Also, during preliminary insolvency proceedings and following the formal opening of insolvency proceedings, the aircraft lease agreement can generally be terminated by the lessor in accordance with its terms and the aircraft can be repossessed as a consequence of such termination, provided that:
In the insolvency of an aircraft lessee, and despite the continuation of the aircraft lease agreement (see 2.9.2 Other Effects of a Lessee's Insolvency), the insolvent lessee usually lacks the liquidity necessary to fund the agreed-upon maintenance of the aircraft.
During preliminary insolvency proceedings lease rentals might not necessarily be paid (in full). In case the lease agreement continues beyond the formal opening of insolvency proceeding, claims for lease rentals incurred following the formal opening of insolvency proceedings constitute preferred claims against the insolvency estate. The lease security deposit would be available to the lessor to cover outstanding claims; the insolvent lessee will very likely not replenish the security deposit.
Maintenance reserves would usually remain with the lessor, unless upon the redelivery of the aircraft the maintenance reserves exceed the amount necessary to compensate any deviations from the agreed redelivery conditions. In that instance, and depending on the underlying factual circumstances, the lessor may be permitted to set-off its other outstanding claims against the lessee against the lessee’s claim for the repayment of the remainder of the maintenance reserves.
Note, however, that the exercise of set-off and retention rights against the insolvent party is widely restricted as a matter of statutory German insolvency law.
Germany has not ratified the Convention on International Interests in Mobile Equipment or the related Protocol on Matters Specific to Aircraft Equipment.
See 2.10.1 Conventions in Force.
See 2.10.1 Conventions in Force.
See 2.10.1 Conventions in Force.
See 2.10.1 Conventions in Force.
Lenders which offer loans in Germany are subject to German banking supervision by the German Banking Regulator (Bundesanstalt für Finanzdienstleistungsaufsicht) and thus to the German Banking Act (Kreditwesengesetz). There are no particular restrictions on borrowers in conjunction with the utilisation of the loan proceeds. However, borrowers have to abide by any rules which apply to the utilisation of monies generally (eg, compliance with sanctions, etc).
Exchange controls between member states and between member states and third countries are prohibited in the European Union. However, for statistical purposes all inbound or outbound cross-border payments in excess of EUR12,500 have to be reported by German residents (Inländer) to the German Federal Bank (Deutsche Bundesbank) within a time period of seven calendar days of such inbound or outbound payment pursuant to the German Foreign Trade Ordinance (Außenwirtschaftsverordnung). A German court must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund.
Borrowers are permitted to grant security to foreign lenders. Depending on the legal form of the corporate borrower, certain statutory restrictions exist in case the lender is a direct or indirect affiliate, or if collateral is granted for the liabilities of an affiliated person (upstream or sidestream collateral). The details depend on the specific corporate set-up.
In case of a German company with limited liability (Gesellschaft mit beschränkter Haftung, GmbH,) an upstream and/or cross-stream guarantee can expose its directors to personal civil liability, unless it is ensured that the assets required for maintaining the registered capital are not distributed to the GmbH’s direct or indirect shareholders or any of their respective subsidiaries. Even stricter restrictions exist in case of German stock corporations (Aktiengesellschaften) and Societates Europaea (established under German law).
It would not be unusual in aviation finance transactions for a lender to take share security over a domestic special purpose vehicle which owns the aircraft. German law generally recognises share pledge agreements. Share pledges over limited liability companies in Germany require notarisation with high notarial fees.
A negative pledge obliging the pledgor not to grant security to a third party is generally recognised as an obligatory arrangement, but would not restrict the grantor’s ability to dispose of its assets in rem.
There is no material restriction or requirement imposed on intercreditor arrangements. Creditors could be deemed to form a partnership with regard to any collateral held in Germany or if formed under German law.
The role of an agent (such as the facility agent) under a syndicated loan is generally recognised in Germany and well established in the German lending market, including the aviation finance market.
Generally, debt can be or become subordinated by means of a contractual subordination or a structural subordination as well as by operation of law (eg, in the case of a shareholder loan).
The concept of transfer and assumption of contracts (including the debt) is generally recognised in Germany. Certain implications of the Regulation (EC) No 593/2008 (Rome I Regulation) may require specific attention in that regard.
Pursuant to the German Civil Code (Bürgerliches Gesetzbuch) usury is prohibited and any agreement providing for usurious consideration is void ab initio. Compound interest cannot be validly agreed upon in advance under German law.
Typical forms of security and recourse granted in an aviation finance transaction domestically would be an aircraft mortgage, a security assignment (regarding lease rent payments, insurance proceeds, requisition and total loss proceeds), a share pledge, an account pledge, a parent company guarantee, cross-collateralisation arrangements, airframe and engine warranties arrangements, a security deposit and a deregistration power of attorney. It depends on the specific transaction structure and the parties involved which of the above security instruments are employed.
If the aircraft is registered in the German Aircraft Register (Luftfahrzeugrolle), no in rem security can be taken over the aircraft other than a German aircraft mortgage.
The concept of a security trustee (Sicherheitentreuhänder) is generally recognised and established in the German secured lending industry. With respect to accessory security instruments such as mortgages and pledges it should be combined with a parallel debt arrangement in favour of the security trustee (eg, on the basis of an abstract acknowledgement of debt) in order to address the peculiarities of accessory security instruments.
A borrower can assign to a security trustee its rights under an aircraft lease pursuant to a security assignment and mortgage the aircraft to the benefit of the security trustee. The assignment of a lessor’s title interest in the aircraft (Sicherungsübereignung) would require additional legal consideration.
It would be usual for a borrower/lessor to assign the rights and benefits only without also assigning the related obligations of the lessor under an aircraft lease to the security trustee.
A security assignment or guarantee can generally be governed by English or New York law. Upon their enforcement a German court may give effect to German public policy and to overriding mandatory provisions of either German law or of the laws of any other country pursuant to Regulation (EC) No 593/2008 (Rome I Regulation) and must give effect to foreign exchange regulations pursuant to Article VIII 2(b) of the Articles of Agreement of the International Monetary Fund. A security assignment should follow the law governing the right that is assigned.
In connection with any Germany law security assignment a notification of the third-party debtor is advisable in order to prevent that the third-party debtor extinguishes is obligations by making payments to the assignor instead of making payments to the assignee. It is not necessary for a security assignment to be translated, certified, notarised or apostilled/legalised to be enforceable against a domestic party. However, if legal proceedings are instigated before a competent German court, upon request of the German court, foreign language documents have to be translated into German to be admissible in evidence in such legal proceedings.
An aircraft registered in Germany should be encumbered with a German aircraft mortgage; other security over the aircraft would not be enforced by German courts. The German aircraft mortgage needs to be notarised and registered with the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen), which is different from the German aircraft register (Luftfahrzeugrolle). The costs for the notarisation as well as for the filing depend on the amount of the secured obligations. As Germany has not ratified the Cape Town Convention, no international interest can be registered against the aircraft on the basis of a German aircraft mortgage.
A security assignment of rights cannot be registered in Germany. The German aircraft mortgage has to be registered domestically in the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen) in order to be effective.
A security interest over an aircraft pursuant to a German aircraft mortgage (Registerpfandrecht) can generally be transferred. Due to its accessory nature it can only transfer together with the transfer of the secured obligations and to the same person.
The effects of any change in the identity of the secured parties on a German law security assignment depend on the specific arrangements made with respect to such security interest – eg, whether a security trustee concept has been introduced or not. The transfer of a mortgagee’s position under a German aircraft mortgage (Registerpfandrecht) is possible if performed together with the secured obligation and requires registration with the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen).
The concept of "parallel debt" on the basis of abstract acknowledgements of debt is generally an established concept in Germany.
A secured party under a security assignment is generally not deemed to be resident, domiciled, carrying on business or subject to any taxes in Germany solely as a result of its being a party to, or the enforcement of, such security assignment.
A German aircraft mortgage would take effect upon its registration in the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen). A German aircraft mortgage encompasses engines which are on-wing and are owned by the same legal entity or natural person owning the airframe.
An engine installed on an airframe owned by the same person can become subject to an aircraft mortgage pertaining to such airframe. For a spare engine that is off-wing or owned by a person different from the owner of the airframe, other forms of security interests – such as a pledge or security transfer of title – may be available.
Typically, an account pledge would be used to take security over a bank account (such as a lease receivables account), which, among others, requires a notification of the bank.
In the case of (i) undischarged European Union Emission Trading Scheme payments, (ii) unpaid VAT and/or customs in case of an import of an aircraft, and (iii) non-payment of fines as a result of a breach of obligations under the German Air Traffic Act (Luftverkehrsgesetz) the relevant authority can register a non-consensual lien over an aircraft registered in Germany if the debtor is the aircraft owner (and in case of Air Traffic Control charges if the operator is unknown).
Repairer’s charges, which are generally permitted under the German Civil Code (Bürgerliches Gesetzbuch), cannot be created in respect of German registered aircraft. However, in respect of salvage, the Act on the Rights in Aircraft (Gesetz über Rechte an Luftfahrzeugen) provides for a first-priority lien if certain conditions are met.
A German aircraft mortgage can be granted over more than one German-registered aircraft.
The German Aviation Safety Agency (Deutsche Flugsicherung GmbH) and the German Civil Aviation Authority (Luftfahrt-Bundesamt) can retain a bailiff (Gerichtsvollzieher) who is entitled to detain and encumber the aircraft or the fleet with a German aircraft mortgage as security for any unpaid amounts.
It is necessary to draw a distinction between the discharge of the mortgage itself as a legal right and the deregistration of the mortgage from the register. In general, the right "mortgage" extinguishes automatically if the claim secured by the mortgage extinguishes, and its deregistration from the German Aircraft Mortgage Register (Register für Pfandrechte an Luftfahrzeugen) can be sought. Vis-à-vis third parties acting in good faith, the register is generally deemed to be correct as long as the mortgage is still registered.
Once the required documents have been submitted to the Mortgage Register, it generally takes at least one week until written confirmation of deregistration is received by mortgagee and mortgagor.
German aircraft mortgages have to be registered in the German Aircraft Mortgage Register (Register für Pfandrechte an Luftfahrzeugen) in order to be effective. The mortgage registration avails in rem effects and generally entitles the secured party to enforce the aircraft mortgage by obliging the owner to suffer the foreclosure into the aircraft.
In the case of (i) a default in the payment of Eurocontrol charges by the operator of an aircraft and, if the operator is unknown, non-payment of such charges by the owner, and (ii) non-payment of charges for official acts, especially for examinations and inspections according to the German Air Traffic Act (Luftverkehrsgesetz) and the Act on the German Civil Aviation Authority (Gesetz über das Luftfahrt-Bundesamt), a bailiff (Gerichtsvollzieher) can detain and encumber the aircraft – to the extent the defaulting debtor is at the same time the owner of the aircraft – whereas an aircraft which is or was registered in the German Aircraft Register (Luftfahrzeugrolle) may be encumbered with a German aircraft mortgage (Registerpfandrecht) and an aircraft registered abroad may be encumbered by way of attachment.
In principle, the non-consensual lien would arise over one aircraft, whereas the Act on the Rights in Aircraft (Gesetz über Rechte an Luftfahrzeugen) generally provides for the entitlement of the bailiff to encumber more than one aircraft registered in the German Aircraft Register (Luftfahrzeugrolle) with a German Aircraft Mortgage (Registerpfandrecht) and the same should apply for the attachment of aircraft registered abroad.
A potential purchaser of an aircraft may search the German aircraft mortgage register (Register für Pfandrechte an Luftfahrzeugen) where the mortgage is recorded to verify that an aircraft is free from encumbrances; further a check should be run for Eurocontrol charges and, if the aircraft was registered in any other country before, a check in such jurisdiction and in the International Register is recommended.
A security assignment over rights and claims, constituting an in rem interest over the respective collateral, is typically enforced by the secured party collecting any claims and in case of other rights by realising them by private sale or auction. A loan or guarantee, constituting claims in personam are enforced by filing a lawsuit against the respective debtor and seeking court title for payment or performance, as the case may be.
Under German law a notice and acknowledgement of a security assignment over a German law governed lease is not necessary to establish a valid security assignment or to allow for enforcement. The lessee may, however, continue to discharge its obligations under the lease by payment to the lessor, and will be otherwise protected – eg, by a continuing right to set-off for new claims acquired against the lessor unless notice of assignment or other appropriate proof of assignment is given to the lessee by the relevant assignor.
German law will apply German and European conflict of law rules to any finance or security document. Subject to limitations in certain circumstances and compliance with ordre public there is general freedom of choice of applicable law under contracts between commercial parties. As regard to security, the law governing the collateral (eg, a claim or tangible item) will typically determine the law applicable to any security interest over such asset. The submission to a foreign place of venue is typically permissible between commercial parties.
A final judgment by a court in any member state of the EEA on commercial matters will typically be recognised in Germany, pursuant to Regulation (EU) No 1215/2012 (Brussels Recast Regulation). In the absence of any specific treaties, a judgment obtained in any other jurisdiction will have to comply with certain standards of due process, certain prerequisites of the German Civil Procedure Code (Zivilprozessordnung) and reciprocity will have to be ensured. An arbitral award will be recognised and enforced by German courts subject to certain restrictions pursuant to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention).
The remedy of self-help is not available in Germany. Therefore, a court order may have to be sought to obtain access to the aircraft, the engines or the aircraft documents.
For questions of enforcement (outside insolvency proceedings) the competent court will have to be determined pursuant to general rules, (eg, linking the place of venue to the debtor’s seat, the place of performance or the location of the asset). The local court (Amtsgericht) of Braunschweig has exclusive competence for the enforcement of a German registered aircraft mortgage (Registerpfandrecht).
Summary proceedings are available for pecuniary claims, but not for the repossession of a tangible asset such as an aircraft. Injunctive relief (einstweilige Verfügung) can generally be sought to prevent a continuing or threatening violation of the lessor’s rights. Injunctive relief will typically not accelerate the objective of the main proceedings – for example, an aircraft may be sequestered and be kept under custody of a bailiff (Gerichtsvollzieher) but will not be handed over to the lessor claiming repossession. There may be exemptions in extraordinary circumstances, for ancillary claims (eg, relating to aircraft manuals) or where compliance with public law obligations is to be preserved.
A judgment can be obtained in any currency. A judgment for payment of money expressed in a foreign currency may be satisfied in Euro at the exchange rate prevailing at the time of payment, unless the enforcement court decides that specific performance of the obligation to effect payment in the judgment currency has been agreed.
A secured party is not required to pay taxes in a non-nominal amount in connection with the enforcement of a security agreement/aircraft mortgage per se.
Enforcement of a German aircraft mortgage can be accelerated by ensuring that the mortgage is provided as an immediately enforceable mortgage in the form of a notarial deed, thereby saving the need to first obtain court title for the enforcement. In practice, enforcement may require a close co-ordination with the local court (Amtsgericht) of Braunschweig as additional measures may be necessary to ground the aircraft and facilitate sequestration. Maintenance and storage of the aircraft while in custody of the bailiff (Gerichtsvollzieher) should be supported by the creditor.
The factual, tax and legal background of each transaction needs to be assessed on a case-by-case basis in order to be able to render conclusive advice on the specific legal issues that may arise in connection with a purchase, sale, lease or debt financing of an aircraft registered in Germany or involving a domestic party.
The German legislation in response to the COVID-19 pandemic does not provide for a rent payment holiday for German lessees or a moratorium in favour of commercial borrowers under loan financings. As of 15 June 2020, we are not aware of any proposed German legislation specifically addressing transactions concerning a purchase, sale, lease or debt financing of an aircraft registered in Germany or involving a domestic party.