Aviation Finance & Leasing 2020

Last Updated July 30, 2020

Turkey

Law and Practice

Author



Kartal Law Firm is a boutique practice in Istanbul that offers a full legal service exclusively to the aviation industry. Its passion for aviation and understanding of aviation operations sets it apart from other full-service firms which serve many different industries. By contrast, the lawyers at Kartal specialise in aviation and have an immediate and clear understanding of aviation issues. The firm's clients include insurers, lenders, lessors, airlines, manufacturers, general aviation operators, ground handling companies and other players in the aviation industry. It has advised and represented insurers and airlines in air crash litigation, lenders and lessors in dispute resolution and aircraft repossession, and a host of other aviation businesses in contentious and non-contentious matters.

Stamp duty is payable in respect of all agreements that are put in writing and signed, either physically or electronically. Written and signed agreements for the sale of aircraft and engines (including the sale of ownership interest in an entity) are subject to stamp duty. The rate is 0.948% of the value of the transaction. For example, an aircraft sale agreement in which the purchase price is stated as USD10 million will require payment of USD94,800 as stamp duty. Agreements signed outside Turkey are not subject to stamp duty. However, if these documents are to be used in Turkey for any purpose, stamp duty has to be paid. Since agreements for sale of aircraft or engines registered or located in Turkey, or that will be imported into Turkey, are required to be registered or deregistered, stamp duty has to be paid. 

It is not a legal requirement for validity and enforceability for a sale agreement to be translated, certified, notarised or legalised. However, notarisation will prevent the parties from denying the authenticity of their signatures, as well as their authority. The need to notarise therefore depends on the relationship and rapport of the parties, and may be advisable in certain situations. Also, if the sale agreement is for an aircraft, notarisation is required for registration or deregistration. 

Execution of a written sale agreement transfers title in an aircraft, including all its installed engines and parts. It is possible to exclude engines or other parts in the agreement. An engine or other aircraft part must be physically transferred for transfer of title. Sale of the ownership interest in an entity that owns an aircraft or engine will not be recognised as a sale of such aircraft or engine itself.

Transfer of title to an aircraft or engine physically delivered in Turkey will be recognised if the bill of sale is governed by English or New York Law. The bill of sale will be recognised in Turkey without any substantive requirements. 

A bill of sale does not need to be translated, certified, notarised or legalised to be valid and enforceable against a domestic party. However, enforcement through judicial authorities will require translation of the bill of sale by a sworn translator whose signature must be authenticated by a notary public. 

A bill of sale for an aircraft does not need to be registered in order to be valid and enforceable, however it should ideally be registered in the aircraft registry. It is not subject to any government consent. 

Registration of the sale in the aircraft registry requires presentation of a notarised/apostilled sale agreement and bill of sale, notarised translations into Turkish, proof of payment of stamp duty, proof of the authority of persons who have signed the agreement and bill of sale, and a letter of technical conformity. The Directorate General of Civil Aviation states on its website that the registration formalities must be finalised within 30 days. 

No government applications or consents are prerequisite to the execution and delivery of a bill of sale in relation to an aircraft or engine registered in Turkey. 

Execution of a bill of sale or consummating the sale of ownership interest in an entity that owns an aircraft or engine requires payment of stamp duty, regardless of where the aircraft or engine is located. In the majority of cases, notarisation and/or translation of documents will also be required and this will attract notary charges, which can be substantial. 

Freedom of contract within the confines of the law is a general principle and there are no types of leases that are not permissible or not recognised. 

Choice of law is permitted in contracts. Leases of movable assets such as aircraft and engines can be governed by foreign law provided there is a foreign element to the lease, such as one of the parties being a foreign entity. 

No restrictions are imposed on domestic lessees making rent payments to foreign lessors in US dollars.

There are no exchange controls preventing rent payments under a lease or repatriation of realisation proceeds where the lease is enforced by a foreign lessor. 

Stamp duty and notary/translation charges are payable, as these are required for the lease to be registered and filed in Turkey. 

Lessors of aircraft and engines do not need to be licensed or otherwise qualified in Turkey to do business with a domestic lessee.  

No mandatory terms are required in a lease governed by English or New York Law that would not typically already be included. 

Tax and other withholding gross-up provisions are permissible and enforceable. 

The owner of an aircraft or engine becomes the owner of any part that is installed on the aircraft or engine, automatically upon installation. As such, these parts are captured under the lease upon installation, without the need to take any action. 

If the engine is registered in the registry of financial leases, or in the international registry, there is no risk of title annexation. 

The concept of owner trustee is recognised. 

The legal owner of an aircraft is registered as such in the aircraft registry. A beneficial owner cannot be registered. If the aircraft is to be registered in the Turkish aircraft registry on the basis of a lease to a Turkish operator, the lessor must also be the owner of the aircraft. The registration of a person or entity as the owner of an aircraft makes it public knowledge, and any third person who acquires a bona fide right in rem in relation to this record shall be protected. 

An aircraft may be registered in the Turkish registry if it is dry-leased to a Turkish operator for a term of at least six months. The owner is registered as the owner/lessor and the operator is registered as the operator/lessee of the aircraft. Registration of the operator as operator/lessee does not confer ownership privileges to the operator. 

Leases are registered in the aircraft registry and there is no separate specific aircraft registry for leases of aircraft and engines. There is also a registry of financial leases, in which both operational and financial leases of aircraft and engines must be registered. This registry is not specific to aircraft and engines. It is governed by financial regulations and maintained by the Association of Financial Institutions, which is a trade association entrusted with public duties. 

An aircraft owned by a foreign entity or person cannot be registered in the Turkish aircraft registry unless it is dry-leased to a Turkish operator for a term of at least six months. The lease itself is the reason for the registration of the aircraft in the domestic registry; not registering the lease is not an option. Leases are not subject to the consent of any government entity. 

Application Documents

An application has to be made to the Directorate General of Civil Aviation with the following documents:

  • the lease agreement;
  • confirmation from the Association of Financial Institutions that the lease agreement is registered in the registry of financial leases;
  • an application letter signed by the owner;
  • an application form;
  • confirmation of importation sent from the customs directorate to the Directorate General of Civil Aviation;
  • a certificate of deregistration;
  • an export certificate of airworthiness;
  • a customs import declaration;
  • a letter of technical conformity;
  • a copy of the aircraft flight manual page showing the maximum take-off weight;
  • a copy of the airworthiness certificate; and
  • photographs of the aircraft where the registration mark and flag are visible.

The Directorate General of Civil Aviation states on its website that the registration formalities shall be finalised within 30 days. 

The lease agreement has to be registered with the registry of financial leases, maintained by the Association of Financial Institutions. There is no requirement for government consent. 

The lease agreement has to be in both English and Turkish, and signed by the parties before a notary public. If the lease agreement is executed in a foreign country before a foreign notary public, legalisation by the Turkish consulate or apostille certification, as appropriate, is required. At least four originals are required. 

If the notarisation process is completed in Turkey, notary fees are payable. Fees are based on the total of lease payments throughout the term of the lease, the number of pages and the number of notarised copies, and will vary for each lease. As an example, circa USD2,000 of notary fees were recently paid for an eight-year lease in which the total of lease payments was USD22,080,000. A registration certificate fee of TRY5,000 is also payable to the Directorate General of Civil Aviation. 

Aircraft habitually based in Turkey have to be registered in Turkey. 

Originals of documents are required except where it is specifically stated that copies are acceptable. Documents from official authorities or notaries from foreign countries have to be legalised by the Turkish consulate or apostilled, as appropriate, and translated into Turkish by a sworn translator, and the translation also has to be notarised. 

A foreign lessor will not be required to pay any income or capital gains or other taxes upon leasing an aircraft or engine to a domestic lessee. This includes where the lessee was required to withhold and remit withholding tax but failed to do so. 

A foreign lessor is not deemed to be a resident, domiciled, carrying on business or subject to any taxes as a result of its being a party to, or its enforcement of, the lease. 

No liabilities in respect of aircraft or engine maintenance and operations can be imposed on a foreign lessor under a lease because of its being a party to such lease. 

Only the operator of an aircraft has strict liability for damages caused by the aircraft. The owner of an aircraft is deemed to be its operator unless it can prove otherwise. However, when a lease has been signed, the lessee is regarded as the operator of the aircraft, meaning that the owner or lessor has no liability for damages arising from the operation of an aircraft by a lessee. Financiers are not liable under any circumstances. 

The Financial Leasing Act prohibits attachment of leased assets for debts of lessees. Aircraft under a lease therefore cannot be attached for the debts of the lessee. 

Manufacturers and repairers of aircraft are entitled to demand registration of a statutory mortgage for their receivables arising from manufacturing or repairing these aircraft. This demand has to be made within three months of completion of the manufacture or repair. No other third-party rights take priority over a lessor’s rights. 

All Turkish operators have to place insurance with insurance companies that are established in Turkey. 

There are mandatory minimum insurance coverage requirements in respect of liability arising from the carriage of passengers, baggage and cargo, as well as liability arising from damage to third parties. 

Up to 100% of coverage can be placed outside Turkey by way of reinsurance. Turkish insurance companies act as fronting insurers and place all or part of the risk with reinsurers outside the jurisdiction. 

There is no precedent regarding the enforcement of cut-through clauses. In practice, however, aviation claims are almost always handled and settled by reinsurers rather than by local fronting insurers. 

Insurances can be assigned by the insured and reinsurances can be assigned by the insurance company. It is not possible for the original insured to assign a reinsurance. 

There are certain restrictions on a lessor’s ability to terminate a lease upon breach by the lessee. If the breach is failure to make lease payments, the lessor cannot terminate the lease unless the lessee has been warned at least three times within one year, or for two consecutive failures, to make timely lease payments. For this condition to be fulfilled:

  • the lessee must have failed to make the lease payments on their due dates; and
  • the lessor must have warned the lessee.

If the lessee makes the payment late, but before they receive a warning from the lessor, then this condition is not fulfilled and does not constitute grounds for termination. Termination for any other breach must be material and substantial to the extent that the lessor cannot objectively and reasonably be expected to continue with the lease. Once a lease has been terminated, there are no restrictions preventing the lessor from re-exporting or selling the aircraft. The location of the aircraft is irrelevant as far as termination and sale are concerned. However, the aircraft needs to be in Turkey at the time of exportation for customs purposes. 

A lessor is entitled to take physical possession of the aircraft. 

No specific courts have been assigned to deal with aviation disputes. Since lessees and lessors are commercial entities, the task usually falls on general commercial courts. It must be noted that since 1 January 2019, all commercial disputes for the payment of a certain amount of money have to be referred to mediation before being taken to court. While settling in mediation is not an obligation, applying for mediation is prerequisite to filing a lawsuit claiming credit or compensation. 

Summary judgment may be obtained for monetary obligations based on negotiable instruments such as promissory notes or cheques. It is not available where the demand is possession of an aircraft or engine. Injunctive relief can be obtained in the form of grounding an aircraft, which is at the discretion of the judge. If granted, it will normally be accompanied by an order to post security against possible damages to be suffered by the party against whom it is ordered. The security can be cash, or a bank letter of guarantee issued by a Turkish bank. 

Domestic courts will recognise a choice-of-law clause and apply the foreign law chosen by the parties. It is possible to include a jurisdiction clause in the lease and this will be recognised by domestic courts. Waiver of immunity is also recognised. 

Recognition and enforcement of a foreign court judgment or arbitral award in Turkey requires the judgment or award to be recognised by a Turkish court through an exequatur decision. The matter is not re-examined; the Turkish court only tests whether the criteria for recognition and enforcement of a foreign court judgment or arbitral award are met. One of these conditions is reciprocity, which means that a foreign court judgment or arbitral award will be recognised and enforced if Turkish court judgments and arbitral awards are recognised and enforced by the country in which the judgment or award has been rendered. This reciprocity may be on the basis of a bilateral or multilateral treaty between Turkey and that country, or it may be a de facto reciprocity. Other important conditions are:

  • the defendant should have duly been given the opportunity to defend itself against the claim; and
  • the judgment or award should have become res judicata and not be subject to further appeal. 

It is possible to make a claim and obtain a judgment in which the defendant is ordered to pay in foreign currency. However, the defendant is free to choose between paying in the foreign currency, or the equivalent amount in Turkish lira, calculated by using the exchange rate on the date of payment. Litigation cost awards are always in Turkish lira. 

There are no limitations on default interest. However, interest may not be compounded. Additional rent can be charged upon failure of the lessee to return the aircraft. 

Litigation requires payment of an upfront filing fee, which is circa 1.7% of the amount that is claimed. These filing fees are eventually recoverable, even if the claim is dismissed. Pure enforcement actions will require payment of an upfront fee of 0.5% of the claim amount, which is recoverable from the other party, provided they are solvent. 

There are no mandatory notice periods for terminating a lease. However, if the lease is to be terminated due to default in lease payments, the lessor must have warned the lessee and granted at least 30 days for payment. If the lease is a financial lease where the lessee is entitled to obtain title to the aircraft at the end of the lease term, this period has to be at least 60 days. 

A lessee is not entitled to claim sovereign immunity from suit. 

Turkey adopted the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards in 1992. Domestic courts will recognise and enforce arbitral awards in accordance with this convention. A foreign arbitral award will need to be presented to a Turkish court, which will check to see if it satisfies the criteria for recognition and enforcement. 

There are no other relevant issues.

Contractual assignment and novation are recognised concepts in Turkey. 

An assignment and assumption agreement, novation agreement or deed that is governed by a foreign law will be regarded as valid by a domestic court. The lessee’s consent is required, but prior consent within the lease agreement is valid. 

An aircraft or engine lease assignment and assumption/novation needs to be registered in the registry of financial leases and the aircraft registry. In order for these registrations to be made, the agreement for assignment and assumption/novation needs to be in both English and Turkish, or translated into Turkish, notarised and, if executed in a foreign country, legalised or apostilled, as appropriate. 

Requirements

An aircraft and/or engine lease assignment and assumption/novation must be registered in the domestic aircraft registry, although failing to do so does not render the assignment and assumption/novation invalid. However, third parties are entitled to rely on the records in the registry and any difference between the recorded lease and the actual lease may have adverse consequences for the lessor and lessee. Registration is also required in order to complete deregistration and exportation at the end of the lease. There is no requirement for consent from any government entity.

Formalities

The agreement must be executed in both Turkish and English, before a notary public. If it is executed abroad, legalisation by the Turkish consulate, or apostille certification, as appropriate, must be obtained. There must be at least four originals. Following this, the agreement must be notified to the Association of Financial Institutions. Upon registration in the registry of financial leases, the association must notify the Directorate General of Civil Aviation for registration in the aircraft registry. The whole process takes about ten days. If the registered owner of the aircraft has changed, this also has to be notified to the Directorate General of Civil Aviation and must be certified by the bill of sale and other relevant documentation. 

No government consents are prerequisite to the execution and delivery of an aircraft and/or engine lease assignment, and assumption/novation in relation to an aircraft registered domestically. 

Stamp duty may be payable in respect of assignment and an assumption/novation agreement, or as a consequence of an original or copy of it being brought into Turkey physically or electronically. 

Ownership or beneficial interest in an aircraft-owning entity is of no consequence or concern in Turkey. Any change in such interest will not bear any consequences, nor is it required to be registered or disclosed. 

An aircraft can be deregistered upon applicaton by its owner, or by a person or entity who is designated as the "authorised party" in a registered irrevocable deregistration and export request authorisation (IDERA). This is achieved by filling out forms published on the website of the Directorate General of Civil Aviation. An aircraft can also be deregistered at the initiative of the Directorate General of Civil Aviation upon expiry of the lease. 

An aircraft owner, mortgagee or lessor can only apply for deregistration of an aircraft that is under a lease if the lessee has given consent. If there is an operation agreement, it needs to be terminated. If the deregistration application is being made under an IDERA, no consent is required. 

The documents that must be provided to deregister the aircraft are as follows: 

  • a registration application form; 
  • a notarised termination of the operation agreement, if any; 
  • the original copy of the tax clearance certificate; 
  • a notarised list of authorised signatories; 
  • the original copies of the certificate of registration and the certificate of airworthiness; 
  • the original copy of the "sales agreement" and copies of the receipts of taxes, charges, etc arising from this agreement; 
  • the notarised translation of the sales agreement into Turkish, if the same is drawn up in any language other than Turkish; 
  • the letter of conformity to be obtained from the Association of Financial Institutions in the case of early termination of the lease agreement; and 
  • a notarised termination agreement executed by and between the parties in the event of early termination of the rental agreement. 

The deregistration process can take up to two weeks.

The Directorate General of Civil Aviation states on its website that the process will be completed within one month at most. However, in the case of deregistration by exercise of an IDERA, the Directorate General of Civil Aviation states that the deregistration shall be effected within five business days. 

There are no significant costs/fees/taxes chargeable in respect of the deregistration of an aircraft. 

A deregistration power of attorney will be recognised. It has to be notarised and, if notarisation is executed abroad, it will need to be apostilled or legalised. If it is in a foreign language, it will need to be translated into Turkish by a sworn translator, and the translation will need to be notarised locally. 

No additional documents are required to enforce a deregistration power of attorney. 

The internal relationship between the principal and attorney may be governed by foreign laws. However, as far as third parties and the authorities are concerned, the powers granted by a power of attorney are determined and interpreted in accordance with Turkish laws. 

A power of attorney may not be irrevocable under Turkish law. This is mandatory. In fact, it may be revoked at any time even if it is expressed as being irrevocable. Moreover, an attorney cannot take any action on behalf of its principal in the absence of express instructions to do so by the principal. Therefore, if the holder of a deregistration power of attorney is instructed by the principal not to deregister an aircraft, the attorney must abide with that instruction, even if it is verbal. 

An aircraft can be exported without the consent of the owner or lessee only on the basis of a registered IDERA. If there is no registered IDERA, the owner, mortgagee or lessor cannot export the aircraft without the consent of the lessee or owner, as the case may be. In the case of a lease, the lease must be terminated. If the lessee challenges the termination, a court order shall be required. In the case of a mortgage, the aircraft has to be put through the mortgage enforcement procedure under which it will be sold by public auction. Therefore, it is very important that the registration of an IDERA is made a condition precedent to the lease or mortgage.  

An export permit or licence is not required. An export customs declaration will need to be filed and that is the only requirement. These matters are usually handled by customs brokers and are completed within a few days. 

No significant costs/fees/taxes are charged in respect of the export of an aircraft. 

There are no significant practical issues related to deregistration of aircraft.

A registered IDERA remains in effect regardless of the status of the lessee. It cannot be revoked unless and until the authorised party consents to its revocation. A deregistration power of attorney will remain valid until such time as the legal existence of the lessee is terminated upon completion and closing of the liquidation. However, if the lessee is declared bankrupt, the deregistration power of attorney will become null and void.

Should a lessee be put into liquidation or administration or similar process, the lease will not be set aside. However, the lessee is entitled to ask for termination of the lease. It can be terminated by the lessor in accordance with its terms. The lessor will not be prevented or delayed from repossessing the aircraft upon termination of the lease. The aircraft will not be deemed the property of the lessee and will be separated from the assets of the lessee. Other creditors of the lessee have no right to the aircraft and, therefore, no other creditor can have priority. 

If the loan is secured with a mortgage on the aircraft, outstandings can be recovered by sale of the aircraft in a public auction through the mortgage enforcement process. If an IDERA is registered, the aircraft can be repossessed. The risk for the lender is therefore relatively low. If a guarantor or other entity providing security becomes insolvent, there will be a degradation in security, which can be addressed in the loan agreement by requiring the borrower to replace the security afforded by the insolvent guarantor. 

All debt-collection proceedings against a debtor who has been declared bankrupt are stayed and new ones are not permitted. This continues until the bankruptcy administration is set up and notifies creditors to state their credits. If the administration rejects recording a certain credit, the creditor is then free to start a lawsuit for inclusion in the liquidation. Formation of the bankruptcy administration takes approximately six months after the declaration of bankruptcy. Bankruptcy proceedings invariably take a very long time and no monies are paid for many years.

A domestic lessee will be put into administration and liquidation either upon being declared bankrupt by a commercial court or if their shareholders decide to liquidate the company in accordance with its by-laws. 

Bankruptcy of a lessee is grounds for automatic termination of a lease, unless the parties have agreed otherwise. No other default is required to repossess the aircraft. 

If a domestic lessee is wound up by a court or administration proceeding, this will not affect the aircraft. It remains the property of the lessor and will be separated from the assets of the lessee. If there are outstanding lease payments, these will be unsecured credits of the lessor and the lessor will rank pari passu with all other unsecured creditors of the lessee. These credits can be offset against the lease security deposit. Maintenance reserves will be subject to the lease agreement and will be resolved accordingly. If the lessor is owed money on the basis of maintenance reserves, these will be unsecured credits of the lessor and can be offset against the lease security deposit. If there is a net surplus of maintenance reserves that are required to be returned to the lessee, these can be offset against outstanding lease payments, if any. If there is still a surplus after offsetting, this amount needs to be paid back to the administrators. 

The Convention on International Interests in Mobile Equipment (the Convention) and related Protocol on Matters specific to Aircraft Equipment (the Protocol) are in force in Turkey. It is not necessary to obtain authorised entry point (AEP) codes for registering international interests; lessors can attend to these by themselves. 

Turkey has made several declarations under the Protocol. Turkey will apply Article VIII – Choice of Law, Article XII – Insolvency Assistance, and Article XIII – Deregistration and Export Request Authorisation. In addition to these, Turkey has also declared that under Article X – Modification of Provisions Regarding Relief Pending Final Determination, injunctive relief and similar protective precautions will be issued within ten days and actions such as lease, management or sale and application of proceeds shall be completed within 30 days. Also under the Convention, Turkey has declared that remedies available to the creditor can be exercised without the involvement of a court, except where this is expressly required by the Convention. 

Article XIII of the Protocol is in force domestically. The Directorate General of Civil Aviation has published a standing instruction for this purpose.

Submission of an IDERA

The IDERA has to include certain information, it has to be signed before a notary public and if in a foreign language, it has to be translated into Turkish by a sworn notarised translator. If the authorised party is not resident in Turkey, they must appoint a representative who is resident in Turkey. Once these formalities are completed, the IDERA can be registered.  

There are numerous court decisions under which aircraft have been repossessed by owners/lessors by relying on the Convention and Protocol. There are also appeal decisions, which generally shows that Turkish courts are becoming familiar with the Convention and Protocol, and are applying them. 

Turkey is not a party to the 1948 Geneva Convention on the International Recognition of Rights in Aircraft or the 1933 Rome Convention on the Unification of Certain Rules relating to the Precautionary Arrest of Aircraft. 

Loans are required to be utilised through domestic banks.

There are not any exchange controls or government consents that would be material to any financing or repatriation of realisation proceeds under a loan, guarantee or security document.

Borrowers are permitted to grant security to foreign lenders.

Downstream, upstream or cross-stream guarantees, by related or unrelated third parties, are permitted in favour of lenders. Where the lender is a foreign entity and the guarantee is given by a Turkish entity, the guarantee needs to be notified to the government. This is a notification only and failure to notify does not affect the validity and enforceability of the guarantee. It must be observed that the issuance of guarantees is supported by appropriate board of directors’ decisions in accordance with the by-laws of the guarantor entity.

Pledge of shares is recognised and enforceable. In order for this to be valid and binding, the entity must have recorded the pledge in its corporate book of shareholders. If these are bearer shares, these must be endorsed with a pledge and delivered to the pledgee. An SPV established and registered in Turkey can create an administrative and tax burden, so this option must be weighed up carefully.

A negative pledge can be recognised as a contractual obligation of the borrower and consequences may be attached to it within the finance documents. In practice under Turkish law, it is not possible for the borrower to create any lien or other encumbrance on an asset that will undermine the interest of an existing security holder.

There are no material restrictions or requirements placed on intercreditor agreements.

The concepts of agency and a facility agent under a syndicated loan are recognised in Turkish law.

For unsecured loans, debt subordination is possible only through intercreditor agreements. For loans secured with an aircraft mortgage, debt subordination can be achieved through establishing mortgages with different priorities.

Assignment of all or part of an outstanding debt under an English or New York law-governed loan is permissible and recognised.

Parties to commercial transactions are free to determine the rate of interest applicable to loans and defaults. Even if there is no agreement on interest, default rates of interest determined by the central bank are still applicable to commercial transactions. The default rates are usually in line with central bank discount rates.

Typical securities for an aviation finance transaction are a mortgage on the aircraft, assignment of earnings, assignment of insurances, corporate and/or personal guarantees, post-dated cheques, and notarised acknowledgements of debt.

The only type of security over an aircraft is a mortgage, and the only type of security on an engine is a pledge. There are no restrictions on the types of security that can be taken over warranties or insurances.

The concepts of trusts and security trustees are recognised.

Where the borrower is also the owner of the aircraft, ownership rights cannot be assigned, but can be encumbered with a mortgage. Insurance proceeds, revenues obtained from leasing the aircraft and other contractual rights can be freely assigned.

It is possible to assign the rights and benefits only, without also assigning the attendant obligations of the lessor under an aircraft lease.

A security assignment or guarantee can be governed by English or New York law, unless it involves assignment of rights in rem, namely ownership and mortgage. Issues of ownership and mortgage are governed by the laws of the state of registration.

Any type of assignment, including security assignments, must be made in writing. Notarisation is not required for their validity, but in practice notarising an assignment makes it more secure as it is possible, in the worst-case scenario, for a debtor to deny their signature and notarisation prevents this. Where the term "security assignment" refers to a mortgage or pledge, the mortgage or pledge is assigned automatically upon assignment of the debt that it secures.

If a security assignment governed by English or New York law were to be taken in respect of an aircraft registered domestically, any security that includes a right in rem on the aircraft, namely a mortgage or the title to the aircraft, has to be subject to Turkish law and has to be registered in the aircraft registry. Other instruments only need to be in writing and no filings are required. Sometimes post-dated cheques, promissory notes or notarised acknowledgements of unconditional indebtedness are taken. These instruments provide the option of allowing summary judgments for faster enforcement, and cheques are also protected and secured by penalties under criminal law.

Security instruments other than mortgages and pledges are not subject to registration and cannot be registered. Mortgages and pledges are subject to Turkish law.

The transfer of security interests over an aircraft and/or engines is recognised.

The assignment of the secured interest is sufficient to transfer the security itself to another party.

"Parallel debt" structures are not a common instrument in Turkey. It is possible to structure the debt so that it can be enforced by the lender or security trustee independently, but this would not be considered as a parallel debt and payment to one of the parties extinguishes the entire debt. 

A secured party under a security assignment is not deemed to be resident, domiciled, carrying on business or subject to any taxes as a result of its being a party to, or its enforcement of, such security assignment.

A domestic law mortgage on an aircraft can be created only by registration in the aircraft registry, so its creation and perfection are simultaneous. An engine can be pledged domestically by executing it in writing before a notary public and/or by recording it in the international registry.

An aircraft can be mortgaged but an engine cannot be mortgaged. An engine can be pledged, although in order for a pledge to be valid and enforceable, the engine must be in the possession of the pledgee, which means that it cannot be used by its owner or operator. The Cape Town Convention solves this problem in that, if the pledge interest is registered in the international registry, the pledge will remain valid and enforceable even if it is not in the possession of the pledgee.

A bank account can be pledged by its owner. This needs to be in writing and has to be notified to the bank. A bank account pledge will prevent its owner from withdrawing funds from the account in any manner.

Liens can be registered over an aircraft for the debts of its owners only. Liens cannot be registered on engines; they can only be subject to attachment. Likewise, they can be attached only for the debts of their owners.

A non-consensual repairer’s mortgage can be registered only on the aircraft on which the repair has been performed and for the work actually done.

A fleet lien is not recognised.

A lien is enforced by the public auction of the aircraft and application of the proceeds.

A mortgage or lien can be discharged within one or two business days, provided the conditions for discharge are fulfilled.

Mortgages and liens are recorded in the aircraft registry. A mortgage is the only form of security that can be granted on an aircraft. Only a security trustee may be listed as a mortgagee.

There are no statutory rights of detention. Non-consensual preferential liens may be registered by the manufacturers or repairers of an aircraft, but not on a fleet-wide basis.

The domestic aircraft registry, the international registry and the registry of financial leases can be searched to verify that an aircraft is free of encumbrances.

There are no significant differences between enforcing security assignments, loans and guarantees.

Notice of acknowledgement of assignment by the lessor and lessee is sufficient to enforce the rights under a security assignment.

Domestic courts will uphold a foreign law as the governing law of a finance or security document, except those that pertain to rights in rem on aircraft, namely mortgage and ownership. This also applies to submission to a jurisdiction. Disputes over ownership, validity and enforceability of a mortgage fall under the exclusive jurisdiction of the Turkish courts.

Domestic courts will uphold a foreign law as the governing law of a finance or security document, except those that pertain to rights in rem on aircraft, namely mortgage and ownership. This also applies to submission to a jurisdiction. Disputes over ownership, validity and enforceability of a mortgage fall under the exclusive jurisdiction of the Turkish courts.

A secured party can take physical possession of an aircraft to enforce a security agreement/aircraft mortgage without the lessee’s or operator’s consent.

Enforcement actions under an aircraft mortgage do not require the involvement or decision of a court and are handled entirely by a bailiff. Certain other types of enforcement are also handled entirely by a bailiff. Depending on the type of enforcement action, executory supervisory courts or general commercial courts will be competent and have jurisdiction to decide enforcement actions.

Summary judgment may be obtained for monetary obligations based on negotiable instruments such as promissory notes or cheques. It is not available where the demand is possession of an aircraft or engine. Injunctive relief can be obtained under the Cape Town Convention and Protocol. Depending on the circumstances, the court may decide to give possession of the aircraft to the secured party, pending the final judgment.

It is possible to make a claim and obtain a judgment in which the defendant is ordered to pay in foreign currency. However, the defendant is free to choose between paying in the foreign currency, or paying the equivalent amount in Turkish lira, calculated by using the exchange rate on the date of payment. Litigation cost awards are always in Turkish lira.

Enforcement actions and litigation require payment of an upfront filing fee, which is approximately 1.7% of the amount that is claimed. These filing fees are eventually recoverable, even if the claim is dismissed. Pure enforcement actions will require payment of an upfront fee of 0.5% of the claim amount, which is recoverable from the other party, provided they are solvent.

When a dispute is referred to litigation or arbitration, it takes a relatively shorter time to obtain a judgment or award in Turkey than to obtain it abroad and go through the recognition process in Turkey. Even though a case cannot be re-examined by a Turkish court, the exequatur process can still take years. Lessors and lenders are recommended to keep an open mind and keep their options open in this regard when negotiating deals. In a similar spirit, it is strongly recommended that when taking any form of security that is to be eventually enforced against a borrower or lessee in Turkey, advice should be sought from Turkish counsel, to ensure that the security is not set aside by adversaries for trivial mistakes in the form or content.

Lessors may be interested to know that failure to return an aircraft upon termination of a lease constitutes a criminal offence, which is one of the more powerful tools in the lessor’s arsenal to ensure timely return of an aircraft at the end of a lease that has turned sour. One area lacking in certainty is what happens if a lessee or borrower physically resists a repossession under the Cape Town Convention. Although Turkey has accepted that court rulings are not required to exercise remedies afforded by the Convention and Protocol, there is also no legislation or regulation in place through which a repossessor may seek law enforcement assistance in an opposed repossession. The Law on Enforcement states that a regulation is to be put in place for this purpose, but it is not even in the works. However, in recent years Turkish courts have granted quick relief to creditors/lessors in the form of injunctive repossession orders prior to filing of substantive proceedings. If it is likely that a lessee will physically oppose a repossession, it is therefore advisable to seek a court order for repossession rather than doing it by self-help.

There is currently no proposed legislation that will affect the present legal landscape of aviation finance and leasing.

Kartal Law Firm

Tekfen Tower Level 8
209 Buyukdere Street
Levent 34394
Istanbul
Turkey

+90 212 293 23 23

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ali.kartal@kartallawfirm.com www.kartallawfirm.com
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Law and Practice

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Kartal Law Firm is a boutique practice in Istanbul that offers a full legal service exclusively to the aviation industry. Its passion for aviation and understanding of aviation operations sets it apart from other full-service firms which serve many different industries. By contrast, the lawyers at Kartal specialise in aviation and have an immediate and clear understanding of aviation issues. The firm's clients include insurers, lenders, lessors, airlines, manufacturers, general aviation operators, ground handling companies and other players in the aviation industry. It has advised and represented insurers and airlines in air crash litigation, lenders and lessors in dispute resolution and aircraft repossession, and a host of other aviation businesses in contentious and non-contentious matters.

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