Aviation Finance & Leasing 2023 Comparisons

There are no federal registration, sales or stamp taxes payable in the US (or similar taxes imposed in New York) solely by virtue of the execution or delivery of an aircraft or engine sale agreement or an ownership interest sale agreement. Individual state registration tax and stamp duty rules should be reviewed as relevant.

See 1.2.5 Taxes/Duties Payable Upon Execution of a Bill of Sale regarding sales and use taxes in connection with completing the sale of an aircraft or engine.

There is no requirement that sale agreements be certified, notarised or legalised to be enforceable in the US against a domestic party. It is advisable that sale agreements be in English (or translated into English).

Transfer of title is governed by Article 2 (Sales) of the Uniform Commercial Code (UCC), as adopted by all US states except Louisiana. Transfer of title is achieved by any means agreed to by the parties; however, most typically, title is transferred through a bill of sale and/or contract of sale, through the physical delivery of an aircraft or engine, or through a combination of both. Goods being transferred must be presently existing and identifiable; therefore aircraft and engines should be specifically identified by make, model and serial number.

Title to parts (other than engines) installed on an aircraft, such as auxiliary power units, will transfer automatically with the aircraft.

The sale of an ownership interest of an entity that owns an aircraft or engine is considered a transfer of a beneficial interest only and would not be effectively recognised as a sale of the aircraft or engine itself.

English law and New York law are recognised as valid governing law in the US for the transfer of title to an aircraft or engine physically delivered in the US.

For US-registered aircraft, there are no minimum substantive requirements for a bill of sale transferring title to an aircraft or engine physically delivered in the US, other than requirements under Article 2 of the UCC as modified by Federal Aviation Administration (FAA) rules, including the requirement that goods be identified by make, model, serial number and registration mark. For a sale to be effective against third parties, an FAA bill of sale must be recorded in the FAA Registry.

For non-US-registered aircraft, there are no minimum substantive requirements other than the requirements of the 1948 Geneva Convention on International Recognition of Rights in Aircraft (the “Geneva Convention”) that such bill of sale be constituted in accordance with the laws of the country of the state of registration and be regularly recorded there, if required by local law.

To be enforceable against a domestic party, a bill of sale should be in English (or translated into English) and comply with applicable state law and UCC, Article 2 (Sales) requirements. There is no federal requirement for a bill of sale to be certified, notarised or legalised to be valid and enforceable in the US against a domestic party.

Bills of sale are not subject to government consent in the US. For aircraft registered or to be registered on the US N-registry, the buyer must satisfy certain FAA US citizenship requirements.

The sale of US N-registered aircraft typically involves two separate bills of sale, the first being the bill of sale recorded with the FAA and the second being the warranty bill of sale that contains the seller’s warranties of title.

Bills of sale transferring title to US N-registered aircraft must be filed and recorded with the FAA, which requires a specific form of bill of sale (AC FORM 8050-2). Because the FAA is an owner’s registry, the bill of sale should be submitted with an aircraft registration application to register (or reregister) the aircraft in the name of the new owner (AC FORM 8050-1). If the seller is not the current registered owner of the aircraft, copies of historical bills of sale or similar documents completing the chain of title to the last registered owner should also be submitted.

FAA Recordation

The FAA bill of sale, the application for registration and copies of historical bills of sale (if required), like all documents submitted to the FAA for recording purposes, should comply with the following requirements (the “FAA Recordation Requirements”):

• documents must be originals, or duplicate original documents, or if neither is available, true copies of the original documents;
• original documents must be executed in wet ink or with verified digital signatures and must contain the name of each signer in the signature block or be provided in compliance with FAA approved electronic signature procedures;
• documents must describe the aircraft or engine by make and model, manufacturer’s serial number and in respect of aircraft, FAA N-registration number;
• if required, evidence of the authority to sign the documents for entities signing as companies, agents, corporations or such other entity that the FAA may request; and
• documents should be submitted with the required recording fee.

Under normal circumstances, documents submitted for FAA recordation are typically recorded the same day, although a delay is possible if the submission is made close to the day’s filing deadline. Conveyance numbers are issued by the FAA several days or sometimes weeks after the recordation date, but this delay does not affect priority.

If the Cape Town Convention (CTC) applies, the sale of an “aircraft object” (as defined in the CTC) should also be registered on the International Registry. Registrations on the International Registry are instantaneous once authorised by the relevant parties. International Registry filings made in respect of US N-registered aircraft require FAA issued Authorized Entry Point codes (as defined in the CTC).

Requirements for US Aircraft Registration

US N-registered aircraft must be owned by a US citizen. To qualify as a US citizen, the proposed owner must be either:

• an individual citizen of the US;
• a partnership, with each partner an individual citizen of the US; or
• a US corporation or association of which the president and at least two thirds of the board of directors and managing officers are US citizens, which is under the actual control of US citizens, and in which at least 75% of the voting interest is owned or controlled by US citizens.

Other ownership structures currently permitted by the FAA include limited liability companies and owner trusts.

Some US states impose sales or use taxes on gross sale proceeds for an aircraft or an engine that is purchased in or is based in or used in such state. At the time of the sale of an aircraft or an engine then physically located in a state, the state may require the seller to collect sales or use taxes from the buyer and remit the taxes to the state.

There is no standard tax rate. Some states do not impose sales or use taxes and in other states, exemptions for sales of aircraft to air carriers for use in foreign or interstate commerce may be available.

Some parties arrange sale and delivery of aircraft over international airspace or in another state or jurisdiction that does not impose a sales tax or offers a tax exemption, to eliminate or reduce their tax burden. In this scenario, however, some states may still impose a use tax on aircraft being imported from a non-tax jurisdiction.

There are no applicable sales or use taxes at the federal level; however, there may be federal or state income tax consequences if sale proceeds or lease rentals are considered to be taxable income or gains.

Each set of facts and circumstances can lead to different tax obligations.

There are no types of leases that are prohibited under US law, including leases concerning only engine or parts, except that:

• a wet lease by a foreign carrier to a US airline for use on domestic routes would not be permissible; and
• certain US sanctions prohibit the lease of aircraft, engines or parts to sanctioned or barred countries or entities.

It is permissible for a lease involving either a domestic party or an asset located in the US to be governed by foreign law. See 2.6.5 Domestic Courts’ Approach to Foreign Laws and Judgments for additional details regarding choice of law.

There are no US restrictions on international payments other than regular bank reporting requirements and certain restrictions on sanctioned, controlled or barred entities and countries.

There are no US exchange controls other than regular bank reporting requirements and certain restrictions on sanctioned, controlled or barred entities and countries.

There are no stamp or other document taxes payable solely by virtue of executing a lease in the US or because a domestic party executes a lease or because a lease is physically or electronically located in the US.

It is not necessary for a foreign lessor to be licensed or qualified in the US to do business with a domestic lessee.

There are no mandatory terms required for New York law- or English law-governed leases that would not typically already be included.

Generally, tax clauses and other withholding and gross-up provisions in leases are permissible and enforceable.

Leases can cover parts that are installed or replaced after the lease is signed. It is advisable that:

• leases include language stating that all parts shall remain subject to the lease until replacement parts (of equal value) are installed; and
• all relevant definitions, such as the definitions of aircraft, engines and parts in the leases are properly drafted to cover the replacement of aircraft, engines or parts during the lease term.

Aircraft engines are considered distinct and separate aircraft objects and are not at risk of title annexation.

Some parties may require lessees and operators to affix nameplates to engines to ensure third-party notice.

The rules for helicopter engines under the CTC, however, differ slightly and separate title to a helicopter engine is dependent on its installation (or non-installation) on a helicopter. Because there is some controversy on this point, it is typical to file two separate international interests for helicopter engines:

• a current international interest for an engine not installed on a helicopter; and
• a prospective international interest that attaches to the helicopter engine upon its removal from a helicopter.

The US recognises the concepts of trusts and owner trustees in lease structures. For US N-registered aircraft, a trustee may own and lease an aircraft on behalf of beneficiaries so long as the owner trustee meets certain FAA citizenship qualifications:

• it is a US citizen; or
• it is a resident alien and US citizens have at least 75% of the aggregate power to influence, limit, direct or remove the owning trustee; or
• the trustee must have the power and authority in respect of the ownership and operation of the aircraft to take discretionary actions to protect the interests of the US, without interference from beneficiaries (in this instance, the beneficiaries do not have to be US citizens and this form of trust is commonly referred to as a non-citizen trust).

Ownership interests must be recorded with the FAA and evidence of ownership is a prerequisite for US N-registration (see 1.2.4 Registration, Filing and/or Consent From Government Entities for US registration requirements). The issuance by the FAA of a certificate of registration in the name of the owner is prima facie evidence of ownership.

To be valid against third parties without notice, a lessor’s interests must be recorded with the FAA by filing the relevant lease.

An aircraft can only be registered in the US in the name of the owner, although under a finance lease, the lessee would be considered the owner of the aircraft for purposes of FAA registration.

There is no specific US registry for aircraft or engine leases; however, aircraft leases may be recorded on the FAA Registry (see 2.3.1 Notation of Owner’s/Lessor’s Interests on Aircraft Register) and all leases must be filed with the FAA to comply with the FAA’s truth-in-leasing requirements.

Leases involving US-registered aircraft must be filed with the FAA for truth-in-leasing purposes.

To be effective against third parties without notice, leases involving US-registered aircraft must be recorded with the FAA. If the lease constitutes an international interest under the CTC, an international interest must also be registered on the International Registry.

Leases are not subject to any consent by any government entity.

An original of the lease should be submitted to the FAA. See 1.2.4 Registration, Filing and/or Consent From Government Entities for the complete list of formalities required and timeframes for the completion of the FAA and CTC filings.

Although the FAA does not prescribe a specific form of lease, the FAA reviews all leases in respect of US-registered aircraft. An FAA determination that a lease does not constitute a “true” lease may affect the possibility of US registration of such aircraft.

Leases filed with the FAA must identify all aircraft, engines and propellers by make, model, serial number and in the case of aircraft, US registration mark. Leases should also explicitly provide that the lessee maintains actual control of the aircraft and for leases that contemplate operation of an aircraft by a non-certificated operator (eg, under Part 91 of the US Federal Aviation Regulations), the lease should contain the mandatory truth-in-leasing clause.

Leases should be in English, but do not need to be served, certified, notarised or legalised to be valid and recordable in the FAA Registry.

There are no taxes or duties payable for filing a lease with the FAA. Fees are due for recording a lease with the FAA (USD5) and registering a lease international interest on the International Registry (USD100 for aircraft and USD50 for engines), and there are recording fees for filing UCC-1 financing statements (varies by state).

It is not common for aircraft that are habitually based in the US to be registered outside the US.

See 1.2.4 Registration, Filing and/or Consent From Government Entities for a complete list of the requirements for documents to be recorded with the FAA. There is no requirement for documents to be notarised, apostilled or otherwise authenticated.

Foreign lessors deemed to not be engaged in a US leasing business (per US tax rules) are subject to regular withholding tax at a rate of 30% on gross rentals, to the extent that such rentals are attributable to periods when the aircraft is located or operated in the US. Foreign lessors are also subject to federal gross transportation income tax at a rate of 4% of one half of their rental income, for periods when the aircraft is operated between a location in the US and a location outside the US. Depending on the jurisdiction of the foreign lessor, there may be US tax treaties in place that exempt or reduce a foreign lessor’s tax liability. Foreign lessors will be liable for withholding taxes that the lessee fails to withhold and remit.

Foreign lessors engaged in a leasing business in the US may also be subject to income tax on gross rental income or property tax for any tangible property it owns in that state. Liabilities and tax rates vary by state.

As a general matter, a foreign lessor would not be deemed a resident, domiciled, to be carrying on business or to become subject to taxes solely by virtue of being a party to a lease agreement or merely because it takes enforcement action(s) under a lease.

Under Section 44112(b) of the US Transportation Code (“Section 44112(b)”), a foreign lessor may be held liable for injury or damage caused by aircraft or engine maintenance or operation only if the foreign lessor was in actual control of such equipment.

The application of Section 44112(b) is inconsistent among the states, and therefore a foreign lessor’s liability could depend on where the claim for damages is filed. Most states construe Section 44112(b) broadly to pre-empt state laws that impose liability on a foreign lessor irrespective of the foreign lessor’s actual control of the equipment. A minority of states construe Section 44112(b) narrowly so that the determination of a foreign lessor’s liability will be based on applicable state laws.

The question of owner or lender liability will depend on the state’s laws (see 2.4.3 Engine Maintenance and Operations). It is unlikely that an owner, lessor or financier would be strictly liable for damages or losses unless it had actual control or was in possession of the equipment.

Creditors of a domestic lessee cannot attach an aircraft leased to the lessee that is owned by another party.

Third-party rights generally do not affect a lessor’s rights or remedies under an aircraft or engine lease; however, certain US and states laws recognise some non-consensual third-party liens as having priority over lessor rights, regardless of where the aircraft is registered, including:

• possessory storage liens, mechanics’ or fuel suppliers’ liens;
• non-possessory mechanics’ or fuel suppliers’ liens;
• FAA penalty liens;
• federal tax liens;
• state and local tax liens;
• UCC Article 9 liens such as purchase money security interests in favour of a lender and liens over goods purchased in the ordinary course of business from a merchant selling goods of that kind; and
• local airport and air navigation liens (in rare instances).

Similarly, aircraft may be detained for illegal activities by the US Customs Service. The US government also has the right to take over all or any part of the US airline transportation system for government use during times of war, with a constitutional obligation to compensate parties for such a taking.

There is no requirement under US law that US-registered aircraft be insured through domestic insurers in whole or in part. Any insurer licensed or approved by a foreign government will satisfy the Department of Transportation’s basic requirements.

US law requires all US and foreign air carriers operating in US territories to have aircraft accident liability insurance coverage. US and foreign carriers operating large aircraft (more than 60 seats and maximum payload capacity of more than 18,00 pounds) must carry the following minimum insurance:

• combined bodily injury (excluding passengers other than cargo attendants) and property damage liability of not less than USD300,000 per person and USD20 million per occurrence; and
• passenger bodily injury or death of not less than USD300,000 per person and USD300,000 x 75% of the total number of passenger seats installed in the aircraft.

US law also sets out minimum dollar insurance coverage requirements for smaller aircraft, US air taxi operators and Canadian charter air taxi operators.

100% reinsurance may be placed outside the US.

The enforceability of cut-through clauses varies from state to state. The law of the state of location of the primary insurer may or may not allow for proceeds to be paid directly to the insured instead of to the primary insurer. New York and California permit cut-through clauses.

Likewise, the law of the state where the reinsurer is located may or may not require that the reinsurer and the insured have privity of contract.

Assignments of insurances and reinsurances are permitted. However, it is prudent to name the financier as the sole contract party/sole hull loss payee and to have a cut-through clause in the reinsurance certificate.

A lessor’s ability to terminate an aircraft lease and exercise its remedies may be limited by applicable bankruptcy laws. Outside bankruptcy, there are generally no limitations on the lessor’s ability to exercise its remedies pursuant to the terms of the lease (including termination, repossession, export and sale). To the extent the lessor exercises any self-help remedies, it must do so without breach of the peace and acting reasonably (see 2.6.2 Lessor Taking Possession of the Aircraft). In order to export the aircraft, certain export information filings may be required prior to the permanent physical export of the aircraft.

The aircraft does not need to be physically in the US for the lessor to terminate the lease or sell the aircraft.

The lessor may recover possession of the aircraft upon the occurrence of an event of default or termination of the lease without the lessee’s consent or a court ruling. In order to do so, the lessor (and its agents) must be able to recover possession of the aircraft without breach of the peace and acting reasonably. If the lessee physically opposes the lessor’s actions, the lessor would need to obtain a court order and assistance from law enforcement officers to recover possession of the aircraft. Self-help remedies are also recognised under the CTC (as in effect in the US) to the extent agreed by the debtor in the relevant security documents.

There are no specific courts for aviation disputes in the US.

A lessor may obtain a summary judgment, equitable or other injunctive relief pending the final resolution of judicial proceedings to enforce an aircraft lease subject to certain due process requirements and statutory provisions. With respect to summary judgment, the lessor may be required to prove, inter alia, that there is no genuine dispute of material facts.

Temporary restraining orders and injunctions may be available to the lessor to prevent the lessee from removing the aircraft from a particular jurisdiction or to allow the lessor to recover possession of the aircraft. In order to grant injunctions, courts usually require the lessor to prove that there is risk of irreparable loss and to post security or other undertakings acceptable to the court to cover the defendant’s possible damages. The amount of the bond or undertaking is often set at a percentage of the claim or the value of the collateral involved.

A domestic court will generally uphold the parties’ agreement to (i) select foreign law as the governing law of an aircraft lease and (ii) submit disputes under the lease to the jurisdiction of a foreign court. Public policy considerations, fraud and statutory prohibitions may affect the enforceability of the parties’ agreement regarding governing law and submission to jurisdiction.

Waivers of immunity by the parties to an aircraft lease are also generally valid, effective and enforceable in the US subject to the limitations set forth in the Foreign Sovereign Immunities Act and the Vienna Convention on Consular Relations.

Domestic courts will generally recognise and enforce foreign judgments without re-examination of the matter if the judgment is conclusive, final and enforceable in the jurisdiction in which it was issued and is not contrary to US public policy or constitutional principles.

Domestic courts will generally recognise and enforce arbitration awards unless one of the limited grounds for setting aside an award applies pursuant to the Federal Arbitration Act and the New York Convention on Enforcement of Arbitral Awards. These grounds include an arbitrator’s misconduct, abuse of an arbitrator’s powers and evident partiality or corruption of an arbitrator.

As a general matter, a lessor under an aircraft lease can only obtain a judgment in a currency other than US dollars in limited circumstances. Most states follow the “dollar-judgment rule” and require that foreign currency claims be converted to US dollars.

Parties to a lease can validly agree to the payment by the lessee of default interest (including compounding thereof), supplemental rent and lease termination payments. Usury limits are generally inapplicable to payments under the lease so long as such payments are not characterised as payments for borrowed money and the lessee has unequivocally agreed to them.

There are no US federal taxes payable in connection with the lessor’s enforcement of its remedies under the lease.

There are no mandatory notice periods for the termination of a lease by the lessor for leases in respect of domestically operated aircraft or aircraft leased by a domestic operator.

A private business entity is generally not entitled to claim immunity from suit and waivers in respect of immunity are generally valid, effective and enforceable.

Waivers of sovereign immunity by sovereign lessees are generally valid, effective and enforceable subject to the limitations set forth in the Foreign Sovereign Immunities Act and the Vienna Convention on Consular Relations.

The US has adopted the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Domestic courts will recognise and enforce an arbitral award in accordance with the New York Convention.

There are no other relevant issues.

In general, the US recognises the concepts of contractual assignment and novation.

When transferring a lessor’s interest in an aircraft lease to an assignee, parties would typically enter into an assignment and assumption agreement. An assignment and assumption agreement introduces a new party to the lease and creates a new contractual duty on the part of the assignee, while maintaining the continuity of the underlying lease.

In contrast, a novation, which is more commonly used in England, would extinguish the underlying lease and create a new agreement between the new lessor and the lessee.

Because there is a risk that an assignment may be characterised as a novation, the safest approach recommended with respect to CTC filings is to register both the assignment of the original international interest and a new international interest.

A domestic court would hold valid a New York law assignment or English law novation (or deed) transferring the rights of a lessor under an aircraft lease to a new lessor.

No specific language is required to create an assignment if the assignor is clear in its intent to assign specified contractual rights to the assignee. For an assignment to be effective, it must occur in the present.

Unless the contract requires otherwise, the consent of the lessee to the assignment is not required but notice should be given to the lessee. A novation of a lease would require the agreement of the three parties involved: the assignor, the assignee and the lessee.

While it is not required, it would be advisable for an aircraft and/or engine lease assignment and assumption/novation to be in English, or translated into English, for enforcement against a domestic party. It is not necessary for the lease assignment or assumption/novation to be certified, notarised or legalised.

An assignment or assumption/novation of a lease involving an aircraft or engine registered with the FAA should be filed for recording with the FAA Registry to be valid against third parties without notice. FAA Recordation Requirements (see 1.2.4 Registration, Filing and/or Consent From Government Entities) should be followed when filing an assignment or assumption/novation.

There are no government applications or consents required in connection with the execution and delivery of an aircraft and/or engine lease assignment and assumption/novation for an aircraft registered domestically.

Generally, there are no federal taxes or duties payable in respect of an assignment or assumption/novation agreement. No stamp taxes will be payable as a consequence of an original or copy of the agreement being brought into the US physically or electronically (see 2.4.1 Tax Requirements for a Foreign Lessor).

A transfer of the ownership interest of an entity (or the beneficial interest in the trust) owning an N-registered aircraft may affect the US citizenship status of the owner and the US registration of the aircraft (see 1.2.4 Registration, Filing and/or Consent From Government Entities for US registration eligibility and US citizenship requirements and 2.2.5 Recognition of the Concepts of Trust/Trustee for owner trust requirements).

An aircraft can be deregistered from the US by the owner of record, the foreign purchaser of an aircraft (when supported by evidence of ownership), the authorised party under an irrevocable deregistration and export request authorisation (IDERA) under the CTC (if an IDERA has been filed with the FAA), or a deregistration power of attorney.

To deregister an aircraft for export, the FAA requires the requester to include the following information and documents.

• A complete description of the aircraft, including the manufacturer name and model, the serial number and the registration mark.
• The reason for the cancellation.
• The country of export.
• The signature and title of the requester.
• The release or a consent to export for all outstanding security instruments and unexpired leases that have a term of six months or more (if the lease was executed on or before 28 February 2006).
• A resolution of outstanding interests in the aircraft executed on or after 1 March 2006, including the following documents.
1. If the aircraft is subject to the CTC and an IDERA has been filed with the FAA, the party holder of an IDERA must include:
1. a written certification providing the following wording: “that all interests ranking in priority to that of the requestor have been discharged or that the holders of such interests have consented to the cancellation for export purposes”; 
2. evidence of the discharge of interests or consent to export; and
3. a copy of the International Registry Priority Search Certificate.
2. If the aircraft is subject to the CTC and no IDERA has been filed with the FAA, the requester must include:
1. a written certification that all outstanding interests recorded with the FAA have been discharged or consent from the holders of interests to deregister the aircraft for export purposes; and
2. evidence that the holders of these outstanding interests have discharged their interests or consented to the export.
3. If the aircraft is not subject to the CTC, the requester must include a release or a consent to export for all outstanding security instruments and unexpired leases that have a term of six months or more. 

Once the aircraft is deregistered, the FAA Registry notifies the country of export of the deregistration.

The Certificate of Aircraft Registration must be returned to the FAA within 21 days of the deregistration by the holder of the Certificate of Aircraft Registration.

The aircraft owner, the mortgagee or the lessor can apply for the deregistration of the aircraft without the lessee’s or the operator’s consent (see also 2.8.1 Deregistering Aircraft in This Jurisdiction).

See 2.8.1 Deregistering Aircraft in This Jurisdiction.

The FAA processes deregistration requests on a priority basis. The envelope and the request must mention “Export” in red ink.

The process typically takes one to five business days.

The FAA does not provide advance assurances to an aircraft owner, mortgagee or lessor regarding the prompt deregistration of the aircraft.

There are no costs, fees or taxes chargeable in respect of the deregistration of an aircraft.

In addition to IDERAs, the FAA recognises the filing of deregistration powers of attorney to effect the deregistration of an aircraft.

A deregistration power of attorney needs to be prepared in English or translated into English and it is advisable to file the deregistration power of attorney for recordation with the FAA. There are no other requirements for the deregistration power of attorney to be enforceable against a domestic party.

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

See 2.8.1 Deregistering Aircraft in This Jurisdiction regarding the procedure and requirements to deregister an aircraft.

A deregistration power of attorney does not need to be governed by the laws of the United States.

Once issued and registered, an irrevocable deregistration power of attorney cannot be revoked by its issuer.

At the time of negotiating the lease or the mortgage, an owner, mortgagee or lessor can ensure that an IDERA (together with its underlying security documents) and a deregistration power of attorney are in place and recorded with the FAA to facilitate the deregistration and export of the aircraft.

An aircraft does not need to be located in the US at the time of deregistration or export.

See also 2.8.1 Deregistering Aircraft in This Jurisdiction and 2.8.2 Lessee’s/Operator’s Consent.

FAA Regulations

If an aircraft is being exported, the exporter or its authorised representative needs to apply for the Export Certificate of Airworthiness (Form 8130-1) to the relevant FAA Flight Standards District Office.

The FAA Export Certificate of Airworthiness certifies compliance with applicable safety requirements but does not constitute authority to operate an aircraft.

Timing to obtain the FAA Export Certificate of Airworthiness depends on the completion of all necessary inspections.

Customs and Export Laws

US customs and export laws also govern the permanent export of an aircraft from the US.

When an aircraft is permanently exported from the United States, the exporter will need to make an Electronic Export Information (EEI) filing prior to the physical export of the aircraft. The EEI is an electronic submission of export data containing details such as the parties to a transaction, the export classification of the item, its value, and the ultimate consignee. The EEI is filed through the Automated Export System (AES), which is administered by the US Customs and Border Protection. The AES generates an Internal Transaction Number (ITN) that will need to be included in the export documents (eg, airway bill, export manifest and export shipping instructions).

The exporter must obtain the ITN at least two hours before the aircraft’s scheduled departure from the US.

An EEI filing is not required for the temporary export of aircraft or for the permanent export of aircraft to Canada.

Other requirements may apply depending on the specifics of the transaction or the type of equipment to be exported.

See 2.8.1 Deregistering Aircraft in This Jurisdiction and 2.8.2 Lessee’s/Operator’s Consent.

There are no significant fees or taxes that are charged in respect of the export of an aircraft.

See 2.8.1 Deregistering Aircraft in This Jurisdiction and 2.8.2 Lessee’s/Operator’s Consent.

Federal

Title 11 of the US Bankruptcy Code governs US restructuring and liquidation proceedings. Chapter 11 of the Bankruptcy Code deals with reorganisations, while Chapter 7 involves liquidations.

State

Restructuring or liquidation under state law is also available to US lessees. Note that common law and statutory laws are different in each state.

Voluntary

Chapter 11

A Chapter 11 bankruptcy is the most common path used by companies that want to continue operating and repay creditors concurrently through a court-approved plan or reorganisation. Upon filing of a Chapter 11 bankruptcy petition, an automatic stay on enforcement is imposed, which prohibits creditors from seeking to terminate leases and repossess or otherwise assert control over the debtor's aircraft.

As a way of incentivising investments in aircraft, aircraft creditors are given certain privileges in bankruptcy. Section 1110 of the Bankruptcy Code provides a special insolvency regime to govern a creditor’s rights with respect to an aircraft, engine, propeller or spare part that is subject to a security interest granted by, leased to or conditionally sold to an airline. For Section 1110 to apply, the airline must hold an FAA operating certificate for aircraft capable of carrying ten or more individuals or 6,000 pounds or more of cargo.

Chapter 7

Chapter 7 of the Bankruptcy Code is a liquidation procedure. Upon filing of a Chapter 7 petition, a trustee is appointed to replace the management and the board of the debtor, and this trustee will gather and liquidate all assets for the benefit of creditors. Proceeds of the liquidation (after payment of liquidation costs and trustee fees) are distributed to creditors under the waterfall provisions of the Bankruptcy Code.

Assignment for the benefit of creditors

Under state law, a debtor may assign, through a deed of assignment, all its property to an assignee or receiver. Such assignee or receiver administers the assets for the benefit of the creditors. State laws in the US may vary.

Involuntary

Chapter 7 or Chapter 11

Under the US Bankruptcy Code, an operator or lessee of an aircraft is not required to file for bankruptcy because it becomes insolvent or is unable to pay its debts. However, creditors can commence an involuntary bankruptcy against an operator or lessee subject to meeting the requirements for filing an involuntary bankruptcy petition.

In an involuntary petition, the petitioning creditors must designate into which bankruptcy (Chapter 7 or Chapter 11) they are seeking to force the company.

Receivership

Pursuant to state law, a creditor may file a petition requesting that the court order that a debtor be placed in receivership, wherein the company and its assets are administered by a court-appointed receiver for the benefit of creditors. State laws in the US may vary.

Chapter 15 of the Bankruptcy Code is the US domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (UNCITRAL) and is intended to foster co-operation among the insolvency courts of different jurisdictions.

Generally, a Chapter 15 case is ancillary to a primary proceeding brought in another country (typically the debtor's home country). An ancillary case is commenced by a "foreign representative" filing a petition for recognition of a "foreign proceeding,” which under Chapter 15 gives the foreign representative the right of direct access to US courts for such a filing. Immediately upon the recognition of a foreign main proceeding, the automatic stay and selected other provisions of the Bankruptcy Code take effect within the US. Through the recognition process, Chapter 15 operates as the principal door of a foreign representative to the federal and state courts of the US. Once recognised, a foreign representative may seek additional relief from the bankruptcy court or from other state and federal courts and is authorised to bring a full (as opposed to ancillary) bankruptcy case.

In a liquidation scenario, because the automatic stay provisions of the bankruptcy court would apply, the lessor or creditor would not be able to exercise the powers granted to it under a deregistration power of attorney or IDERA.

The lease may be set aside. Section 365 of the Bankruptcy Code allows the lessee to reject or assume any unexpired lease.

If a lessee rejects the lease under Section 365, it would be deemed a material breach of the lease and the lessee would be required to return the aircraft to the lessor. The lessor can also make a claim for unsecured damages from the bankruptcy estate.

The lease can be considered a disguised financing if the lessee has an option to purchase the aircraft at the end of the lease term for a nominal amount and there are other elements pointing to a financing instead of a true lease. If the lease is recharacterised as a financing, the lessee would be deemed the true owner of the aircraft.

If the lessor’s security interest in the aircraft or in the rental payments is not perfected, the lessor can be deemed an unsecured creditor.

The main risks for a lender if a borrower, a guarantor or an entity providing security becomes insolvent are:

• automatic stay regarding the leased property;
• recharacterisation by a bankruptcy court of the lease as a secured loan;
• payments made by the lessee to a non-insider 90 days before the bankruptcy filing may (subject to defences, including ordinary course) be viewed as preferences and avoided;
• assets transferred or liens granted with an intent to defraud or for less than equivalent value when the debtor was insolvent may be avoided; and
• claims against a lease guarantor subject to its own bankruptcy proceeding would generally be viewed as unsecured claims and enforcement will be subject to the automatic stay.

Upon the filing of a voluntary (or involuntary) petition for relief under the Bankruptcy Code, an “automatic stay” is imposed that prohibits creditors from taking certain enforcement actions. However, notwithstanding the automatic stay, if Section 1110 applies to an aircraft lease, the creditor may exercise remedies (eg, repossession of the aircraft) set out in the lease, 60 days following a bankruptcy filing unless the debtor agrees to perform under the lease and cures any outstanding defaults during the 60-day period (an “1110(a) Election”).

Following an 1110(a) Election, the protections of the automatic stay, which are in effect for the initial 60-day period, remain in place until:

• the parties agree otherwise;
• there is a default under the 1110(a) Election; or
• the debtors’ case is completed.

Section 1110(b) allows the parties to mutually agree to extend the initial 60-day period, subject to the approval of the court. If a debtor fails to make the election and meet the requirements of Section 1110(a) within the initial 60-day period or the parties do not agree to extend the initial 60-day period pursuant to Section 1110(b), then, upon the receipt of a written demand for surrender of the aircraft, the automatic stay is no longer applicable and the creditor may exercise its rights and remedies against the debtor, including repossessing the aircraft.

Domestic lessees can be liquidated or placed in administration or receivership in the following manner:

• by a trustee pursuant to Chapter 7 of the Bankruptcy Code;
• in a Chapter 11 case, a liquidating plan would allow the debtor-in-possession to liquidate the business; and
• state laws may also allow a lessee to dissolve, wind down, liquidate or dispose of its assets, make distributions, and terminate its legal existence.

“Ipso facto” clauses, which allow a lessor or creditor to automatically terminate the lease in the event of insolvency or bankruptcy, are generally not enforceable.

If a domestic lessee is wound up by a court or administration proceeding:

• as long as the lease is not deemed to be a disguised financing, the lessor would maintain its ownership of the aircraft; and
• the lessor would have a claim against the estate for pre-petition or pre-election or lease assumption rentals.

Although a lease security deposit would be considered property of the bankruptcy estate, courts have recognised the interest of the lessor in the security deposit.

Maintenance reserves paid to the lessor as supplemental rent on an unconditional basis would typically not be considered part of the bankruptcy estate. Note that this may not be the case with respect to maintenance reserves held in escrow.

The United States ratified the CTC and its related Protocol on Matters specific to Aircraft Equipment (the “Protocol”) on 28 October 2004. The CTC and the Protocol became effective on 1 March 2006.

The adoption of the CTC and its Protocol established the FAA Civil Aviation Registry as the authorising entry point (AEP). To register any type of interest, except for transfers of Right to Discharge, in the International Registry, the interested party must file an FAA Entry Point Filing Form (AC Form 8050-135) to obtain a unique authorisation code that will be used to register an international interest in the International Registry. The FAA requires the documents giving rise to the international interest or sale to be provided with the requests for the AEP codes.

The FAA typically provides the AEP code within approximately one hour.

Any interested party can apply for an AEP code.

Under the CTC, the United States has made the following declarations:

• Article 39(1)(a)–(b) on Rights having priority without registration; and
• Article 54(2) on Declarations regarding remedies.

Under the Protocol, the United States has also made the following declarations:

• Article XIX on Designated entry points; and
• Article XXX(1) on the application of Articles VIII, XII and XIII.

The United States has made a declaration pursuant to Article XXX(1) of the Protocol and applies Article XIII of the Protocol on De-registration and export request authorisation (see also 2.10.2 Declarations Made Concerning Conventions).

The FAA requires an IDERA to relate to a specific security agreement and be in the form annexed to the Protocol.

Jurisprudence regarding the enforcement of the CTC or the Protocol in the United States is limited. However, in a Chapter 15 proceeding in the US Bankruptcy Court for the Southern District of New York involving Avianca Brazil in 2019, the court granted recognition of the bankruptcy proceedings in Brazil and ordered the lessors not to take any action in the US inconsistent with the Brazilian court’s orders. The court rejected a lessor’s argument that it should be able to repossess the aircraft in the US and that the Brazilian bankruptcy court’s order violated the CTC and, consequently, US and Brazilian laws as well, and should not be enforced.

Geneva Convention

The United States is a party to the Geneva Convention. Pursuant to Article XXIII of the Protocol, the CTC supersedes the Geneva Convention as it relates to aircraft, but not “with respect to rights and interests not covered or affected by” the CTC.

Rome Convention

The United States is not a party to the 1933 Rome Convention for the Unification of Certain Rules relating to the Precautionary Attachment of Aircraft.

Foreign lenders and borrowers are subject to US law. As a general matter, there are no restrictions on foreign lenders financing an aircraft locally or on borrowers using loan proceeds to finance an aircraft.

There are no 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 may grant security to foreign lenders.

Intercorporate guarantees in favour of lenders are permitted but adequate consideration is a requirement. Although courts have regularly held that loans to borrowers are adequate consideration for a guarantee, lenders should be aware of the risk of a fraudulent conveyance issue arising in respect of upstream and cross-stream guarantees if the guarantor is insolvent or there is no adequate consideration.

It is advisable for a lender to obtain a security interest over the shares of a domestic special purpose vehicle. Such a security interest will take the form of a pledge of the shares, membership interests or beneficial interest of a corporation, limited liability company or owner trust, respectively.

Negative pledges are recognised as enforceable contractual obligations.

There are no material restrictions or requirements imposed on intercreditor arrangements.

The concept of agency and the role of an agent (eg, facility agent) under a syndicated loan is recognised.

Debt can be contractually and/or structurally subordinated.

In a contractual subordination, the rights and remedies of a senior lender would be free from any actions of a junior lender with respect to the lessee (and usually any guarantor) and the aircraft. This arrangement is typically agreed in intercreditor agreements or subordination agreements.

A structural subordination is achieved based on the structure of the company group. A lender to a company will not have access to the assets of the company's subsidiary until after all the subsidiary's creditors have been paid. Creditors at the parent level are limited to a claim on the assets of the parent company, which typically consists only of equity in the subsidiary.

The transfer or assignment of all or part of an outstanding debt under an English or New York law-governed loan is permissible and will be recognised, subject to any restrictions under applicable law.

Usury laws are mostly regulated and enforced by the states, rather than on a federal level. Each US state has its own statute that dictates how much interest a lender can charge before it is considered usurious or unlawful.

For example, in New York, the maximum rate of interest on a loan is 16% per annum. If a lender charges interest at higher than 16% per annum, it may be liable for civil usury. Interest higher than 25% constitutes criminal usury. However, there are certain exceptions depending on the type of borrower and the amount of the loan. Generally, corporations and LLCs can be charged more than 16% interest. Under New York law, loans to businesses under USD2,500,000 are generally exempt from the 16% civil usury cap, but remain subject to the 25% criminal usury cap. All loans over USD2,500,000 are exempt from civil and criminal usury laws regardless of whether the borrower is an individual or corporation.

Typical forms of security granted in an aviation finance transaction domestically include:

• an aircraft mortgage and security agreement granted by the owner of the aircraft as mortgagor and the lender/security trustee as mortgagee covering the aircraft and other rights and properties (eg, the lease agreement, rental payments, manufacturer warranties and insurance proceeds);
• airframe and engine warranty assignments;
• assignments of insurances and reinsurances;

• a membership interest (or beneficial interest) pledge agreement granted by the borrower/owner parent in favour of the lender/security trustee;
• an account pledge and/or account control agreements in respect of accounts in which rent, maintenance reserves and any monies may be deposited;
• deregistration powers of attorney;
• security deposit agreements; and
• parent or affiliate guarantees.

There is no limitation for structuring financings as non-recourse, limited recourse or full recourse to the borrower, lessee and guarantors.

All types of security may be taken over an aircraft and aircraft collateral (including engines, warranties and insurances). With respect to insurances, however, liability policies are typically excluded from insurance and reinsurances assignments.

Trusts and security trustees are recognised and commonly utilised in aircraft finance transactions in the US.

A borrower may assign its rights to the aircraft or under a lease (including in relation to insurances) pursuant to an aircraft mortgage or security assignment.

It is possible for a lessor to only assign the rights and benefits under an aircraft lease without assigning its corresponding obligations. This typically occurs in security assignments granted by the lessor to the lender/security trustee.

A security assignment or guarantee can be governed by English or New York law.

In order for a security interest to be valid against the debtor/grantor, the following three requirements must be met:

• value must be given to the debtor;
• the debtor must have rights in the collateral; and
• the debtor must have signed or authenticated a security agreement sufficiently describing the collateral and the obligations secured.

Security interests in US-registered aircraft are perfected by filing the mortgage or security agreement with the FAA Registry. International interests created under the CTC in respect of US-registered aircraft must be registered in the International Registry utilising the FAA Entry Point.

Secured parties will generally also make perfection filings in respect of non-US-registered aircraft by filing a UCC financing statement in the state in which the debtor is located. Debtors located in a foreign jurisdiction that does not have a public filing system meeting the requirements set forth in the UCC are deemed to be located in Washington, DC (unless such foreign debtor is a foreign air carrier, in which case it is deemed located in the state in the US where its agent for service of process is located).

Priority under the UCC is established based on the “first to file rule” (or in the case of security interests that are perfected by other methods, the “first to perfect rule”). UCC filings lapse five years after the date of filing unless a continuation statement is filed within six months prior to its five-year anniversary.

If a security interest is not validly created, it will not be valid or enforceable between the parties or against third parties. Failure to comply with the perfection requirements will render the security interest unenforceable against third parties.

It is not necessary for security assignments to be certified, notarised or legalised to be enforceable against a domestic party.

If the aircraft is registered in the US and an English law security assignment is taken, a financier should:

• take a New York law security assignment over the relevant aircraft collateral; and
• make the appropriate International Registry, FAA and UCC filings.

Foreign law security agreements may not be recorded with the FAA.

Given that the US has designated the FAA as the exclusive entry point for making Cape Town filings in respect of US-registered aircraft, it is necessary to file a form 8050-135 together with the relevant underlying document (eg, security agreement and lease) with the FAA and obtain an AEP access code from the FAA in order to make Cape Town filings.

UCC filing fees vary from state to state but each UCC filing costs approximately USD150. The FAA fee for recording any conveyance or instrument is USD5 per filing.

See 3.2.8 Domestic Law Security Instruments.

The transfer of security interests over an aircraft and/or engines is generally recognised and enforceable against third parties so long as the appropriate International Registry, FAA and UCC filings and registrations in respect of the transfer are duly made.

So long as the appropriate filings and registrations are made, changing the identity of secured parties under a security assignment would not generally jeopardise the validity or enforceability of the original security interest.

Parallel debt structures are not necessary in respect of US law-governed agreements.

A secured party under a security assignment would generally not be deemed to be resident, domiciled, carrying on business or subject to any taxes in the US solely as a result of it being a party to such security assignment. The enforcement of a security assignment, however, may trigger tax consequences depending on the type of enforcement action, collateral and jurisdictions involved. For example, the sale or disposition of the aircraft may be subject to sales or use tax.

See 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments.

There is generally no difference between the form of security or perfection taken over an aircraft and that taken over spare engines. They are both perfected by filing the relevant security with the International Registry and the FAA and by submitting a UCC-1 filing in the jurisdiction in which the debtor is located in accordance with the UCC, except that:

• aircraft engines having less than 550-rated take-off horsepower or the equivalent are not eligible for filing with the FAA; and
• jet propulsion engines having less than 1,750 pounds of thrust (or its equivalent) or turbine-powered or piston-powered engines having less than 550-rated take-off horsepower (or its equivalent) are not eligible for International Registry filings.

Security over a bank account (such as a lease receivables account) would typically be created by an account pledge agreement. Perfection of a security interest in an account is accomplished by the secured party obtaining “control” over the account. This occurs if:

• the borrower maintains its deposit account directly with the secured party;
• the secured party becomes the owner of the account with the borrower's depository bank; or
• the secured party enters into a deposit account control agreement with the borrower and the borrower's depository bank.

It is also common for account pledge agreements to contain “account blocking” provisions that allow the secured party to control and dispose of the funds in a default scenario (with the borrower having some limited rights to sweep funds while no default has occurred).

A third party can take or register a lien over an aircraft or engine in certain circumstances, including in relation to unpaid airport fees, navigation charges, and taxes and customs duties pursuant to the applicable state law and subject to filing requirements.

Possessory mechanics liens and storage or warehouse liens can exist and, depending on the state, may have priority over other perfected security. Depending on the state, these liens may or may not need to be filed for perfection to have priority. State law also determines whether these liens must relate directly to the aircraft on which the work was performed or warehoused.

Non-possessory mechanics liens can exist and may or may not have priority over other perfected liens depending on the state. Some states require non-possessory mechanics liens to be recorded directly with the FAA.

Other liens provided for under Article 9 of the UCC as in effect in the applicable state can exist and may have priority over other perfected security, including lender liens that qualify as purchase money security interests and buyers in the ordinary course of business.

Federal tax liens that are property recorded with the relevant state can exist and may have priority over other perfected security.

“Fleet liens” are not recognised in the US.

Remedies for third parties vary from state to state and may include seizure, detention or foreclosure of the aircraft.

Typically, liens and mortgages that are recorded at the FAA can be discharged within one day of submitting the requisite release documents.

The discharge of an international interest filed with the International Registry can be done instantaneously by the holder of the right to discharge the international interest.

The US transportation code establishes the FAA Registry as the central system in which to record liens and mortgages over US-registered aircraft. Mortgages over US-registered aircraft must be recorded with the FAA to be valid against third parties without notice. If the CTC applies, interests should also be registered with the International Registry. UCC-1 financing statements should also be filed in the state where the debtor is located.

Once the security interests of a mortgagee or a security trustee are recorded and filed, the secured party will have a perfected security interest. Failure to properly record an interest can result in a loss of lien priority in the aircraft and related collateral.

There are no federal or state statutory rights of detention; however, aircraft may be seized by US Customs and Border Protection (CBP) for suspected violations of customs laws or other laws enforced by the CBP, such as the prohibition on the transportation of illegal drugs on aircraft. The US government also has authority to seize all or any party of the US airline transportation system, including aircraft, for government use during war time. This would give rise to a constitutional obligation on the US government to compensate parties for such taking.

In certain circumstances, non-consensual preferential liens may arise over an aircraft (see 3.3.1 Third-Party Liens).

Although not a right of detention, under the US Civil Reserve Air Fleet programme, some US airlines have contractually committed certain of their aircraft for use by the US Department of Defense in emergencies when a need for airlift arises and exceeds the current capacity of US military aircraft.

To verify that an aircraft is free of encumbrances, a potential purchaser or financier of an aircraft can search the FAA Registry (for US-registered aircraft) and the International Registry (for both US- and non-US-registered aircraft) to verify that an aircraft is free of encumbrances. It is customary for parties to use local FAA counsel or a title company when searching the FAA records. Searches on the International Registry can be performed by anyone online.

A security assignment is enforced by foreclosing on the asset that is subject to the security interest and applying sale proceeds towards the outstanding secured obligations. Creditor rights under loans or guarantees are enforced by filing a claim against the debtor or guarantor to seek payment or performance of the outstanding obligation.

If security is granted to a security trustee by a lessor in respect of its rights under a lease, the security trustee may enforce its rights under the security assignment pursuant only to a notice and acknowledgement executed by that lessor and the relevant lessee respectively (assuming the security assignment was duly perfected; see 3.2.7 Formalities/Mandatory Terms to Create and Perfect Security Assignments).

Domestic courts will generally uphold (i) a foreign law as the governing law of a finance or security document and (ii) the submission to a foreign jurisdiction subject to certain exceptions (see 2.6.5 Domestic Courts’ Approach to Foreign Laws and Judgments).

See 2.6.6 Domestic Courts’ Recognition of Foreign Judgments/Awards.

A secured party may take physical possession of the aircraft to enforce a security agreement/aircraft mortgage without the lessee’s or operator’s consent (i) if the lease is expressly subject and subordinate to the rights of the secured party under the security agreement/aircraft mortgage and (ii) the secured party is able to recover possession without breach of the peace and acting reasonably (see 2.6.2 Lessor Taking Possession of the Aircraft with respect to self-help remedies).

There is no specific domestic court that is competent to decide enforcement actions under a security agreement/aircraft mortgage. A court’s jurisdiction will be determined by the rules of subject matter jurisdiction and in personam or quasi in rem jurisdiction as well as venue and forum considerations and defences.

See 2.6.4 Summary Judgment or Other Relief.

See 2.6.7 Judgments in Foreign Currencies.

See 3.2.13 Effect of Security Assignments on Residence of Secured Parties.

See 2.9 Insolvency Proceedings.