By Steve Shropshire, AttorneyThis article originally appeared in the December 5, 2018 issue of the Cascade Business News.
Buying an aircraft is a big decision. No great surprise. However, unlike other big purchases such as a home or car, an aircraft purchase requires specialized knowledge about both the technical and regulatory aspects of the transaction.
Aircraft sales are governed by a complex body of federal laws designed to protect public safety. The Federal Aviation Administration ("FAA") is responsible for implementing those laws through regulations governing the registration and airworthiness of aircraft.
The first step in the purchase process is to assemble a qualified team of professionals to assist with the transaction. A solid acquisition team should include a buyer’s agent, a technical inspector, and an attorney with experience in aircraft transactions.
Once a buyer has selected an aircraft, it is important to develop a customized purchase agreement that covers all aspects of the transaction. Every aircraft is unique, and for that reason, it is a good idea to develop an agreement tailored to that machine and the terms of the particular transaction, rather than using a template agreement provided by a broker or the seller.
A well-crafted purchase agreement will contain all the essential deal terms, together with adequate buyer protections associated with the buyer’s due diligence investigation of the aircraft. This should include contingencies for title or lien issues, as well as technical and mechanical items. It is important to make sure that the agreement properly reflects the seller as the record owner of the aircraft. The buyer should verify that the person on the seller’s signature line has legal authority to sign on behalf of the owner (in the case of a corporate seller). In addition, the agreement should incorporate representations and warranties (if any) made by the seller or seller’s broker about the aircraft, such as installed equipment, engine time, and aircraft damage history. If the buyer is relying on those representations as part of the decision to purchase the aircraft, the representations should be expressly incorporated into the purchase agreement. Other relevant details may include deposit and escrow terms, how and when closing will occur, how the parties will exchange physical possession of the aircraft, default provisions, and dispute resolution provisions.
Once the purchase agreement is signed, the due diligence period begins. During the due diligence investigation, the buyer’s team should evaluate all available (and legally required) technical and legal documentation for the aircraft, including all maintenance logs, airworthiness directive logs, and any FAA airworthiness directives mandating potentially expensive repairs. In addition, the team should conduct a mechanical inspection of the aircraft. These evaluations may result in a list of items that need to be resolved prior to closing the sale or alternatively may be the basis to terminate the sale. Generally, an aircraft sale is made on an “AS IS” basis, meaning that unless the seller misrepresents the condition of the aircraft, the buyer is responsible for determining its airworthiness and compliance with applicable FAA regulations.
After any pre-purchase inspection issues are resolved, the next step is closing. This is the point where the parties will need to work with the FAA. The FAA oversees both safety and registry of aircraft ownership. The buyer should verify with the FAA that the aircraft has a current FAA Airworthiness Certificate as of the closing date. Additionally, to transfer ownership, the parties will need to file paperwork to change the aircraft registry information to reflect the sale from seller to buyer.
There are frequently other important considerations associated with the purchase of an aircraft that go beyond the scope of this short article. These include establishing business entities to own, lease, or operate the aircraft, developing strategies and structures to minimize or segregate liability, developing strategies for minimizing tax liability, getting insurance coverage in place prior to the time that the buyer is responsible for any loss, leasing hangar space, and more.
Although aircraft purchases are complex matters, when done correctly and with the right team, they can be smooth and gratifying transactions.