Aircraft Purchase Agreements – Guide + Aviation FinancingNovember 19, 2019
An aircraft purchase agreement (APA) helps ensure the orderly transfer of title to an aircraft. With the growing popularity of personal, luxury, and business jets, the APA assumes increasing importance. In this article, we’ll explain the structure and contents of an aircraft purchase agreement.
In addition, we’ll point you to a sample aircraft purchase agreement and aircraft purchase agreement in PDF format. Next, we’ll discuss how Assets America® can help you with financing aircraft. Finally, we’ll conclude by answering a few frequently asked questions about APAs.
Russian Finance Co. Signs Purchase Agreement for up to 42 Bombardier C-Series Aircraft
What is an Aircraft Purchase Agreement?
An APA is a document that specifies the purchase and sale of an aircraft. Both parties, the buyer and seller must mutually execute the document. Typically, the buyer offers the seller an LOI (letter of interest). The seller then signs the LOI once all terms are mutually agreed upon. Subsequent to the execution of the LOI, the parties progress to the more formal, detailed and much lengthier document, the aircraft purchase agreement.
After the execution of the APA, the buyer pays the purchase price, or consideration, to the seller, who then transfers title to the buyer. Businesses and private individuals use APAs to purchase new and used aircraft. Typically, lawyers on both sides will structure and review the APA. An orderly process helps smooth the overall transaction.
Overview of the Aircraft Purchase Process
The process starts when a buyer decides to purchase an aircraft. Typically, businesses purchasing expensive corporate jets (aka business jets) or helicopters will assemble a small aircraft acquisition team, which may include:
- The owner, chairman, chief executive officer, chief financial officer, or other executives
- In-house counsel (the team leader)
- Outside experienced aviation lawyer
- Tax advisor
- Aircraft advisor/broker
- The company’s aircraft department if it already owns aircraft
The team’s job is to identify and prevent any problems before they can manifest.
Frequently, the in-house counsel acts as the team leader. The attorney oversees all aspects of the acquisition process and approves the deal documents, including the APA. As shown below, the aircraft industry uses standard APAs, but counsel can revise these as needed. Typically, aircraft purchase transactions close quickly, putting time pressure on the acquisition team.
Inputs to the Process
The team identifies possible issues and appoints members to address them:
- Statement of Requirements: Depending on the formality of the process, the buyer may assemble the aircraft’s requirements into a statement. Those requirements may include price, size, capabilities, and service.
- The Type of Aircraft: In some cases, the buyer desires a particular make and model of aircraft. However, sometimes the buyer is flexible as long as the aircraft meets the buyer’s general requirements.
- Location and Use: Where the aircraft will reside and who will operate and service the aircraft.
- Financial Considerations: How the buyer will finance the purchase or lease and who will pay what taxes.
- Tax Considerations: These include tax minimization, including sales, property, use, or other taxes.
- Regulatory Considerations: Avoiding the risk of violating regulations from the pertinent agencies. These include the Department of Transportation, Federal Aviation Administration (FAA), IRS, and state revenue departments. Insurance policy requirements may also apply.
- Technical Advice: A knowledgeable aircraft broker can provide technical advice that can help buyers avoid wasting money. Also, brokers may help buyers create a budget based on an aircraft’s direct and fixed costs. The team specifies the fee arrangement with the broker, including the timing of payments.
Executing the Process
Some teams may generate a Request for Quote (RFQ) that contains all the deal requirements and constraints. The team provides copies of the RFQ to manufacturers, sellers, selling brokers, and other interested parties. The RFQ specifies the desired aircraft features and characteristics. The process continues with several steps that may include:
1. Evaluating RFQs
If the buyer disseminates one or more RFQs, it will evaluate the quote sheets returned by potential sellers. Accordingly, the buyer may eliminate or qualify sellers.
2. Undertaking Pre-Purchase Inspections
The broker, technical advisor, and/or other experts will inspect candidate aircraft. Quite often, sellers offer used aircraft as-is, so buyers must undertake extremely thorough inspections. The inspection should reveal any repairs that the seller will repair and/or finance. The seller may prefer to limit repairs, such as ones that affect air-worthiness as opposed to other items.
3. Checking the Title
The buyer must perform due diligence on the aircraft’s title. It will check airframes and engines from sources such as the FAA Registry and the International Aircraft Registry. Buyers should also research the aircraft’s records including that of any tax liens, judgment liens, or rap sheets. The buyer should most assuredly purchase title insurance.
4. Negotiating Terms
The buyer and seller should negotiate the terms of the purchase. This includes price, date, place of delivery, required repairs, and any other important provisions. The result can be one of several documents, including a Letter of Intent (LOI), Term Sheet, Offer to Purchase, etc.
Frequently, LOIs are non-binding. They should, however, contain all the important aspects of the purchase. Doing so will make it easier to finalize the more formal aircraft purchase agreement. It will also save you the time it takes to create the APA if the seller is not serious about the sale.
5. Creating an APA
After both parties execute the LOI, it’s time to draft the APA. Manufacturers provide their own standard APAs. However, when the seller is not a manufacturer, the buyer or seller may draft the APA. In most cases, the buyer should perform this task to ensure they include sufficient protections.
Experts agree that aircraft brokers and non-expert lawyers should not write an APA, as the resulting document may require a full rewrite wasting time and money. Lawyers should have aviation law expertise if they participate in this process. The APA may add language about rights to a jury trial, tax indemnities, and escrow fees.
What is the Purpose of an Aircraft Letter of Intent?
Structure of an Aircraft Purchase Agreement
APAs can vary in the number of provisions they contain. At a minimum, an APA should address:
- The identities of the buyer and the seller
- The term of the purchase, including a description of the aircraft by model, make, registration number, and serial numbers of the engine(s) and airframe
- The purchase price, escrow, and deposit, including refundability
- Tax obligations, including analysis of proper sales tax and use tax, ownership structure, and delivery location
- Pre-purchase inspection, including items included, deferred maintenance items and any maintenance fees the seller owes
- Delivery of aircraft, including location and condition, including verification of condition upon delivery
- Verification of good and marketable title and release of any and all liens
- The time of closing and when the buyer becomes responsible for the costs of damage
- Responsibility for costs, if any, of preparing the aircraft for export
- Aircraft registration with the International Registry and the FAA, if appropriate, and specification of who is responsible for such fees
- Condition of the aircraft, either sold AS-IS or with warranties
- Representations and covenants, including the legality of the sale
- Whether one party receives indemnification should the other party breach the contract
- Remedies, default, and termination, including pre-closing termination rights and requirements, with and without breach of contract
Sample Aircraft Purchase Agreements
How Assets America® Can Help
Assets America® can arrange financing for the purchase, lease, and sale-leaseback of aircraft starting at $10 million and above. We can also help in the actual brokerage of the sale as well; we can help find and located and negotiate the transaction from beginning to end.
Frequently Asked Questions
What can happen without a good aircraft purchase and sale agreement?
All heck can break loose without a proper purchase and sale agreement, especially once a dispute arises. Without the agreement, the parties may disagree on who pays for what, and what the buyer will receive from the seller.
Are aircraft “hiding” on the U.S. Registry?
Newspapers have reported that Russian oligarchs who purchased aircraft were hiding their purchases. They did so by using straw owners on the U.S. Registry. This practice raises questions of taxation and national security.
Do I need a lawyer for an aircraft purchase agreement?
While legally it is not mandated to have an attorney, it is absolutely advisable to use one! Trying to close such a complex transaction without an attorney would be risky, unless the seller is a trusted friend or relative, and even then, you should always use an attorney. Many things can go wrong with an aircraft purchase-sale that you can avoid with a proper APA.
What is an LOI?
An LOI is a letter of intent. You use it to specify the overall outline parameters of a deal. Later on, you use the LOI as the starting point for drafting the aircraft purchase agreement.