Owning a Private or Corporate Jet: Plan Carefully for Acquisition of the Ultimate Asset

By: Aoife O’Sullivan and Dan Soffin

Posted: 4th August 2011 12:03

Introduction

Demand for bespoke business transport is increasing. The high cost of executive and management time, combined with the need for worldwide access, flexibility, convenience, and costs savings over more rigid scheduled commercial flights, all contribute to continuing strong demand for ownership of business jets.

There are a variety of ways in which such aircraft can be acquired: direct ownership by an individual, joint ownership, ownership through a company, chartering, fractional ownership, and more. This article provides a brief overview of the possible legal and financing structures associated with outright ownership.

Common Ownership Structures

The simplest ownership structure is likely to be acquisition of an aircraft by a private or corporate owner for exclusive personal or business use. Owners will likely create a specially formed legal entity, a special purpose vehicle (SPV), to hold the asset whether for tax reasons, liability management, corporate structure, or to gain access to an aircraft register.

There are significant risks associated with ownership and subsequent operation. It is rare and ill-advised for an individual or a company to own an aircraft in its own name without some attempt to segregate liability associated with ownership or operation of an aircraft from other individual or company assets. The owner will also likely want to separate ownership activities from operating activities so that potential torts of one are not imputed to the other. This is especially important when aircraft are pilot owned and operated.

Creation of a limited liability company SPV to own an aircraft is a common ownership structure. Such a structure is intended to concentrate liability associated with ownership and operation of the aircraft in a separate company. If the aircraft is involved in an accident, liability is intended to be confined to the company. The ultimate or beneficial owner (in this case the shareholder), should be protected from claims. But the SPV corporate veil may be pieced in certain situations. For example, a beneficial owner is not shielded from operational liability or compliance with mandatory aviation regulations.

Companies owning one or more aircraft will often elect to form a flight department subsidiary for the sole purpose of owning and operating the aircraft on behalf of the parent corporation.

Another common aircraft ownership structure is a trust. A trust is simply an agreement between one person (the Settlor or Beneficial Owner) who gives to another person (the Trustee) an asset, in this case an aircraft, to hold on certain terms. The structure is typically used by non-US citizens wishing to register aircraft on the N Register. Although all aircraft on the N Register must be owned by US citizens, a US trust with a European ultimate owner will comply with the requirements. US Federal Aviation Regulations require that the power of the trustee cannot be "fettered" by the beneficiary. The US Trustee has all the rights and powers of an owner and may sell or mortgage the aircraft subject always to the terms of the trust agreement between the Settlor and Trustee.

In situations in which three or more individuals own an aircraft directly, it is recommended that one or two of the owners be nominated as trustees of the group either for purposes of entering the aircraft on the UK Register or to record a change of ownership. In this way, any member may leave or join the group without the need to re-register the aircraft on every occasion. The aircraft must, however, be re-registered if the trustee leaves the group. In structuring group ownership, careful attention must be paid to defining the rights and powers of the trustee.

Aircraft Finance and its Implications on Ownership

Aircraft finance in today’s international marketplace is relatively straightforward. There are generally two options – straight loan finance or leasing.

With straight loan finance, the bank finances the purchase of the aircraft by way of a loan facility. The buyer becomes the legal owner of the aircraft and the bank is granted security in the form of an aircraft mortgage and other arrangements. If the buyer defaults on payments, the bank will move to enforce its security. The bank will not have an immediate right to own the aircraft and will usually have to apply to the courts for an order allowing it to repossess the aircraft.

In a leasing arrangement, the bank buys the aircraft direct from the seller. The bank then leases the aircraft to the buyer. The buyer never becomes the legal owner of the aircraft but is instead granted a possessory interest. Security is still granted to the bank but the bank enforces its security by way of recovery of possession of the aircraft under the lease and security.

Leasing can be as costly as outright ownership, both in terms of operating expenses and commitments of time and energy to manage the aircraft. A lessee must generally arrange for, and pay for, all fuel, maintenance, hangar, pilot employment, and insurance to the same extent as an owner.  Lessees may avail themselves of the services of an aircraft management company to the same extent as an owner.  The major risks of owning the aircraft – such as legal liability and risk of loss from damage or theft – are also just as applicable to a lessee.

Taxation

Ownership of an aircraft should never be contemplated without comprehensive advice being sought on the taxation implications of the proposed structure and acquisition of the aircraft. Getting it wrong can be extremely expensive and very hard to unravel.

Proof of Aircraft Ownership

A purchase of an aircraft is not complete without proper and effective transfer of title. Buyers must ensure via search or other evidence that the seller has proper title to sell the aircraft. Buyers must also be aware of any title encumbrances. Mortgage searches (if available) should be carried out on the aircraft its current registry as well as under the Cape Town Convention’s international registry.

Corporate governance – directors’ duties and responsibilities

The common law imposes fiduciary duties and a duty of care and skill on all directors. Statutes and regulations create additional duties and offences and many of them impose strict liability. These duties are owed to the company. At a time in which criminalization of aircraft accidents and incidents is on the rise, any individual contemplating directorship in a company which owns or operates an aircraft should take detailed legal advice on what may be expected in such a position of stewardship.

Conclusion

Appropriate ownership and finance structure should be considered in the earliest stages of the acquisition process. The purchase and financing of an aircraft in an international forum is not without its complications and it is important to have the right team on board from the outset. Equip yourself with a legal advisor that has experience in the complete spectrum of international aviation specific issues that will almost certainly arise in any aircraft acquisition. Initial outlay on getting the right structure and procedures in place will go a long way to prevent having to unravel an unworkable structure and incur unnecessary associated costs.

 

Aoife O’Sullivan is a lead partner in the aircraft finance department of Gates and Partners. She advises on all aspects of international acquisition and sale as well as structure and finance. She is well known and regarded internationally throughout the industry for her leadership, guidance, and advice on regulatory and policy issues critical to business aviation.

Dan Soffin, founding partner, now of counsel, advises on insurance, liability, business and commercial strategy and operations, as well as regulatory issues, risk management, and employment. He is an active speaker and educator for IATA, airlines, insurers, brokers, and aviation businesses and related organisations around the world.

Gates and Partners is an international aviation specialist law firm with offices in London, Singapore, Paris, Brussels, and Dubai. The firm was recently voted one of the top ten law firms in the world (2010) by AirFinance Journal and was granted a Global Award from Finance Monthly as UK Aerospace Law Firm of the Year (2010).

For further information contact the authors at aosullivan@gatesandpartners.com or dsoffin@gatesandpartners.com T: +44 20 7337 0300.


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