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Understanding and Negotiating Aircraft Leases

by Greg Reigel 1. July 2007 00:00
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If you own an aircraft, but are not fully utilizing the aircraft, how can you maximize your investment in the aircraft? What do you do if you cannot afford to own an aircraft, but you still want to fly? The answer to these questions for many people is aircraft leasing. An aircraft lease can allow an aircraft owner to maximize the use of the owner's aircraft and recover some of the owner's expenses. It also provides an opportunity for someone who cannot afford to own an aircraft to fly.

However, leasing an aircraft involves a number of issues between the owner who is leasing the aircraft to another person, the "Lessor", and the person leasing the aircraft from the owner, the "Lessee". A written aircraft lease should be used to address the issues between the Lessor and Lessee so that each party has a clear understanding of what to expect during the relationship. The parties should pay careful attention to some of the following lease provisions:

Lease Term. This provision establishes the duration of the lease. The lease can be for a fixed term (e.g. 6 months or 1 year etc.), on a month-to-month basis or, in some cases, it may be indefinite with the Lessee leasing the aircraft as needed or on a one time only basis.

Knowing the potential duration of your lease becomes especially important in situations where the Lessor does not have an obligation to renew or extend the lease. If the lease does not provide otherwise, a Lessor could have the ability to refuse to renew or extend a lease even after the Lessee makes commitments based upon the Lessee's belief that the Lessee will continue to have access to the aircraft. Although this may seem unfair, the language of the lease will govern the rights between the parties. Thus, understanding this information up front is essential because it will allow the Lessor to assess the Lessor's ability to use the aircraft or lease it to another party and it will allow the Lessee to accurately assess the Lessee's ability to make commitments in reliance upon the Lessee's access to the leased aircraft.

Use of the Aircraft. The use provision details the types of activities for which the aircraft may be used. Other than the obvious use of flying the aircraft, the lease should establish the types of operations in which the aircraft may be used. The scope of use typically distinguishes between private use (e.g. pursuant to FAR Part 91) and commercial use (e.g. pursuant to FAR Part 135 or other commercial operations such as flight instruction, sightseeing flights, powerline patrol etc.). The terms of the lease should specifically identify permitted uses and any prohibited uses. If the Lessee wants to lease the aircraft for commercial operations, as opposed to private operations, this use will have a direct impact on the maintenance and insurance for the aircraft. The Lessor may or may not want the aircraft for such operations and, if the commercial operations are permitted, the Lessor will likely want to assess the increased costs directly to the Lessee. Thus, it is imperative that the scope of use be identified so the lease can properly address any issues that arise from the anticipated use.

Additionally, once the lease is executed, if the language of the lease does not allow a desired use, the Lessee's desired use may only be possible by obtaining permission from the Lessor. It is much easier to include the appropriate language in the lease prior to signing, rather than attempting to change the lease or obtain the Lessor's permission after the fact. Thus, to the extent possible, the Lessee will need to have a good idea of how the Lessee intends to use the aircraft both at the beginning and throughout the term of the lease.

Scheduling. The lease should explain the method and timing for scheduling use of the aircraft, whether by the Lessor or the Lessee. Scheduling can be done on a "first-come, first-served" basis or one party may have priority or pre-emptive rights over the other. If one party has pre-emptive rights over the other, how and when can those rights be asserted? The lease should also address scheduling of the aircraft at a time when the aircraft is due for maintenance. Typically, a lease will include language that prohibits any period of maintenance, preventive maintenance or inspection from being delayed or postponed for the purpose of scheduling the aircraft, unless the maintenance or inspection can be safely conducted at a later time in compliance with applicable laws and regulations.

Lease Payments The lease should establish the amount the Lessee will be charged for the use of the aircraft and method of payment. Several common options include charging a flat hourly rate (with or without fuel), a monthly rate for availability of the aircraft with a corresponding hourly rate for actual use, or a lump sum or "block-time" rate for use of the aircraft for a fixed number of hours. Depending upon the situation, the Lessee may also be responsible for maintenance costs or other fixed costs associated with the aircraft (e.g. insurance, hangar rent, software updates etc.). Additionally, most leases will require the Lessee to be responsible for any other costs associated with the Lessee's operations including landing permits and fees, head taxes, departure taxes, immigration, customs, handling, foreign fuel taxes and surcharges, over-flight fees, navigation and airspace fees and similar charges. The lease may provide the Lessor with the ability to raise or decrease the amounts charged to the Lessee. This is especially true if the aircraft is being provided with fuel, or if the Lessor's is charging certain of Lessor's fixed expenses to the Lessee. Both parties should be sure they understand when this can happen and upon what conditions such a change is based. Although the parties may not be able to control whether or not an increase or decrease in the rent is imposed, by understanding the circumstances upon which this change may take place, each party will be able to plan for and possibly forecast this change in rent. This knowledge allows the Lessor to own and the Lessee to operate the aircraft in ways that may limit the effect of an increase, or take advantage of a decrease, depending upon the circumstances.

Operational Control. The lease should identify which party will have operational control, as defined in the FAR Part 1, Definitions. If the lease is for private use or commercial, non-Part 135 use, typically each party will have operational control of the aircraft when it is in that party's possession. Oftentimes in this situation, operational control will revert to the Lessor during the times when the Lessee is not using or possessing the aircraft.

If the lease is for Part 135 commercial use, the lease will have to specify, and the Part 135 certificate holder will have to actually exercise, operational control over the aircraft. This type of leasing arrangement is currently in the FAA's "bulls eye" and both Lessor and Lessee need to understand and carefully comply with the applicable regulatory requirements. An experienced aviation attorney is recommended to make sure the aircraft lease is in compliance and protects both parties.

Indemnification. Most aircraft leases will contain an indemnification provision. Indemnification, in essence, means the party agreeing to indemnify will reimburse the indemnified party for any money the indemnified party is forced to pay as a result of the actions of the party agreeing to indemnify. The Lessee may indemnify the Lessor, the Lessor may indemnify the Lessee or the indemnification may be mutual. The indemnification may also be limited by any applicable insurance coverage.

Limitation of Liability. The Lessor and Lessee may also want to limit the liability between them. Typically, this limitation prevents either party from recovering any amounts from the other party in excess of the liability limits of the aircraft's insurance for anything other than direct damages. Damages that may be limited include amounts for loss of use, loss of revenue, loss of value, diminution in value or costs associated with substitution or replacement aircraft or transportation.

Truth in Leasing. If the aircraft is a "large civil aircraft", as defined in FAR Section 1.1 (12,500 pounds, maximum certificated takeoff weight), the lease will need to include a written truth-in-leasing clause in accordance with FAR Section 91.23. The clause will need to be in bold print and at the end of the lease immediately preceding the space for the parties' signatures. Additionally, a copy of the lease will need to be provided to the local FAA FSDO prior to any operations under the lease, and will also need to be carried in the aircraft during all operations under the lease.

General Provisions. In reviewing the lease, make sure the lease refers to parties consistently. The aircraft should be specifically identified, along with any accessories or other property that may accompany the aircraft in connection with the lease. Names of persons or entities should also be spelled correctly and should refer to the appropriate party throughout the lease. If the Lessee is a business entity, such as a partnership or corporation, the lease will need to refer to that entity as the Lessee and not to an individual. To the extent that an individual is required to sign the lease on behalf of an entity, the parties will want the lease to refer to the individual in his or her capacity as an officer or partner of the particular entity that is a party to the lease. Even if a personal signature is required as an additional Lessee or as a guarantor for the entity, this formality should still be observed, although ultimately it may be immaterial to the individual's personal liability under the lease.

Finally, it is essential that you carefully review all of the provisions of any aircraft lease before you sign. Consultation with an experienced aviation attorney beforehand can help you protect yourself, whether Lessor or Lessee. By taking the time to understand the aircraft lease, both parties can ensure that their expectations are met and their interests protected.

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Greg Reigel



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