Introduction
It costs a great deal of money to purchase an aircraft, and once purchased the aircraft will be a valuable asset. Only a privileged few have sufficient funds to purchase an aircraft outright, and for those not so fortunate funds are often raised by borrowing from banks, financial institutions and other lenders. When funds are borrowed to purchase an aircraft the lender will invariably require security to ensure repayment of the debt. This security will almost certainly include a mortgage over the aircraft.
Under English law aircraft are treated as chattels, or items of tangible property. This means that aircraft mortgages are governed by the general law, and in particular the general law governing the mortgaging of chattels. Unlike mortgages over land, there is relatively little statutory interference in the terms and conditions of aircraft mortgages. Instead, aircraft mortgage documents are expected to, and should, comprehensively provide for all of the contractual terms and conditions which have been agreed between the owner and the lender.
There is no prescribed form for aircraft mortgages. The negotiation of mutually acceptable terms and conditions and their accurate reduction into the aircraft mortgage document can be a substantial task. It is advisable for owners and lenders alike to take legal and tax advice during negotiations, and to have the draft aircraft mortgage document professionally drafted and reviewed by legal and tax advisers before signing.
Aircraft mortgages documents
Although there is no prescribed form for aircraft mortgages, these documents do tend to include certain common provisions, including
- representations and warranties that the owner owns the aircraft free of encumbrances
- representations and warranties that the aircraft has been properly registered with the Civil Aviation Authority (CAA)
- the application of the mortgage to include the aircraft’s engines, equipment, stores of spare parts etc
- requirements to mark the aircraft etc displaying the lender’s interest
- strict obligations concerning the insuring of the aircraft
- covenants concerning the aircraft and its condition and servicing and maintenance
- covenants concerning the numerous certificates, licences, permits and authorisations required to operate the aircraft
- restrictions regulating the basing and operation of the aircraft
- restrictions regulating the leasing or chartering of the aircraft
- the circumstances when the mortgage may be enforced and the enforcement action that the lender may take
- an indemnity against any liability the lender may incur as a result of entering into the mortgage
- where the owner is a company, personal guarantees.
Each aircraft mortgage document should be tailored to suit the specific facts and circumstances on each occasion.
Register of aircraft mortgages
As a general rule, aircraft must be registered with the CAA in the United Kingdom, or the corresponding authority in other states. Details of all UK registered aircraft are kept in a ‘register of aircraft’ which is open to the public.
Aircraft mortgages should also be registered with the CAA, and details of all UK registered aircraft mortgages are kept in ‘register of aircraft mortgages’ which is also open to the public. The register of aircraft mortgages may be searched using the prescribed form (CA350) and upon payment of a fee (currently £25 per aircraft), and certified copies of entries may be extracted upon payment of a further fee (currently £25 per aircraft). There are various statutory provisions governing the registration of aircraft mortgages with the CAA.
Priority
A lender taking security over an aircraft will need to know that the aircraft is not already mortgaged or charged, and will need to be sure that all subsequent mortgages or charges will rank behind its security. The statutory provisions governing the registration of aircraft mortgages with the CAA provide for a regime which affords a degree of certainty and comfort for lenders.
The main principal of the regime is that a registered mortgage of an aircraft will take priority over any other mortgage of or charge on that aircraft, except for
- mortgages registered earlier in time
- mortgages created prior to 1 October 1972
- certain possessory liens in respect of work done on the aircraft
- any statutory rights certain authorities have to detain the aircraft
In addition, where the owner is a company the aircraft mortgage must also be registered with Companies House within 21 days of it being entered into. This is carried out by using the prescribed form (CH395) and supplying a copy of the aircraft mortgage document. There is a registration fee payable (currently £13).
Registration of priority notice
To protect its position during the period leading up to an aircraft mortgage being entered into and its registration with the CAA, a lender can register a ‘notice of intention to make an application to register a contemplated mortgage of an aircraft’. The registration of this notice will provide a lender with a window of 14 days in which to complete the registration of the mortgage. Provided the mortgage is registered in good time the lender will be deemed to have priority from the time of registration of the notice. Applications to register a priority notice can be made using the prescribed form (CA1330) and upon payment of a fee (currently £45 or £90 depending upon maximum take-off weight). To ensure priority is secured it is advisable for lenders to take legal advice when registering priority notices.
Registration of aircraft mortgages
The registration of aircraft mortgages with the CAA is relatively straightforward. A lender merely applies for registration using the prescribed form (CA1577) and supplies a certified copy of the aircraft mortgage document. There is a registration fee payable (currently £150 to £900 depending upon maximum take-off weight). Applications duly made are entered into the register in order of their receipt, whereupon the CAA will notify the lender and the owner of the registration.
Applications to amend the register of aircraft mortgages can be made using the prescribed form (CA1760) and upon payment of a fee (currently £30). The High Court may order the amendment of the register in certain circumstances.
Discharge of aircraft mortgages
Once the owner of an aircraft has repaid the debt and the mortgage has been discharged the owner will want the register of aircraft mortgages to be updated to show this fact. The owner does this by using the prescribed form (CAA1577C) and supplying documentary evidence of the discharge. There is no fee to pay.
Foreign jurisdictions
Special rules are likely to apply when an aircraft is registered in another state or a mortgage is to be governed by the laws of another country. In such situations it is advisable for owners and lenders to take legal and tax advice from professionals specialising in aviation law in the relevant jurisdiction. If Sykes Anderson LLP does not have the requisite knowledge and experience of the laws of that other country, we will locate and work with legal and tax advisors who do.
Sykes Anderson LLP has acted for both owners and lenders in numerous aircraft mortgage situations and has knowledge and experience of this complex area of aviation law. If you require any further information on this subject or would like Sykes Anderson LLP to act for you in connection with the mortgaging of an aircraft, or the sale or purchase of an aircraft, then please contact our Aviation Team - Christopher Sykes & Alan Massenhove on tel: 020 3178 3770 or Email: alan.massenhove@sykesanderson.com
November 2008
9 Devonshire Square, London EC2M 4YF Tel 020 3178 3770 Fax 020 3178 3771 DX 729 London/City E-mail: |
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