Registration of aircraft and parts thereof
Use of aircraft and aircraft engines as collateral
Engines: constituent parts or accessories to the aircraft?
Comment


Despite the Ministry of Justice's long-term project to ratify the Cape Town Convention,(1) it has published no developments on the matter in more than a decade. Because the Cape Town Convention remains unratified and the aircraft mortgage and register legislation outdated and deficient, valuable aircraft parts (eg, engines) cannot be separately registered in the aircraft register. Therefore, the use of aircraft engines as a separate security asset from the mortgaged airframe is limited under Finnish law.

Registration of aircraft and parts thereof

Finland's aircraft register is maintained by the Transport and Communications Agency. It contains details about aircraft registered in Finland, including:

  • their registration number;
  • their certificate of airworthiness's expiry date;
  • their maximum take-off weight; and
  • information about their owner, possessor and operator and the authorised representatives thereof.

The aircraft register also contains information about Finnish aircraft mortgages that are registered against the aircraft. However, there is no register in Finland for aircraft engines or any other parts thereof and the aircraft register includes no details about the engines installed on the registered aircraft or their owners.

Use of aircraft and aircraft engines as collateral

Only aircraft mortgages, which are generated under the Act on Aircraft Mortgages (211/1928, as amended), are recognised by law to constitute a security interest over an aircraft (ie, the airframe). According to the Act on Aircraft Mortgages, an aircraft mortgage creates a security over the registered aircraft and its constituent parts and accessories (eg, engines, landing gear and navigation equipment). However, neither the Act on Aircraft Mortgages nor any other law specifies which parts are considered constituent parts or accessories of the airframe.

Thus, only a registered aircraft may be subject to an aircraft mortgage and not an engine by itself. Where an engine and airframe belong to the same owner, the engine is usually deemed to be a constituent part of or accessory to the airframe. Therefore, it would be subject to an aircraft mortgage registered over the aircraft, but could not be used as a security separately from the airframe. This often benefits the aircraft's and engine's owner and lessor.

However, where an engine is leased separately from and has a different owner to the airframe, it would be in the interests of the engine's owner and lessor for it not to constitute a constituent part of or accessory to the aircraft and thus be subject to an aircraft mortgage registered over the aircraft (ie, the airframe). In this case, the engine, which is regarded as movable property by law, could also be used as a security by way of a possessory pledge separately from the airframe.

Another reason why an aircraft engine lessor would wish to avoid such engine being considered a constituent part of the airframe is that by law, any transactions that involve the airframe would also concern its constituent parts and accessories (ie, the engine). For example, if the airframe were sold to a new owner in good faith, the title to the engine would also be transferred to the airframe's purchaser. This raises the question of when the engine is deemed to be a constituent part of or accessory to the airframe.

Engines: constituent parts or accessories to the aircraft?

The concepts of constituent parts and accessories are defined in jurisprudence based on a wider Nordic legal tradition and precedents that primarily concern real estate. Under Finnish law principles, a 'constituent part' is an item which is:

  • mechanically fitted to or installed on the main object (ie, the airframe);
  • intended for the main object's permanent use; and
  • owned by the same owner as the main object or installed on the main object in the interests of the main object's owner.

An 'accessory' of the main object is an item which:

  • has a local and cohesive relationship with the main object, while capable of being uninstalled from the main object without difficulty;
  • is, considering its purpose and quality, necessary for the main object's appropriate economical use; and
  • meets the second and third requirements of the definition of a constituent part.

Notwithstanding the third requirement for joint ownership in the definition of a constituent part, an item is deemed to be part of the main object by principle of accession where it is installed on, attached to or otherwise incorporated in the main object in such a manner that:

  • it cannot be uninstalled from the main object without causing considerable damage to the main object or the item; or
  • the uninstallation cost would be excessively high compared with the item's value.

If the principle of accession applies, the owner of the item installed on the main object loses the rights in rem to the item.

Finnish legal literature opines that where an engine and airframe belong to the same owner, the engine is regarded as a constituent part of or accessory to the airframe. However, there are no legal precedents in Finland that address this question. Further, Finnish jurisprudence recognises that there are usually other factors that speak for the contrary, including the following:

  • In most cases, an engine lessee or airframe owner does not intend to become the engine owner, based on the engine lease agreement.
  • An engine can easily be uninstalled from an airframe (eg, for maintenance) and the engine remains a distinguishable part of the airframe during the entire lease period.
  • The engine is of significant value compared with other aircraft and airframe parts and the engine has significant collateral value to its owner.
  • It is common practice in the Finnish aviation market to lease engines separately from the aircraft. Engines are often moved from one aircraft to another and therefore not typically intended for the permanent use of only one aircraft.

Comment

Whether an aircraft engine constitutes a constituent part of or accessory to the airframe must be evaluated on a case-by-case basis, considering the relevant lease and financing documentation as a whole and the parties' intentions. The risk of the engine being regarded a constituent part of or accessory to the aircraft can be substantially mitigated by carefully drafting the relevant documentation.

While Finland's ratification of the Cape Town Convention would considerably improve the aircraft engine situation and clarify the legal position, there is little hope that this will happen in the near future.

For further information on this topic please contact Maria Lehtimäki or Ville-Veikko Vänttinen at Waselius & Wist by telephone (+358 9 668 9520) or email ([email protected] or [email protected]). The Waselius & Wist website can be accessed at www.ww.fi.

Endnotes

(1) The Convention on International Interests in Mobile Equipment and its Protocol on Matters Specific to Aircraft Equipment (16 November 2001).