Security

Security document (mortgage) form and content

What is the typical form of a security document over the aircraft and what must it contain?

A German registered aircraft may not be levied with a security interest other than a mortgage registered in the German Aircraft Mortgage Register (see section 9 of the Act on Rights in Aircraft), which is operated by the local court in Braunschweig (thus, unlike the Aircraft Register is the Aircraft Mortgage Register not operated by the Federal Aviation Authority). The aircraft owner needs to issue such mortgage document and apply for registration. To expedite enforcement of a mortgage it is generally issued as a German notarial deed, which includes a submission to immediate enforcement. In addition, the mortgage usually secures not a specific loan agreement but an abstract acknowledgement of debt, which could be included in the mortgage document itself. Further, the mortgage has to state the interest rate, which has to be fixed, and an ancillary charge to cover enforcement cost. Moreover, all documents (the mortgage itself, POA, affidavit regarding ownership, prove of corporate existence as well as the authorisation of the signatories of the owner) have to be provided to the German Aircraft Mortgage Register either in German, in bilingual form whereby the German wording prevails or with a certified German translation.

Only German registered aircraft may be encumbered with a mortgage registered in the German Aircraft Mortgage Register (see questions 6 and 17). Securities on foreign registered aircraft follow different provisions although enforcement rules are similar (see section 103 et seq of the Act on Rights in Aircraft).

Security documentary requirements and costs

What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?

To properly register a mortgage on an aircraft, the approval of registration by the owner of the aircraft must be notarised (section 86(1) of the Act on Rights in Aircraft, together with section 37(1) of the Ship Register Regulation) and the agreement to procure a mortgage does not become binding on the parties before registration (section 5(2) of the Aircraft Mortgage Act). Moreover, in order to expedite enforcement of the mortgage, the mortgage often includes a submission to immediate enforcement and is therefore issued as notarial deed (Notarielle Urkunde). The registry and notary fees are fixed according to a scale of fees provided by law and vary in regard to the amount of the secured claim, respectively the submission of immediate enforcement (see sections 34(1), 53(1) and 97 of the Act on Court and Notary Fees). To reduce the notary fees, a mortgagee may agree to a lower amount of the submission to immediate enforcement than the amount secured by the mortgage.

Security registration requirements

Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.

No security documents have to be filed with the German Federal Aviation Authority. However, a German mortgage needs to be registered in the German Aircraft Mortgage Register as a condition to its effective creation and perfection against the debtor or aircraft owner and third parties.

Registering an aircraft mortgage in Germany may take three to four weeks from filing the required documents with the German Aircraft Mortgage Register until having received an extract of the German Aircraft Mortgage Register showing the registration of the mortgage. Unlike the Aircraft Register is the Aircraft Mortgage Register maintained by the local court in Braunschweig (section 78 of the Act on Rights in Aircraft), thus, in relation to the mortgage all documents have to submitted to it and not to the Federal Aviation Authority. For every aircraft registered, a new page is reserved, which is divided into two parts, one for the aircraft itself and one for any mortgages it might be encumbered with (section 81(1) of the Act on Rights in Aircraft , together with section 2 of the Aircraft Mortgage Register Regulation). Only the person or entity that is registered as owner in the Aircraft Register is entitled to have an aircraft registered in the Aircraft Mortgage Register (section 79(2) of the Act on Rights in Aircraft; see question 6).

The mortgage application must contain the following (section 80 of the Act on Rights in Aircraft):

  • page number of the Aircraft Register (if already known);
  • manufacturer’s serial number and registration mark of the aircraft;
  • make and model of the aircraft;
  • name of the creditor, the amount of the secured claim as well as the applicable interest rate and ancillary charge;
  • name and address of the owner according to the Aircraft Register (the applicant must prove that the data to be recorded corresponds with the data from the Aircraft Register, therefore, an extract of the Aircraft Register from the German Federal Aviation Authority that is not older than four weeks needs to be submitted to the Aircraft Mortgage Register). It may be possible to file the ‘mortgage documents’ prior to registration of the owner in the Aircraft Register and submit the Aircraft Register extract later; however, it is a prerequisite to registration of the mortgage;
  • in addition, prima facie evidence of ownership needs to be submitted (section 80 of the Act on Rights in Aircraft), which is usually done by a notarised and apostilled affidavit of the aircraft owner; and
  • the fees of the Aircraft Mortgage Register and the German notary vary in regard to the amount of the secured claim (see sections 34(1), 53(1) and 55(2) of the Act on Court and Notary Fees - see question 16). After the ‘mortgage documents’ have been filed with the German Aircraft Mortgage Register, the German Aircraft Mortgage Register will issue an invoice for its fee and that invoice needs to be paid prior to the registration of the mortgage.
Registration of security

How is registration of a security interest certified?

Concerning certificates about records in the Aircraft Mortgage Register, there is no equivalent to the official certificate of registration for the Aircraft Register (see question 11). However, as the Aircraft Mortgage Register is public, the register court may be asked for (certified) copies of a register extract and if that extract shows a registered mortgage it is presumed that the mortgagee actually has the benefit of such mortgage, on the other hand, if the extract shows the cancellation of a mortgage it is presumed that such cancelled mortgage is not existing anymore and a third party may rely thereon unless it has knowledge to the contrary (section 85(1)(2), together with section 15 of the Act on Rights in Aircraft).

The rank (absolute and relative) of a registered mortgage, which indicates its priority, is clearly visible from the register extract. A mortgage always is recorded in part 2 of the register (part 1 being reserved for the aircraft itself), starting at the top with no. 1 and continuing further downward if any additional mortgages are registered. If a single aircraft is encumbered with more than one mortgage, their relative rank is discernible from the respective pages of the register extract, as older mortgages have priority over newer ones (section 25(1) of the Act on Rights in Aircraft). For example, an earlier registered mortgage at ‘upper’ position 1 outranks a later registered mortgage at a ‘lower’ position 2, 3, etc. Should a registered mortgage be cancelled for whatever reason, any ‘lower’ entries will move up one position, so if no. 3 were deleted, nos. 1 and 2 remain untouched, but no. 4 becomes 3 and 5 becomes 4, etc.

Subsequent changes of rank of certain positions are permissible, but such alterations again have to be recorded in the register in order to effective (see sections 26 and 27 of the Act on Rights in Aircraft).

Effect of registration of a security interest

What is the effect of registration as to third parties?

Registration of a mortgage usually confers priority over other mortgages that might be registered subsequently (section 25(1) of the Act on Rights in Aircraft; see question 18).

Third parties can rely on the accuracy of the public registration of the German Aircraft Mortgage Register, as it is presumed by law that the person who is registered as the mortgagee in the Aircraft Mortgage Register is actually entitled to such right as long as there is no proof to the contrary (section 15(1) of the Act on Rights in Aircraft). A potential acquirer of the mortgage may rely on the registrations made unless the acquirer knows that those are incorrect (section 16(1) of the Act on Rights in Aircraft). Should the ownership of the aircraft be transferred to a third party, the registered mortgage does not expire but remains intact and the buyer acquires only encumbered ownership (section 98(1)(2) of the Act on Rights in Aircraft). The parties have to notify the German Aircraft Mortgage Register about any change in ownership of the aircraft to have it recorded in the German Aircraft Mortgage Register (section 90 of the Act on Rights in Aircraft).

Security structure and alteration

How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?

In German law the concept of trust is well known, and according to modern majority view can be employed in different ways when providing security. However, as the concept itself is not free from criticism and crosses the border between obligation and property law, it is used as a form of ‘stand-alone security’ at the most. It will not be employed in addition to the registered mortgage on aircraft, itself already being comprehensively and exclusively regulated (see section 9 of the Act on Rights in Aircraft).

The registered mortgage as laid down in section 1 of the Act on Rights in Aircraft is a right in rem, as it rests on the ownership of the aircraft it encumbers, regardless of the owner’s identity. Regarding any changes thereto, several constellations have to be differentiated:

  • to have the underlying claim (together with the mortgage) easily transferred or assigned, the underlying claim of a German aircraft mortgage is usually not the specific loan agreement but an abstract acknowledgement of debt in relation to a certain amount that is also the amount secured by the mortgage; that is also helpful in a syndication scenario as then the mortgage may be easily transferred by simply assigning the abstract acknowledgement of debt to the new financier, security trustee or agent (following which the aircraft mortgage is also transferred by operation of law);
  • changing the aircraft’s ownership leaves the registered mortgage untouched (section 98(1)(2) of the Act on Rights in Aircraft; see question 19); however, as stated above, the parties need to notify the German Aircraft Mortgage Register of the owner change to have it recorded; and
  • changing the amount of the secured claim or the mortgagee needs to be recorded as well in the Aircraft Mortgage Register (section 55 of the German Act of Rights on Aircraft).
Security over spare engines

What form does security over spare engines typically take and how does it operate?

Engines are to be seen as an accessory of the aircraft (see question 7), so that a security interest in the aircraft itself also covers the engines installed at the time it is created, provided they are also owned by the owner of the host aircraft as recorded in the Aircraft Register (section 31 of the Act on Rights in Aircraft). Although the qualification as an accessory is not precluded by the fact that the engine in question is only temporarily used for a single host aircraft (section 31(1)(2) of the Act on Rights in Aircraft) - as such use is typical for aircraft engines because they are regularly swapped between different aircraft - the engine is considered to be an accessory of a specific host aircraft as long as it is dedicated to it, which necessitates some kind of close spatial connection (compare section 97(1)(1) of the German Civil Code). In other words, the engine must at least be in the course of being installed in the host aircraft at the time of creating the mortgage over the aircraft. An engine is released from joint liability as collateral:

  • if ownership is transferred to a third party and the engine is removed from the aircraft before it is seized on behalf of the mortgagee for enforcement purposes (section 31(2)(1) of the Act on Rights in Aircraft);
  • if it loses its classification as an accessory of the respective aircraft, this is usually not the case if it is removed only for maintenance and will be installed on the same aircraft after completing of such maintenance (section 31(3)(1) of the Act on Rights in Aircraft); or
  • if it is placed in a spare parts storage (section 31(3)(2) of the Act on Rights in Aircraft).

To avoid the two latter cases of release, the owner of the aircraft may agree with the mortgagee to extend the mortgage to all spare parts in the inventory of a specific domestic or foreign spare parts storage and have the extension recorded in the Aircraft Mortgage Register. The extension depends on the existence of the aircraft mortgage itself and is subject to comprehensive statutory regulations (section 68 et seq of the Act on Rights in Aircraft).

An independent mortgage in an engine cannot be registered in Germany.