Recent European airline bankruptcies have highlighted the need to take care when formulating aircraft repossession and recovery strategies. An owner or financier will want to ensure that a successful recovery of its aircraft from the defaulting airline is not followed by the detention or loss of its aircraft on the basis of the rules that apply at the fly-out destination or the location chosen for the maintenance or storage of the aircraft.
The risk of detention and sale is present, in one guise or another, in most jurisdictions. In the United Kingdom, it is most commonly associated with unpaid Eurocontrol navigation charges (including the notorious fleet-wide lien) and, more recently, unpaid civil penalties under the EU Emissions Trading Scheme (EU ETS) insofar as it relates to aircraft.
This update summarises the detention and sale regime in the United Kingdom, explains how the risk of the Eurocontrol fleet-wide lien can be handled and highlights the available protection for owners and financiers in the context of EU ETS legislation.
The UK Civil Aviation Authority (CAA) has the power to detain and sell aircraft. This power applies in relation to the non-payment of airport charges (ie, charges payable for the use of various UK airport facilities)(1) or air navigation charges (ie, charges payable for the supply of services by the UK National Air Traffic Services, the Danish and Icelandic authorities and Eurocontrol).(2) The detention and sale regime with respect to aircraft is effectively the same for both airport charges and air navigation charges.
The applicable legislative provisions grant a detention right over an aircraft in favour of the CAA where it is:
- the aircraft in respect of which charges were incurred and remain unpaid, whether or not such charges were incurred by the person that is the operator at the time that the detention begins - thus, an owner or financier is exposed to the risk of prior operators; or
- one aircraft in the fleet of aircraft in relation to which the person in default is the operator at the time that the detention begins - this is the so-called 'fleet-wide lien'.
Any person repossessing an aircraft is therefore not liable to have it detained in the United Kingdom if:
- the aircraft itself has not incurred any charges which are unpaid; and
- the person in default is no longer the operator of the aircraft.
Managing fleet-wide risk
An owner or financier can effectively deal with the fleet-wide risk by terminating the lease agreement before its aircraft enters the United Kingdom. This was affirmed in a 2010 case relating to the now-defunct operator Zoom Airlines, which stated that the election to terminate must be made before the aircraft is detained.(3) Any such termination should be effected before the aircraft reaches the United Kingdom , as the detention right may be exercised on arrival in the United Kingdom and (notwithstanding a subsequent termination of the lease agreement) cannot be removed until such time as the unpaid sums are paid or the CAA elects to sell the aircraft.
The CAA's power to detain aircraft is restricted to so-called 'designated airports', many of which were listed in an order of the secretary of state for transport in 2009. The list includes aerodromes.(4)
The secretary of state can supplement the list of designated airports by amendment order.(5) Before such an order is made, the Department of Transport enters into consultation with the aerodrome concerned, the CAA and other interested consultees.
The 2009 and subsequent legislation has greatly increased the number of airports covered and, as a result, has made it very difficult for the owner or financier of a commercial aircraft to position its aircraft beyond the reach of the CAA.
The right to sell an aircraft is consequent upon its detention. Pursuant to the provisions of the act (in relation to unpaid airport fees) and the Eurocontrol Regulations (in relation to unpaid air navigation charges), the UK CAA has the power, with the leave of the court, to sell the aircraft if due amounts are not settled within 56 days of the date on which the aircraft was detained.
The provisions in relation to the EU ETS(6) impose the same ultimate penalty as those for unpaid airport fees and unpaid air navigation charges. However, the procedure is different and there is probably increased protection for owners and financiers.
In England and Wales, the power to detain an aircraft rests with the Environment Agency, not with the CAA. The power may be exercised in relation to:
- UK administered aircraft operators which have failed to pay a civil penalty within six months of its due date. Civil penalties generally result from a failure to comply with the ETS Regulations (including reporting requirements) or a failure to surrender allowances, and are generally due within one month of the date on which notice to pay is served; and
- EU operators which are subject to an operating ban under Article 16(10) of the EU ETS Directive (2003/87/EC).
The detention right operates on a fleet-wide basis, since its reference point is necessarily the operator, not the aircraft.
The first limb applies only to an operator which is specified as 'administered', for the purposes of the EU ETS, by the United Kingdom under EU Regulation 748/2009, which covers most UK operators plus those international carriers for which the United Kingdom has been allocated administrative responsibility.
Under the second limb, any aircraft operator operating within the European Union may have its aircraft detained if an EU member state applies for an operating ban under Article 16(10) of the directive. Thus, if an airline fails to comply with implementation of the EU ETS in Malta (for example), its aircraft may still be detained in the United Kingdom by the Environment Agency, provided that Malta has applied for an operating ban under Article 16(10).
Protections against detention
An aircraft cannot be detained, continue to be detained or be sold if:
- following detention, the Environment Agency no longer has reason to believe the defaulting operator is the operator of the aircraft; or
- the defaulting operator or any other person that claims an interest in the aircraft demonstrates to the Environment Agency's satisfaction that the defaulting operator is no longer entitled to possession of the aircraft, in particular by virtue of the termination of any lease with respect to the aircraft.(7)
The legislative provisions do not state whether the operator must have ceased to be the operator, or whether the lease must have been terminated, before the exercise of the detention right. The fact that the provisions are in relatively broad terms suggests that lease termination after detention should be effective to cause the release of an aircraft.
Assuming that the transaction includes a lease to the operator, a mortgagee (as "a person claiming an interest in the aircraft") should not rely solely on its enforcement of the aircraft mortgage as a trigger of the requirement to release the aircraft. A mortgagee must be able to demonstrate that the lease has also been terminated in order to be confident of securing the release of the aircraft.
The geographical scope of the Environment Agency's detention power is greater than that of the CAA. Rather than using a list of designated airports, the EU ETS Regulations encompass "any area or space... for the landing and departure of aircraft".(8) Every aerodrome operator must provide assistance to the Environment Agency in detaining the relevant aircraft.
An aircraft may be sold, with the leave of the court, if sums due are not settled within 56 days of the date on which the aircraft was detained. Where the Environment Agency has detained an aircraft under the first limb, it must give at least 21 days' notice to any relevant party (which includes the owner and/or mortgagee) before sale.
The key points on recovery and repossession can be summarised as follows:
- An owner or financier must carefully select its fly-out destination and maintenance and storage location.
- The (perhaps overstated) Eurocontrol fleet-wide risk in the United Kingdom can be effectively addressed by timely lease termination.
- Timely lease termination should also protect against ETS detention and sale risk.
- Recovering mortgagees should not rely on repossession as mortgagee alone.
- It will be more than difficult to find a recovery location in the United Kingdom that is outside the reach of the CAA and the Environment Agency.
For further information on this topic please contact Gavin Hill or John Pearson at Vedder Price LLP by telephone (+44 20 3440 4680), fax (+44 20 3440 4681) or email (email@example.com or firstname.lastname@example.org).
(4) Schedule 1 of the Aerodromes (Designation) (Detention and Sale of Aircraft) (England and Wales) Order 2009 lists Bembridge, Biggin Hill, Birmingham, Blackpool, Bournemouth, Bristol, Bristol (Filton), Cambridge, Cardiff, Carlisle, Coventry, Cranfield, Doncaster/Sheffield, Durham Tees Valley, Exeter, Farnborough, Gloucestershire, Humberside, Leeds/Bradford, Liverpool, London City, London (Gatwick), London (Heathrow), London (Luton), London (Stansted), Lydd, Manchester, Manston, Newcastle, Norwich, Nottingham East Midlands, Oxford, Redhill, Southampton, Southend and Wolverhampton.
(8) 'Aerodrome' means any area of land or water designed, equipped, set apart or commonly used for affording facilities for the landing and departure of aircraft and includes any area or space, whether on the ground, on the roof of a building or elsewhere, which is designed, equipped or set apart for affording facilities for the landing and departure of aircraft capable of descending or climbing vertically. (See Regulation 48 of the ETS Regulations and Section 105 of the Civil Aviation Act).