Security

Security document (mortgage) form and content

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

Other than in respect of the generic provisions of the UAE Federal Law (Law No. 18 of 1993) in relation to the Law of Commercial Transactions (the Commercial Code) concerning mortgages over movable assets and, if applicable, the above-mentioned Federal Law No. 20 of 2016, there is no significant or specific aviation law in the UAE in respect of aircraft security documents such as aircraft mortgages and, therefore, no typical form for such security document would apply. The Commercial Code’s provisions applicable to commercial mortgages over movable assets require the transfer of possession of the movable asset to the mortgagee, whether fully or partially under a joint possession between the mortgagor and the mortgagee. In this context, the affixing of nameplates setting out clearly that the aircraft is mortgaged in favour of a mortgagee would address this requirement up to a certain extent. Furthermore, if mortgages fall within the scope of Federal Law No. 20 of 2016, the conditions set out under its article 8 of Chapter IV would apply. In particular, the registered aircraft mortgage would be enforceable subject to the mortgagee’s obligation to notify its rights against the pledged asset to any third party having a right of possession of the aircraft. From a practical standpoint, such notice should be sent by electronic means or, alternatively, by way of courier or registered mail with an acknowledgement of receipt.

As mentioned above, the Civil Aviation Law allows for the registration of a mortgage over a UAE-registered aircraft and the GCAA, in practice, permits the registration of mortgages governed by foreign law and reflects the name of the mortgagee on the certificate of registration on request. This registration may be considered as sufficient to record and protect the interests of the mortgagee and to prevent the mortgagor from deregistering the aircraft or effecting any change of ownership to the aircraft without the prior consent of the mortgagee. In this context, it is advisable that the mortgage or any other relevant security interest is recorded with the International Registry, to the extent that it is registrable.

Security documentary requirements and costs

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

Subject to the provisions of Federal Law No. 20 of 2016, the Ministerial Decision No. 5 of 2018, the Cabinet Decision No. 5 of 2018 and the Cabinet Decision No. 6 of 2018, which apply to the Emirates Movable Collateral Registry, there are no specific requirements applicable to security documents concerning aircraft. Generic requirements set out in the Commercial Code apply to commercial mortgages. The Commercial Code provides for the general principles and conditions that apply to mortgages over movable assets with a transfer of possession. As part of the conditions set out, the commercial mortgage shall contain the amount of the secured debt and shall be notarised before a notary of the UAE. The GCAA does not require a notarised Arabic translation of foreign law security documents, but it would be advisable to arrange for foreign law mortgages under English law or New York law (or both) to be translated into Arabic and notarised by a notary of the UAE to avoid any potential challenge of the validity of such documents.

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.

The GCAA does not provide for a specific registry for the registration or security documents. In the event of a mortgage being granted over a registered aircraft, the GCAA will register the identification details of the mortgagee in its records. A request shall be made in this regard and accompanied with a certified copy of the mortgage document and any other supporting documents evidencing the existence and powers of the mortgagee. In light of the provisions of article 2(3) of the Federal Law No. 20 of 2016, the GCAA may contemplate in the future establishing a special aircraft registry governed with a specific regime applicable to it.

At present, it is not a condition of the validity or the enforceability of a mortgage that it is filed or recorded by the GCAA under UAE law. As mentioned above, the information recorded by the GCAA other than reflected on the certificate of registration of the aircraft is not available to third parties other than interested parties. In the event that the mortgage is noted on the certificate of registration, this information will be available to third parties but does not create, on this sole basis, any specific rights or priority and it is advisable therefore that this mortgage is recorded with the International Registry as an international interest to the extent possible. No registration fees specifically apply to a mortgage registration except in respect of the GCAA’s fees applicable to International Registry’s registration for the purpose of the allocation of an AEP code as detailed in question 14.

Registration of security

How is registration of a security interest certified?

The Civil Aviation Law provides for the registration of a mortgage over UAE-registered aircraft and the GCAA. In practice, it permits the registration of mortgages governed by foreign law under its registry and the notation of the name of the mortgagee on the certificate of registration issued by it to the extent requested by the mortgagee. The registration of the mortgage under the certificate of registration would not specify the rank of the mortgage, but would constitute a protection of the mortgagee against the owner’s attempt to sell or deregister the aircraft without obtaining the mortgagee’s prior written consent.

The Commercial Code does not contain any specific provisions in respect of the rank and priority of security interest created by the commercial mortgage, but the rights of the secured creditors would be governed by the provisions applicable to the international interests of the Cape Town Convention provisions except that the effect of such provisions may be affected in the event of insolvency proceedings, and non-consensual rights may have priority over international interests under the laws of the UAE.

Effect of registration of a security interest

What is the effect of registration as to third parties?

The information registered with the GCAA, other than recorded on the certificate of registration of the aircraft, is not available to third parties other than interested parties. Regarding the information and documents recorded with the GCAA but not strictly reflected in the aircraft certificate, it is doubtful whether such recorded information and documents would be recognised as enforceable with regard to third parties. However, on the basis of the aforementioned provisions of Federal Law No. 10 of 1992, as amended by Federal Law No. 36 of 2006, the courts of the UAE would recognise a certificate of registration issued by the GCAA as admissible evidence of a security interest such as a mortgage interest.

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?

Security over aircraft is typically structured using a security trustee or agent holding the security over the aircraft on behalf of financiers. Most aircraft are owned by special-purpose companies (SPCs) in the relevant aircraft structure. The SPC is typically a private limited company incorporated in countries with favourable tax regimes such as the Cayman Islands or Ireland. Under the Civil Aviation Regulations, the GCAA would give effect to the registration of a security (typically a mortgage) and register it in the name of the security trustee or agent against the SPC as owner. Aside from the mortgage, which has been discussed above, a security assignment of the owner’s rights under the lease and its rights under the hull and war insurances in respect of the operation of the aircraft would be granted in favour of the financiers and a pledge over the owner’s bank account to which the lease rentals are paid would be put in place. Pledges over credit accounts and deposits held in the books of licence banks and financial institutions fall within the scope of article 3 of Federal Law No. 20 of 2016 and, accordingly, are eligible for registration with the Emirates Movable Collateral Registry. Under the Civil Aviation Regulations, international interests as set out under the Cape Town Convention and its Protocol would be recognised in respect of a mortgage interest as an enforceable item of collateral in the UAE, as the state of registration. In respect of lease interests, a lessor’s rights over a property that is subject to a lease for a period of at lease one year or a finance lease are registrable under the provisions of articles 11(a) and (b) of Federal Law No. 20 of 2016. In line with our above observations, it is doubtful at this stage whether mortgagees or lessor’s rights created over aircraft would be registrable.

Under a simple finance lease structure, the SPC would lease the aircraft to the operator under a finance lease. The operator would operate the UAE-registered aircraft and pay the lease rentals to the SPC under the finance lease and, in broad terms, that rent would be equal to the principal and interest the SPC must pay to the financiers in respect of the financing documentation. When considering the registration of the lease and the financing documentation with the GCAA, the interested parties should provide originals or certified copies of the relevant transaction documents that reflect the transaction’s structure. The term of the finance lease and the loan would coincide, and therefore, upon the expiry of the lease term, if the airline has paid all amounts due from it under the finance lease, the SPC will have repaid the loan in full and at that point, the financiers would request from the GCAA the release of the mortgage and any other security documents registered with the GCAA’s file such as an IDERA. Typically, under this finance lease structure, the operator would be entitled to purchase the aircraft for a nominal sum and amendments would be made with the GCAA in order to reflect the transfer of ownership of the aircraft and its deregistration if the UAE’s registration cannot be maintained under the conditions set out by the Civil Aviation Law.

No specific regulations have been developed under the UAE to govern lease financings and it should be noted, as a general matter, that financial institutions are generally restricted from owning assets and carrying out commercial activities. Sharia-compliant structures, such as Ijaara leases and Murabaha financing structures, can take over as an alternative to the traditional lease financing structures.

Security over spare engines

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

A security over spare engines or spare parts can take the form of a pledge. The pledge is a form of security under Law No. 5 of 1985 relating to the Law of Civil Transactions (the Civil Code). The completion of a pledge requires, as for a commercial mortgage, that the possession of the pledged asset is physically transferred to the pledgee or its agent. Accordingly, this type of security created by the Civil Code is not applicable to movable assets, such as installed engines or parts that shall continue to be used by the borrower or a third party such as the aircraft’s operator, notwithstanding the completion of the security. In addition to articles 11(a) and (b) of Federal Law No. 20 of 2016 in respect of lease interests, article 3(9) provides that ‘goods assigned for rent’ and other movable assets that can be pledged under existing provisions of UAE laws are eligible for registration under the Emirates Movable Collateral Registry. In this regard, it may be possible to create a specific security over installed engines and parts under UAE law, subject to taking the view that the securities granted over installed engines shall follow the same regime as aircraft.