Security

Security document (mortgage) form and content

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

Mortgage is the typical contractual security that can be created in Lithuania. A mortgage agreement must be notarised to create a valid security over the aircraft. As long as the notarisation is required, such documents must either be concluded in Lithuanian or be multilingual, in which case the public notary certifies the Lithuanian version (and the Lithuanian language will prevail) and the foreign version serves for informative purposes if one of the parties does not speak the local language (if the document is bilingual a third party must verify the translation from Lithuanian into any other language). Also, such contracts normally include a clause that in the case of discrepancy, the Lithuanian version shall prevail.

As a matter of practice, the public notary prepares a draft of a mortgage agreement tailored for the needs of the parties. Quite often the parties’ attorneys are involved in amending the draft prepared by the public notary and agreeing the final form with the public notary. There is no specific form for this type of document; however, the mortgage agreement must be compliant with the requirements of Lithuanian laws and typically includes the following:

  • the identities of the debtor, creditor and mortgagor;
  • the object of the mortgage (aircraft engines can be specifically identified when the aircraft is described);
  • the total or agreed value of the mortgaged object;
  • the obligation of the debtors secured by the mortgage;
  • the maximum secured amount (if the parties agree);
  • the date of fixing the debt amount;
  • the term within which the secured obligations must be fulfilled;
  • the default interest rate;
  • the number of contract counterparts; and
  • boilerplate clauses that clarify the relations between parties.

Inclusion of economic terms in the mortgage agreement is necessary; however, it may sometimes suffice to provide a reference to the major agreement (eg, facility agreement) that specifies the secured obligations.

There are various types of mortgages available under the Civil Code (eg, a maximum mortgage, a conditional mortgage or a simple mortgage) and the mortgage agreement must contain additional information depending on the type of mortgage agreed between parties.

Security documentary requirements and costs

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

As noted in question 15, a mortgage agreement must be concluded in a written form in Lithuanian and be notarised. In terms of the costs, the notarisation of a mortgage agreement will cost approximately €150 excluding VAT; in addition, one must pay compensation for the searches in public registers of around €1 and compensation for the services of the State Enterprise Centre of Registers of around €30. The documents’ legalisation costs are €15 per apostille. Document translation costs may vary, but translation of one A4 page should cost around €15 excluding VAT.

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 registration of a mortgage is not a condition for the effective creation and its perfection against the debtor, but it is normally a condition for perfection of the mortgage against third parties.

The mortgage agreement and the relevant data shall be electronically transferred by the public notary approving the mortgage to the Register of Mortgages of the State Enterprise Centre of Registers and then the Civil Aircraft Register. The recordation of the mortgage is evidenced by an extract from the Register of Mortgages and acknowledgement of the mortgage by the Public Institution Transport Competence Agency, which can be made in a letter to be issued on behalf of the Public Institution Transport Competence Agency upon request by the relevant party. The registration of the mortgage at the Register of Mortgages is made on the same or the next business day upon receipt of data from the public notary; however, it may take a few days for the Public Institution Transport Competence Agency to receive data from the Register of Mortgages and to acknowledge the mortgage.

If a hypothec creditor (mortgagee) wishes to remove a mortgage, it must file a written declaration on the deregistration of a mortgage before a public notary and the public notary submits the data on the end of the mortgage to the Register of Mortgages and then the Register of Mortgages submits the data to the Civil Aircraft Register.

Registration of security

How is registration of a security interest certified?

On the same day or on the day after the mortgage agreement is notarised, the State Enterprise Centre of Registers issues a notification to the public notary confirming the registration of the mortgage in the Register of Mortgages. The notification specifies the following:

  • the mortgage registration number;
  • the registration date and time;
  • the type of hypothec (eg, consensual);
  • the date and time of conclusion of the mortgage contract;
  • the notarial register number;
  • the name of the creditor, debtor and the person offering security; and
  • the obligation secured by the mortgage.

Recordation of a mortgage can be evidenced at any time by an extract from the Register of Mortgages and acknowledgement of the mortgage by the Lithuanian civil aviation authority (the Public Institution Transport Competence Agency), which is made in a letter to be issued upon request by the relevant party.

Effect of registration of a security interest

What is the effect of registration as to third parties?

The hypothec creditor (mortgagee) has priority claim over other creditors, including subsequently registered mortgages, in respect of the mortgaged assets. The role of hypothec creditor is very important if the debtor defaults and bankruptcy proceedings are initiated. Such hypothec creditor becomes a super-priority creditor broadly outside the bankruptcy that is entitled to satisfy its claim from the mortgaged assets before other claims are satisfied (eg, bankruptcy administrator claims, taxes, employee remuneration).

As noted above, a mortgage creation notice is basically addressed to the public notary. The registration of a mortgage at the Register of Mortgages is a valid notice binding third parties from the date the record is made. All third parties may rely on the accuracy of the newly issued extract of the public Register of Mortgages and the data contained therein, since the data recorded in the register is deemed to be true and correct until contested under the procedures set by law (prima facie effect).

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?

Lithuanian law does not distinguish between legal and beneficial interest. Similarly, the concept of trust is not recognised in the Lithuanian jurisdiction in the same way as in the common law countries. The Lithuanian mortgage agreement includes the debtor, creditor and the mortgagor (the debtor and mortgagor may be the same person).

However, it is not possible to include a security trustee that, for example, acts as an agent of lenders under and in connection with the English or New York law-governed finance documents, in Lithuanian mortgage documents.

Also, a change of lenders triggers the slight modification of mortgage documentation, as the security registration would be affected and the new lender needs to be recorded in the Register of Mortgages locally. As a practical solution, the borrower and security agent may agree that an independent payment obligation (or parallel debt) is created in favour of a security trustee, which can be secured locally.

Under Lithuanian law, an aircraft mortgage is a proprietary right. With the transfer of title to a mortgaged aircraft, the mortgage follows the aircraft. The mortgage does not give the mortgagee a title to the mortgaged property, which remains in the ownership of the mortgagor. The mortgage of an aircraft does not prevent the mortgagor from transferring title to the mortgaged aircraft to a third party, unless otherwise agreed by parties.

Security over spare engines

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

Security over an engine can be created either as security over the part of the aircraft in which it is installed or separately from the aircraft as the security over separate equipment.

As long as an engine does not qualify as a part of the aircraft (eg, a spare engine), it can be separately encumbered by entering into a pledge agreement. By virtue of the Lithuanian law, a spare engine can be made subject to a possessory or non-possessory right of pledge. For the creation of non-possessory pledge, the notarisation of a private agreement is required and it is registered in the Register of Mortgages.

As long as the aircraft engine is not considered part of an aircraft, which is an immovable property under Lithuanian law, a pledge agreement may be governed by foreign laws if a counterparty to such an agreement is a foreign entity.

The pledged engine does not cease to be encumbered upon its removal or installation on another aircraft.