Overview

Conventions

To which major air law treaties is your state a party?

Turkey is a party to the Chicago Convention (1944) and the Cape Town Convention (2001).

Domestic legislation

What is the principal domestic legislation applicable to aviation finance and leasing?

The primary legislation applicable to aircraft finance and leasing transactions are:

  • the Code of Obligations;
  • the Civil Code;
  • the Civil Aviation Act; and
  • the Financial Leasing Act.

International conventions to which Turkey is a party are also applicable, as is all other national legislation.

Governing law

Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?

There is no restriction on the choice of law in contracts for the transfer of interests in aircraft. Creation of a security over aircraft is subject to the laws of the place in which the aircraft is registered, and this cannot be altered by a choice-of-law clause.

Title transfer

Transfer of aircraft

How is title in an aircraft transferred?

Title to aircraft is transferred on conclusion of a written contract. A bill of sale is effective and sufficient for transfer of title. However, transfer of title must be perfected through registration at the aircraft registry in order to be effective for third parties.

Transfer document requirements

What are the formalities for creating an enforceable transfer document for an aircraft?

A notarised contract is required to register the transfer of title. If the notarisation is made abroad, the document must bear the apostille stamp. If the contract is in a foreign language, it must be translated into Turkish by a sworn translator and the translation must also be notarised.

Registration of aircraft ownership and lease interests

Aircraft registry

Identify and describe the aircraft registry.

The aircraft registry is kept by the Directorate General of Civil Aviation in Ankara and is an owner registry.

Registration of an aircraft can be demanded only by its owner. The aircraft must be a Turkish aircraft. An aircraft is a Turkish aircraft if its owner is a Turkish citizen or a Turkish company in which the majority of directors and shareholders are Turkish citizens. The only exception to this rule is where an aircraft owned by a foreign party is leased for at least six months to a Turkish citizen or company that fulfils the aforementioned conditions.

The lease can be a dry lease or a financial lease. For dry leases, there are regulations and processes in place for concluding Article 83bis arrangements with the country of original registration. However, this is extremely rare in practice. Most leases in Turkey are financial leases, which do not require Article 83bis agreements. Operating leases are also treated as financial leases.

Registrability of ownership of aircraft and lease interests

Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?

Ownership and lease interests can be registered. While there is no other registry in which ownership interest can be registered, financial leases for aircraft and engines are also registered by the Association of Financial Institutions.

As a rule, an engine is an integral part of the aircraft. The engine becomes property of the owner of the aircraft, by accession, when it is installed on the aircraft. However, Turkey is a party to the Cape Town Convention, which provides for the international registration of rights and securities in aircraft engines. Any registration of an owner’s, operator’s or lessee’s interest in an aircraft engine which is registered in the international registry should be recognised in Turkey.

Registration of ownership interests

Summarise the process to register an ownership interest.

The following documents must be submitted in order to register an ownership interest in an aircraft that is imported into Turkey:

  • the registration application form;
  • the bill of sale and/or purchase agreement, including notarised translations if these are in a language other than Turkish;
  • proof of payment of stamp duty (0.948% of the purchase price);
  • proof of authority and the authenticated/apostilled signature specimens of persons who have signed the bill of sale and purchase agreement; and
  • proof of payment of the aircraft registry service fee.

Registration is completed within five to 10 business days upon application. The costs for registration consist of:

  • stamp duty;
  • notary charges; and
  • the aircraft registry service fee.

Stamp duty can be hefty. For example, the stamp duty where the purchase price is $30 million would be $284,400. Notary charges are approximately $12,000, while the aircraft registry service fee is approximately $500. Title to an engine is automatically vested with the owner unless other interests are registered in the international registry.

Title and third parties

What is the effect of registration of an ownership interest as to proof of title and third parties?

Registration of ownership is proof of title against third parties. The bona fide acquisition of title or other interest by relying on the contents of the registry is protected, even if the owner has no or defective title. Claims that the registration is not correct can be recorded in the registry through a precautionary court order.

Registration of lease interests

Summarise the process to register a lease interest.

The following information is specific to financial leases. Other types of lease can also be registered, but commercial and business aircraft leased to Turkish entities are almost invariably leased under a financial lease, even though the terms of the lease may not conform to the definition of a financial lease exactly.

Registration of a lease interest is a two-step process. The first step is registration of the lease agreement with the Association of Financial Institutions. This is a quasi-governmental agency, which records all financial leasing transactions. Financial leasing agreements must be notarised and translated into Turkish if they are in a foreign language. These are exempt from stamp duty. Depending on the length and language of the agreement, notarisation will cost between $2,000 and $5,000.

Step two is registration of the lease in the aircraft registry. The following documents must be submitted to the aircraft registry:

  • the lease agreement, as recorded and certified by the Association of Financial Institutions;
  • the registration application form;
  • the application letter signed by the owner or their attorney;
  • a letter of deregistration from the previous registry;
  • a copy of the aircraft flight manual page that shows the maximum takeoff weight; and
  • proof of payment of the aircraft registry service fee.

Registration is completed within five to 10 business days upon application. The aircraft registry service fee is approximately $500.

Certificate of registration

What is the regime for certification of registered aviation interests in your jurisdiction?

The aircraft registry issues a registration certificate for registered aircraft. This shows the aircraft’s:

  • owner;
  • make;
  • model;
  • manufacturer serial number;
  • maximum takeoff weight;
  • registration marks; and
  • operator.

Registered leases and other encumbrances are not included on the certificate. The certificate is merely proof that an aircraft is registered. In case of a discrepancy between the certificate and the registration records, the registration records will prevail. It is not advisable to make commitments based solely on the certificate.

Deregistration and export

Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?

In principle, an aircraft cannot be deregistered or exported without the consent of its owner or mortgagee. An operator cannot block deregistration or export. However, if the operator is also the lessee of the aircraft, it may be able to block deregistration and export by relying on the lease agreement, even if its validity is disputed.

Powers of attorney

What are the principal characteristics of deregistration and export powers of attorney?

A deregistration and export power of attorney can be used to deregister and export an aircraft. However, under Turkish law, a power of attorney cannot be issued irrevocably. The principal has the unrestricted and absolute right to revoke the power of attorney at any time, even if the power of attorney states that it is irrevocable. The power of attorney can be issued to any number of attorneys. However, a power of attorney cannot be registered. A power of attorney will become invalid if the principal is declared bankrupt.

Cape Town Convention and IDERA

If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.

In contrast with a deregistration and export power of attorney, an IDERA is, true to its name, irrevocable. Once it has been issued and registered in accordance with the regulations, it cannot be revoked by its issuer.

The IDERA must be in the form prescribed by the regulation on IDERAs, which is similar to the form provided by the Cape Town Convention. This must be notarised by the issuer and submitted to the aircraft registry for registration.

The party authorised under the IDERA is required to appoint and maintain an attorney in Turkey who is authorised to execute the IDERA and to receive service on the authorised party’s behalf.

There are no rules to prohibit parties from obtaining both a deregistration and export power of attorney and an IDERA.

Security

Security document (mortgage) form and content

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

The only security that can be placed on an aircraft is a mortgage. This is established with an agreement between the owner and the mortgagee. There is no specified form; however, it must contain the amount of the debt and the interest rate. If the debt is not certain or is variable, the maximum secured amount including interest must be stated. This requirement does not comply with the Cape Town Convention, which states that a security amount need not be stated.

Security documentary requirements and costs

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

The mortgage agreement must be notarised. If it is in a foreign language, it must be translated into Turkish by a sworn translator. The mortgage agreement is subject to stamp duty at the rate of 0.948% of the secured amount. Notary charges are also payable and again depend on the secured amount.

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 mortgage is created through registration in the aircraft registry. The registration will be completed within five to 10 business days after the application letter and original mortgage agreement are submitted to the aircraft registry. If the operator is not the owner, the owner’s consent is required for registration.

Registration of security

How is registration of a security interest certified?

On request, the aircraft registry will issue a letter confirming that the mortgage is registered. The rank and priority will be stated in the letter.

Effect of registration of a security interest

What is the effect of registration as to third parties?

Priority of the mortgage depends on its rank, which the parties are free to agree on. For example, a second-ranking mortgage can be established, even if no first-ranking mortgage has been registered. This means that a first-ranking mortgage can be registered subsequent to the registration of the second-ranking mortgage. Lower-ranking mortgages will not automatically advance to a higher rank if that higher-ranking mortgage is discharged.

There is no priority notice system. Third parties can rely on the registry records, but not the certificate. A certificate or other letter outlining the mortgage has no value, other than to show that a mortgage has been registered. The registry must always be checked.

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?

The concept of trust is not recognised; however, a similar concept exists in Turkish law. Under this, a person acts as a fiduciary for another. The fiduciary owns a certain asset or right but is obliged to return the asset or exercise the right in the favour of the beneficiary on demand or on realisation of a certain condition. For all concerned third parties, the fiduciary is the real owner of the asset or right. The trust relationship between the beneficiary and the fiduciary is not of concern to, nor does it need to be known by, third parties.

The mortgage creates a right in rem. The creditor, regardless of whether it is a fiduciary or beneficiary, has the right to extract its credit from the sale proceeds of the aircraft, regardless of whether the owner of the aircraft is the actual debtor at the time of sale. Changes to the beneficiary will not affect the security held by a fiduciary. The relationship between the beneficiary and the fiduciary is extraneous to, and will not affect, the mortgage.  

A novation discharges a debt and creates a new one. Any security or other ancillary rights attached to a debt are also discharged on novation. However, if a loan is transferred by way of assignment, rather than a novation, the security and any other ancillary rights attached to the assigned loan will be automatically transferred to the assignee.

A loan can also be transferred through accession to a contract. In this case, the contract remains as is, but one or more parties to the contract are replaced by others. Since the original obligation remains valid and enforceable, so do the securities attached to it.

In summary, a novation will result in the discharge of a mortgage. Assignment of credit or accession to a contract will not affect the mortgage and a new registration will not be required.

Security over spare engines

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

Turkey is a party to the Cape Town Convention. Any security interest in an aircraft engine that is registered in the international registry should be recognised, regardless of whether the engine is installed on the aircraft. If a security interest in an engine has been registered before the registration of a security interest in the aircraft on which the engine is installed, the aircraft and engine should be treated separately. However, in the case of an aircraft mortgage agreement to be concluded and registered in Turkey, due consideration should be given to the wording of the agreement on issues relating to ownership and security interests that may already exist in the engine or where the parties intend to exclude the engine from the scope of the mortgaged property.

Enforcement measures

Repossession following lease termination

Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?

Turkey recognises the right of the lessor to use self-help for repossession on lease termination as provided for in the Cape Town Convention. This has been applied in a small number of cases where the former lessee did not try to physically prevent or legally challenge the repossession process. Use of self-help is not recommended where the former lessee tries to prevent or legally challenges the repossession. For this reason, it is advisable to seek a court order for repossession. It is also possible for the former lessee to obtain a precautionary injunction by claiming that the lease has not been terminated. However, these are theoretical conjectures, as Turkish courts currently have no experience of the Cape Town Convention, nor is there any precedent.

Enforcement of security

Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?

Turkey recognises the right of the mortgagee to use self-help for repossession on default, as provided for in the Cape Town Convention. Use of self-help is not recommended where the owner tries to prevent or legally challenges the repossession. For this reason, it is advisable to seek a court order for repossession. It is also possible for the owner to obtain a precautionary injunction by claiming that there is no default. However, these are theoretical conjectures, as Turkish courts currently have no experience of the Cape Town Convention, nor is there any precedent.  

It is also possible to start a mortgage enforcement action, which will lead to the sale of the aircraft by public auction. The debtor has a right to raise objections to this action. Depending on the mortgage agreement and documentation of the default, the objection may be set aside by summary judgment.

Priority liens and rights

Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?

Aircraft manufacturers and repairers have the right to demand the registration of a statutory mortgage on the aircraft for their receivables. This mortgage will take priority over all other consensual mortgages. The demand must be made within three months of completion of the construction or repairs, otherwise it becomes extinct.

The government has priority only for the motor vehicle tax that is payable for the aircraft. This is usually negligible, as the amount will not exceed a few thousand US dollars.

Aircraft can be requisitioned only for general mobilisation in a state of war, in which case the owner will be compensated.

No other liens or rights will have priority over registered consensual mortgages.

 

Enforcement of foreign judgments and arbitral awards

How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?

The enforcement of foreign court judgments requires a recognition and enforcement decision by a Turkish court. The purpose of a recognition and enforcement action is not to retry the merits of the case, but only to determine whether the foreign court decision fulfils the requirements for enforcement in Turkey.

One of the important requirements for recognition and enforcement is the existence of a de facto or contractual reciprocity between Turkey and the country that issued the decision in regard to recognising and enforcing each others’ court decisions. Reciprocity exists between the United Kingdom and Turkey. It is unclear whether reciprocity exists between the state of New York and Turkey. As such, there are instances of New York court judgments being denied recognition and enforcement.

Turkey is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. A foreign arbitral award will also require a recognition and enforcement decision from a Turkish court. An arbitral award issued in a country that is a party to the 1958 New York Convention will be enforceable in Turkey, provided that other conditions for enforcement are met.

Another important requirement for the recognition and enforcement of both court decisions and arbitral awards is that the claim has been duly and properly served on the defendant, and the defendant has been given adequate opportunity to defend itself against the claim. It is not necessary to prove that defendants have defended themselves. The decision may be given in absentia if they have been invited.

Taxes and payment restrictions

Taxes

What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?

Deliveries of aircraft to operators or lessors of aircraft are exempt from VAT.

Lease payments are subject to 1% VAT and 1% WHT. These should be grossed up, declared and paid by the lessee. Gross-up provisions are valid and enforceable.

Exchange control

Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?

There are no restrictive exchange control mechanisms.

Default interest

Are there any limitations on the amount of default interest that can be charged on lease or loan payments?

Default interest rates can be freely decided between commercial entities. There are no restrictions or limitations.

Customs, import and export

Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?

There are costs to bring an aircraft into, or take it out of, Turkey. Liability would attach to the operator of the aircraft.

Insurance and reinsurance

Captive insurance

Summarise any captive insurance regime in your jurisdiction as applicable to aviation.

There is no captive insurance regime applicable to aviation. Turkish parties are required to place insurance with insurers established and licensed in Turkey. A foreign owner can place hull insurance outside Turkey. There is no minimum retention requirement; the risk can be reinsured in its entirety outside Turkey. The usual practice is to use a domestic insurer to issue a fronting policy and an identical reinsurance policy in which the entire risk is placed outside Turkey by facultative reinsurance.

Cut-through clauses

Are cut-through clauses under the insurance and reinsurance documentation legally effective?

Cut-through and claims control clauses are applicable and effective.

Reinsurance

Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?

Assignments of reinsurance are legally binding and effective. These are typically used in aircraft finance and leasing transactions.

Liability

Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?

An owner, lessor or financier cannot be held liable for the operation of the aircraft or activities of the operator. The owner may be held liable only if the operator cannot be identified and the owner cannot prove that it is not the operator.

Strict liability

Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?

There is no strict liability regime for owners, lessors, financiers or others with no operational interest in the aircraft.

Third-party liability insurance

Are there minimum requirements for the amount of third-party liability cover that must be in place?

The minimum cover requirement for third-party damage varies depending on the maximum takeoff weight. The minimum requirement is 300 million special drawing rights (SDR) for typical single-aisle aircraft and 500 million SDR for typical twin-aisle aircraft.

Update and trends

Recent developments

Are there any emerging trends or hot topics in aviation finance and leasing in your jurisdiction?

One hot topic is the stamp duty that is payable for notarising a mortgage agreement. This is 0.948% of the secured amount, with a cap of TL2,642,810 (approximately $465,000). Most, if not all, commercial aircraft financings are for large amounts, which makes this a deterrent for prospective financiers. It may even have killed deals, although that cannot be confirmed.

Application of the Cape Town Convention remains an uncertain issue, since there has been little to no application of enforced repossession. The IDERA has been honoured by the Turkish Civil Aviation Authority on a number of occasions, but it remains to be seen how self-help will be perceived and respected by the courts and enforcements officers.