Beyond Boilerplate: Key Provisions in an Aircraft Lease Agreement
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Delivery and Acceptance: Starting Well

It is important to keep in mind the interplay between the delivery condition (objective criteria that are a condition precedent to Lessee’s obligation to accept the aircraft) and an ‘as-is, where-is’ acceptance (the Lessee’s unconditional acceptance of the physical condition of the aircraft).

The famous Olympic Airlines SA v ACG Acquisition XX LLC case in the English courts makes it clear that execution by the Lessee of an acceptance certificate confirming that the aircraft had been irrevocably and unconditionally accepted by it, and that the aircraft complied in all respects with conditions required at delivery under the terms of the lease agreement estopped it from subsequently asserting that the aircraft did not comply with the delivery conditions.

Drafting tips: Make it clear if the Lessor has an obligation to deliver the Aircraft in the Delivery Condition or if compliance with the Delivery Condition is simply a condition precedent for Lessee’s benefit. Include clear language in both the lease agreement itself and the acceptance certificate that execution of the acceptance certificate is an ‘as-is’ acceptance of the aircraft.

Redelivery, Maintenance and Maintenance Reserves: Protecting Asset Value

Objective and clearly defined maintenance obligations and return conditions provide certainty for both parties and, from a Lessor perspective, are key to protecting residual value. Ambiguity can result in delayed transitions at lease end or, if the aircraft is traded while on lease, can impact the buyer’s assessment of the value of the asset. Treatment of life-limited parts, records completeness, integrity of digital data and what (if any) flexibility the Lessee has to swap engine or parts in anticipation of redelivery are all areas to consider.

Maintenance Reserves are a common cause of lease disputes and so it pays to get the drafting right at the outset by considering: Are the definitions current? When do rates escalate? Are there assumptions on which the rates are based and what happens if they prove incorrect? Is payment made directly to the MRO or the lessee?

Drafting tips: Make sure key definitions are clearly and precisely drafted. If compensation mechanics are included, make sure the equations work (and, ideally, include a worked example)!

Events of Default and Remedies: Drafting versus Practicality

Events of default and cross-default provisions are typically drafted with worst-case scenarios in mind. The breadth of these clauses can provide important leverage and short grace periods give maximum lessor protection but their true value lies not simply in drafting strength but in practical operability - it is better to have a grace period that the lessee agrees is likely to be sufficient to cure a default than have a hair trigger that, if acted on by the lessor, would then tie up lessee resources in responding to default notices.

Cure periods, notice mechanics and the interaction with insolvency regimes all determine how enforceable rights function in reality and local law advice should be obtained early. Insufficient clarity may weaken recovery options when they are most needed.

Drafting tips: Reflect local law advice as precisely as possible. Consider carefully the interplay with the Business Day definition and the notice provisions.

Indemnities: Risk Allocation

The operational indemnity and tax indemnity provisions are designed to bolster the ‘triple net’ nature of the lease which ensures that the only risk that remains with Lessor is the residual value of the asset.

Pre-Delivery risks will be allocated differently for a new aircraft and a used aircraft: in the former, the operational indemnity will extend to pre-Delivery risks; in the latter, any pre-Delivery risks will likely be carved out (but the Lessor should have the necessary cover from the previous lessee).

Drafting tips: Offer reasonable exclusions (but avoid treble-negatives!). Remember that, as a matter of English law, indemnities are not subject to mitigation but if that is contractually agreed then it will be enforced by the courts.

Transfer and Assignment: Ensuring Tradeability

For lessors, the ability to transfer an aircraft efficiently is fundamental and this starts with clear assignment provisions in the lease itself.

Airlines are increasingly focused on these provisions too and it is now routine that lessees request that any transferee meets tangible net worth thresholds and has aircraft leasing experience (or appoints a servicer that does); we also increasingly see lessee requests that the transfer provisions cover not just a sale of the ‘metal’ but also a transfer of beneficial interest or share sale to effect the trade. There is no ‘right’ answer for any of these so requests need to be considered in the wider context of the relationship between the lessor and lessee as well as the asset type, jurisdiction and lessee creditworthiness which will all impact tradeability.

Whether in the drafting itself or a point to be addressed at the time of any particular trade, consider if there are ways that the lessor can incentivise lessee cooperation with the transfer process and engage with them as early as possible in the process.