Security

Security document (mortgage) form and content

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

In South Africa, security over aircraft may only be taken and registered by way of an aircraft mortgage registered with the CAA.

An aircraft mortgage may be obtained by the filing of a prescribed form (MAR 2.1) with the CAA. The form identifies the mortgagor and mortgagee as well as the relevant cause of indebtedness and the amount secured. As the form itself is fairly rudimentary the practice has been to accompany the prescribed form with a mortgage agreement in financing transactions. The mortgage agreement is simply attached to the prescribed form as an annexure.

It is preferable, for enforcement purposes, that the mortgage agreement also be regulated by South African law. The mortgage agreement mentioned is used to supplement the detail provided on the prescribed form by the inclusion of customary aircraft mortgage provisions including provisions relating to the hypothecation of replacement engines.

The prescribed form and the form of mortgage agreement are in English. The form of mortgage agreement may also be used to record the more detailed provisions of the underlying indebtedness (eg, details as to the payment of principal, interest and the dates on which such amounts are payable).

Security documentary requirements and costs

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

There are no formalities directly relating to the completion or filing of the prescribed form mentioned above. However, where the prescribed form is executed locally under a power of attorney obtained from a foreign entity, then the power of attorney typically requires notarisation and apostille in order to be accepted by the CAA. The power of attorney must also be accompanied by a signing authority.

There are no stamp duties associated with the filing or registration of a local aircraft mortgage. There are, however, costs payable to the CAA for the registration of a local aircraft mortgage. These costs are nominal in foreign currency terms (less than US$150 at current rates of exchange).

There is no requirement that the documents be translated as all documents are in English.

There will be local counsel costs associated with the preparation of the mortgage agreement.

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.

An aircraft mortgage can only be created in South Africa by the registration of form MAR 2.1 with the CAA, as detailed above. It is only through this process that an enforceable and perfected security interest will be created.

To register an aircraft mortgage the mortgagee needs to file the documents mentioned below with the CAA. To do this an appointment needs to be made with the said authority. The filing of multiple instruments (eg, deregistration of any prior mortgage and registration of one or more new mortgages) may well require separate appointments for the filing of each instrument. It is therefore preferable that these appointments be made in advance, particularly where the exigencies of a particular financing transaction may require the mortgage to be filed at a particular time (such as on closing).

The prescribed form must be accompanied by an authorised signatories list as well as relevant signing authorities. As mentioned above, if the mortgage documents are being executed locally under a power of attorney then the executed power of attorney, duly notarised and apostilled where required, must also be filed. The form MAR 2.1 also needs to be accompanied by an application to amend the registration of the aircraft. This is done by way of a further prescribed form, CAR47A-2. Form CAR47A-2 also needs to be accompanied by the signing authorities of the person applying to amend the registration of the aircraft. At least three representatives of the applicant are required to authorise the entr of the said application.

Once all the required documents have been filed with the CAA, there is typically a seven-working day waiting period for registration. Practically, however, the time period for registration of aircraft mortgages may exceed this, although it is unusual to wait more than 14 days for registration.

Once registered, the mortgage will be regarded as effective and enforceable on the date on which the filing for its registration was made. There is no requirement for renewal. Once registered, the aircraft mortgage will remain effective and enforceable until deregistered.

See above in regard to the costs of registration of an aircraft mortgage.

Registration of security

How is registration of a security interest certified?

Once an aircraft mortgage has been registered with the CAA the Authority will endorse the details of the mortgage onto the current certificate of registration for the relevant aircraft. The endorsement will not necessarily list the priority of the relevant aircraft mortgages. Once an aircraft mortgage has been registered, the updated certificate of registration is issued together with the confirmation of registration of the related aircraft mortgage.

Effect of registration of a security interest

What is the effect of registration as to third parties?

Priority in South African mortgages can only be created by way of order of registration. There is no priority notice system in place.

The noting of the aircraft mortgage on a certificate of registration comprises constructive notice to third parties of the existence of an aircraft mortgage over the aircraft. In general, third parties may rely on the aircraft mortgage information contained on a certificate of registration, but this does not preclude the possibility of administrative error and therefore the aircraft mortgage information so contained cannot be conclusively regarded as correct.

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?

In single creditor financings security is generally taken directly by the relevant creditor. This applies to both local and foreign financings.

In local financings where there are multiple creditors and a single cause of indebtedness (such as a single loan agreement with multiple lenders participating through a single tranche), it may be possible for more than one mortgagee to be noted as such on the aircraft mortgage.

To cater for changes in lenders, however, South African security arrangements in syndicated financings are typically structured through what is locally called a ‘debt guarantor structure’. The effect of this arrangement is to simulate, through a series of contractual arrangements and by the use of a special-purpose debt guarantor, the effect of a typical security trust or security agency arrangement. Security trusts and security agency arrangements are not deployed in South African financings owing to a quirk of South African law and there is a question mark over whether registered security of this nature may be held by more than one person or through agency.

Although South African law and the local courts will respect and enforce foreign law, security trusts and security agency arrangements, this can become more complicated where, for example, a foreign law form of aircraft mortgage agreement (eg, one under English or New York law) is registered together with the prescribed form MAR 2.1, which is a South African law document.

The use of debt guarantor arrangements described above will obviate the need to update the aircraft security each time there is a change in creditor.

There is no formal way in which an aircraft mortgage may be amended once registered. We have seen the filing of amendment documents to registered mortgages but, as mentioned, there are no regulations in force to suggest that this practice works legally. In other words, if an amendment document was filed in relation to a registered aircraft mortgage, it may be that the registered mortgage would remain unamended. The only foolproof way in which a registered aircraft mortgage can be amended is by filing for deregistration and filing a new mortgage. This can obviously give rise to many complications in a secured financing.

Although not tested in South African law it would seem that a registered aircraft mortgage would create a real right of security over the asset. The mortgage agreement, however, might be regarded as creating only a personal right as it is really the prescribed form that creates the enforceable security interest over the aircraft.

Security over spare engines

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

The law allows for the registration of an aircraft mortgage over an airframe and its engines. There is no mechanism through which an engine can be separately hypothecated by way of an aircraft mortgage.

If a security interest was required over an engine this would need to be obtained through the registration of special notarial security in South Africa. This type of security is akin to a fixed charge and is inflexible, particularly in relation to any replacement or sale of the engine in question.

When an aircraft mortgage is registered over an aircraft the aircraft mortgage will also cover the engines. The security interest will be effected even though the relevant engine is not installed at the time of the creation of the security interest as long as it relates to the airframe being mortgaged.

The prescribed form MAR 2.1 does not allow for the mortgaging of replacement engines. This is something that is usually achieved through the use of the mortgage agreement described above.