Overview

Conventions

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

Germany has ratified the International Convention of Warsaw for the Unification of Certain Rules Relating to International Carriage by Air (1929, effective 13 February 1933), including the Hague Protocol for the amendment of the Warsaw Convention (1955, effective 1 August 1963), the Convention of Chicago on International Civil Aviation (1944, effective 4 April 1947), the Convention of Geneva on the International Recognition of Rights in Aircraft (1948, effective 17 September 1953), the Convention of Montreal for the Unification of Certain Rules Relating to International Carriage by Air (1999, effective 4 November 2003) and the Rome Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft (1933, effective 12 January 1937). The Rome Convention of Damage Caused by Foreign Aircraft to Third Parties on the Surface (1952, effective 4 February 1958), the Montreal Protocol amending the above-stated Warsaw Convention (1975, effective 14 June 1998) and the Cape Town Convention on International Interests in Mobile Equipment and the Protocol on Matters Specific to Aircraft Equipment (2001, effective 1 March 2006) have not been ratified by Germany. However, Germany is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958, effective date 7 June 1959).

Domestic legislation

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

The Air Traffic Act is the German basic law on aviation, modelled on the Chicago Convention, containing provisions on registration, operation, conduct and liability in regard to aircraft, personnel, air carriers and airports. It is, inter alia, supplemented by the Air Traffic Licensing Regulation, which states, inter alia, the prerequisites for an aircraft to be allowed to fly in Germany.

The Act on Rights in Aircraft concerns in particular aircraft used as collateral for loan agreements by way of a registered mortgage, and contains numerous specific regulations on registered aircraft mortgages (general, procedure of registration and contents, execution, transfer, change and expiry, extension on spare parts and organisation of the German Aircraft Mortgage Register).

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?

In general, the parties to a contract are free to choose the law that shall apply to a specific contract. However, in the interest of legal certainty, German international private law restricts the parties’ choice of law regarding rights in rem. Whereas commonly the rule of lex situs (the place where the property is situated) is applied on immovables as well as movables, this is highly impractical for aircraft as, being means of transportation, they typically cross borders several times a day. Therefore, by specific statutory rule, any interests in airborne vehicles are governed by the law of the country of origin, meaning their nationality (article 45, paragraph 1, No. 1 of the Introductory Act to the (German) Civil Code). According to article 17 of the Chicago Convention, aircraft have the nationality of the state in which they are registered. For example, registration of an aircraft in the German Aircraft Register (see question 6) thus results in German substantive law being the applicable law in order to determine the valid creation of any rights in rem in the aircraft. The nationality of unregistered aircraft may be more difficult to determine. In any event, although a sale and purchase agreement or a bill of sale in relation to a German registered aircraft may be governed by a foreign law, German law is decisive as to whether title or ownership was validly transferred or a contractual security interest over such aircraft has been validly created. Moreover, section 9 of the Act on Rights in Aircraft states that a German registered aircraft cannot be levied with a security interest other than a mortgage registered in the German Aircraft Mortgage Register. Therefore, a mortgage registered on an aircraft in Germany has to be governed by German law.

Title transfer

Transfer of aircraft

How is title in an aircraft transferred?

Title in an aircraft is transferred pursuant to the general rules of German civil law on the transfer of ownership of movables. Thus, a bill of sale is neither needed nor alone would it be sufficient and a sale and purchase agreement only imposes a contractual duty on the seller to transfer the ownership of the aircraft to the buyer (section 433(1)(1) of the German Civil Code). To actually transfer title in an aircraft, the owner - in execution of the underlying contract of sale - usually has to deliver possession of the aircraft to the buyer while both parties agree that the change of direct possession also results in a change of ownership (see section 929(1) of the German Civil Code). However, a transfer to title to an aircraft could be effected as well by any of the following: if, at title transfer (i) the seller is in direct possession of the aircraft and wants to continue to use the aircraft, then seller and purchaser have to enter into a lease agreement (sale and lease back) pursuant to which the purchaser may demand repossession of the aircraft in accordance with its terms (thus the purchaser obtains indirect possession pursuant to section 930 German Civil Code); or (ii) a third party is in direct possession of the aircraft (eg, a third-party lessee), then the seller, purchaser and that third party have to enter into an assignment or novation agreement in relation to the lease whereby the seller assigns to the purchaser, inter alia, its repossession right against the third-party lessee (section 931 of the German Civil Code).

Registration of an aircraft in the Aircraft Register (see questions 6 and 9) does not have any legal impact on the transfer of title, it is governed just by the general rules for transfer of ownership of movables (section 98(1)(1) of the Act on Rights in Aircraft). Thus, the registration of the aircraft on the German Aircraft Register does not in itself constitute such title to or interest in the aircraft but merely serves as some form of evidence that the person who is registered as the owner is in fact the owner of the aircraft. However, although there is no requirement for registration in order effect transfer of title, there is a requirement that the owner of the aircraft has to notify the German Federal Aviation Authority of any change in ownership without undue delay (section 64(5) Air Traffic Act) and any owner who wants to be registered in the German Aircraft Register has to provide proof of ownership, usually done by providing the original or a notarised and apostilled copy of the bill of sale to the Aircraft Register (see question 7).

Transfer document requirements

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

There are no such formal requirements in German law. The registration of aircraft ownership serves other purposes (see question 6).

Registration of aircraft ownership and lease interests

Aircraft registry

Identify and describe the aircraft registry.

The German Aircraft Register is maintained at the Federal Aviation Authority (LBA) as one of two registers (see section 64(1) of the Air Traffic Act; the other, on ‘aerial sports equipment’, being irrelevant in this context). The registration serves the public purpose of supervising air traffic safety, identifying individual aircraft by a German registration mark (see section 2(5) of the Air Traffic Act) and enables the Federal Aviation Authority to use the recorded data to provide information in statutorily specified situations (section 64(2)(7-9) of the Air Traffic Act). The data to be registered is comprehensive and encompasses type, design, and manufacturer’s serial number of the airframe, as well as the German registration mark of the aircraft. In addition, the page number of the register, and in case the aircraft is registered as well in the German Aircraft Mortgage Register (which is a separate register operated by the local court in Braunschweig): the page number of the mortgage register (see question 17), as well as the name and address of the owner (section 64(3) of the Air Traffic Act). In addition, the following is recorded: use and regular base of the aircraft, noise protection, liability insurance and make and model of engines installed as well as name and address of operator - if the operator is not the same person as the owner (section 64(4) of the Air Traffic Act).

In contrast to the German land register or ship register, the Aircraft Register does not have a comparable significance in private law; thus, it only has a declaratory effect in the sense of private law (see question 9). Moreover, it is not open to the public to be searched; however, data recorded in the Aircraft Register may be requested if that person provides prima facie evidence that it needs such information for the enforcement of a private claim (section 64(8) of the Air Traffic Act).

According to article 83-bis of the Chicago Convention in connection with section 3a (2 and 3) of the Air Traffic Act, it is possible that German-registered aircraft are used by foreign airlines and foreign registered aircraft may be used by German airlines whereby the Aviation Authority of the state of registration of the aircraft may, by agreement with the Aviation Authority from the other state, transfer certain functions and duties as state of registration in respect of the respective aircraft, for example, regarding its operation, airworthiness and the competency of its personnel as well as general ‘rules of the air transportation’. Germany has so far closed five bilateral agreements in relation to article 83-bis: with Italy (18 July 2007), Austria (1 July 2016), Sweden (3 November 2010), Spain (17 December 2010) and Denmark (26 September 2012).

There is no separate registry for aircraft engines; however, the make and model of the engines (but not the serial numbers) will be recorded in the Aircraft Register (section 64(4) No. 3 of the Air Traffic Act; see also question 7).

 

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?

In order not to misunderstand the mechanics of the German Aircraft Register, it should be noted that following its main public function to provide for air traffic safety (see question 6), the German Aircraft Register is not a ‘table’ to record existing ownership or lease interests as proof towards third parties. However, the aircraft owner is registered and in order to be registered needs to provide some evidence of ownership to the LBA (usually the original or a notarised and apostilled copy of the bill of sale).

Basically, an aircraft may only be recorded in the German Aircraft Register if it is not already registered in any other aircraft register in a foreign country and if it is majority owned and controlled by German or EU member state nationals, or at least by nationals of a country where EU aviation law applies (section 3 (1) of the Air Traffic Act). ‘Majority owned and controlled’ means that the majority of the owner’s assets or capital, the actual control as well as the majority of the representatives and persons liable are, nationals of such countries.

An aircraft not owned in the manner described above may still be recorded in the German Aircraft Register, if (i) the third country owner has a contract with a German or other EU national who is (according to such contract) entitled to acquire ownership of the aircraft, for example, in the case of a hire-purchase agreement or payment in instalments with reservation of title or (ii) such national has a right to possession of the aircraft according to a rental or similar agreement (with the third country owner) provided such contract has a minimum term of six months (section 3(1) of the Air Traffic Act; see as well article 1, No. 1 of the Geneva Convention). Thus, all typical kinds of leasing contracts are covered. The Federal Aviation Authority may allow for exceptions under a case by case basis (section 3(2) of the Air Traffic Act).

It is not possible to record a lease interest or lease agreement on the Aircraft Register or any other register in Germany (however, copies of the dated and signed lease and sub-lease (as applicable) have to be submitted to the LBA to provide evidence that the operator is entitled to quiet enjoyment of the aircraft from the owner (through any intermediate lessor), see section 62 No. 7 Air Traffic Licensing Regulation. As mentioned before, there is no register in Germany where an interest in an engine may be registered. How to deal with the legal relationship between the aircraft and its engines has been discussed in German legal literature. However, the independent economic value of the engines, their intentionally ‘loose’ connection with the aircraft in order to facilitate quick exchange and the statutory regulation of aircraft mortgages and the possible extension to spare parts (see question 21) points to a classification of the engines not as an integral part, but as an accessory of the aircraft that is the ‘main object’ (section 97 of the German Civil Code). Therefore, engines do not automatically share the legal fate of the aircraft itself (airframe, fuselage, etc), but may be the object of independent rights or claims of a third party.

Registration of ownership interests

Summarise the process to register an ownership interest.

To register an aircraft in Germany the owner has to submit to Federal Aviation Authority the following documents (originals unless otherwise stated):

  • completed and signed application form;
  • power of attorney (POA) if a third party submits the documents for the owner;
  • commercial register extract or company printout or some other form of evidence of its corporate existence and registered address;
  • section 3 Air Traffic Act declaration;
  • declaration of German process agent for all communication between the aircraft owner and the LBA if the owner does not have its registered address in Germany;
  • bill of sale (notarised and apostilled copy sufficient);
  • lease agreement if the owner is not the operator (copy is sufficient);
  • certificate of cancellation from previous registry or non-registration certificate;
  • export certificate of airworthiness or airworthiness review certificate from previous state of registration (to obtain a certificate of airworthiness from the Federal Aviation Authority;
  • insurance confirmation;
  • maintenance programme for the aircraft approved by the Federal Aviation Authority; and
  • customs certificate in case of import from a non-EU state.

The last three items may be submitted by the operator if the operator is a person other than the owner.

Title and third parties

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

The registration of an aircraft in the Aircraft Register aims to facilitate the supervision of air traffic safety and to disseminate selected information to certain authorised recipients (see question 6), so it remains without effect on private law rights or claims and does not provide any proof of title against third parties. In contrast, for example, to the land register, a registration in the Aircraft Register does not allow for an acquisition ‘in good faith’ (see section 932(2) of the German Civil Code) by a third party that erroneously believes the registered entity to be the owner of the respective aircraft. However, in the opposite case where the prospective acquirer knows that its contractual partner differs from the person registered as owner, the acquirer would not be in good faith and thus unable to obtain title to the aircraft if its contractual partner actually did not own the aircraft.

Registration of lease interests

Summarise the process to register a lease interest.

Lease interests cannot be registered in Germany; however, copies of the executed and dated lease agreements (which means head lease and sublease, as applicable) have to be submitted to the LBA to show the operator’s entitlement to quiet enjoyment of the aircraft - from the owner through any intermediate lessor (see section 62 No. 7 of the German Air Traffic Licensing Regulation) and in the case of a third country owner to prove that such owner has a lease agreement in place with a German or other EU country national for a term of at least six months (see section 3(1) No. 2 Air Traffic Act as well as question 7).

Certificate of registration

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

After registering an aircraft in the German Aircraft Register, the Federal Aviation Authority issues a certificate of registration following international (International Civil Aviation Organization (ICAO)) usage (according to section 14 of the German Air Traffic Licensing Regulation). Such certificate of registration must be carried on board the aircraft at all times. With nomenclature in German and English, it contains information on the register itself (volume, page), on the aircraft (class, nationality and registration mark, manufacturer, model, serial number) as well as name and address of the owner (if the owner is a non-EU entity the name and address of the operator is mentioned on the backside) and certifies that the aircraft has been duly registered in the Aircraft Register (date of issue and signature of issuing person as well as stamp of the Federal Aviation Authority). As there is no register for engines, no separate engine certificate of registration is issued.

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?

The owner of the aircraft must apply for deregistration and a certificate of airworthiness for export (if needed), at the Federal Aviation Authority, using a standard form (Federal Aviation Authority Form No. 11 that is available in German and English). The mortgagee does not have the authority to have the encumbered aircraft deregistered or exported unless the owner provides the mortgagee with a power of attorney. Moreover, the mortgagee does not have to consent to such action by the owner, as a registered mortgage does not expire in case of deregistration of the aircraft. As Germany is an ‘owner register’, the operator may not block deregistration or export. However, in order to have the aircraft actually deregistered in Germany, the original certificate of registration, certificate of airworthiness and noise certificate issued by the German Federal Aviation Authority (which have to be carried at all times on board of the aircraft) have to be returned to the German Federal Aviation Authority. Upon deregistration the Federal Aviation Authority will notify the Aviation Authority of the next state of registration if so requested by the owner in the application.

Powers of attorney

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

Usual deregistration powers of attorney are not needed in Germany as it is only the owner (and not the operator) who is entitled to deregister an aircraft. Under German law a POA is generally revocable; if not, it still may be revoked for good cause. It is grantable to more than one attorney but cannot be registered. If the grantor becomes insolvent, any POA (with regard to property forming part of the insolvency estate) lapses upon the opening of the insolvency proceedings (section 117(1) of the Insolvency Act).

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.

This is not applicable, as the Cape Town Convention has not been ratified by Germany.

Security

Security document (mortgage) form and content

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

A German registered aircraft may not be levied with a security interest other than a mortgage registered in the German Aircraft Mortgage Register (see section 9 of the Act on Rights in Aircraft), which is operated by the local court in Braunschweig (thus, unlike the Aircraft Register is the Aircraft Mortgage Register not operated by the Federal Aviation Authority). The aircraft owner needs to issue such mortgage document and apply for registration. To expedite enforcement of a mortgage it is generally issued as a German notarial deed, which includes a submission to immediate enforcement. In addition, the mortgage usually secures not a specific loan agreement but an abstract acknowledgement of debt, which could be included in the mortgage document itself. Further, the mortgage has to state the interest rate, which has to be fixed, and an ancillary charge to cover enforcement cost. Moreover, all documents (the mortgage itself, POA, affidavit regarding ownership, prove of corporate existence as well as the authorisation of the signatories of the owner) have to be provided to the German Aircraft Mortgage Register either in German, in bilingual form whereby the German wording prevails or with a certified German translation.

Only German registered aircraft may be encumbered with a mortgage registered in the German Aircraft Mortgage Register (see questions 6 and 17). Securities on foreign registered aircraft follow different provisions although enforcement rules are similar (see section 103 et seq of the Act on Rights in Aircraft).

Security documentary requirements and costs

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

To properly register a mortgage on an aircraft, the approval of registration by the owner of the aircraft must be notarised (section 86(1) of the Act on Rights in Aircraft, together with section 37(1) of the Ship Register Regulation) and the agreement to procure a mortgage does not become binding on the parties before registration (section 5(2) of the Aircraft Mortgage Act). Moreover, in order to expedite enforcement of the mortgage, the mortgage often includes a submission to immediate enforcement and is therefore issued as notarial deed (Notarielle Urkunde). The registry and notary fees are fixed according to a scale of fees provided by law and vary in regard to the amount of the secured claim, respectively the submission of immediate enforcement (see sections 34(1), 53(1) and 97 of the Act on Court and Notary Fees). To reduce the notary fees, a mortgagee may agree to a lower amount of the submission to immediate enforcement than the amount secured by the mortgage.

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.

No security documents have to be filed with the German Federal Aviation Authority. However, a German mortgage needs to be registered in the German Aircraft Mortgage Register as a condition to its effective creation and perfection against the debtor or aircraft owner and third parties.

Registering an aircraft mortgage in Germany may take three to four weeks from filing the required documents with the German Aircraft Mortgage Register until having received an extract of the German Aircraft Mortgage Register showing the registration of the mortgage. Unlike the Aircraft Register is the Aircraft Mortgage Register maintained by the local court in Braunschweig (section 78 of the Act on Rights in Aircraft), thus, in relation to the mortgage all documents have to submitted to it and not to the Federal Aviation Authority. For every aircraft registered, a new page is reserved, which is divided into two parts, one for the aircraft itself and one for any mortgages it might be encumbered with (section 81(1) of the Act on Rights in Aircraft , together with section 2 of the Aircraft Mortgage Register Regulation). Only the person or entity that is registered as owner in the Aircraft Register is entitled to have an aircraft registered in the Aircraft Mortgage Register (section 79(2) of the Act on Rights in Aircraft; see question 6).

The mortgage application must contain the following (section 80 of the Act on Rights in Aircraft):

  • page number of the Aircraft Register (if already known);
  • manufacturer’s serial number and registration mark of the aircraft;
  • make and model of the aircraft;
  • name of the creditor, the amount of the secured claim as well as the applicable interest rate and ancillary charge;
  • name and address of the owner according to the Aircraft Register (the applicant must prove that the data to be recorded corresponds with the data from the Aircraft Register, therefore, an extract of the Aircraft Register from the German Federal Aviation Authority that is not older than four weeks needs to be submitted to the Aircraft Mortgage Register). It may be possible to file the ‘mortgage documents’ prior to registration of the owner in the Aircraft Register and submit the Aircraft Register extract later; however, it is a prerequisite to registration of the mortgage;
  • in addition, prima facie evidence of ownership needs to be submitted (section 80 of the Act on Rights in Aircraft), which is usually done by a notarised and apostilled affidavit of the aircraft owner; and
  • the fees of the Aircraft Mortgage Register and the German notary vary in regard to the amount of the secured claim (see sections 34(1), 53(1) and 55(2) of the Act on Court and Notary Fees - see question 16). After the ‘mortgage documents’ have been filed with the German Aircraft Mortgage Register, the German Aircraft Mortgage Register will issue an invoice for its fee and that invoice needs to be paid prior to the registration of the mortgage.

Registration of security

How is registration of a security interest certified?

Concerning certificates about records in the Aircraft Mortgage Register, there is no equivalent to the official certificate of registration for the Aircraft Register (see question 11). However, as the Aircraft Mortgage Register is public, the register court may be asked for (certified) copies of a register extract and if that extract shows a registered mortgage it is presumed that the mortgagee actually has the benefit of such mortgage, on the other hand, if the extract shows the cancellation of a mortgage it is presumed that such cancelled mortgage is not existing anymore and a third party may rely thereon unless it has knowledge to the contrary (section 85(1)(2), together with section 15 of the Act on Rights in Aircraft).

The rank (absolute and relative) of a registered mortgage, which indicates its priority, is clearly visible from the register extract. A mortgage always is recorded in part 2 of the register (part 1 being reserved for the aircraft itself), starting at the top with no. 1 and continuing further downward if any additional mortgages are registered. If a single aircraft is encumbered with more than one mortgage, their relative rank is discernible from the respective pages of the register extract, as older mortgages have priority over newer ones (section 25(1) of the Act on Rights in Aircraft). For example, an earlier registered mortgage at ‘upper’ position 1 outranks a later registered mortgage at a ‘lower’ position 2, 3, etc. Should a registered mortgage be cancelled for whatever reason, any ‘lower’ entries will move up one position, so if no. 3 were deleted, nos. 1 and 2 remain untouched, but no. 4 becomes 3 and 5 becomes 4, etc.

Subsequent changes of rank of certain positions are permissible, but such alterations again have to be recorded in the register in order to effective (see sections 26 and 27 of the Act on Rights in Aircraft).

Effect of registration of a security interest

What is the effect of registration as to third parties?

Registration of a mortgage usually confers priority over other mortgages that might be registered subsequently (section 25(1) of the Act on Rights in Aircraft; see question 18).

Third parties can rely on the accuracy of the public registration of the German Aircraft Mortgage Register, as it is presumed by law that the person who is registered as the mortgagee in the Aircraft Mortgage Register is actually entitled to such right as long as there is no proof to the contrary (section 15(1) of the Act on Rights in Aircraft). A potential acquirer of the mortgage may rely on the registrations made unless the acquirer knows that those are incorrect (section 16(1) of the Act on Rights in Aircraft). Should the ownership of the aircraft be transferred to a third party, the registered mortgage does not expire but remains intact and the buyer acquires only encumbered ownership (section 98(1)(2) of the Act on Rights in Aircraft). The parties have to notify the German Aircraft Mortgage Register about any change in ownership of the aircraft to have it recorded in the German Aircraft Mortgage Register (section 90 of the Act on Rights in Aircraft).

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 German law the concept of trust is well known, and according to modern majority view can be employed in different ways when providing security. However, as the concept itself is not free from criticism and crosses the border between obligation and property law, it is used as a form of ‘stand-alone security’ at the most. It will not be employed in addition to the registered mortgage on aircraft, itself already being comprehensively and exclusively regulated (see section 9 of the Act on Rights in Aircraft).

The registered mortgage as laid down in section 1 of the Act on Rights in Aircraft is a right in rem, as it rests on the ownership of the aircraft it encumbers, regardless of the owner’s identity. Regarding any changes thereto, several constellations have to be differentiated:

  • to have the underlying claim (together with the mortgage) easily transferred or assigned, the underlying claim of a German aircraft mortgage is usually not the specific loan agreement but an abstract acknowledgement of debt in relation to a certain amount that is also the amount secured by the mortgage; that is also helpful in a syndication scenario as then the mortgage may be easily transferred by simply assigning the abstract acknowledgement of debt to the new financier, security trustee or agent (following which the aircraft mortgage is also transferred by operation of law);
  • changing the aircraft’s ownership leaves the registered mortgage untouched (section 98(1)(2) of the Act on Rights in Aircraft; see question 19); however, as stated above, the parties need to notify the German Aircraft Mortgage Register of the owner change to have it recorded; and
  • changing the amount of the secured claim or the mortgagee needs to be recorded as well in the Aircraft Mortgage Register (section 55 of the German Act of Rights on Aircraft).

Security over spare engines

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

Engines are to be seen as an accessory of the aircraft (see question 7), so that a security interest in the aircraft itself also covers the engines installed at the time it is created, provided they are also owned by the owner of the host aircraft as recorded in the Aircraft Register (section 31 of the Act on Rights in Aircraft). Although the qualification as an accessory is not precluded by the fact that the engine in question is only temporarily used for a single host aircraft (section 31(1)(2) of the Act on Rights in Aircraft) - as such use is typical for aircraft engines because they are regularly swapped between different aircraft - the engine is considered to be an accessory of a specific host aircraft as long as it is dedicated to it, which necessitates some kind of close spatial connection (compare section 97(1)(1) of the German Civil Code). In other words, the engine must at least be in the course of being installed in the host aircraft at the time of creating the mortgage over the aircraft. An engine is released from joint liability as collateral:

  • if ownership is transferred to a third party and the engine is removed from the aircraft before it is seized on behalf of the mortgagee for enforcement purposes (section 31(2)(1) of the Act on Rights in Aircraft);
  • if it loses its classification as an accessory of the respective aircraft, this is usually not the case if it is removed only for maintenance and will be installed on the same aircraft after completing of such maintenance (section 31(3)(1) of the Act on Rights in Aircraft); or
  • if it is placed in a spare parts storage (section 31(3)(2) of the Act on Rights in Aircraft).

To avoid the two latter cases of release, the owner of the aircraft may agree with the mortgagee to extend the mortgage to all spare parts in the inventory of a specific domestic or foreign spare parts storage and have the extension recorded in the Aircraft Mortgage Register. The extension depends on the existence of the aircraft mortgage itself and is subject to comprehensive statutory regulations (section 68 et seq of the Act on Rights in Aircraft).

An independent mortgage in an engine cannot be registered in Germany.

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?

There are no self-help remedies available to the owner or lessor. In order to repossess the aircraft, the owner or lessor must proceed in accordance with the German laws of debt enforcement. That necessitates obtaining an enforceable title (court order or judgment) for the repossession claim from the German civil court having jurisdiction. The title must contain the necessary enforcement clause and needs to be duly served on the debtor (lessee). The owner can then apply for the enforcement of the court order or judgment with a bailiff, who will put the owner in possession of the aircraft. However, as this procedure is usually rather lengthy, the lessor may request that the lessee submits itself already at the commencement of the leasing to immediate enforcement proceedings in case of default that has to be established by a notarial deed. Such notarial deed allows the owner to directly apply for enforcement of its repossession claim.

The lessee may lawfully impede an owner’s repossession claim if the lessee is able to substantiate and prove that it still has a right to possession of the aircraft (eg, the termination of the leasing is invalid).

Thus, if the lessee does not cooperate, respectively contests the owner’s right to repossession, the owner needs to seek assistance through judicial proceedings. However, ASD has ‘developed’ a ‘quasi-self-help remedy’, which is a mixture of law and practice. This remedy requires support from a German bailiff, the local aviation authorities and the police at the airport if the measure (after a landing of the aircraft at the respective airport), will be accomplished by serving (again) the termination notice on the pilot and requesting the handing over of the board documents so that it is not possible to fly the aircraft any more. This solution depends on the element of surprise and the cooperation of the respective local aviation authorities and needs to be adequately prepared.

Enforcement of security

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

To enforce an aircraft mortgage, the mortgagee is limited to execution according to statutory regulations (section 47(1) of the Act on Rights in Aircraft) and may not avail itself of any self-help remedies or similar private measures of enforcement (like a private sale) unless the owner consents thereto when the mortgage has become enforceable. The statutory enforcement procedure follows slightly modified provisions on immovables, which means a sale of the aircraft by public auction will be the enforcement measure (section 99(1) of the Act on Rights in Aircraft, together with sections 864(1) and 870a(1)(1) of the Code of Civil Procedure). Competent for any such public auction of an aircraft is the local court in Braunschweig (section 171b(1) of the Act on Enforced Auction and Receivership).

Initiating a public auction by the court (on request of the mortgagee) results in a seizure of the aircraft in favour of the mortgagee (section 20(1), together with section 171a(1) of the Act on Enforced Auction and Receivership). It encompasses all objects that are covered by the aircraft mortgage, for example, accessories such as the engines mounted on the aircraft (section 20(2) of the Act on Enforced Auction and Receivership , together with section 31 of the German Act on Rights in Aircraft; see question 21). The aircraft is then taken into custody by the bailiff and may no longer be operated; upon ordering the enforced auction the court shall concurrently order the custody and safekeeping of the aircraft (section 171c(2)(1) of the Act on Enforced Auction and Receivership). As this measure is usually very detrimental to a lessee of the aircraft, the mortgagee by statutory order legally replaces the previous owner or lessor of the aircraft and thus will have to grant the lessee further use of the aircraft for the time being, if the lessee was already in possession of the aircraft (sections 171f and 169 of the Act on Enforced Auction and Receivership , together with sections 578a(1), 567(1), 566(1) and 535(1)(1) of the German Civil Code). On the other hand, the lessee may not demand that the enforcement procedures (sale by public auction) be suspended.

The auction itself is organised by the court and follows common practice (see section 66 et seq of the Act on Enforced Auction and Receivership). The mortgagee is entitled to the proceeds according to the unpaid amount of its secured claim, but among other things certain costs will have to be settled first (section 10 of the Act on Enforced Auction and Receivership). The highest bidder obtains ownership of the aircraft through a public authority (section 90(1) of the Act on Enforced Auction and Receivership). Such bidder will automatically become party to an existing contract of lease (see above), but may terminate the lease agreement within the statutory notice period (section 57a of the Act on Enforced Auction and Receivership). All other rights resting on the aircraft expire upon the sale by public auction; however, they may continue in regard to the proceeds (sections 91(1) and 92(1) of the Act on Enforced Auction and Receivership). Loss of a right to possession of the aircraft based on a rental or leasing agreement of a duration of more than six months (compare section 3(1) of the Air Traffic Act; see question 7) due to the sale by public auction and the following termination of the rental or lease agreement shall be compensated by a payment corresponding to the contractual period as agreed upon (sections 171n and 92(2) of the Act on Enforced Auction and Receivership ).

If the debtor (aircraft owner) is insolvent, the (provisional) insolvency administrator may apply for a temporary stay of the enforcement measures (sale by public auction) under certain conditions (section 30d of the Act on Enforced Auction and Receivership). In turn, the mortgagee may apply for continuation of the enforcement procedures if the reason for suspension has ceased to exist or if the administrator or the debtor respectively assents to the continuation of such enforcement proceedings (section 30f of the Act on Enforced Auction and Receivership).

Anyone who will risk losing a right to the aircraft as a result of its sale by public auction (eg, the owner or even the party in possession of the aircraft) may prevent such sale by satisfying the claim of the mortgagee through payment, set-off or deposit (section 50 of the Act on Rights in Aircraft).

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?

Any existing registered security interests because of salvage or inevitable maintenance measures by third parties will have priority (sections 75 and 76 of the Act on Rights in Aircraft). On the other hand, liens for repairs and comparable statutory pledges cannot be created on a German registered aircraft (section 9(1) of the German Act of Rights on Aircraft). An aircraft may be seized in an interim court proceeding when a creditor of the owner wants to enforce a private claim; however, to obtain such an arrest order by a court the party requesting it has to provide certain prima facie evidence of its claim and the need for the urgency of the measure. Moreover, the court may order the requesting party to provide some form of security prior to enforcing any such order issued in an interim court proceeding. In that regard it has to be noted that certain aircraft are protected from such seizure, in particular aircraft used for public transportation by an airline (section 1 of the Act on Inadmissibility of Seizure of Aircraft). If the aircraft is subject to a registered mortgage the owner may sell the aircraft only subject to that mortgage. A mortgagee may enforce its mortgage (in particular if it includes a submission to immediate enforcement) by requesting the court to take the aircraft into custody and sell it by public auction. The costs and expenses of the court in relation to conducting the auction of the aircraft will be satisfied first from the proceeds of the sale. Thereafter, the mortgagee will be satisfied out of the sales proceeds and if any balance is left thereafter that balance will be paid to the owner.

Enforcement of foreign judgments and arbitral awards

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

Judgments of any court of an EU country (thus currently also any judgment from an English court) are enforced pursuant to the Regulation (EU) 1215/2012 (as amended from time to time) without re-examination on its merits but subject to the provisions of that Regulation. Judgments from courts of other countries or states (such as New York) are enforced pursuant to the provisions of section 328 of the German Code of Civil Procedure. Thus such foreign judgment will be recognised unless:

  • the courts of the state to which the foreign court belongs do not have jurisdiction according to German law;
  • the defendant, who has not entered an appearance in the proceedings and who takes recourse to this fact, has not duly been served the document by which the proceedings were initiated, or not in such time to allow the defendant to defend itself;
  • the judgment is incompatible with a judgment delivered in Germany, or with an earlier judgment handed down abroad that is to be recognised, or if the proceedings on which such judgment is based are incompatible with proceedings that have become pending earlier in Germany;
  • the recognition of the judgment would lead to a result that is obviously incompatible with essential principles of German law, in particular if the recognition is not compatible with fundamental rights; or
  • reciprocity with the country of the foreign court has not been granted.

Germany is a party to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

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?

The sale (including the transfer of title) of aircraft is generally subject to German VAT of 19 per cent whenever:

  • the delivery of the aircraft originates in Germany, regardless of its final destination (section 1(1)No. 1, together with section 3(6) of the VAT Act). The tax burden rests on the seller (section 13a(1) No. 1 of the VAT Act); or
  • the delivery of the aircraft, originating in another EU member state, but ends, according to the terms of the respective contract, in Germany (sections 1(1) No. 5, 1a(1) and 3d of the VAT Act). The tax burden rests on the purchaser (section 13a(1) No. 2 of the VAT Act).

The sale is subject to German import VAT whenever the delivery of the aircraft ends in Germany, originating in a non-EU member state (section 1(1) No. 4 of the VAT Act). The tax burden rests on the person who legally owes duties for a customs debt incurred on importation, namely the applicant (sections 13a(2) and 21(2) of the VAT Act). However, sales of aircraft benefit widely from tax exemptions, so that in all three scenarios stated below, no VAT is due:

  • if it can be proven that at the time of delivery the aircraft was determined for (final) delivery to an airline operating on a commercial basis mainly on international routes (the German Ministry of Finance publishes each year a list of German airlines that operate on that basis and are therefore exempt from VAT - including import VAT (sections 4 No. 2, and 5(1) No. 2, each together with section 8(2) No. 1 of the VAT Act), to be precise, delivery, refurbishment, repair, maintenance, chartering and leasing of aircraft is tax free, if intended for a company that in its everyday business is mainly engaged in non-gratuitous cross-border or purely foreign transportation;
  • regardless of such business, no VAT applies in case the aircraft (after transfer of title) is exported from Germany to a third country, in other words, to a non-EU member state (section 4 No. 1a), together with section 6 of the VAT Act); or
  • if the aircraft is subject to an intra-EU (Community)-delivery, the aircraft is delivered to a company from another EU member state that wants to use it for its enterprise, thereafter the aircraft is brought to this other EU member state and the purchase of the aircraft is taxable in that other EU member state (section 6a of the VAT Act).

German VAT does not apply to lease payments or loan repayments as they do not constitute a performance in a fiscal sense. In general, in case of a true lease the income of a lessor from an aircraft lease is subject to German taxation pursuant to German domestic tax law if the aircraft is registered in a German register. However, in many cases, German taxation of the income of a foreign lessor from an aircraft registered in a German register is limited or excluded by a double taxation treaty. But to be on the safe side it has to be expressly stated in the double taxation treaty that aircraft are regarded as movable (and not as immovable) assets, because otherwise the German tax authorities may tax the income earned from the aircraft in Germany as it is considered income from real estate under German tax law.

Exchange control

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

Residents of Germany (according to section 63 of the Foreign Trade Ordinance means Germany the German economic territory within the meaning of Annex A, Chapter 2, No. 2.05 of Regulation (EC) No. 2223/96 as amended from time to time), have to report to the German Central Bank all international payments made to, or received from, foreigners in an amount exceeding €12,500 (or the equivalent in a foreign currency) within seven days of the transaction (sections 67(1) and (4)(1), together with section 71(7) of the Foreign Trade Ordinance) using a specific document (Z4) that, inter alia, contains information on the reporting party as well as on the purpose and the amount of the payment. Moreover, pursuant to section 66 of the German Foreign Trade Ordinance, receivables and liabilities of German residents (other than natural persons, certain monetary financial institutions, investment stock corporations and capital management companies regarding the claims and liabilities of their investment funds) towards foreigners exceeding in aggregate an amount of €5 million at the end of a calendar month have to be notified to the German Federal Bank, Deutsche Bundesbank.

There are no exchange controls in effect in Germany, because within the framework of the provisions set out in the Lisbon Treaty, all restrictions on payments between member states and between member states and third countries are prohibited (article 63(2) TFEU).

Default interest

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

The statutory default interest rate is 8.12 per cent as of 1 January 2019, if none of the parties qualifies as consumer (sections 288(2) and 247(1) of the German Civil Code). There is no statutory limit for individual agreements on higher interest rates, but if contained in (the more commonly used) general terms and conditions the rate is limited by the amount of damage actually suffered because of delayed payment (section 309(5)(b) of the German Civil Code). However, if the lease agreement or loan agreement is governed by a law other than German law, the enforceability of the interest rate agreed in such contract is determined by such foreign law and not by German law.

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?

No customs duty or import VAT is payable if an aircraft is brought to Germany from another EU member state. In addition, no customs duty is payable in Germany on the export of an aircraft from Germany. Moreover, according to customs tariff number 8802, 400,100 are civil fixed-wing aircraft that have an empty weight of more than 15,000 kilograms exempt from customs duty. In any event, no customs duty and import VAT will be charged in Germany if the aircraft is imported (from a non-EU country) by a German airline that is (i) the owner or the lessee of the aircraft and (ii) exempt from VAT as it predominately operates (on a commercial basis) on international routes (see question 26).

Insurance and reinsurance

Captive insurance

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

The most common specific insurances in German aviation practice are as follows:

  • aviation hull insurance, covering damage to aircraft from the outside because of adverse weather conditions, crashes or forced landings, etc;
  • aviation liability insurance, covering damage to passengers (section 44 and 50 of the Air Traffic Act in connection with Regulation (EU) No. 785/2004); and
  • aviation liability insurance, covering damage (personal injury or property) to third parties caused by the aircraft (section 33 and 43 Air Traffic Act in connection with Regulation (EU) No. 785/2004).

Liability insurance is of special importance as it is compulsory under EU law and a prerequisite for an aircraft to be operated in Germany (see question 35). The respective insurance company must be licensed for business in Germany (section 105(1) of the Air Traffic Licensing Regulation) to ensure that it is properly supervised by German or EU authorities.

Cut-through clauses

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

This depends on the content of the specific agreement.

Reinsurance

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

Generally, such assignments can be effective. It depends, however, on the specific clauses of the agreement.

Liability

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

No. Strict liability (thus without prove of fault or negligence or wilful misconduct) for any damage resulting from the operation of an aircraft according to EU and German law is limited to the aircraft operator for damage to third parties on the surface (article 1 et seq of the Rome Convention and section 33 et seq of the Air Traffic Act) and to the air carrier for damage to passengers (article 17 et seq of the Montreal Convention and section 44 et seq of the Air Traffic Act). Thus, a lessor or financier will never be strictly liable, and the owner only in case of simultaneously being aircraft operator or air carrier (compare article 4(2) of Regulation (EC) No. 785/2004).

Strict liability

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

No. See question 33.

Third-party liability insurance

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

EU, as well as subsidiary German, law (see sections 43(1) and 44 of the Air Traffic Act and section 101 of the Air Traffic Licensing Regulation) again distinguishes between liability for damage suffered by a passenger, resting on the air carrier, and liability for damage suffered by a third party, resting on the aircraft operator:

  • insurance for (inside) passengers, baggage and cargo: according to article 6 of Regulation (EC) No. 785/2004 as amended by Regulation (EU) No. 285/2010, minimum insurance cover is 250,000 special drawing rights (SDR) per passenger, equalling €306,353.94 (conversion date: 17 January 2019); 1,131 SDR (€1,385.95) per passengers’ baggage and 19 SDR (€23.28) per kilogram of cargo; and
  • insurance for (outside) third parties: according to article 7 of Regulation (EC) No. 785/2004, minimum insurance cover per accident for each aircraft operated is determined by its maximum take-off mass or weight (MTOM or MTOW). Operators of aircraft within the ‘heavy’ class (ICAO/FAA) with an MTOM between 50 and 200 or 200 and 500 tonnes have to provide insurance amounting to at least 300-500 million SDR (about €368 million to €613 million). Only the Airbus A380-800, with an MTOM of over 500 tonnes, falls into the top bracket, necessitating insurance cover of at least 700 million SDR (about €858 million).

German law provisions contain the same amounts for German aircraft (section 103(2)(1) of the Air Traffic Licensing Regulation; section 103(2)(3) of the Air Traffic Licensing Regulation, together with section 47(4) of the Air Traffic Act; section 104(3)(1) of the Air Traffic Licensing Regulation and section 102(2) of the Air Traffic Licensing Regulation, together with section 37(1) of the Air Traffic Act, respectively).

A foreign aircraft entering German airspace must carry a certificate proving the existence of equivalent liability insurance for third parties to avoid being grounded on its first landing on German surface (section 99(4) of the Air Traffic Licensing Regulation). When taking on board additional passengers in Germany, the existence of liability insurance for such passengers must also be proven by a certificate to continue the journey (section 99(5) of the Air Traffic Licensing Regulation).