Security

Security document (mortgage) form and content

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

Most Brazilian security agreements take the form of a mortgage. There are some other types of Brazilian security agreements, in particular a form of document called a fiduciary sale agreement, that occasionally attract the attention of financiers; however, most lenders are more comfortable with mortgages coupled with security assignments.

As mentioned in question 3, mortgages have traditionally been governed by Brazilian law and using a non-Brazilian law mortgage based on the Cape Town Convention is as yet untested. Most practitioners consider such mortgages to be valid ‘security agreements’ under the Cape Town Convention, thus creating international interests. Increasingly large asset-based securitisation and warehouse facilities do not require Brazilian-law mortgages.

Aircraft mortgages (regardless of governing law) may be executed in English and most of them are. The requirement of sworn translations, described in question 16, applies to mortgages.

According to the Brazilian Aeronautical Code an aircraft mortgage must contain certain information such as the amount secured and the interest rate of the underlying loan. This requirement frequently made financiers uncomfortable, considering that registered mortgages are in the public domain. In addition the inclusion of such information was difficult in large multi-aircraft financing transactions. Based on the Cape Town Convention the RAB no longer requires inclusion of the financial details of the underlying financing. Other requirements of the Brazilian Aeronautical Code such as identification of the insurance policies covering the mortgaged aircraft is still required, however, such information is relatively innocuous.

Under Brazilian law a mortgagee is not entitled to take possession of the mortgaged asset. The traditional remedy of a mortgagee is to prompt a court to take possession of the asset, auction it and then use the proceeds to satisfy the secured debt. This remedy is unattractive because of the relatively long period of time it would take to organise an auction and also to several other unknown factors in the process, such as whether the court would conduct the auction in US dollars or Brazilian currency, and the means to remit the sale proceeds from Brazil after the auction.

Brazil has a considerable number of aircraft lease repossession cases that have had fairly favourable results for lessors, including precedents in 2015, 2016 and 2018. Thus it is common to include security assignments enabling a mortgagee to ‘step into the shoes’ of a lessor and repossess an aircraft as the lessor’s assignee. Security assignments typically contain notices of assignment given to the Brazilian operator and acknowledgements or consent given by the Brazilian operator to a security trustee or the ultimate creditor. The Brazilian operator will usually agree to redirect payments to a security trustee and to recognise the exercise of lease remedies by the security trustee as assignee of the lessor.

There is a possibility that with the Cape Town Convention mortgagees will be allowed to repossess aircraft in their capacity as mortgagees, and not necessarily as assignees of lessors. Since most security packages include security assignments, there may be a need to test this issue in the future.

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 following are general rules that apply to all documents being registered with the RAB and not merely security documents:

  • documents that are not written in Portuguese must be registered with a sworn translation. A sworn translation refers to a translation prepared by a licensed Brazilian translator;
  • documents that are signed outside Brazil must be apostilled or consularised by the Brazilian consulate responsible for the jurisdiction where the signature has taken place. If the jurisdiction is a signatory to the Hague Convention then an apostille is sufficient. If the jurisdiction is not a signatory to the Hague Convention then the document must be consularised. In most cases the consulates require local notarisation as a prerequisite to consularisation. In some cases the apostille of a government officer is required for consularisation. The rules of the various Brazilian consulates vary. There are a few traditional exceptions to the consularisation rule. The main exception applicable to aviation contracts is France. Based on a bilateral treaty between Brazil and France, documents executed in France require notarisation but do not require an apostille or consularisation;
  • documents signed in Brazil by attorneys-in-fact pursuant to notarised and apostilled or consularised powers of attorney do not require a further apostille or consularisation;
  • the RAB usually requires the signature of two witnesses on all documents being submitted for registration;
  • all signatures must be notarised. There is a notarisation method that allows for signatures to be notarised after execution, without the notary actually witnessing the signature. This allows for the submission of undated documents in custody pending a closing. This simplified notarisation procedure does not apply to bills of sale; and
  • documents signed outside Brazil or in languages other than Portuguese that are not registered with the RAB would, for the purposes of admissibility, need to be registered with RTDs (see question 7).

Costs to comply with these documentary requirements vary. The cost to obtain a sworn translation averages US$30 per page; however, the actual cost is based on the number of characters in the Portuguese translation of the document. RAB registration costs are approximately US$7 per page. RTD filing costs vary the most depending on the contents of the document and the jurisdiction of the RTD. The usual basis for RTD registration costs is based on the ‘value of the document’. The RTD fees used to be subject to ceilings, and aircraft leases usually exceed the ceilings. However, even the ceilings can vary, sometimes being as little as US$2,500 or as much as US$8,500. Since 2016, the RTDs in the State of Rio de Janeiro and the RTDs of a few other jurisdictions eliminated ceilings and in those locations the RTD costs have risen sharply. This is what caused parties to question the need to make RTD filings in some cases. As mentioned in question 7 there is support for the position that RTD registration is unnecessary for documents registered with the RAB. This has become the norm in most aircraft finance transactions.

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.

Similar to ownership interest and lease documents, security documents creating liens over Brazilian-registered aircraft must be filed with the RAB and should be filed with RTDs to ensure admissibility. The procedures described in questions 8, 10 and 16 apply to security documents. International interests arising from mortgages and other security agreements must be registered with the International Registry.

Registration of security

How is registration of a security interest certified?

As stated in question 11, a certificate of registration will mention that an aircraft is subject to a mortgage but will not include any details such as the name of the mortgagee. A registry extract certificate confirms the full details of all mortgages and registered liens over aircraft (see questions 9 and 11 regarding registry extract certificates). For the International Registry priority search certificates are procured.

Effect of registration of a security interest

What is the effect of registration as to third parties?

Registration with the RAB confers priority over security interests registered subsequently unless an express agreement such as a subordination agreement is executed and establishes different priorities.

A third party interested in ascertaining the terms of a security interest may rely on a registry extract certificate (see questions 9 and 11). In addition, all the documents registered with the RAB are in the public domain, and third parties can obtain copies when necessary.

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?

Security interests over aircraft are usually structured as mortgages. The concept of trusts is not recognised in Brazil, and there are no ‘Brazilian trusts’. But trusts from other jurisdictions are recognised as entities in Brazil and are frequently used to hold title or mortgage interests over aircraft registered in Brazil. Thus, many aircraft are registered in the names of owner trustees and many mortgages are registered in the names of security trustees.

In the case of owner trustees, there is no need to register changes in beneficiaries; however, since November 2013 the RAB has required the submission of trust agreements (which must be notarised, apostilled or consularised and translated as described in question 16). Although the RAB regulation does not expressly mention amendments to trust agreements, parties should consider submitting trust agreement amendments to the RAB. Trust agreements are not registered with the RAB per se. They are submitted for and retained in the RAB’s internal records.

A security trustee may hold a mortgage interest for a large group of lenders or for a changing group of beneficiaries such as new lenders without affecting the security. Loan transfers would not affect the security. The only party with registered rights as a lienholder in Brazil would be the security trustee. The lenders’ recourse against the security trustee would not be a Brazilian issue and would be adjudicated outside Brazil.

Security over spare engines

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

For the purposes of encumbrances, spare engines tend to be treated in the same way as aircraft. Spare engine mortgages should be registered with the RAB and RTDs for the reasons given above in respect of aircraft mortgages.

A security interest over a financed aircraft creates a security interest over the aircraft’s engines unless the security agreement expressly includes stipulations to the contrary. Engines should be described by model and serial number in aircraft mortgages. Whether an engine is installed on the aircraft at the time of creation is irrelevant to the creation of the lien (though location may have tax consequences).

It is generally understood that the installation of an engine on an airframe does not transfer title to that engine to the owner of the airframe. Equally, the removal of an engine from an airframe does not cause any title transfer. This principle has not been tested frequently; however, there have been a few challenges to this principle in recent years. In the major bankruptcy case of Varig airlines in 2005 and 2006, this principle was upheld and disputes over engine ownership did not arise (disputes over other parts did arise in that case). With the introduction of engine registrations under the Cape Town Convention, the tendency is that this principle will be fortified in Brazil. To date this issue has not arisen in the ongoing Avianca Brasil bankruptcy.

An engine that has been encumbered though registration of a mortgage or security agreement with the RAB will cease to be encumbered when a release is filed with the RAB.

Helicopter engines require special attention because of the frequency with which they are swapped from their airframes with the intention of title swaps. The general rules applicable to fixed-wing aircraft engines apply to helicopter engines as well; however, these rules do not always coincide with the commercial agreements relating to helicopter engine maintenance.

For engines (spare or otherwise) leased or acquired after 15 May 2013, international interest and sale registrations should also be made on the International Registry to obtain rights under the Cape Town Convention.