Overview

Conventions

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

Lithuania is a party to the following major air law treaties:

  • the Chicago Convention on International Civil Aviation (1944), effective from 7 February 1992, and a number of protocols relating to its amendments;
  • the Warsaw Convention for the Unification of Certain Rules Relating to International Carriage (1929), effective from 19 February 1997 and its Hague Protocol (1955), effective from 19 February 1997;
  • the Guadalajara Supplementary Convention to the Warsaw Convention (1961), effective from 9 March 1997;
  • the Tokyo Convention on Offences and Certain Other Acts Committed on Board Aircraft (1963), effective from 19 February 1997;
  • the Hague Convention for the Suppression of Unlawful Seizure of Aircraft (1970), effective from 3 January 1997;
  • the Montreal Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation (1971) and its Protocol (1988), effective from 3 January 1997;
  • the Montreal Convention on the Marking of Plastic Explosives for the Purpose of Detection (1991), effective from 21 June 1998; and
  • the Montreal Convention for the Unification of Certain Rules for International Carriage by Air (1999), effective from 29 January 2005.

Also, Lithuania is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), effective from 12 June 1995.

The Rome Convention (1933), the Geneva Convention (1948) and the Cape Town Convention (2001) have not yet been ratified in Lithuania.

On 6 April 2009, the Council of the European Union adopted a Decision on the accession of the European Community to the Convention on international interests in mobile equipment and its Protocol on matters specific to aircraft equipment, adopted jointly in Cape Town on 16 November 2001. Thus, the Cape Town Convention is applicable insofar as the Community has exclusive jurisdiction over the matters governed by the Cape Town Convention and the Protocol.

Domestic legislation

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

The basic legal acts related to aviation finance and leasing are the Law on Aviation (2000) and the Civil Code (2001), expanded in various specific secondary legislation (ie, decrees of the government of Lithuania, orders of the Minister of Transport (particularly, the Order on the Approval of the Rules of Approving the Aircraft Leasing Agreements (2011) and the Order on the Approval of the Rules of Civil Aircraft Registration (2005)). Orders of the Director of the Civil Aviation Administration (CAA) and Orders of the General Director of the State Enterprise ‘Air Navigation’ are also relevant for certain aspects of aviation leasing.

Also, since Lithuania is a member of the EU, the respective aquis communautaire constitutes an integral part of the Lithuanian legal system.

The Law on Banks (2004) and the Law on Companies (2000), together with resolutions of the Bank of Lithuania, establish a legal framework for aviation finance in case the financing originates from Lithuanian lenders.

The 20th Business Accounting Standard adopted by the Lithuanian Authority of Audit, Accounting, Property Valuation and Insolvency Management (formerly known as the Lithuanian Authority of Audit and Accounting and prior to that - the Lithuanian Institute of Accounting) ‘Operative lease, finance lease and loan-for-use’ sets out how a finance lease, operating lease and loan-for-use shall be recorded in accounting and presented in financial statements.

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?

Apart from the Civil Code, which recognises freedom of contract, Rome I Regulation (EC) No. 593/2008 is directly applicable in Lithuania. Aircraft lease, finance and security transactions where one party is based in a foreign jurisdiction are customarily governed under the English or New York laws and such choice of law (as well as the choice of any other foreign law) should normally be recognised in Lithuania respecting the freedom of contract, provided the choice is expressly demonstrated in the contract and there are no contradicting overriding Lithuanian rules.

By reason of the Civil Code, an aircraft bearing a Lithuanian registration shall be deemed as immovable property in Lithuania and transactions on the transfer of ownership rights and other rights in rem to an immovable property (aircraft) shall be subject to notarial certification in Lithuania. For this reason, transfer of interests in or creation of security interest (eg, mortgage) over an aircraft bearing Lithuanian registration must be carried out in accordance with Lithuanian law requirements, and relevant agreements must be governed by the laws of Lithuania.

It is customary that the parties enter into an English or New York law-governed agreement regarding the transfer of interest in or creation of security interest over aircraft and also enter into additional Lithuanian law-governed agreements so as to ensure validity of the transfer of interest or creation of security in Lithuania.

Title transfer

Transfer of aircraft

How is title in an aircraft transferred?

As noted, an aircraft bearing Lithuanian registration shall be considered as immovable property and transfer of immovable property is subject to notarial certification in Lithuania. A signed and notarised agreement creates a contractual duty on the seller to transfer the ownership of an aircraft to the buyer. The ownership of an aircraft is transferred by delivery, which is evidenced by parties signing a respective delivery and acceptance certificate or a similar document mentioned in the sale and purchase or another agreement on the transfer of an aircraft. The respective provisions of delivery and acceptance certificate can be incorporated into the contract of sale and then the title to an aircraft is transferred after the agreement is signed and notarised.

In practice, the English law or New York law bill of sale is recognised as a document evidencing the title to the aircraft when a foreign aircraft is newly registered in Lithuania. In those cases, an original bill of sale or its notarised copy must be submitted to the civil aviation authority. Also, if an aircraft registered in Lithuania is deregistered from the Lithuanian civil aircraft register, such asset ceases to be an immovable property in the sense of Lithuanian laws and, strictly speaking, it is not required that the transfer of title is made in accordance with Lithuanian law.

However, if an aircraft is already registered in Lithuania and the parties need to sustain the Lithuanian aircraft registration after the transfer of title, then such transfer of title must be made in accordance with the laws of Lithuania and the sale and purchase or another agreement on the transfer of title needs to be notarised locally.

As a matter of practice, the deregistration and re-registration of an aircraft is linked with many technical practicalities. Thus, a Lithuanian sale and purchase agreement is often concluded for aircraft re-registration purposes; however, the parties enter into a parallel English or New York law sale and purchase agreement, which is further accompanied by a customary bill of sale.

Transfer document requirements

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

As noted in question 4, the aircraft sale and purchase or a similar agreement on the transfer of aircraft must be concluded in a written form and notarised. The delivery and acceptance certificate (or equivalent document) made in accordance with the agreement on transfer of aircraft effects and evidences the transfer of title. It is, however, not required by Lithuanian law that the delivery and acceptance certificate must be certified by a public notary. Transfer of title shall be effective after the relevant documents are signed and notarised (if applicable).

Failure to notarise the Lithuanian law-based aircraft sale and purchase agreement renders the sale transaction null and void ab initio.

The Lithuanian public notary may notarise the documents made in Lithuanian or in Lithuanian and any other foreign language (a translation from Lithuanian has to be verified by a third party, acting as a translator). Thus, as a matter of practice, international aircraft sale and purchase transactions are often made bilingual.

Registration of aircraft ownership and lease interests

Aircraft registry

Identify and describe the aircraft registry.

As of 1 January 2019, Lithuanian underwent a reform concerning the civil aviation supervision system. The body managing the Civil Aircraft Registry of the Republic of Lithuania is the Public Institution Transport Competence Agency (the functions were mostly transferred to this entity after the reorganisation of the Civil Aviation Administration). Generally, the Lithuanian civil aircraft register is an owner register, although the purpose of the register is to record both the owners and operators of an aircraft. Also, it is a public and not a ‘private use only’ register.

The aircraft is registered in the name of an owner and the owner and its address are indicated in the aircraft certificate of registration. The register also records the operators of an aircraft. In case an aircraft is leased to an intermediate lessor and further subleased to the ultimate operator, the owner and the ultimate operator are recorded in the aircraft certificate of registration. A mortgagee is not recorded in the aircraft certificate of registration.

Generally, the entry in the registry is based on the principles of the Chicago Convention on International Civil Aviation (1944). Once the aircraft is registered, it bears an alphanumeric string starting with ‘LY’, which indicates the Lithuanian nationality of the aircraft.

An aircraft may be registered in the Lithuanian Civil Aircraft Registry only if there is a link with Lithuania. It is not possible to register an aircraft in Lithuania on the basis of lease-in lease-out structures. According to the Law on Aviation, a civil aircraft may be registered in the Lithuania if:

  • the owner of an aircraft is a citizen of Lithuania or a legal entity registered in Lithuania, the Lithuanian state or municipality;
  • the aircraft has a certificate of airworthiness; and
  • the aircraft is not registered in the aircraft register of another state.

If the aircraft is not airworthy, a certificate of temporary registration of aircraft can be issued (normally valid for six months).

An aircraft belonging to a legal or natural person of a foreign state, if it is constantly operated from an airport in Lithuania, may also be registered in the Civil Aircraft Register of the Republic of Lithuania. Finally, an aircraft being operated by a Lithuanian legal or natural person may be registered in the Civil Aircraft Register if it is constantly flown from a Lithuanian airport or an airport in another EU country.

It is possible that an aircraft registered in Lithuania can be operated permanently in airports of other countries if such aircraft is covered by a bilateral agreement on the implementation of article 83-bis of the Convention on International Civil Aviation for the transfer of surveillance of responsibilities (operations, maintenance and continuing airworthiness) entered into between the Lithuanian Public Institution Transport Competence Agency and a foreign state civil aviation authority (83-bis agreements).

It is up to the discretion of the Public Institution Transport Competence Agency to enter into an 83-bis agreement with a foreign aviation authority. It is required by the Public Institution Transport Competence Agency that an aircraft to be covered by an 83-bis agreement to be operated outside Lithuania must be owned by a Lithuanian resident (natural or legal person), and transfer of title to a Lithuanian subsidiary can be an issue for foreign financiers.

There is no separate register for engines or rights in engines in Lithuania. The aircraft engines are recorded within the Civil Aircraft Registry as part of aircraft technical data.

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?

An aircraft is registered in the name of the owner and the owner is indicated in the aircraft certificate of registration. A person that is indicated on the bill of sale or equivalent ownership document shall be registered as an owner of the aircraft. However, the aircraft certificate of registration is not a proof of ownership over the aircraft.

An operator of the aircraft is also registered in Lithuania. In this context, the CAA needs to see the link between the owner of an aircraft and its operator. For this reason, a lease agreement or equivalent documents translated into Lithuanian must be submitted to the CAA for aircraft registration purposes.

There is no limitation on who can be recorded as owner, as long as it is a validly incorporated and existing legal entity or a natural person. Legal entities must provide a copy of the certificate of registration to be recorded as owner and natural persons must provide a copy of identification. As a matter of practicality, owner trustees are recorded as owners in the aircraft certificate of registration; beneficial owners are not recorded.

Lease interests are not specifically registered in Lithuania, except that the ultimate operator is recorded on the certificate of registration of an aircraft. For example, if an aircraft is leased to an intermediate lessor and further subleased to the ultimate operator, the owner and the ultimate operator only are recorded in the aircraft certificate of registration.

The interest in aircraft engines is also not registered. The description of the aircraft also includes certain technical aircraft data, including the type and number of engines. However, no interest in the engines is created by registering the aircraft.

Registration of ownership interests

Summarise the process to register an ownership interest.

The procedure of registering an aircraft is regulated by the Rules of the Aircraft Registration as approved by Order No. 3-439 of 10 October 2005 by the Minister of Communications and Transport (the Aircraft Registration Rules).

The application for aircraft registration must be made by an owner or its duly authorised representative. Normally, the application for aircraft registration is submitted by persons who are acting on the basis of a power of attorney. A fee must also be paid so that the application is processed. The registration fee depends on the specifications of the aircraft. As of 1 January 2019, there is no nominal fee for re-registration of the aircraft. Therefore, in case the aircraft is already registered with the Lithuanian Civil Aircraft Register and needs to be re-registered due to the change of ownership, the standard registration fee applies as if the aircraft has never been previously registered in Lithuania and the amount of the re-registration fee in such cases is equal to the registration fee and depends on the specification of the aircraft (the maximum take-off weight).

Along with the application, a person must submit the following documents:

  • an original document or a notarised copy proving the basis of the ownership of the aircraft (such as a sale and purchase agreement, a bill of sale etc). If the document is written in a foreign language, an original translation or a notarised copy must be provided. Customarily an original bill of sale or its notarised copy is submitted. It would suffice for a representative of the Public Institution Transport Competence Agency to see the original bill of sale and this would immediately be returned to the owner after saving a copy of the same;
  • an acceptance certificate or equivalent document showing that the transfer of possession over the aircraft by the previous owner to the current owner occurred;
  • an aircraft deregistration certificate or equivalent document in case the aircraft was previously registered in an aircraft registry of a foreign country or a confirmation from the relevant aviation authority of the country from which the aircraft is being imported, stating that the aircraft was not registered in the civil aircraft registry of that country. If it is not possible to present such documents, an application should specify the reasons for their absence;
  • a certified registration (incorporation) certificate of an owner or a copy of ID in the case of a natural person;
  • a certificate of airworthiness;
  • an aircraft lease agreement or equivalent document proving the right of an operator to use and operate the aircraft;
  • if the application is submitted by an authorised person, acting on the basis of a power of attorney, an original or a notarised copy of the power of attorney must be provided, along with a copy of ID of the authorised person submitting the documents; and
  • if an owner is not a Lithuanian resident, confirmation that the aircraft will be operated permanently from Lithuanian airports must be provided.

The Public Institution Transport Competence Agency will process the application within 21 business days.

Title and third parties

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

Although the registration of an aircraft is made on the basis of the bill of sale or equivalent ownership document, the Public Institution Transport Competence Agency does not perform specific checks on the actual owner of the aircraft. The Aircraft Registration Rules make it specific that the certificate of registration of an aircraft is not a proof of ownership. In practical terms, a third party is expected to rely on the acquisition bill of sale and, in case of doubt, to collect back-to-birth bills of sale showing the chain of title back to the manufacturer in order to confirm the ownership interest in the aircraft. Customarily an original bill of sale or its notarised copy is submitted to the Public Institution Transport Competence Agency, apostillisation of the bill of sale is not required (see question 8).

The registered ownership interest in the aircraft (if defective or otherwise) can be challenged in court and the Lithuanian courts should assume jurisdiction to hear this type of dispute, subject to the aircraft being registered in Lithuania.

Registration of lease interests

Summarise the process to register a lease interest.

Lease agreements translated into Lithuanian are submitted to the Public Institution Transport Competence Agency with the application for registration of ownership interests over the aircraft (see question 8) to evidence the link as between the owner and the operator (the head lease agreements as between the owner and the intermediate lessor must also be submitted to the Public Institution Transport Competence Agency). Accordingly, the operator is recorded in the certificate of registration. In case the operator of the aircraft changes, a new lease agreement, the lease novation or other relevant documents changing the data recorded by the Public Institution Transport Competence Agency must be submitted. However, otherwise, lease interests are not subject to registration in Lithuania.

Certificate of registration

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

The certificate of registration is issued by the Public Institution Transport Competence Agency. Information on the certificate contains the following:

  • number of the certificate of registration;
  • nationality and registration marks of an aircraft;
  • manufacturer and manufacturer’s designation of an aircraft;
  • aircraft serial number;
  • name and address of the owner;
  • name and address of the operator;
  • date of issue of the certificate;
  • date of expiry of the certificate, in case a certificate of temporarily registration is issued;
  • signature block; and
  • remarks, if any. The most common remark included by the Public Institution Transport Competence Agencyis that the aircraft is registered in accordance with the Chicago Convention on International Civil Aviation (1944) and the local Law on Aviation (2000). Additional remarks related to registration may also be stated.

There is no separate certificate of engine registration, as the engines are registered as a part of an aircraft. Also, the certificate of registration does not state the mortgagee’s interest over aircraft and such interest can be evidenced by an extract from the Register of Mortgages of the State Enterprise Centre of Registers and can also be acknowledged by the Public Institution Transport Competence Agency in a letter to be issued on behalf of the Public Institution Transport Competence Agency upon request of a relevant party.

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 aircraft can be deregistered if a relevant application is submitted to the Public Institution Transport Competence Agency by an owner. However, if the aircraft is mortgaged or seized by a court order, the aircraft cannot be deregistered without the consent of a mortgagee or a court order lifting the seizure order. A lessee’s consent is not required to deregister the aircraft and it is not essential for the aviation authority to give notice prior to deregistration. The Public Institution Transport Competence Agency can cancel registration of an aircraft upon its own motion if the aircraft does not meet the requirements for its registration; however, in practice, the Public Institution Transport Competence Agency tends not to exercise this right unless there is a very good reason.

The certificate of deregistration is issued only after the original aircraft certificate of registration is returned to the Public Institution Transport Competence Agency. It should be noted that the certificate of registration must be kept in the aircraft while it is operated. It is not possible to give a definite answer regarding the situation that would arise if an owner did not surrender the original aircraft registration certificate (it can happen that the certificate is not surrendered by a lessee so as to withhold the repossession and deregistration); however, we are of the opinion that the general principle of reasonableness would be considered and the aviation authority would make a final decision giving due regard to the exact reasons why the original documents were not returned.

As noted, the operator may not block the deregistration and exportation. However, an operator may seek a court injunction if, for example, a contractual quiet enjoyment covenant is breached. Also, if the operator is recorded as a user of the aircraft, the owner may ferry the aircraft out of the country only after the aircraft is re-registered or the operator is deleted from the certificate of registration, and a flight permit is received from a relevant aviation authority.

The owner shall be entitled to export the aircraft out of Lithuania.

Powers of attorney

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

The owner of the aircraft or a person authorised on the aircraft owner’s behalf is entitled to deregister the aircraft from the Civil Aircraft Registry of the Republic of Lithuania, subject to a consent from a mortgagee (if applicable) and save when such right to deregister the aircraft is restricted by a court injunction.

Most international lessors require deregistration and export powers of attorney (DPOA) issued by their lessees. DPOAs are usually notarised to avoid disputes about the authority of the grantor and authenticity of the DPOA. However, strictly speaking, the owner of an aircraft may enforce the right to deregister the aircraft without invoking such power of attorney. By reason of Lithuanian law, a lessee may neither register nor deregister the aircraft without a power of attorney issued by an owner. Therefore, it is arguable that the lessee’s authority in the form of a DPOA to permit the deregistration of the aircraft is null and void, because of the rule that no one can transfer more rights than he or she has.

In terms of the contents of the DPOA, it is advisable to specify the term for which a DPOA is valid, as by reason of the Civil Code the DPOA with no validity term shall be considered as valid for one year only.

The legal standing regarding the irrevocability of power of attorneys is not completely certain. The Civil Code includes such case that ‘a contract may determine the cases, when an irrevocable power of attorney is issued’. However, the possibility may not be completely eliminated that the revocation of any power of attorney potentially made by a principal may be deemed enforceable by reason of the Lithuanian law.

A DPOA can be issued to more than one attorney and they survive the grantor’s insolvency as long as the grantor is not liquidated and still existing. DPOA notarised by a public notary are registered with the Register of Powers of Attorney Approved in the Notarial Form, managed by the State Enterprise Centre of Registers.

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.

Lithuania is not a signatory to the Cape Town Convention and Aircraft Protocol. The irrevocable deregistration and export request authorisation (the Cape Town Power of Attorney) is not required by the Public Institution Transport Competence Agency and is not relevant for the Lithuanian jurisdiction in general.

Security

Security document (mortgage) form and content

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

Mortgage is the typical contractual security that can be created in Lithuania. A mortgage agreement must be notarised to create a valid security over the aircraft. As long as the notarisation is required, such documents must either be concluded in Lithuanian or be multilingual, in which case the public notary certifies the Lithuanian version (and the Lithuanian language will prevail) and the foreign version serves for informative purposes if one of the parties does not speak the local language (if the document is bilingual a third party must verify the translation from Lithuanian into any other language). Also, such contracts normally include a clause that in the case of discrepancy, the Lithuanian version shall prevail.

As a matter of practice, the public notary prepares a draft of a mortgage agreement tailored for the needs of the parties. Quite often the parties’ attorneys are involved in amending the draft prepared by the public notary and agreeing the final form with the public notary. There is no specific form for this type of document; however, the mortgage agreement must be compliant with the requirements of Lithuanian laws and typically includes the following:

  • the identities of the debtor, creditor and mortgagor;
  • the object of the mortgage (aircraft engines can be specifically identified when the aircraft is described);
  • the total or agreed value of the mortgaged object;
  • the obligation of the debtors secured by the mortgage;
  • the maximum secured amount (if the parties agree);
  • the date of fixing the debt amount;
  • the term within which the secured obligations must be fulfilled;
  • the default interest rate;
  • the number of contract counterparts; and
  • boilerplate clauses that clarify the relations between parties.

Inclusion of economic terms in the mortgage agreement is necessary; however, it may sometimes suffice to provide a reference to the major agreement (eg, facility agreement) that specifies the secured obligations.

There are various types of mortgages available under the Civil Code (eg, a maximum mortgage, a conditional mortgage or a simple mortgage) and the mortgage agreement must contain additional information depending on the type of mortgage agreed between parties.

Security documentary requirements and costs

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

As noted in question 15, a mortgage agreement must be concluded in a written form in Lithuanian and be notarised. In terms of the costs, the notarisation of a mortgage agreement will cost approximately €150 excluding VAT; in addition, one must pay compensation for the searches in public registers of around €1 and compensation for the services of the State Enterprise Centre of Registers of around €30. The documents’ legalisation costs are €15 per apostille. Document translation costs may vary, but translation of one A4 page should cost around €15 excluding VAT.

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 registration of a mortgage is not a condition for the effective creation and its perfection against the debtor, but it is normally a condition for perfection of the mortgage against third parties.

The mortgage agreement and the relevant data shall be electronically transferred by the public notary approving the mortgage to the Register of Mortgages of the State Enterprise Centre of Registers and then the Civil Aircraft Register. The recordation of the mortgage is evidenced by an extract from the Register of Mortgages and acknowledgement of the mortgage by the Public Institution Transport Competence Agency, which can be made in a letter to be issued on behalf of the Public Institution Transport Competence Agency upon request by the relevant party. The registration of the mortgage at the Register of Mortgages is made on the same or the next business day upon receipt of data from the public notary; however, it may take a few days for the Public Institution Transport Competence Agency to receive data from the Register of Mortgages and to acknowledge the mortgage.

If a hypothec creditor (mortgagee) wishes to remove a mortgage, it must file a written declaration on the deregistration of a mortgage before a public notary and the public notary submits the data on the end of the mortgage to the Register of Mortgages and then the Register of Mortgages submits the data to the Civil Aircraft Register.

Registration of security

How is registration of a security interest certified?

On the same day or on the day after the mortgage agreement is notarised, the State Enterprise Centre of Registers issues a notification to the public notary confirming the registration of the mortgage in the Register of Mortgages. The notification specifies the following:

  • the mortgage registration number;
  • the registration date and time;
  • the type of hypothec (eg, consensual);
  • the date and time of conclusion of the mortgage contract;
  • the notarial register number;
  • the name of the creditor, debtor and the person offering security; and
  • the obligation secured by the mortgage.

Recordation of a mortgage can be evidenced at any time by an extract from the Register of Mortgages and acknowledgement of the mortgage by the Lithuanian civil aviation authority (the Public Institution Transport Competence Agency), which is made in a letter to be issued upon request by the relevant party.

Effect of registration of a security interest

What is the effect of registration as to third parties?

The hypothec creditor (mortgagee) has priority claim over other creditors, including subsequently registered mortgages, in respect of the mortgaged assets. The role of hypothec creditor is very important if the debtor defaults and bankruptcy proceedings are initiated. Such hypothec creditor becomes a super-priority creditor broadly outside the bankruptcy that is entitled to satisfy its claim from the mortgaged assets before other claims are satisfied (eg, bankruptcy administrator claims, taxes, employee remuneration).

As noted above, a mortgage creation notice is basically addressed to the public notary. The registration of a mortgage at the Register of Mortgages is a valid notice binding third parties from the date the record is made. All third parties may rely on the accuracy of the newly issued extract of the public Register of Mortgages and the data contained therein, since the data recorded in the register is deemed to be true and correct until contested under the procedures set by law (prima facie effect).

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?

Lithuanian law does not distinguish between legal and beneficial interest. Similarly, the concept of trust is not recognised in the Lithuanian jurisdiction in the same way as in the common law countries. The Lithuanian mortgage agreement includes the debtor, creditor and the mortgagor (the debtor and mortgagor may be the same person).

However, it is not possible to include a security trustee that, for example, acts as an agent of lenders under and in connection with the English or New York law-governed finance documents, in Lithuanian mortgage documents.

Also, a change of lenders triggers the slight modification of mortgage documentation, as the security registration would be affected and the new lender needs to be recorded in the Register of Mortgages locally. As a practical solution, the borrower and security agent may agree that an independent payment obligation (or parallel debt) is created in favour of a security trustee, which can be secured locally.

Under Lithuanian law, an aircraft mortgage is a proprietary right. With the transfer of title to a mortgaged aircraft, the mortgage follows the aircraft. The mortgage does not give the mortgagee a title to the mortgaged property, which remains in the ownership of the mortgagor. The mortgage of an aircraft does not prevent the mortgagor from transferring title to the mortgaged aircraft to a third party, unless otherwise agreed by parties.

Security over spare engines

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

Security over an engine can be created either as security over the part of the aircraft in which it is installed or separately from the aircraft as the security over separate equipment.

As long as an engine does not qualify as a part of the aircraft (eg, a spare engine), it can be separately encumbered by entering into a pledge agreement. By virtue of the Lithuanian law, a spare engine can be made subject to a possessory or non-possessory right of pledge. For the creation of non-possessory pledge, the notarisation of a private agreement is required and it is registered in the Register of Mortgages.

As long as the aircraft engine is not considered part of an aircraft, which is an immovable property under Lithuanian law, a pledge agreement may be governed by foreign laws if a counterparty to such an agreement is a foreign entity.

The pledged engine does not cease to be encumbered upon its removal or installation on another aircraft.

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?

As long as the contract provides for cases where the lessor may terminate the agreement and repossess the aircraft, the lessor may enforce such right subject to the terms and conditions of the agreement and its governing law. Lithuanian law states that parties may agree on the conditions of terminating the agreement; however, if no such agreement is made, relevant provisions of Lithuanian law apply, stating that the nature of the lessee’s breach must be taken into consideration (as material or non-material) and the lessor must file a default notice requesting the lessee to comply with its respective obligations prior to terminating the lease.

Provided that the lease agreement or respective provisions of governing law provide such right for the lessor, after an event of default and subsequent termination by the lessor of the leasing of an aircraft to the lessee, the lessor would be entitled to repossess the aircraft without additional fees or duties (other than a deregistration fee).

However, the repossession must be exercised peacefully. In the event that an operator does not voluntarily surrender the aircraft, the owner or lessor would not be entitled to enforce the repossession by force. The use of self-help remedies is very limited under Lithuanian law and it is allowed only when expressly permitted by law. The owner or lessor shall be permitted to repossess the aircraft without the cooperation of an operator when it is so specifically authorised by the court. An enforceable court order shall be enforced by a bailiff (with assistance of the police if necessary).

An operator may obstruct repossession of an aircraft by refusing to surrender the aircraft, its documents or by making an application to the court for injunction. However, we are not aware of practical cases where a Lithuanian operator challenged the repossession or otherwise physically obstructed the process.

Enforcement of security

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

In the event of default, the mortgagee may enforce its claims from the value of the mortgaged assets and proceeds received from its disposal. In practical terms, a mortgagee should apply to a public notary to receive an executive writ. The executive writ permits the mortgagee to enforce a security interest in an out-of-court procedure. The notary verifies if the information in the mortgagee’s application conforms to the information in the Register of Mortgages. After the notary makes an executive writ, it can be submitted for execution to the public bailiff. The mortgaged assets will either be sold by public auction or be given to the mortgagee to administer.

In the event that insolvency proceedings are opened against the debtor, the court shall appoint a bankruptcy administrator to manage the assets of a company, including organisation of public auctions aimed at selling the outstanding assets of the debtor.

The owner may obstruct the enforcement of a mortgage by challenging the executive writ issued by the notary in court, challenging the actions of the public notary or the bailiff, making a respective application to the court for injunction or filing any other counterclaims.

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?

Under certain circumstances, an owner or operator may be deprived of possession or use of aircraft by a government entity or any other person and such rights and liens of public law shall have priority over aircraft ownership or an aircraft security interest.

The Law on State of Emergency (6 June 2002, as amended) provides that temporary utilisation or requisition of means of transport or other property for remuneration is allowed during a state of emergency in accordance with the procedures set out by the Law on Mobilisation and Support of the Host Country and the Government of Lithuania to prevent or eliminate or to save lives or protect the health and property of the people.

The Law on Mobilisation and Support of the Host Country (19 November 1996, as amended) provides that temporary utilisation or requisition for public needs of means of transport or other property for remuneration is allowed upon announcement of mobilisation and in other cases prescribed by law in accordance with the procedures set out by the government of Lithuania.

The Criminal Code (26 September 2000, as amended) provides the possibility for the state to confiscate property that was the tool, means or result of a criminal offence. In case the owner of the property is convicted of a criminal offence and such property is subject to confiscation (ie, it was the tool, means or result of the criminal offence), such property is subject to confiscation in all cases. The property belonging to an owner may be confiscated even if the owner is not convicted of a criminal office if:

  • the owner of the property must have and could have been aware that the property would be used while committing a criminal offence;
  • the property has been transferred to the owner under a fake transaction;
  • the property has been transferred to the owner who is an offender’s family member or close relative;
  • the property has been transferred to the owner who is a legal person, and the offender, his or her family members or close relatives is or are the legal person’s manager, a member of its management body or participants holding at least 50 per cent of the legal person’s shares (member shares, contributions, etc);
  • the owner whereto the property has been transferred or the persons holding executive positions in the legal person whereto the property has been transferred and being entitled to represent it, to make decisions on behalf of the legal person or to control the activities of the legal person was or were, or ought to and could have been, aware that the property obtained had been the tool, means or result of the criminal offence.

The Criminal Code also provides the possibility for the state to confiscate property of the offender or part thereof disproportionate to the legitimate income of the offender, where there are grounds for believing that the property has been obtained by criminal means (extended confiscation).

The Code of Criminal Procedure (14 March 2002) provides for the right of the pretrial investigation judge to seize tangible objects (eg, an aircraft) that are relevant for the investigation of a criminal offence and also the right of the prosecutor to temporarily limit the property rights of the owner for the purpose of securing a civil claim in the criminal proceedings or for the purpose of likely confiscation or extended confiscation of property.

The Civil Code provides a legal basis for a lawful possessor of assets to detain assets until the claim is satisfied. This right is commonly exercised by maintenance repair organisations refusing to release an aircraft prior to payment.

The Law on Tax Administration (13 April 2004) provides that seizure of property or mortgage may be applied by the tax administrator over the property of the owner as a measure of enforcing tax obligations.

The Order of the Director of the CAA, of 10 September 2010, on the Approval of the Rules on the Prohibition to Leave and Aircraft Detention provides for a prohibition to leave Lithuanian airports to be imposed if, among other things, airport charges or air navigation fees are not discharged in respect of that aircraft or if failure to comply with safety requirements takes place.

The law allows any relevant creditor to file a request to the court to seize the aircraft under a court injunction until the dispute is resolved.

However, the party detaining the aircraft shall not have the right to sell the aircraft, unless the aircraft is confiscated or requisitioned. The mortgagee should not cease to be a super-priority creditor; however, the owner’s or mortgagee’s right to compensation will be determined according to general principles of civil law as well as in conjunction with the claim made by a third party.

Enforcement of foreign judgments and arbitral awards

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

A judgment given in EU member state, including in England, is recognised in Lithuania without any special procedure being required and without the court itself examining the case on its merits. The recognition of the judgment entered in England would be made pursuant to Regulation (EU) No. 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the Regulation), which repealed Regulation (EC) No. 44/2001 and is directly applicable in the Republic of Lithuania together with applicable rules of the Civil Procedure Code of the Republic of Lithuania.

After the Court of Appeal of Lithuania receives a request to recognise a judgment entered in another EU member state, the court merely verifies if such a request submitted by a party meets the formal requirements of form and content.

A judgment given in New York or another US state or any other non-EU third country may not be enforced in a simplified way. A respective motion needs to be filed to the Court of Appeal of Lithuania as a trial court. Generally, a judgment entered outside the European Union is recognised in accordance with the provisions of bilateral treaties. The Republic of Lithuania and the United States do not have a bilingual treaty regulating the issues of recognising and enforcing court rulings. For this reason, mandatory requirements of the Code of Civil Procedure apply and the court verifies whether the exclusive jurisdiction of the Lithuanian courts and the public policy have not been violated upon its own initiative (ex officio), while the other party concerned may argue that grounds for refusing to recognise and enforce a foreign judgment exist (eg, the party was not served information about the venue and time of the hearing, etc). Nonetheless, the court is still precluded from re-examining the case on its merits.

Lithuania is a party to the 1958 New York Convention, effective from 12 June 1995.

The Supreme Court of Lithuania recognises that article V of the New York Convention provides for an exhaustive list of possible grounds for non-recognition of an arbitration award in Lithuania, and the procedure for the recognition and enforcement of foreign arbitral awards implies verification of the existence or absence of the grounds laid down in article V of the New York Convention. The public policy within the New York Convention is interpreted by the Supreme Court of Lithuania as an international one, which encompasses fundamental legal principles of due process and mandatory rules of substantive law embedding generally accepted principles of law. Lithuanian judiciary, while interpreting the concept of public policy, generally takes a restrictive effect and so passing the message that Lithuania is a friendly jurisdiction to enforce 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?

Aircraft operational lease contracts

Payments under an aircraft lease agreement do not attract a withholding tax, provided that the transaction is made on the arm’s length basis. No further stamp duties or similar are applicable.

Generally, where both lessor and lessee are Lithuanian businesses from the VAT perspective, the lease payments are subject to Lithuanian VAT. A zero per cent VAT rate would, however, be applicable on lease rentals provided the aircraft is leased to a taxable person that receives more than half of its annual income from transporting passengers or cargo, or both, on international routes for consideration (the qualified airline). Proper evidence should be collected that the relevant airline is the qualified airline.

Loans

If a loan is provided to a Lithuanian resident, the interest earned from the loan provided by foreign residents (lenders) that are not incorporated in the European Economic Area (EEA) or in countries with which Lithuania has concluded a double taxation avoidance treaty, shall be taxed at a 10 per cent rate and the tax must be withheld by the Lithuanian borrower. If a loan is provided to a non-Lithuanian tax resident, interest on such loan will not trigger Lithuanian taxes.

A foreign company providing loans to its Lithuanian special purpose company should also consider the ‘thin capitalisation rule’, particularly if interest paid to its parent that provided a loan can be treated as a permitted deduction for the purposes of calculation of Lithuanian corporate tax. The Resolution of the Government of the Republic of Lithuania ‘On the Approval of the Rules for the Requalification of Income and Payments’ (9 December 2003) provides for certain specific rules of requalification of income or payments. These rules were drafted for the purpose of creating an incentive to abstain from reducing the profit tax base in cases where equity investments that are subject to profit tax (and dividend taxation, if applicable) are replaced by loans. In particular, the rules set out that a share of capital lent for remuneration to a Lithuanian entity by the controlling lender that is in excess of a 4:1 ratio between such lent capital for remuneration and fixed capital shall be qualified as controlled lent capital. Subject to certain exemptions, interest payable on the use of controlled lent capital shall be considered unrelated to the earning of business revenue and shall not be deductible, for the purpose of calculating taxable profit of the controlled Lithuanian entity, from income of the Lithuanian entity.

Transfers of aircraft

The sale of an aircraft that takes place within the territory of Lithuania falls within the scope of Lithuanian VAT and is subject to Lithuanian VAT at a rate of 21 per cent. However, a zero per cent VAT rate is applied in case the aircraft is sold to a qualified airline receiving more than half of its annual income from transporting passengers or cargo on international routes for consideration, and also for maintenance and repairs of such aircraft (except for aircraft used for personal needs), provided that such services are supplied to the mentioned airlines.

The financing parties should be cautious if they decide to transfer the title of an aircraft on the ground. The Lithuanian tax authorities tend to take a restrictive approach, which means that supplies of aircraft only to a qualified airline would trigger zero per cent VAT, but not if supplying an aircraft to a new asset management company (such as a finance or operating lessor), even when the qualified airline operates the relevant aircraft. It is not completely clear how the ruling of the Court of Justice in Re A Oy (Case C-33/11) would be interpreted in Lithuania, which permitted the VAT zero-rated supplies of aircraft to intermediaries where the end user is the qualified airline.

In the event that the sale of the aircraft is made outside Lithuania, such transaction does not trigger Lithuanian VAT. There is no applicable case law on transfers in international airspace; however, such transfers should qualify as transfers outside Lithuanian territory provided the Lithuanian jurisdiction was not artificially circumvented.

Exchange control

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

There are no exchange control laws in Lithuania relating to the payment of foreign currency obligations. However, the EU and UN sanctions legislation should be considered.

Default interest

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

There is no statutory limitation on the default interest rate, and parties are free to agree on the default interest rate. However, a Lithuanian court is entitled to exercise some policing over default interest rates and can reduce clearly excessive interest rates (even if they were contractually agreed). If the interest rate is not agreed, a default interest rate of 6 per cent per annum prescribed in the Civil Code would be applied in business-to-business transactions. Also, in cases prescribed by the Law on Prevention of Late Payment in Commercial Transactions (9 December 2003), a default interest rate equal to (i) the fixed interest rate on the latest main refinancing operation of the European Central Bank, if the latest main refinancing operation of the European Central Bank was conducted as fixed rate tender, or (ii) a variable rate on the latest main refinancing operation of the European Central Bank, if the latest main refinancing operation of the European Central Bank was conducted as variable rate tender, increased by 8 per cent, may be applied in business-to-business transactions. Clearly, excessive interest rates adjudged by a foreign court or arbitration may be found by the Lithuanian courts to be at odds with the public policy of the Republic of Lithuania. In such cases, the local courts may refuse to recognise and enforce a respective foreign court judgment or arbitral award in Lithuania (see question 25).

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?

Lithuania, being a member of the European Union, is bound by the Community Customs Code, which sets the rules, arrangement and procedures applicable to goods traded between EU member and non-member states. As a general rule, the importation of aircraft from non-EU countries into Lithuania is subject to import VAT at the standard rate of 21 per cent.

Provided an aircraft needs to be imported into the European Union, the import declaration will have to be filed with the EU customs authorities to accomplish customs procedures. A civil aircraft can be imported for free circulation into the European Union with relief from customs duties in cases where the aircraft has been duly entered on a register of a member state in accordance with the Convention on International Civil Aviation dated 7 December 1944 and reference is made in the customs declaration for release for free circulation to the relevant certificate of registration (see: 12/10/2017 Commission Implementing Regulation (EU) 2017/1925 amending Annex I to Council Regulation (EEC) No. 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff). ‘Civil aircraft’ means aircraft other than aircraft used in military or similar services in the member states that carry a military or non-civil registration. The relevant regulation is applied in Lithuania, and relief from the customs duties is granted by customs authorities after the aircraft registration certificate is provided.

However, the end-use relief does not apply to VAT and excise duties. No export duties are applied in respect of civil aircraft.

In the event the aircraft contains certain ozone-depleting substances, Regulation (EC) No. 1005/2009 of the European Parliament and of the Council on substances that deplete the ozone layers, should also be considered. This means that the relevant party must be issued with a licence in accordance with Regulation (EC) No. 1005/2009.

Insurance and reinsurance

Captive insurance

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

There are no mandatory fronting requirements under the laws of Lithuania provided insurance is placed with insurance companies of EEA countries. Other insurance companies from third countries are subject to permission from the Bank of Lithuania.

Cut-through clauses

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

The concept of the cut-through clause is not developed in Lithuanian insurance law. However, it is a common practice that aircraft lease agreements governed by English or New York laws specify certain requirements for reinsurance, particularly that the reinsurance should contain cut-through clauses in a form reasonably satisfactory to the lessor. In practice, if the insurance is not procured from insurers active in London or New York insurance markets, international lessors may require that the relevant aircraft are reinsured with an approved insurer and such reinsurance would contain a cut-through clause. It is, however, not certain how cut-through clauses would be enforced in Lithuania, as, owing to the absence of fronting requirements, cut-through clauses are not customarily found in the contracts entered into on behalf of Lithuanian companies.

Reinsurance

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

Lithuanian insurance laws are compliant with applicable EU regulations. However, it is considered to be a business risk of the fronting company (insurer) to settle the insured claim. Thus, the fronting company would deal with reinsurers and then make the payments in accordance with the initial insurance contract. Assignments of insurance (reinsurance) are often used in aviation finance transaction and should generally be enforceable from the perspective of Lithuanian law. From the Lithuanian law perspective, assignments should be perfected by making relevant notifications to a debtor.

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 is not liable for the actions or omissions of the operator. According to the laws of the European Union and Lithuania, liability for operating the aircraft is only restricted to the operator. The legislation on liability is laid down according to the Montreal Convention for the Unification of Certain Rules for International Carriage by Air. The legislation is also compliant with Regulation (EC) No. 785/2004 of the European Parliament and of the Council of 21 April 2004 on insurance requirements for air carriers and aircraft operators.

Strict liability

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

According to the provisions of the Civil Code, a person whose activity is linked to transport vehicles shall be liable for compensation of damage caused by such vehicles that constitute special danger for surrounding persons, unless he or she proves that the damage was caused by superior force or victims’ wilful acts or gross negligence.

However, under Lithuanian law, owners, lessors, financiers or others with no operational interest in an aircraft would not be held strictly liable (ie, liable without fault) or vicariously liable (ie, liable without fault for another party’s obligations) for damages caused when an aircraft was operated by a third party. An owner, however, might be required to prove that it did not have operational control.

Third-party liability insurance

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

As a member of the European Union, Lithuania is bound by the requirements of Regulation (EC) No. 785/2004 of the European Parliament and of the Council of 21 April 2004 on insurance requirements for air carriers and aircraft operators (accidents with respect to passengers, cargo and third parties), and applies the minimum insurance requirements provided in this regulation. The regulation specifies the minimal insurance coverage for liability of third parties. The minimum insurance coverage per accident for each aircraft depends on the maximum take-off mass. The CAA is authorised to control whether operators comply with the requirements of this regulation. It is a common practice that international lessors often contractually require higher limits of liability that an airline should purchase, as the claim settlement above the limits would not be covered by the insurance policy.

Update and trends

Recent developments

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

Perhaps the hottest topic of the local aviation market in 2018 was the bankruptcy of Small Planet Airlines, which had subsidiaries in Poland and Germany. However, the aircraft operated by Small Planet Airlines were repossessed peacefully and the airline otherwise cooperated with international lessors.

Another topic for discussion is that by reason of the amended Law on Aviation (2000), the Civil Aviation Administration ceased to exist as an independent authority as of 1 January 2019. Most of its functions (licensing, auditing) were transferred to the Public Institution Transport Competence Agency. However, the procedures - insofar as aircraft finance transactions are concerned - have basically not been amended, except that the fees for the services currently provided by the Public Institution Transport Competence Agency were increased quite dramatically.