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 mortgage is the sole security interest that can be voluntarily created over an aircraft. Pursuant to article 1030 of the Italian Navigation Code, a mortgage must be recorded with the Italian Aircraft Registry and reflected on the aircraft certificate of registration.

A mortgage must be in the Italian language and contain, among others: the name and legal seat of the mortgagor and the mortgagee; type, model, marks and manufacturer’s serial number of the aircraft over which the security is recorded; and the secured amount.

Security documentary requirements and costs

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

A mortgage on an aircraft can only be created by means of a public deed executed by the aircraft owner (mortgagor), certified by a notary public and then registered with the Italian Aircraft Registry.

The costs associated with the creation of a mortgage include the notary public’s fees for the execution and notarisation of the mortgage and the ENAC fees for registering the mortgage with the Italian Aircraft Registry (both varying on the basis of the secured amount specified in the mortgage deed). In addition, the perfection of a mortgage attracts a registration tax in the flat amount of €200 (if the mortgage is granted directly by the borrower to the lender) or, otherwise, in the proportional amount equal to 0.5 per cent of the sum 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.

Yes, the mortgage deed must be registered with the Italian Aircraft Registry as a condition to its effective creation against the debtor and third parties. Failing such registration means that the mortgage is null and void, as if it had never come into existence.

The process to register a mortgage requires, at first, the execution of a mortgage deed by the aircraft owner (mortgagor) before a notary public. Subsequently the notarised mortgage deed must be filed with the Italian Aircraft Registry along with:

  • an application for registration, signed by the mortgagor;
  • two enrolment notes (summarising details of the mortgagor, the mortgagee, the aircraft and the secured amount); and
  • the original certificate of registration of the aircraft.
Registration of security

How is registration of a security interest certified?

The existence of a mortgage is certified by way of the registration with the Italian Aircraft Registry and the relevant note on the aircraft certificate of registration, which is duly updated and reissued by ENAC upon the notarised mortgage is submitted to ENAC by the mortgagor.

Effect of registration of a security interest

What is the effect of registration as to third parties?

Under Italian law the main effects of the registration of a mortgage are the following:

  • to provide public notice of the existence of the mortgage toward any third party;
  • to grant the mortgagee with security and priority over all subsequent mortgages (ie, mortgages with a lower rank);
  • to create a right in rem over the aircraft in favour of the mortgagee;
  • to prevent any modifications to the essential features of the aircraft being made without the mortgagee’s prior express consent; and
  • to prevent the deregistration of the aircraft without the prior release or cancellation of the mortgage.
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?

The financing of Italian-registered aircraft is structured either by way of financial leases (ie, the ownership is kept by the lender acting as financial lessor) or by way of loan agreements secured by mortgages over the aircraft (ie, the borrower or owner grants a mortgage to the lender).

As a general remark, the Italian laws recognise the concept of trust. Italy is party to the Hague Convention of 1985 on the law applicable to trusts and on their recognition (ratified by Law No. 364 of 16 October 1989). Nevertheless, notwithstanding the implementation of the Hague Convention, the concept and the role of a trust are not often utilised within the Italian system. On the other hand, a trust acting on behalf of foreign lenders is a common mechanism in cross-border lease and financing transactions involving Italian aircraft operators, to the extent that the same does not have the effect of breaching rules of Italian public policy. On such basis, the role of a trust is recognised in Italy and indeed an aircraft ownership can be registered in the name of a foreign trust with the Italian Aircraft Registry. Also, an aircraft mortgage can be granted in favour of foreign trusts acting as mortgagees not in their individual capacity but in representation of a pool of lenders.

In case of a change to the security or its beneficiaries, as a general principle the execution of novation or assignment agreements would be required under the Italian laws.

As far as the nature of an aircraft security, mortgages over Italian-registered aircraft are considered to be a right in rem rather than in personam, as they are attached over the asset and not over the asset’s beneficiary. Therefore, mortgages stay on the ownership of the aircraft, regardless of the identity of the aircraft owner. On the contrary, a mortgage interest cannot be assigned by the mortgagee, unless in conjunction with the assignment of the mortgagee’s credit behind the grant of the mortgage. If so, pursuant to article 2843 of the Italian Civil Code, the transfer of the mortgage interest to the assignee is effective upon recordation of the relevant credit assignment with the Italian Aircraft Registry.

Security over spare engines

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

Under Italian laws engines are considered to be part of an aircraft, even if materially separate. There is no specific public register for engines, but rather for the aircraft in its entirety (ie, the Italian Aircraft Registry). Accordingly, pursuant to article 1029 of the Italian Navigation Code, a mortgage recorded over an aircraft encumbers as well on its appurtenances and separate parts (including engines), irrespective of whether they are installed on the airframe or not. The sole exception to the mentioned rule is when the ownership interest in an engine is from a party different from the aircraft owner and such ownership interest is reflected either in a deed having undisputable date (such as a bill of sale or a recognition agreement) or in the aircraft certificate of registration (which is not common practice with ENAC). If a different ownership interest can be proven by one of the said means, then the aircraft mortgage does not affect the engine.