Security

Security document (mortgage) form and content

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

The typical form of security document in respect of aircraft registered with the public register is a notarial deed of mortgage. The deed of mortgage is executed by or on behalf of the mortgagor and the mortgagee before a Dutch civil law notary. It must contain a description of the secured obligations and the maximum secured amount. Usually, the mortgage deed does not record the economic terms of the underlying finance documentation, but instead refers to said finance documentation in general terms. The deed of mortgage must be drawn up in Dutch and it must reflect that the mortgagee chooses domicile in the Netherlands. The deed of mortgage must be filed with the public register held by the Land Registry.

In respect of an aircraft that is not registered with the public register, a security right is created in the form of a possessory or non-possessory right of pledge. A possessory right of pledge is created by a (private or notarial) deed of pledge and bringing the aircraft into the possession of the pledgee or a third party acting on behalf of the pledgee. A non-possessory right of pledge is created by either a notarial deed of pledge or a private deed of pledge that is registered with the tax authorities. In contrast with a right of mortgage, a right of pledge is not recorded with any public register.

Security documentary requirements and costs

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

See question 15. A right of mortgage over an aircraft is validly created by registration of a notarial deed of mortgage (drawn up in Dutch, but often accompanied by an English translation) with the public register held by the Land Registry. The documentary fees charged by the Land Registry amount to approximately €137.50.

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: see questions 15 and 16. The deed of mortgage is filed by a Dutch civil law notary with the public register held by the Land Registry. The registration with the public register is usually completed on the same day of (or one day after) filing. No periodical renewals of the registration are required.

Registration of security

How is registration of a security interest certified?

A certificate of registration of a right of mortgage can be obtained from the Land Registry. Such a certificate contains details relating to the airframe and engines, the owner and the mortgagee, as well as details relating to such owner’s and mortgagee’s interests in the aircraft and the maximum amount secured by the mortgage. A certificate of registration is usually available within one business day following filing of the notarial deed of mortgage with the public register held by the Land Registry. The certificate does not state the rank or priority of the right of mortgage.

Effect of registration of a security interest

What is the effect of registration as to third parties?

The ranking of security interests (in the form of rights of mortgage) is established by the time of filing of such security interests with the public register held by the Land Registry: the security interest filed first has priority over any security interest filed thereafter. Pursuant to a notarial deed registered with the public register it is possible to change the ranking of a right of mortgage, provided that from that deed it appears that the holders of any higher ranked mortgages have consented thereto.

The public register is maintained, and likewise, registered interests are recognised, pursuant to the Geneva Convention (1948). In principle, third parties may rely on the accuracy of the rights of a mortgage recorded with the public register, unless it is known to such third party that the information is incorrect or incomplete.

No priority notice system is in place.

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 a single lender transaction, the sole lender will act as mortgagee and pledgee. In the event the lender transfers or assigns the loan, the security interest will follow the indebtedness to the new lender. The security right is not affected as a result of such transfer of assignment. It is, however, recommended that where it concerns an aircraft mortgage a filing is made with the Public Registry to the effect that the name and address of the new lender, as mortgagee, is properly recorded in the public register.

In the case of multiple lenders, the security structure is slightly more complicated because Dutch law requires that the beneficiary of security rights is also the creditor of the indebtedness to be secured by the security rights. Without properly structuring the security, this would lead to joint security rights for the benefit of all lenders involved. Joint security structures are typically not used because the security will need to be released and recreated in the event of existing lenders resigning or new lenders acceding to the syndicate. To circumvent this problem, a solution has been developed in the form of ‘parallel debt’. Pursuant to a parallel debt obligation (which can be included in the facility agreement or the security documents), the borrower is required to pay to the security agent an amount that is equal to its aggregate payment obligations to all lenders in the syndicate (the primary debt obligations). The security rights secure the repayment of such parallel debt obligation. This additional and independent debt exists ‘in parallel’ with the debt owed by the borrower to the lenders in the sense that any payments by the borrower to the lenders under the primary debt obligations decrease the parallel debt in the same amount and any payments by the borrower to the security agent under the parallel debt (including the enforcement proceeds of the security package) decrease the primary debt obligation in the same amount. As a result, there is no double financial obligation of the borrower. This parallel debt structure enables the security agent to hold the security for a changing group of lenders in the syndicate without affecting the security and without having to amend the existing security documents. Although the parallel debt structure is not tested in Dutch courts, it is widely used and accepted in the Dutch market.

In the Netherlands, typically a security agent is appointed by the syndicate. However, a security trustee is also recognised because the Netherlands is a party to the Convention on the Law Applicable to Trusts and on their recognition (The Hague, 1 July 1985).

Security over spare engines

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

Section 8:3(a) of the Dutch Civil Code provides that:

engines, the propellers, the radio equipment and all other articles intended for use in or on the aircraft, irrespective of whether they are attached thereto or temporarily separated therefrom, shall be component parts of the aircraft.

It should be noted that there is debate in the legal literature whether the phrase ‘intended for use in or on the aircraft’ refers back to ‘all other articles’ only or to ‘engines, the propellers, the radio equipment’ as well and as to how to interpret the words ‘temporarily separated’.

A right of mortgage vested on an aircraft will by operation of law include the engines if they are component parts of the aircraft. An engine that is removed from the aircraft only temporarily (for instance for maintenance or overhaul) will continue to be a component part of the aircraft and remain subject to the right of mortgage. However, in case of a removal on a more permanent basis (ie, not merely temporarily), the engine will cease to be a component part and will no longer be subject to the right of mortgage vested on the aircraft.

It is safe to assume that a spare engine will not be a component part of an aircraft. Spare engines located in the Netherlands can be encumbered by a possessory or non-possessory right of pledge. A possessory right of pledge is created by a (private or notarial) deed of pledge and bringing the spare engine into the possession of the pledgee or a third party acting on behalf of the pledgee. A non-possessory right of pledge is created by either a notarial deed of pledge or a private deed of pledge that is registered with the tax authorities.

If a spare engine encumbered with a right of pledge is installed on an airframe on a non-temporary basis so that under Dutch law it qualifies as a component part of the aircraft, that engine ceases to be encumbered by the right of pledge (and title to the engine in principle is vested in the name of the owner of that aircraft pursuant to Dutch law accession rules).