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Advertisement Structuring and Practice for Aircraft Leases to Prevent Lease Payments From Being Clawed Back in a Lessee Bankruptcy Friday, April 9, 2021 Key Points The risk that prepetition lease payments made by a lessee that is a debtor in a US bankruptcy will be clawed back from an aircraft lessor can be reduced if: the lease is a true lease rather than a disguised secured loan or finance lease one or both of basic rent and maintenance reserves are payable in advance (i.e., at the beginning of a rent period rather than at the end) basic rent and maintenance reserves are payable monthly rather than quarterly or semiannually ....
Friday, February 19, 2021 The purchase agreement between an aircraft manufacturer and its customer will call for the customer to pay installments of the purchase price between the time the agreement is entered into and the delivery of the aircraft. These installments are called progress payments or predelivery payments ( PDPs ) and can be significant, especially in regard to a fleet purchase over many years. Normally the aircaft buyer pays the PDPs with its own funds. It may finance the PDPs, particularly if it also wishes to conclude a longer-term debt or sale-leaseback financing for the ultimate purchase of the aircraft at delivery. ....
Overview Often an aircraft financer will structure a secured aircraft loan as a full payout lease in order to facilitate the exercise of remedies in the case of a default by the borrower airline. Specifying that the lease is governed by English law facilitates this structure because English law recognizes the lessor as the absolute owner of the aircraft. The legal systems of many foreign airlines home countries may well take the same view. By contrast, in the United States, under Uniform Commercial Code (UCC) principles, courts may take the position that because a full payout lease is economically a secured loan despite the lease structure, the lessor should have the remedies of a secured lender rather than that of a true lessor. ....
Monday, December 21, 2020 Although certain readers’ eyes glaze over “boilerplate” choice of law provisions, the choice of law and the enforcement of choice of law for an aircraft lessor may have substantive economic consequences. For example, under U.S. commercial law, a lease with a nominal purchase option is characterized as a “non-true lease,” the commercial law equivalent of a secured acquisition financing. The implications for the lessor of that characterization when a lessee declares bankruptcy are significant and mostly adverse. However, as discussed in a recent California Bankruptcy Court memorandum of decision (the “Memorandum”)1, a conflicts of law determination by the court allowed the aircraft lessor in that case to avoid a recharacterization of its leasing transaction due to its choice of English law and the court’s application of English law in its decision. ....