Truth or Consequences

Jul 5, 2016 - 9:00 PM

The Truth in Lending Act of 1968, requiring “full disclosure of the terms and conditions of finance charges in credit transactions,” was an unlikely inspiration for the FAA to enact a regulation requiring a “truth in leasing” clause in aircraft leases. Under that regulation (FAR 91.23), which applies to aircraft weighing more than 12,500 pounds (including most business jets), leases must contain information about operational control and other matters. Moreover, that info must be in “large print” and must appear immediately above the signatures of the parties, presumably to enhance the likelihood that they might actually review it.

Unlike the Truth in Lending Act, the leasing regulation doesn’t really require disclosure from one party to another. Instead, it mandates that the lease incorporate an agreement between them about certain issues.

The first issue is maintenance. The truth-in-leasing clause must identify the section of the FAA regulations under which the aircraft has been maintained during the last 12 months and include a “certification by the parties” to the lease regarding compliance with those regulations. This “certification” can simply be a statement that the aircraft has been, and will continue to be, maintained and inspected under, say, FAR 91.409(f)(3). Of course, while FAA inspectors, maintenance technicians, and aviation lawyers may know what FAR 91.409(f)(3) is, it’s unlikely that the guy about to lease the G550 will have a clue.

Second, the name and address of “the person” responsible under the lease for operational control of the aircraft must be typed or printed. This seems to contemplate a single person, but the regulation goes on to require “certification that each person understands that person’s responsibilities for compliance with applicable Federal Aviation Regulations.” Does this refer to the lessor and lessee, or someone else?

Finally, the lease must state that “an explanation of the factors bearing on operational control” and the FAA regulations can be obtained “from the nearest FAA Flight Standards district office.” One wonders how many people have paused before signing a lease to consult the nearest FSDO. One also wonders what sort of reception they would receive if they did.

What is the FAA worried about? In February, the agency tried better to answer this question by replacing a 37-year-old Advisory Circular on truth in leasing with a whole new version. One concern noted in the 2016 circular is that “there are some irresponsible companies which may use various ways to confuse the issue concerning who is the actual aircraft operator.” As an example, the FAA cites a “sham dry lease,” which by its terms appears to pass operational control of the aircraft to the lessee when in fact it is retained by the lessor, usually because the lessor directly or indirectly employs the pilots. Such a lease would require the lessor to hold a commercial certificate issued by the FAA, which the irresponsible company presumably lacks. The FAA recently issued a cease-and-desist order against parties charged with operating a sham lease, which was followed by a lawsuit by the Department of Transportation when the alleged violations continued.

One would assume the FAA’s intent is to protect the lessee, which is the ignorant party in the sham dry lease. But the lessee has not been duped into believing it is free of responsibilities that it has (in reality) assumed under the lease. On the contrary, the lessee thinks it has responsibility for operational control when in fact it does not. The FAA’s real concern, then, would appear to be that the lessee is in effect accepting a charter service from a lessor “that is not certificated to operate charter flights.”

As a result, the lessee may be forgoing “the protection of certain safety standards required by the FAA” for certificated charter operators. But while this may be true, the sham lease leads you to the opposite conclusion. Rather than operating under the mistaken assumption that the lease provides the safety protections of charter, the sham lease in fact leads the lessee to think it has operational control under Part 91. In other words, the typical rationale for the enhanced operational requirements and restrictions of Part 135—that the public has a right to expect a higher bar of safety in “commercial” aviation—doesn’t apply.

Several other truth-in-leasing strictures bear mention. The lease has to be in writing and a copy must be kept on the aircraft. A copy must also be mailed “within 24 hours of its execution” to the FAA Registry in Oklahoma City. Further, at least 48 hours prior to the first flight under the lease, the nearest FSDO must be notified in person or by telephone. (The Advisory Circular says this may also be accomplished by email within the FSDO’s discretion, though if you have to call to ask if it’s OK to use email, you might just as well notify the FSDO at that time.) This may give the impression that leases are under eagle-eyed surveillance by the FAA, but as far as I know, the FSDOs ignore the notices and the Registry ignores the mailed copies. I’ve certainly never heard of an FSDO employee running out to an aircraft after receiving a first-flight notice and saying, “Let me see that lease!” 

Perhaps the most remarkable thing about the truth-in-leasing regulation is that by its terms it doesn’t apply if the lessor or lessee has a commercial certificate, such as a Part 135 air carrier certificate. In other words, the FAA requires no truth-in-leasing disclosure when a lessor executes a sham lease purportedly passing operational control to the lessee so long as the lessor is a certified air carrier! The fact that the lessee mistakenly believes it has operational control in this case is apparently perfectly acceptable. The same is true even if the lessee has no certificate as long as the lessee pays no compensation, since the regulation defines “lease” to include only agreements to furnish an aircraft for compensation or hire. 

The bottom line: instead of providing useful disclosures to prevent unscrupulous lessors  from taking advantage of neophytes, as the Truth in Lending Act does, the FAA’s truth-in-leasing requirement looks more like a “gotcha” designed in part to allow the FAA to sanction those same neophytes if the lease is written incorrectly. Truth in regulating, anyone?


Jeff Wieand is a senior vice president at Boston JetSearch and a member of the National Business Aviation Association’s Tax Committee.