Surviving the aircraft purchase agreement
Negotiating a business jet purchase agreement doesn’t have to be a contentious affair. If the parties are reasonable and try to stay close to industry norms, the terms can usually be finalized with little difficulty. But if one or both parties make unrealistic demands, the negotiations can drag on and ultimately implode with everyone unhappy—except maybe lawyers who are charging by the hour.
An aircraft purchase agreement should be based on a previously negotiated LOI (letter of intent), offer to purchase, term sheet, or similar document. The LOI lays out the principal terms of the sale and sets the stage for the comprehensive contract. LOIs are often non-binding, and the purchase agreement is frequently the first pact with teeth. Lawyers commonly argue that the LOI should cover all the salient points of the deal because if it does, the purchase agreement negotiation will be much easier. That may be true, of course, but it’s a mistake to try to turn the LOI into a mini purchase agreement. If that’s the goal, why not dispense with the LOI and just negotiate a contract?
One reason is that you don’t want to commit the time to negotiating a purchase agreement unless you have a deal. Most LOIs are never signed and never turn into contracts because the parties can’t agree on the purchase price and other key terms. Accordingly, the LOI represents a delicate stage in the negotiations between buyer and seller; the parties are trying to agree on issues like the price, the overall timing of the transaction, and whether the buyer must commit to the purchase before completing its due diligence. Arguing about tax indemnities, rights to jury trial, and payment of escrow fees can wait.
Once the LOI has been signed and a deposit has been funded, it’s time to draft a purchase agreement. Who should do that? If you’re buying a factory-new aircraft (and in some cases, even a preowned one) from a manufacturer, don’t think for a moment there’s any chance you can draft the contract; the manufacturer will provide a draft agreement in its standard form. In other cases, however, which party is entitled to provide the first draft is a subject of negotiation.
My view is that, in most situations, buyers should draft the contracts. It’s buyers who need to make sure they can conduct prebuy inspections and that sellers will fix discrepancies and deliver the aircraft in an agreed-upon condition. As a result, buyers usually have a greater interest in making sure contracts offer sufficient protections.
One thing both parties should agree on, though: don’t start with an agreement provided by a broker, which often requires wholesale rewriting from both sides. The same goes for agreements provided by lawyers who lack business aviation expertise. Experienced aviation attorneys not only understand the issues that need to be addressed in the contract; they also know how such issues are typically resolved. The most painful purchase agreement negotiations invariably involve an attorney with little aviation experience who demands things that are unreasonable or out of bounds, like refusing to permit buyer representatives on the “test flight” or expecting the seller to pay for the prebuy. [See “Choosing Your Aviation Lawyer,” —Ed.]
Allowances have to be made, though, for transactions involving jurisdictions outside the U.S. Practices internationally can vary widely from what’s standard in the States, and contract provisions that might seem strange to U.S. aircraft owners and buyers (such as one party’s attorney acting as escrow agent or the seller being an additional insured on the buyer’s aircraft policy after closing) may be commonplace in Europe or Asia.
Except in a wholesale deal, the buyer will have the right to accomplish a prebuy inspection. Sellers are rarely willing to give the buyer carte blanche in that regard, and it has become standard to attach the agreed-upon work scope to the agreement as an exhibit.
The heart and soul of the purchase agreement are the delivery conditions. Brokers sometimes maintain that the agreement need only require that the aircraft be delivered in “airworthy” condition, and while the purchase agreement should certainly stipulate that, much more is needed to provide adequate protection for the buyer.
For one thing, some delivery terms—such as a requirement that the aircraft be free of liens or that the seller deliver it at closing with all “red gear”—have nothing to do with airworthiness. Does everything have to be working properly on the aircraft or only things necessary to render it “airworthy”? Must the aircraft be equipped as set forth in the specification (which should also be an exhibit to the contract)? Can the repair of a discrepancy leave the aircraft with a non-standard recurring inspection? The delivery conditions should settle issues like these regardless of whether they involve airworthiness.
Delivery conditions require special attention when the deal is “hard”—that is, when the agreement is signed and the purchaser’s deposit becomes non-refundable. Most purchase agreements for preowned business jets permit the buyer to conduct a prebuy and finish its due diligence before making a final decision to acquire the aircraft; but if the deal is “hard,” the buyer can terminate and get the deposit back only if the seller can’t or won’t deliver the aircraft in the condition specified in the contract.
This brings us to perhaps the thorniest purchase-agreement issue: remedies on default. In factory-new aircraft purchase agreements, if the buyer defaults, the manufacturer’s remedies are usually limited to keeping all or part of the deposits that have been paid, a practice that carries over into preowned agreements as well. Deposits on preowned jets range from $100,000 to more than $1 million, so buyers have a strong incentive to go through with the deal once they’re obligated to do so.
If sellers default, shouldn’t they face the same consequence and not only refund the deposit but pay a breakup fee equal to that deposit, especially if they just decide to sell the aircraft to someone else? Though this kind of arrangement is becoming more common, it is hardly standard practice. Sellers argue that buyers should be satisfied with getting their deposit back and that, especially in a falling market, a seller has typically already suffered a significant loss, as the aircraft’s value probably depreciates while the deal is in progress. Such rationales hardly provide much comfort to a buyer concerned that the seller may renege on the deal and sell the aircraft to someone else for more money. At a minimum, in a case like this, the seller should cover all of the buyer’s transactional expenses (like the cost of the prebuy).
On the other hand, buyers should be sympathetic to a key seller purchase agreement issue: the seller’s desire to have no further obligations associated with the aircraft after closing. The standard in business jet deals is that aircraft are sold “as-is, where-is,” a point that sellers’ attorneys sometimes go to great lengths to hammer home. [See “When Boilerplate Boils Over,” 2017 BJT Buyers’ Guide. —Ed.]
But “as-is, where-is” is a misleading expression. If a cabinet for sale in an antique store has a sign on it that reads “as is,” it means: “what you see is what you get; it’s got problems that may not be solvable, and even if they are, we’re not solving them.” But unless you’re buying a jet “wholesale,” the purchase agreement should contemplate that the seller will deliver an airworthy aircraft, equipped as advertised and with everything working properly. Only at closing does the buyer accept the aircraft “as is,” subject to a warranty of title from the seller.
Speaking of closing, the purchase agreement should specify in detail how it will work. Many business jets are sold in “escrow closings” where an escrow agent (usually located in Oklahoma City, Oklahoma, near the U.S. Aircraft Registry) holds all the key documents and funds and, when directed, “simultaneously” wires money and files documents for recording on the U.S. and international registries. (If you’re not planning an escrow closing, there’s no good reason to escrow funds in the first place.) However, if closing involves the discharge of a bank lien on the aircraft, the agreement may need to provide that the bank confirms receipt of funds before the closing proceeds. If the closing involves registering the aircraft in a new jurisdiction, the agreement may need to provide that notice of deregistration must be received before funds will be wired.
Most LOIs allow two to three weeks to draft, negotiate, and sign an aircraft purchase agreement. To make the process go as smoothly as possible, there is no substitute for retaining experienced aviation counsel.