An Aircraft Lessor’s Delivery Commitment: Some Drafting Fundamentals (Part 2)

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Picking up from the end of Part 1.

2. Don’t Make Vague, Un-Qualified or Open-Ended Delivery Commitments

Common Examples:

“The Aircraft will be in good condition.”

“All damage to the Aircraft will have been repaired.”

“The Aircraft will be ready for immediate operation by Lessee in Lessee’s normal operations.”

Let’s talk about each of the above.

“The Aircraft will be in good condition.”  What is “good condition”?  Does it mean “satisfactory to Lessee”?  Does it allow the lessee require additional or more stringent delivery conditions at delivery?  The goal for the lessor in the delivery conditions is agreeing a set of requirements that are achievable (don’t overpromise) and, just as important, objective.  If a lessee were to ask me to add this delivery condition, my response would be “Let’s agree a detailed set of delivery conditions that will make you comfortable that you are getting a satisfactory aircraft, but I can’t promise you the aircraft will be in ‘good condition’ because I don’t know what that means or requires.”

“All damage to the Aircraft will have been repaired.”  Really?  All damage?  Even the scratch on the underside of the armrest in row 23?  The requirement should be re-drafted as follows:  ” All damage to the Aircraft outside of maintenance manual limits will have been repaired in accordance with the SRM or as approved by the Airframe Manufacturer.”

“The Aircraft will be ready for immediate operation by Lessee in Lessee’s normal operations.”  This one is scary.  Does it mean that the lessor has to make the aircraft comply with all operational requirements of the lessee’s regulatory authority (even though the lessor promised only an FAA- or EASA- compliant aircraft)?  Does it mean that the lessor has to outfit the aircraft with lessee’s standard safety and galley equipment?  Does it mean that other parts (avionics, wheels and brakes, etc.) need to be swapped to the lessee’s standard to allow use “in Lessee’s normal operations”?  My response to this request would be the same as above:  “Let’s agree a detailed set of delivery conditions that will make you comfortable that you are getting a satisfactory aircraft, but I can’t promise you that you will be getting an aircraft that is ready for immediate operation in your ‘normal’ operations because I don’t know what that requires.”

3. Don’t Commit to Perfect Tender

It’s rare that an aircraft, even a new aircraft delivered from the manufacturer, meets all of the agreed delivery conditions.  In a transition between lessees it’s almost certain that there will be delivery condition discrepancies.  Different lessors address this issue in different ways, but the basic point is that the lease agreement should provide that the lessee cannot refuse acceptance of the aircraft when tendered by the lessor other than because of “material” delivery condition discrepancies.  The definition of “material” is going to be a discussion item with the lessee and it should be addressed in the lease agreement–and not left for delivery.  My standard approach is to say that the lessee may not refuse acceptance so long as the lessor has complied with its obligations regarding an export certificate of airworthiness (or certificate of airworthiness) and the aircraft is capable of being used by the lessee in its commercial operations–note not “normal commercial operations,” just “commercial operations.”  (The lease will also need a mechanism for the correction of the discrepancies post-delivery, the preferred mechanism (from my POV) being that lessee rectifies the discrepancies after delivery with the lessor to reimburse the lessee for the lessee’s out-of-pocket costs (or for an amount agreed in the acceptance certificate).)

Often during these negotiations the lessee will point out that the lease agreement requires “perfect tender” at redelivery, but not at delivery.  Why is that?  Well, my usual response is that “the lessee has control of the aircraft during the lease term, is responsible for arranging the return maintenance and part of its business is managing aircraft maintenance; on the other hand, the lessor is primarily a financier of aircraft and, in a transition, is relying on the previous lessee to perform its obligations–consequently the lessor should not be held to the same perfect tender standard.”  While I think that this argument is a good one, I do have some sympathy for the lessee’s point of view on this issue–and have agreed from time to time to apply a “materiality” standard at return, but only so long as the new lessee is willing to accept the aircraft with the return discrepancies without the lessor incurring any incremental costs.

4. Give the Lessor Adequate Time to Perform

As I discussed in Part 1 of this post, in a transition of an aircraft between lessees so much of the work required to make the transition successful is outside the control of the lessor–and so the lessor should have an extended grace period during which the lessor can satisfy the delivery conditions.  In addition, a short grace period for the lessor’s delivery obligations may encourage the lessee to “run out the clock” by delaying inspections, delaying comments on the condition of the aircraft, providing serial (daily) comments, nitpicking the condition of the aircraft, etc. until the grace period has expired and the lessee is able to terminate (or renegotiate) its obligations.  Keep in mind that a failed transition really is a disaster for a lessor because in most cases it will result in the aircraft being on the ground (and not earning rent) for a significant period of time–and so an extended grace period is a necessity for a lessor.

What’s the right grace period for a delivery?  From three to six months (possibly longer).  From the lessor’s perspective the minimum amount of time will depend on a lot of factors, including the reputation of each of the returning lessee and the new lessee for competence and fair dealing and the type and amount of work to be performed at return and for the new lessee.  Any factors that add to the uncertainty should result in the lessor pushing harder for a longer grace period.

Like with the perfect tender issue, the lessee will likely point out during these delivery grace period  negotiations that the lessee has no (or a very short) grace period in its obligation to return the aircraft in the required return condition at the end of the scheduled lease term.  The issues here are the same as the perfect tender issues discussed above, and like the above I do have some sympathy for the lessee’s “mutuality” argument so long as the delay in return does not adversely affect the next lessee’s obligation to lease the aircraft.

5. Don’t Give Away Money

During the delivery delay negotiations the lessee will often ask for a per diem “delay penalty” payment–for example, if the delivery if delayed for more than 30 days from the scheduled delivery date, then the lessor will pay the lessee an agreed amount for each day of delay in excess of 30 days.  If you get this request from a lessee, first, you should highlight to the lessee that a delay will likely have negative economic consequences for the lessor as well.  Second, keep in mind that a delay in delivery may be, at least in part, caused by the new lessee’s delay in accepting the aircraft–and the lessor’s agreement to pay a delay penalty to the lessee may only encourage further delay.  Third, also keep in mind that if the returning lessee believes the delay in return is being caused by the lessor (e.g., because of additional return work requested by the lessor) or by the new lessee (e.g., by the new lessee’s unreasonable demands) then the returning lessee may, rightly or wrongly, stop paying rent before return, in which case the loss of rent together with the penalty to the new lessee will be a double financial blow to the lessor.

What do I suggest?  If the returning lessee is obligated to pay a penalty in connection with a delay in the return of the aircraft, offer to share that amount with the lessee if and when actually received from the returning lessee.  Otherwise each party should bear its own costs of delay.

And of course under no circumstance should the lessor be obligated to pay the lessee for the lessee’s “losses” in connection with a delayed delivery.  The lease agreement should in fact expressly provide that under no circumstances will the lessor be liable for any such losses.  The foregoing should go without saying, but you should be careful about the interplay between the lessee’s delivery condition condition precedent and the language of the delivery procedures–for example, I have recently seen in a signed lease agreement (paraphrasing) “Lessor will not be liable for any losses of lessee incurred in connection with a delay in delivery (other than caused by a failure of Lessee’s conditions precedent to be met).”  Since one of the lessee’s conditions precedent was that the aircraft be in the required delivery condition, the lessor is this deal indirectly (and I’m pretty sure unknowingly) agreed to pay for the lessee’s losses in connection with any delay in delivery caused by the failure of the aircraft to meet the required delivery condition.

To sum up, as lessor’s counsel you should make sure the lease agreement’s delivery procedures and conditions are drafted so that your client (1) knows exactly what is required, (2) has the capability to meet the requirements, (3) has sufficient time to meet the requirements and (4) is not penalized for delay.

That’s it for now.

An Aircraft Lessor’s Delivery Commitment: Some Drafting Fundamentals (Part 1)

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Delivering an aircraft to a lessee is difficult.  Delivering an aircraft to a lessee in a transition from a returning lessee is really difficult–easily an aircraft lessor’s most challenging task.  And a failed delivery is a disaster.  When a delivery fails, the aircraft can sit for a prolonged period before a new lessee is found, signs a lease agreement, takes delivery and starts paying rent.

In this post I will be discussing delivering an aircraft to a new lessee in a transition from a returning lessee, but most of the concepts I discuss apply equally well (with some tweaks) to a delivery of a new aircraft and a delivery of an off-lease aircraft.

Why are deliveries so difficult for a lessor?

Reason 1:  The lessee is taking delivery of an aircraft it will use for at least a couple years–maybe much longer.  After delivery the lessee wants to avoid, for as long a period as possible, paying for any unplanned maintenance or modifications or having any unplanned downtime.  As a consequence, the lessee is going to be aggressive in its pre-delivery inspections and claimed delivery condition discrepancies.

Reason 2:  So much of a transition delivery is outside of the lessor’s direct control. For putting the aircraft in the required delivery condition the lessor will need to rely on not only the returning lessee, but also possibly on, inert alios, parts suppliers, an engineering firm, the airframe manufacturer and/or an MRO.   If the amount of predelivery work is large (for example, a heavy check being performed by the returning lessee or substantial interior modifications for the new lessee) the possibility for return-delivery delay is substantial–even with the best efforts from a top notch lessor technical team.

Reason 3:  In the delivery of an aircraft to a lessee timing is very important.  In a transition between lessees, the returning lessee wants the lessor to take redelivery as scheduled so that the returning lessee can stop paying rent and go “off risk” for the aircraft; and the lessor wants the new lessee to simultaneously take delivery so that the new lessee starts paying rent and goes “on risk” for the aircraft.  Unfortunately, the new lessee may not (for whatever reason) be willing to take delivery as scheduled and if so the lessor needs to manage both the returning lessee and the new lessee to avoid a gap in rent and risk allocation (as well as a gap in registration and insurance coverage).

With the above in mind, following is a discussion of some “fundamentals” the lessor’s counsel should keep in mind when drafting the delivery conditions and procedures in a lease agreement.  Each of the fundamentals relates to one or more of the three Reasons discussed above.

1. Don’t Overpromise

(a)  Avoid Mismatches

First, each and every delivery commitment by the lessor (e.g., the aircraft will be painted in the new lessee’s livery) should have either a corresponding return commitment from the returning lessee or a clear indication from the lessor’s tech team that the delivery commitment is otherwise achievable.  When I draft or review delivery conditions I usually prepare a matrix (“matrix” is my fancy word for a Microsoft Word table) with three columns and with a row for each delivery condition.  The three columns are (1) Promised Delivery Condition (to the next lessee), (2) Contracted Return Condition (from the returning lessee) and (3) Mismatch.  In the Mismatch column each row should ideally say “None”; if not, there should be an explanation of why the mismatch is ok or how the mismatch is going to be addressed.

And don’t be too creative with your drafting–where your goal is to simply match a return requirement, then (unless you have a very good reason) the wording of the delivery requirement should be a cut-and-paste from the return section of the returning lessee’s lease agreement.  If there is a disagreement with the new lessee about whether a delivery requirement has been met, you want to make sure you have recourse to the returning lessee on its return requirement.  Don’t allow the lessor to get whipsawed between two different wordings that you thought said the same thing.

Speaking of being whipsawed, when matching the returning lessee’s return conditions in the delivery conditions be careful when referring to maintenance intervals and hours/cycle/months remaining (and similar concepts).  In all cases such references should be expressly tied to the returning lessee’s maintenance schedule/program.  I learned that lesson the hard way.

(b) Use Common Sense

If you see a return condition from a returning lessee and have reason to doubt whether it will be performed, then don’t automatically match it in the delivery conditions to the new lessee.  For example, if you see a return condition that says “No part will be older than the Airframe in hours, cycles or calendar time,” before you match that return condition in the delivery conditions check with a lessor tech officer to see whether he or she thinks the returning lessee will actually satisfy that return requirement.  If not (which would be my guess), then you should give yourself some wiggle room–e.g., “no more than 150% of the age of the airframe”–or maybe not have a part-age delivery condition at all.  Another good example is “All Aircraft records will be in English.”  For some returning lessees that return condition is not going to be met–regardless of the what the lease agreement return conditions say.  It may be better to say “All Aircraft records required to be in English by [EASA/the FAA] will be in English.”  The delivery condition matrix mentioned above is helpful for working through these “in practice” mismatches with the lessor tech team; you can go through each row with a  tech officer and discuss whether the returning lessee will meet the return requirement.

(c)  Pre-delivery Modifications

Most lessees of used aircraft will want, before or immediately after delivery, some modifications to the aircraft–because of the lessee’s regulatory requirements, for the aircraft to conform to the lessee’s other aircraft or for some other reason.  There are three options for performing these modifications:

A.  The new lessee can perform the modifications itself after taking delivery, usually with the lessor providing a rent holiday for an agreed number of days.

B.  The returning lessee can perform them during the return maintenance.

C.  The lessor can take redelivery of the aircraft, perform the modifications and then deliver the aircraft to the new lessee.

From the lessor’s point of view, the first option is almost always the best.  The new lessee takes responsibility for ordering the parts, arranging any engineering, scheduling the labor and arranging any regulatory approval in connection with the modifications.  Plus the new lessee takes any risk of delay in connection with the modifications, with the lessor’s loss of rent capped at the agreed rent holiday period.

As between options B and C, the lessor’s preference is going to depend on the facts–the identity of the returning lessee, the returning lessee’s ability and willingness to accommodate the request, whether the modifications can be performed during the scheduled return maintenance (or will the aircraft downtime need to be extended), the added complexity of the lessor taking redelivery and having to register and insure the aircraft during the modification and deal with the regulatory approvals for the mods.  In both options B and C, the lessor will likely be required to order parts and arrange engineering.

Option B is generally my least favorite option.  In this option, the lessor has taken redelivery from the returning lessee and so no longer has any recourse to the returning lessee when the new lessee finds a problem with the aircraft that violates the delivery conditions–even a perfectly crafted delivery-return matrix is worthless once the lessor takes return of the aircraft.  Plus during the modifications the lessor has all the risks associated with the possession of the aircraft–risk or damage and risk of mechanical failure (both of which are real risks even for a grounded aircraft).  And during the modifications the lessor will need to register and insure the aircraft and, depending on the facts, the lessor may need to arrange for issuance of a new export CofA before delivery to the new lessee.

Regarding option C, it will be tempting to avoid option B by asking the returning lessee to perform the modifications, and in fact some lease agreements have a boilerplate provision dealing with lessor-requested maintenance and modifications at return.  But please be careful.  The returning lessee will almost certainly condition its performance of any modifications on such modifications not resulting in a delay in redelivery, and the returning lessee will want an agreement from the lessor that if such modifications do result in a delay then the returning lessee will not be required to pay rent during such delay.  That is a fair request from the returning lessee, but I can tell you from personal experience that the returning lessee will try to tie *any* delay in the redelivery to the performance of the modifications.  For example, “we couldn’t finish the required return check because of the on-going interior reconfiguration that you requested, and then when the reconfiguration was finally done we didn’t have sufficient manpower to finish the check and so redelivery will be delayed for at least two weeks and we won’t be paying rent–oh, and the interior configuration means that we cannot get an export CofA without having the new configuration approved by our aviation authority and that approval will take several weeks (during which we won’t be paying rent)–unless of course you’re willing to waive the requirement for an export CofA.”  Sometimes having the returning lessee do the work is the best option (it may be the only option), but the lessor’s tech team needs to be heavily involved in the returning lessee’s return planning and execution–it’s not just a matter of the lawyers getting the drafting right.  And, of course, don’t commit option C to the new lessee until you have a written agreement with the returning lessee in which the returning lessee agrees to perform the modifications.

Finally, you’ve probably noticed that I haven’t mentioned which party bears the cost of these modifications.  Clearly the returning lessee will not bear any costs.  As between the lessor and lessee, the burden of these costs is a matter for commercial negotiation, but note that option A is the only effective way for a lessor to cap its costs.

Option A is also the best way to avoid over-promising on modifications.

Wow, this post is already over 1,700 words and I’ve only made it through one fundamental.

To be continued in Part 2.

Initial Reserve Credits When Leasing a Used Aircraft: Some Thoughts

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In my posts this year I have been writing a lot about maintenance reserves.  This focus is not misplaced.  The maintenance reserve section is one of four aircraft lease sections where the lawyers on a deal can make a commercial difference–either positively or negatively.  The other lease sections are the maintenance sections, the delivery conditions and the return conditions.

My work for the last year has been focused on reviewing lease agreements in connection with the purchase of leased aircraft–and an unsurprising pattern has emerged in these reviews.  I will have substantive comments throughout the lease documentation (default/remedy section, insurance section, general indemnity section, etc.), but when I finish the review and prepare a summary highlighting the most serious problems with the lease documentation, the list is heavily weighted with maintenance reserve and return condition issues–mainly because these are the issues that will have a material and inevitable financial impact on the lessor.  If there is a mistake in the general indemnity, insurance or the default/remedies section, it’s highly unlikely such mistake will ever have any impact on the lessor.

As a consequence, when my client discusses my comments with me and then with the seller of the aircraft, my client’s focus is on these maintenance reserve and return condition issues.  And if a purchase falls apart during the due diligence stage, it’s very likely going to be because of either an unsatisfactory aircraft inspection or deficiencies in the maintenance reserve and return condition sections of the lease documentation.  The deal is not going to fail because, for example, the scope of the general indemnity isn’t broad enough.

With the above in mind, here are some thoughts on the maintenance reserve provision dealing with initial credits for reimbursable maintenance (aka “lessor contributions”).

1. Start Date. When a lessor is offering to lease a used aircraft to a lessee the lessor will generally offer to provide the lessee with credits that the lessee may use in connection with the first reserve reimbursable maintenance visit (major airframe check, engine performance restoration, etc.) during the lease term.  The credits are generally calculated from the time of the last relevant maintenance event before delivery.  One of the things that I look for when reviewing this lease provision is whether the lease documentation is clear about the start date for the calculation of the credit.

For the airframe and the landing gear, where the checks/overhauls are generally calendar driven and the workscope well-defined, the start date should be obvious from the aircraft’s maintenance records.  Similarly, for the engine LLPs, assuming the aircraft records and lease documentation accurately reflect cycles since new and have back-to-birth (including thrust usage) traceability, the start date and the credit calculation should be just a matter of math.

But for the engines and APU, the timing of performance restorations is driven by operating condition and not by calendar time, hours or cycles, and the workscope for an engine restoration can be heavy or light.  Consequently it is very common for a lessor and lessee to disagree about the start date for the initial credit on the engines and APU–that is, disagree on the amount of the initial credit.  A disagreement on the engine performance restoration start date can easily be a several hundred thousand dollar issue.

The best practice here is to agree either the start date or the amount of the initial credit during the lease negotiation.  If the start date is not clear from the lease documentation, then I will recommend to the buyer of the aircraft to agree the start date in the lease novation documentation.

2. The Method of Calculation. Once the start date is agreed there are a couple ways to calculate the initial credit–the pro rata method and the rate-times-hours/cycles/months method.

Under the latter method, the calculation of the initial credit is the simply the applicable base year (unescalated) maintenance reserve rate multiplied by the number of hours, cycles or months (as applicable) since the last relevant maintenance event.

Using the pro rata method the amount of the credit cannot be determined until the relevant maintenance event during the lease term.  At that time the full reimbursable cost for the visit is allocated pro rata between the usage before the delivery date and  the usage after the delivery date, with the lessor obligation to provide a credit for the usage before the delivery date.  For example, if an engine performance restoration costs $4M, the “start date” was two years before the delivery date and the performance restoration was started two years after the delivery date, then the initial credit would be $2M.

Lessors generally don’t like the pro rata approach because (1) it shifts the risk early maintenance (especially respect to engines) on to the lessor (because the denominator in the pro rata calculation is smaller for early maintenance) and (2) it shifts part of the risk of the final cost of the maintenance on to the lessor (because the lessor’s credit is not capped at the per hour/cycle/month rate, but instead is calculated using the actual reimbursable cost of the maintenance event).

The use of the pro rata method for engine performance restorations is especially risky for lessors–because an engine can come off wing early for condition reasons and because the cost of performance restorations is notoriously difficult to predict/control.  To take an extreme example, if an engine is driven off wing for a performance restoration on the first day of the lease term, the pro rata approach would result in the lessor bearing 100% of the cost of the performance restoration.

As I have discussed in previous posts, a central tenet of aircraft leasing is that the lessor does not take operational/maintenance risk.  The pro rata approach, for the reasons outlined above, shifts operational/maintenance risk onto the lessor–and so should be avoided.

3. Engine LLPs. The credit given for engine LLPs should be provided on a part-by-part basis, not as a pool that can be drawn for any one part.  Like the pro rata approach discussed above, allowing the lessee to draw on a pool of credits for the replacement of any one part shifts the risk of early removal to the lessor.  Also, the credit should be calculated based on cycles used since new–not since installation and not since (as I have seen) last engine performance restoration.

4. Other Considerations. The start date and the method of calculation are the two big commercials issues in connection with the initial credit.  Here are some further less controversial recommendations:

(a)  The initial credit provisions should apply only to the first reimbursable maintenance event during the lease term.

(b)  The initial credit should apply only to reimbursable maintenance events and only to the extent the maintenance event is reimbursable.

(c)  The obligation to pay the credit should be conditioned on the same conditions as the reimbursement of reserves (e.g., no continuing lessee default).

(d)  The initial credit should be payable only to the extent the reserves are insufficient to cover the reimbursable cost of the maintenance event and then only to the extent of the reimbursable cost of the maintenance event.

(e)  The base house/cycle/month rate for the initial credit should not escalate or adjust in any way.

I know some you will be saying “no duh, dude” to (a) through (e) above, but it’s common for a lease to be silent on one or more of these issues.

5. Novation. As discussed in a previous post, when acquiring a lease by novation or assignment, the novation/assignment agreement should have a provision in which the lessee confirms which credits have already been satisfied and, unless the lease documentation uses the pro rata method, the amount of the remaining credits.

Engine Thrust at Delivery and Return

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Here’s a common fact pattern in connection with the sale and leaseback of a used aircraft:  An airline and a lessor will agree that the lessor will purchase one or more of the airline’s aircraft and then lease those aircraft back to the lessee for an agreed term and at an agreed rent.  The lessor’s obligation to purchase the aircraft will usually be subject to a pre-purchase inspection of the aircraft and to the aircraft being in the same condition (as at inspection) on the purchase date.  Rarely will there be a full description of the aircraft in the purchase agreement; instead the lessor will rely on its inspection of the aircraft and on detailed return conditions in the leaseback documentation.  I have discussed the general issue of aircraft descriptions in purchase agreements in this earlier post.

As most of you know most (all?) aircraft jet engines may be operated at different thrusts.  Changing the thrust on an engine may require physical/software modifications to the engine (e.g., a derate plug), but a change will also require paperwork from the engine manufacturer; and the paperwork from the manufacturer for an increase in thrust will generally require a large payment to the engine manufacturer (sometimes hundreds of thousands of dollars per engine).  Instead of purchasing additional thrust, airlines may “lease” the thrust for an agreed period of time.

Most of you probably see where I’m going here.  If the lessor in a sale/leaseback transaction sends its inspector to look at, say, a 737-800 and the inspector reports back that the installed engines are CFM56-7B26 engines (per the dataplate on each engine), the lessor knows that that the installed engines are certified to operate at 26,300 lbs. thrust (signified by the “26” in the “7B26”).  But the first question from the lessor’s tech and legal officers should be “is that thrust rating owned and transferable by the airline or is it leased by the airline (and the engines will revert to a lower thrust rating at some point)?”

If the lessor fails to ask that question, it may be surprised to find at return of the aircraft at lease end that the engines are returned as CFM56-7B24 engines (that is, with 24,000 lbs. thrust).  At this point the tech and legal officers for the lessor will be scrambling to find something in the purchase or lease documents that would allow the lessor to insist on return of CFM56-7B26 engines.  For example, the lessor may say “look, the description of the engine in the purchase agreement says ‘CFM56-7B26,'” to which the airline will respond “that’s because they were CFM56-7B26 engines at delivery.”  Then the lessor will say “look, the lease return conditions require the aircraft to be returned in the same configuration and with the same capabilities as delivery,” to which the lessee will say “‘configuration’ refers to the seating configuration and the aircraft is airworthy and so does have the same capabilities.”  Acrimony ensues.

The lessons here are:

  1. The purchase agreement should be clear that the current thrust is owned and transferable by the airline. In addition, the lessor’s tech officers should confirm such with the engine manufacturer directly.
  2. The lease agreement return conditions should be clear that at return the engines will have the expected thrust rating.

The above also applies to new aircraft in sale/leaseback transactions.  For example, an airline may have a deal with the engine manufacturer such that the installed engines will be delivered from the airframe manufacturer at a higher thrust but such thrust will apply only for so long as the airline operates the aircraft, after which a lower thrust rating would apply.

As always, be careful out there.

Replacement of Parts and Part Pooling

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In a perfect world for an aircraft lessor the following rules would apply to each part on a leased aircraft:

Rule 1.  No part should be removed from the aircraft except as required for maintenance of the aircraft and/or the part.

Rule 2.  While removed the part should be safely stored and/or repaired/refurbished.

Rule 3.  No part on the aircraft should be replaced other than because of damage, failure, loss or expiry of that part.

Rule 4.  If a part is to be replaced because of damage, failure, loss or expiry, the part should be promptly replaced with a part of the same manufacturer and model (or a more advanced and compatible model), and upon installation title to the replacement part should vest in lessor free and clear of any liens.

I can hear a number of you saying “uh huh, yeah, that’s right, what’s your point?”

My point is that very few aircraft lease agreements actually contain the first three rules.  Don’t believe me?  Pick up any random lease and check.

Right now I am picking up a lease at random (I really am) and I see the following standard Replacement of Parts clause:

LESSEE, at its own cost and expense, will promptly replace all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or rendered unfit or beyond economical repair for use for any reason. In the ordinary course of maintenance, service, repair, Overhaul or testing, LESSEE may remove any Part provided that LESSEE replaces such Part as promptly as practicable.

The wording in this lease agreement goes on to specify the requirements for the replacement part (Rule 4 above) and to address title transfer issues (also Rule 4 above) and the required timing for replacement (again, Rule 4 above).

But what about the first three rules?  They are not contained in the above quoted language (read it again).  Note especially that in the second sentence it does not say “Only in ordinary course of maintenance . . . ” or “maintenance, service, repair, Overhaul or testing of the Aircraft.”

You may be able to find the first three rules partly covered in other parts of the lease agreement.  For example, the lease agreement Possession section may have a provision prohibiting delivering possession of any part to a third party (though the prohibition in that section is often limited to the aircraft and engines).  The Maintenance section will likely have a clause on repair.  But I bet you didn’t find the first three rules in the Replacement of Parts section.

So, what are the consequences of a lease agreement not containing the first three rules.  Well, the most material and (highly) likely consequence is that parts will be removed from the lessor’s aircraft for use on other aircraft in the lessee’s fleet, with the only requirement usually being that the removed part be replaced with a compliant part “as soon as practical but in any case prior to the last day of the Lease Term”–and that the lessor will not be able to prohibit the use of its parts on other aircraft.  Another possible consequence, theoretically at least, is that good parts can also be swapped out for inferior parts–though most leases have a requirement that the replacement part have a value and utility at least equal to the replaced part.

Let me jump to another issue here and then I’ll come back the issues raised above.

Often during lease negotiations the lessee will say “we need the right to do part pooling,” and when I’m reviewing leases I sometimes run across a “Part Pooling” section in which the lessor gives the lessee broad rights to pool “Parts” from the aircraft with other airlines pursuant to an inter-airline pooling arrangement.  When I see such a part pooling section I wonder how can the lessee engage in inter-airline part pooling and still comply with its separate obligation to replace removed parts “as soon as practical,” vesting title to the replacement part in the lessor.  The two provisions are in conflict.

When pooling comes up in my lease negotiations, my first response is to ask the lessee’s representative what he/she means by “parts pooling.”  Invariably the response is something like “if we need a part from your aircraft to keep another aircraft in our fleet in operation then we will want the right to remove the part from your aircraft.”  Anyone who has been in the aircraft leasing business for more than a few deals knows that this sort of part sharing among aircraft is common.  Lessors don’t like it, but it’s going to happen and it’s unlikely the lessor will ever find out.

I don’t think I have ever heard the following response from a lessee:  “we want the ability to share your aircraft’s parts with other airlines as part of an inter-airline pooling arrangement without any obligation on our part to replace them before return of the aircraft to you.”  I can see a very creditworthy airline taking that position, but unfortunately (for me) those are the kind of airlines I don’t usually deal with.  My experience is that a request to “pool parts” is a pretty narrow request to use parts from a lessor’s aircraft in an “emergency.”  And if that is the case and the lessor is willing accommodate the lessee on this request, then the “part pooling” provision should be narrowly drafted.

I sometimes wonder whether the loose drafting around the removal and replacement of parts (as discussed above) is the result of lessees trying to leave open the possibility of removing parts from the leased aircraft for use on other aircraft in its fleet.  If so, I guess that is OK, but as a lessor’s counsel I would strongly prefer that the four rules above are clearly stated and that any exception for “emergency” use of parts on other aircraft is clearly and narrowly drafted.

Miscellaneous Thoughts on the Miscellaneous Section

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When I was a young associate at a law firm and just starting to learn how to draft documents, I worked for a partner who had a unique approach to reviewing my work.  After I handed him my draft (this was post-computer (barely) but way before email) he would weigh my draft  in his open palm and invariably say “feels light.”  When he handed back his handwritten markup, his comments were almost always spot on, but I noticed that the most marked up section of every draft was the Miscellaneous section.  I wasn’t the only associate to observe this pattern and it became of the subject of some humor:  “your draft is malpractice per se, except for the Miscellaneous section, which is brilliant.”

And, to this day, when I get to the Miscellaneous section of a draft (whether I’m drafting or reviewing) I force myself to slow down and apply some of the things I learned, like the following:

1.  Redundancy. Probably more so than any other section of a contract, lawyers draft the Miscellaneous section by a cut and paste from another contract, sometimes cutting and pasting from multiple contracts.  And of course this leads to a Miscellaneous section that has both a “Severability” clause and an “Invalidity ” clause, both of which of course say exactly the same thing.  Another common redundancy:  a “No Amendments” section and a “Variation” section.  Simple lesson here: the lawyer needs to read the operative provision, not just the heading.  In fact most Miscellaneous sections have a section that says just that–it’s called “Headings” and it’s often redundant with a clause in the Interpretation section of the same contract that says the same thing.

2.  Lack of consistency. There are a few sub-issues here:

(a)  The most common mistake resulting from “cut and paste drafting” is a mismatch between parties and defined terms with the rest of the document.  But there are also often substantive mismatches–e.g., Miscellaneous provisions addressing payment matters (e.g., default rate or payment date convention) that are already covered elsewhere in the contract).  Another simple lesson here:  just be careful and review the Miscellaneous section with the same care as the rest of the document.

(b)  Most large commercial transactions involve multiple documents–e.g., a loan agreement and associated security agreement.  Each of the documents in a transaction should have matching Miscellaneous sections.  Better yet, the main document should have a Miscellaneous section that expressly applies to all “Related Documents” or “Operative Documents” or whatever term you like for the transaction documents; this approach not only ensures consistency but cuts down on the length of the ancillary documents (and I’m amazed how few people do this).

Rule of thumb:  If in a document (or set of documents) you say the same thing twice but in different ways you should assume the other side is going to find some way to use that against you.  If you must say something twice, use the same words.

(c)  For most commercial attorneys there is really no excuse for not having your own boilerplate Miscellaneous section stored in a Word document.  If you’re the drafter, it’s a simple cut and paste from the boilerplate; if you’re the reviewer the boilerplate serves as a handy checklist and source for drafting comments.  Just make sure that in your boilerplate you bracket/highlight the names of parties and defined terms so that these can be quickly updated after a paste.

3.  Lack of Proportionality

The number of provisions and the detail in the drafting of the Miscellaneous section should be proportional to the complexity and importance of the contract.  If you’re drafting a one section letter agreement with a short performance period, you don’t need three pages of Miscellaneous provisions.  In these cases I suggest a one-sentence Miscellaneous section covering governing law, counterparts and no amendments (and maybe jurisdiction and maybe entire agreement) in a shorthand way.  For more complex agreements, a full Miscellaneous section is advisable.

What is a full Miscellaneous section?  Below is my list.  Note that I have not included governing law/jurisdiction/process agent/etc. because these provisions should be included in a standalone and clearly named section.  Also I don’t include general payment provisions (e.g., application of payments) or default remedies (e.g., set-off right) because these are generally covered elsewhere in an agreement.  The Miscellaneous section should be limited to provisions that don’t fit neatly in other sections of the contract.

Further Assurances
No Implied Waivers
Rights Cumulative
Confidentiality
Press Releases
No Amendments Except in Writing
[Chattel Paper–where relevant]
[No Partnership/No Agent–where relevant]
Severability
Counterparts
Headings [if not contained in the “Construction” section]
Time of Essence
Notices
Documentation Costs
No brokers
English Language
Entire Agreement
[Lessor] Determinations Binding Absent Manifest Error
Third Party Rights
Delegation by [Lessor] (to [Servicer])
Periodic Estoppel Certificate Required
Language

I hope the above is helpful.  I know you are not going to wow a client with your drafting of the Miscellaneous section–in fact it’s probably in your best interest never to mention the Miscellaneous section to a client–but you can take pride in a job well done.  And I know one law firm partner who would appreciate your effort.

Maintenance Reserves for LLPs: Some Random Thoughts

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I have been reviewing a lot of leases recently, and among the various lessors and forms of leases I am seeing that there is almost always a drafting or conceptual issue with the engine LLP reserve provisions.  This post will discuss a few of those issues.  Some of the issues below are also touched upon in less detail in a previous post.

Used LLPs

Several years ago a very sharp lessor tech officer pointed out that the lease agreement we were negotiating should have an adjustment to the LLP reserve reimbursement amount where the replacement LLP (for which reimbursement is being sought) is a used LLP.  The use of used LLPs by airlines and MROs is not uncommon, and the tech officer’s view was that the lessee should not be able to draw, without limit, from reserves or any lessor contributions (for utilization prior to the delivery date) for the cost of a used LLP.

For example, why should a lessee be allowed to draw reserves, without limit, for the cost of a used LLP where the replacement LLP has less cycles remaining than the replaced LLP had at removal (e.g., in a replacement required because of FOD or failure)?  Similarly, why should a lessee be allowed to draw lessor contributions, without limit, for the cost of a used LLP where the replacement LLP has less cycles remaining than the replaced LLP had on the delivery date? Underlying these questions is the (correct and accepted) premise that a lessor should at all times have LLP reserves for an LLP that reflect the utilization of that LLP since new.

The tech officer and I came up with some unfortunately complicated drafting adjusting the LLP reserve reimbursement amount in the above scenarios.  I say “unfortunately” because I value simplicity in drafting–easier to negotiate, easier to administer, easier to enforce.  Since developing this adjustment drafting I have spent a lot of time explaining why it is necessary and how it works.

In the numerous leases I have reviewed recently not one has made a distinction between used LLPs and new LLPs in the reserve reimbursement section, and I so started to wonder whether maybe I was missing something.  Why didn’t these other lessors care about the used LLP issue?  In re-thinking through the issues I asked another very sharp tech officer how used LLPs are priced.  He told me that used LLPs are generally priced pro rata (straight line) to the price of a new part–so an LLP with 75% life remaining would cost 75% of the catalog price of such part.

If we assume that used LLPs are always priced on a straight-line pro rata basis and if the working assumption for drafting is that the reserve balance and any lessor contribution amount for any LLP reflects all prior utilization for such LLP at catalog price, then the use of used parts should not be an issue.  In other words, any LLP reserve reimbursement should deplete the reserves and lessor contribution only to the extent of life remaining on the replacement part.  For example, if a part with 10% life remaining (and for which lessor holds reserves and lessor contributions equal to 90% of the cost of such part) is replaced by a part with 75% remaining (with a cost of 75% of catalog price), then after lessor’s reimbursement (65% of catalog price after netting any waste expense on the replaced part–see more on waste expense below) the lessor should have the benefit of an LLP with 75% life remaining and 25% in reserves/lessor contributions.

Let’s try a more detailed example.  An aircraft is delivered used to the lessee.  One of the LLPs on one of the engines has 60% life remaining at delivery to lessee and the lessor has provided to lessee a lessor contribution equal to 40% of the catalog price for such part.  Lessee pays reserves on such LLP during the term and at the time of removal of such LLP for replacement, 20% life remains on such part; in other words, lessee has paid 40% of catalog price in reserves.  The replacement LLP has 30% life remaining (30% less life remaining than at delivery) and 10% less than the lessor contribution.  Lessor’s reimbursement would be 10% of catalog price after netting any waste expense on the replaced part) and the lessor should have the benefit of an LLP with 30% life remaining and 70% in reserves/lessor contributions.

The key to making these examples work is the assumption that the used LLP is priced on a straight line basis.  And so the conclusion I am drawing from the above thinking is that I can scrap the complicated drafting language I have been using and replace it with something along the lines of the following:  “If the replacement LLP is used then Lessor’s reimbursement obligation will be equal to the lesser of (1) the actual cost of such LLP and (2) the product of (a) the catalog price of such part divided by its cycle life and (b) the number of cycles remaining on such part, in either case, less waste expense.”

Reimbursement on a Part-by-Part Basis vs. from the LLP Reserve Pool

I have discussed this issue in another post and so won’t repeat myself here.  In the leases I have reviewed recently I have seen both approaches taken and also saw a hybrid where the pool approach was used for the LLP reserves and a part-by-part approach was used for the LLP lessor contribution (I didn’t understand the reason behind that split).  My view is that the part-by-part approach is the logical and correct approach because the pool approach shifts operational risk on the LLPs to the lessor.  For a discussion of this issue see this previous post.

Salvage Value, Waste Expense and Stub Life

LLPS are very rarely removed with no life remaining.  Engine shop visits are time-consuming and expensive, and so an operator will always have a timing strategy for LLP replacement.  For example, if an engine is going into the shop for a performance restoration and after the performance restoration the engine will be expected to run without another shop visit for 7,000 cycles, then the operator will generally replace all LLPs on the engine with life remaining of less than 7,000 cycles.  The lease agreement for an aircraft will also usually have an LLP “build standard” for a performance restoration and separately an LLP cycle-remaining return condition, both of which requirements will affect the timing of LLP replacement during a lease term.

The question for the lessor is how to account for the “early removal” of LLPs when collecting and reimbursing reserves.

Some lessors will build the lost cycle life into the reserve rate using a “stub life” assumption–with the effect that the per cycle reserve rate for an LLP is higher than the per cycle catalog price for such LLP.  Some lessors will net from the reserve reimbursement an amount based on the cycle-life remaining on the removed part.  Some lessors will net from the reserve reimbursement the market salvage value (if any) of the removed part, usually in connection with using the stub life approach.

I think the most direct, transparent and easiest-to-explain approach is to base the reserve rate on catalog prices (without adjustment) and then deduct from the reimbursement an amount equal to the product of (1) the per cycle then catalog price of the replaced LLP and (2) the number of cycles remaining on the replaced LLP.  This approach removes the guesswork of stub life and salvage value, with the calculation of LLP reserve rate and reimbursement tied directly to catalog prices.

LLP Replacement–Scope of Reimbursement

LLP reserve reimbursement is for the purchase price of the part, not for repair, installation or any other labor or any other cost.  This preceding sentence isn’t debatable, it’s not an “issue”; it’s the commercial basis of the deal.  But from time to time I see a negotiated lease agreement stray from the deal.  If the lessee wants anything other than LLP price in the reimbursement, then the LLP rate needs to go up.

What Does Life Mean?

I’m just going to touch on this last issue, because it is a big topic.  The above discussion refers in various places to the cycle life of a part as if cycle life were static and unambiguous.  But this not the case.  For example:

  1. Engine manufacturers sometimes extend the cycle life of a part already in service– for example, because operational experience has shown that the part will last longer.
  2. Engine manufacturers may assign different LLP cycle lives to different operators based on each operator’s profile (geographic location, routes, etc.).
  3. Engine manufacturer’s may guarantee a longer life of an LLP than the current cycle life (because the engine manufacturer expects the cycle life will be extended before the current cycle life is used).
  4. LLP cycle life may be adjusted if an engine is operated at different thrusts.

For the lawyer drafting the LLP reserve provisions in a lease agreement, all of the above should be considered while drafting.  I’ll try to come back at a later date for a full discussion of this last issue.  In the meantime, caveat advocatus.

 

Subject and Subordinate Clauses in Subleasing Provisions

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This post will start with a quiz.  The below excerpt is verbatim from the permitted sublease section of a lease agreement I reviewed a couple weeks ago.  The language, which is very common to lease agreements, reflects confused thinking–or more accurately, reflects the use of boilerplate without thinking.  What’s wrong with the below wording?

Any proposed sub-lease shall satisfy each of the following conditions:

(a) the sub-lease shall be expressly stated to be, and shall remain, subject to, and subordinate to this Agreement and the term of any such sublease (including renewal rights) shall not extend beyond the end of the Lease Period and shall terminate immediately upon the occurrence of an Event of Default or upon the date upon which the leasing of the Aircraft hereunder terminates or expires, whichever is the earlier;

. . .

(c) Lessee shall absolutely assign, by way of security, all its rights and interests in the sub-lease to Lessor (in substance and form acceptable to Lessor (acting reasonably)) and procure that the Permitted Sub-Lessee acknowledges the notice to such assignment;

When a lease agreement is in default and the lessor has decided to exercise remedies, the primary concern for a leasing company is the recovery of possession of the aircraft.  Any possible damage claims against the lessee are a distant second to the first priority of protecting the aircraft by getting possession.  Consequently, when structuring a lease transaction and drafting the lease documentation, the lessor’s attorney should ensure that if an event of default does occur the lessor has a clear and unambiguous right to possession of the aircraft.

That all sounds obvious, but it is not uncommon for there to be parties other than the lessee that have a right to possession of or claims against the aircraft (or parts thereof)–for example, sublessees, wetlessees, MROs and parts suppliers.  One or more of these parties may attempt to block a Lessor’s attempted repossession of an aircraft.

In the case of a sublessee, most aircraft lease agreements provide that any sublease is subject and subordinate to the lease agreement between the lessor and lessee, with the lease agreement usually using language similar to that in clause (a) quoted above.

Ok, but then what is the purpose of clause (c) quoted above and doesn’t it undercut the subject-and-subordinate clause?  In other words, why would the lessor want an assignment of a sublease agreement when that agreement terminates automatically before the lessor has ability to step in as sublessor?  In yet more words, doesn’t the language in clause (c) conflict with clause (a) by indicating that the parties expect the sublease to continue after remedies have been exercised against the lessee by the lessor?

Could a sublessee use the ambiguity caused by this conflicting language to try to block a repossession by the lessor?  Absolutely.  Would the sublessee be able to retain the aircraft under the sublease?  I don’t know, it depends on the language of the lease agreement and the sublease assignment, but at the very least the ambiguity gives the lessee and/or the sublessee some leverage over the lessor and buys both of them some time.

Let me argue the other side for a minute:  “Brad, you dolt, the language you quoted is just badly drafted.  The intent is that the sublease is subject and subordinate but that the lessor *at its option* can elect to step into the sublessor’s position under the sublease.”  Or maybe “The intent is that the subleasing is terminated but that the lessor still has the ability to step into the sublessor’s position to force the return of the aircraft by the sublessee.”

Well, ok, maybe, but in my experience those subtleties are not often reflected in real-world lease agreements (e.g., see the language above); usually the subject-and-subordinate language is not (at all) coordinated with the sublease assignment requirement.

That said, I have drafted and negotiated subject-and-subordinate agreements with sublessees that do contain an option by the lessor to continue on with the sublease, with the lessor taking the sublessor’s place (or that require, again at the lessor’s option, a new lease agreement be entered into between the lessor and sublessee on the same terms as the sublease).

But as a lessor’s counsel who has been through many repossessions, my strong preference when approving a sublease is to require a crystal clear and unequivocal subject-and-subordinate agreement under which the sublessee has no arguable claim to continue to possess the aircraft–that is, a subject-and-subordinate agreement that does not contain a sublease assignment.  What limited, speculative upside a lessor gets by requiring a sublease assignment is outweighed, in my opinion, by the sublease assignment muddying the water during a repossession.

 

A couple random but related thoughts:

1. It’s going to be rare case when the sublease will be acceptable “as is” to a lessor. The lessee/sublessor as an operator may have agreed covenants that the lessor cannot perform.  The tax provisions may not work for a direct lease between the lessor and the sublessee.  The return conditions may not be acceptable to the lessor.  The rent and term may be unacceptable to the Lessor.  And so forth.  My point here is the lessor should balance the benefits of simplicity (by not requiring an assignment) against the limited, possible benefit of getting an assignment of the sublease.

2. Here are the general provisions I like to see in the “subject and subordinate agreement” among the lessor, the lessee and the sublessee (these provisions will of course need to be tailored to the specific deal):

(a)  The sublessee should acknowledge that it has received a copy of the lease between the lessor and the lessee (with dollar amounts redacted), and to the extent that the sublease conflicts with the lease, the lease will govern; in addition, the sublessee will ensure the compliance with the maintenance, repair, operation and insurance provisions of the lease.  This approach saves the tedious (for all the parties} exercise of marking up the sublease to conform to the lease.

(b)  The sublessee agrees that the termination of the lessee’s leasing of the aircraft or the termination of the lease agreement automatically results in the termination of sublessee’s leasing of the aircraft under the sublease.

(c)  Upon such termination the lessee will return the aircraft to Lessor as a specified location and in compliance with the return conditions required under the sublease.

The Definition of “Engine Basic Shop Visit”

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I used to joke with a friend that “I’ll be 70 years old and still negotiating the definition of ‘Engine Basic Shop Visit’ on a daily basis.”

That was at least 15 years ago and while “on a daily basis” was an exaggeration, that term (some lessors use “Engine Performance Restoration” or similar terms) is still the most important defined term in most aircraft lease agreements and it is (no doubt about it) the defined term that the lessor’s lawyers and tech officers will look at most often after delivery (and usually while under stress–“oh, please let it say what I need it to say”).

The term should be used sparingly in a lease agreement.  In a previous post I have noted that the term should not be used in return conditions–because the definition usually sets a high standard for the restoration workscope and the main point of the relevant return condition should be on-wing time remaining to the next performance restoration (of any sort)–not on-wing time remaining until the next full performance restoration.  The same logic applies to the delivery conditions, though using the defined term in the delivery conditions would benefit the lessor–unless the delivery conditions uses a “time since” standard for the engine delivery condition.

In lease agreements that I draft the term will usually appear only in the provisions related to maintenance reserves and/or return compensation.  In the maintenance reserve provisions the defined term will be the trigger for when the lessor reimburses reserves.  In the return compensation provisions it will be the trigger for when the hourly return compensation payment from the lessee starts to accrue.  In both cases the lessor will benefit from a high standard.

The definition of ” Engine Basic Shop Visit'” that I use has four components:

1. Workscope. The threshold question in drafting the definition is whether the maintenance reserve/return compensation trigger will be the overhaul of any listed engine module or an overhaul of a set (or all) of modules required.  This issue is usually addressed by the tech and financial officers of the lessor and the resolution will be driven by the expected condition of the engine at delivery and the performance restoration reserve balance for the engine.  (If the “modular approach” is used, then the reserve/return compensation/lessor contribution provisions will need to be drafted to allocate the relevant amounts (usually on a percentage basis) among the modules.)

2. Engine Manufacturer Manuals and Guidelines. The performance restoration should be performed in accordance with the relevant engine manufacturer manuals and guidelines.  The lessor’s tech officers should provide (or at least review) the description of the relevant engine manufacturer manuals and guidelines.

3. Performance Standard. Here is a requirement that I often do not see in lessor’s lease agreements.  The workscope has been agreed with the lessor and the performance restoration has been carried out in accordance with the agreed engine manufacturer manuals and guidelines, but the EGT margin from the test cell after the performance restoration is the same as before the performance restoration.  Should the completion of the performance restoration be a sufficient trigger for purposes of a maintenance reserve reimbursement or return compensation reset?  No, it shouldn’t.

So, I suggest adding a performance standard that requires the performance restoration :

fully restores [the Engine’s/such module’s] performance and service life using the workscope defined in the Engine Manufacturer’s [Engine Management Program and the Engine Manufacturer’s Engine Manual] and so that the EGT margin is (a) at least the average EGT margin that is expected in the industry for an engine of the same model as the Engine fresh from performance restoration (determined on the basis of the Engine Manufacturer prescribed test cell conditions and procedures prevailing at the time of such shop visit) and (b) such that such Engine can reasonably be expected (as determined by the Engine Manufacturer if Lessor and Lessee fail to agree) to run for the average meantime between performance restorations (based on Engine Manufacturer data) for engines of the same model as the Engine

4. LLP Build Standard. The definition should require a minimum LLP build standard, the minimum to be based on the expected run-time between overhauls.  In other words, you don’t want the run-time requirements discussed in 3 above to be undercut by the engine being driven off-wing for an LLP replacement before the next anticipated performance restoration.

Some lessors may argue that 3 and 4 above are unnecessary so long as the lessor has a consent right over the planned workscope.  I don’t think that is right.  A consent right give you no protection over a failed performance restoration and a consent right will likely lead to a negotiation where the lessee will ask for additional (outside of the contract) contributions for what the lessee’s will describe as enhancements to the workscope not required by the lease agreement.  (Nonetheless, somewhere in the lease agreement the lessor should be given consent rights over each performance restoration workscope.)

Random notes:

1. For references to performance restoration where a high standard is not required, I suggest just using “performance restoration” (not defined) or using “Performance Restoration” as a defined term and defining it as follows: “means the off-wing maintenance of an Engine where, as a result of an overhaul or performance restoration, useable life is restored to the engine.”  As always, when using defined terms the drafter and reviewer each needs to be cognizant of both the definition and how it is used–when in doubt, search for the defined term throughout the document and make sure it is being used consistently–and, in each case, to your client’s advantage.

2. In two-way return compensation provisions, you will also need to provide for the “time since” calculation at delivery. As mentioned in a previous post, my preference is (where possible) to specify the date of the last relevant maintenance visit–rather than rely on a definition or description of the prior visit.

“Except as Otherwise Provided Herein” and Aircraft Lease Agreement Disclaimers

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A common drafting comment in contract negotiations is “can we add ‘except as otherwise provided herein’ at the beginning of this sentence?”

My usual (admittedly suspicious) response when the comment is directed at my draft is always “what do you have in mind, what section in this document ‘provides otherwise’?”

If the lawyer on the other side cannot (or will not) give a good example, my response to the request will be “no.”  If the lawyer can provide a good example, then I will try to limit the exception to the example provided.

Usually a lawyer will request the “except as otherwise provided herein” exception where the drafting involves a broadly drafted waiver or limitation of liability–usually near the back of the contract where the wording is often boilerplate.  And the lawyer on the other side will say it is unreasonable for a boilerplate provision to trump a specific commercial agreement contained elsewhere in the contract.  Sounds like a fair comment, right?

If you are requested to add this exception to your draft, my advice is:  be very careful.

An example:

As discussed in another post the purpose of the disclaimer in an aircraft lease agreement is to place, as between the lessor and the lessee, all risk and responsibility for the condition of the aircraft after delivery on the lessee.

A not uncommon lessee comment on the lease agreement disclaimer is “can we change it to read ‘as between the lessor and the lessee, once the aircraft is delivered to the lessee, the lessor has no responsibility or liability with respect to the condition of the aircraft except as otherwise provided in this lease agreement?”

Like I said above, this comment sounds fair, but with this suggested addition the lessee’s lawyer may be trying to make the lessor’s obligations as to the aircraft delivery condition survive the delivery.

Although many lease agreements are (surprisingly) not very clear on this issue, the lease agreement disclaimer is intended to relieve the lessor from all responsibility with respect to the promised delivery condition of the aircraft–once the aircraft has delivered.  In other words, once the lessee has inspected the aircraft and signed the acceptance certificate (with or without waiving certain delivery conditions), the lessee should have no further rights under the provisions of the lease agreement dealing with the delivery condition of the aircraft (in the absence of a specific negotiated agreement with the lessor–which would be unusual).

In this context the more problematic delivery conditions are those that look past the delivery date.  For example, an engine delivery condition that says that each engine will have least a certain number of hours of operation until the next anticipated removal–or an AD compliance condition which provides for the lessor to clear AD for a certain period of time after delivery.  But even delivery conditions that relate only to the delivery date are fair game for the lessee if, notwithstanding the acceptance certificate, such conditions were in fact not met on the delivery date AND the disclaimer is not clear that the lessee has no recourse under the lease agreement’s delivery conditions once the lessee has accepted the aircraft.

Consequently, if you get the request to add “except as otherwise provided in this lease agreement” anywhere in the disclaimer I strongly suggest you follow the general advice above by asking the lessee’s lawyer what “other provisions” he or she has in mind.  If the answer is “the delivery conditions” then the answer should be a strong “no.”

A couple additional related notes:

  1. You may remember the ACG vs. Olympic Airlines case from a few years ago. My reading of the case, including the underlying transaction documents, is that an “except as otherwise provided in this lease agreement” clause in the disclaimer was a material factor and issue in the dispute.  Plus the lease agreement had some very vague delivery conditions (the aircraft would be “airworthy” and “in a condition for safe operation”), allowing the lessee to claim, credibly, that the aircraft was in fact not in the agreed delivery condition on the delivery date.  If you Google “ACG Olympic Airways” you’ll see lots of links to the court opinions and discussions about the case.
  1. It is common practice to address delivery condition discrepancies in the aircraft acceptance certificate, usually by allowing the lessee to return the aircraft with the same discrepancy or with the lessor agreeing to rectify the discrepancy post-delivery. When drafting rectification language, the lessor’s obligations should be drafted so that compliance can be achieved objectively and unilaterally by the lessor, without agreement or cooperation by the lessee (e.g., “Lessor will deliver to Lessee’s base a replacement armrest within 60 days after the Delivery Date”).  The rectification language should not say something like “Lessor will cause the Aircraft to comply with the delivery condition in Section [__] within 60 days after the Delivery Date” because, among various other reasons, the disclaimer in all likelihood (unless drafted very broadly) will not apply to that provision and the lessor’s agreement could be read as an ongoing warranty of compliance with that delivery condition.