Some Drafting Tips for Lease Agreement Engine Return Conditions

Engine maintenance provisions, engine reserve/return comp provisions and engine return condition provisions are “where the money is” in aircraft lease agreements–and this is especially true for older aircraft where the value of the aircraft as a whole can be mostly in the engines.

Here are some drafting tips for the engine performance restoration (not LLP) return conditions in a lease agreement.

1. The Holy Trinity. Each engine should be (1) serviceable, (2) not on watch and (3) have no reduced interval inspections. Yes, there is some overlap in those requirements, but each should be stated to avoid the argument from the returning lessee that, for example, “yes, it has reduced inspection periods, but it is not ‘on watch’.”

As a practical matter, if you try to deliver an engine to the next lessee that fails any of these three conditions, you’re going to have problems–regardless of what the delivery conditions say.

2. Time Remaining. Each engine should have a minimum number of engine flight hours remaining until the next expected performance restoration. There are a lot of drafting traps in this requirement. Here are some of them:

(1) Don’t leave out the word “expected” and make sure that you describe who will determine whether the standard is met and the parameters for that determination (e.g., mutual agreement of the lessor and lessee with a fallback to the determination of the engine manufacturer, and based on an engine borescope, EGT and trend monitoring).

I once had to manage a return from a major US airline where the lease simply said “3,500 engine flights hours remaining to the next overhaul.” The airline took the position that given that engine maintenance is “on condition” and not scheduled, the return condition was nonsensical and the airline was going to ignore it. And we lost that argument–primarily for unrelated commercial reasons.

(2) Make sure the “performance restoration” standard is not too stringent. When a lessor defines “performance restoration” for reserve reimbursement or return compensation purposes, the definition is usually detailed and with extensive requirements. That sort of definition works against the lessor’s interest in the return conditions–and is IMO inappropriate for an engine return condition, the main point of which is to make sure the next lessee has an expected minimum on-wing time after delivery.

(3) Avoid the “hours since” standard as the sole standard. It is a meaningless standard for engines, where maintenance requirements are based on condition, not on a schedule. Sometimes it’s a good standard to have in addition to the hours-remaining standard.

(4) Beware of the following (not uncommon) quoted wording: Each engine should have at least 6,000 engine flight hours remaining until the next expected performance restoration “based on the manufacturer’s expected meantime between overhauls.” This language is very arguably a disguised “hours since” standard. The engine could be a melted mass of metal, but if it has only 5,000 hours consumed out of a 12,000 hours of expected meantime, it’ll meet this return condition (or so the lessee will argue).

(5) Avoid using a cycles-remaining standard unless you specify an assumed hour-to-cycle ratio. Using cycles alone will lead to an argument at redelivery about the assumed hour-to-cycle ratio and will likely lead to a mismatch with the delivery conditions for the next operator (which operator in all likelihood will operate at a different hour-to-cycle ratio than the returning lessee).

3. Engine Borescope. The engine borescope inspection provisions should (1) describe the scope of the inspection (make sure the lessor’s technical team are happy with the scope description), (2) be recorded and either uploaded or put on DVD and provided to the lessor, (3) performed by lessor (or at least in presence of the lessor by a company/individual acceptable to the lessor) and (4) provide for the correction by the lessee prior to the return of any findings outside of manufacturer-approved limits.

Hope that’s helpful.