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

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.

Miscellaneous Thoughts on the Miscellaneous Section

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
Press Releases
No Amendments Except in Writing
[Chattel Paper–where relevant]
[No Partnership/No Agent–where relevant]
Headings [if not contained in the “Construction” section]
Time of Essence
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

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.

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

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.