Default Grace Period for the Return of an Aircraft

A well drafted lease (or at least the first lessor draft) will have as a separate event of default the failure of the lessee to return the aircraft at the termination of the lease term, with either no or a very short default grace period for the lessee. In other words, the lessor does not want the general covenant grace period (sometimes as much as 30 days (or, ugh, longer)) to apply to the return of the aircraft. In a good and just world the lessor will have another lessee lined up to take delivery of the aircraft upon return from the current lessee, and the lessor does not want to annoy the next lessee with a delivery delay (even if the current lessee continues to pay rent until the actual return). So usually a lessor will require a timely and compliant return, with the right to call an immediate event of default if the lessee fails to return the aircraft in the required return condition on the last day of the scheduled lease term.

Lessees often push back on this immediate event of default, using a couple different arguments:

1. A late return may be caused by a number of factors outside the lessee’s complete control, including problems with the return MRO (e.g., lack of manpower), problems discovered during the return maintenance and inspections (e.g., engine defects discovered during borescopes) and unreasonable lessor inspectors; therefore the lessee argues it should be given a grace period to avoid the problems it may have (usually triggered cross defaults under other leases and financings) if an “Event of Default“ under a lease were to be triggered immediately by a late return.

2. Somewhat more persuasively, the lessor has in all likelihood given itself a grace period on its obligation to deliver the aircraft to the lessee; so, as the lessee will argue, it is fair for the lessee to have a grace period at the end of the lease term. The counter-argument by the lessor is that in most cases the lessor is relying on the returning lessee (or the manufacturer) to meet its obligations and the lessor therefore cannot guarantee (and does not control) the actual delivery date of the aircraft. This counter-argument, in my experience, almost always fails to win the day.

I’ve seen some lessees carry this issue to the extreme by saying that the lessee should have a lengthy return grace period (more than a couple months) and ultimately be obligated only to use reasonable efforts to place the aircraft in return condition by the required date; if the lessee fails to put the aircraft in the required return condition after reasonable efforts then the lessee, in its view, should be able to simply return the aircraft in its then “as is” state. This position effectively shifts aircraft return condition/maintenance risk from the lessee to the lessor–and an aircraft lessor’s Prime Directive should be “don’t take aircraft condition/maintenance risk.” EVER.

What can the lessor offer to the lessee that addresses the lessee’s concerns without losing money, losing the next lessee or shifting aircraft condition/maintenance risk from the lessee to the lessor? Here are my thoughts:

1. The simplest and most reasonable approach is to agree a grace period in the aircraft return event of default, the shorter the better, but any grace period should be conditioned upon (a) the aircraft having been removed from commercial service a reasonable time before the scheduled return date to allow for all return inspections and maintenance, (b) the aircraft not being placed back in commercial service or otherwise flown except in connection with the return inspections and maintenance, (c) the problem or problems causing the delay not having been reasonably foreseeable and avoided and (d) the lessee using all responsible efforts to complete the return as soon as practical.

The lessor should make sure that any grace period is well within the grace period the lessor will likely obtain in its commitment to deliver the aircraft to the next lessee.

2. A lessor should also provide for increased rent during any grace period or maybe a per diem “delay fee.” A return delay, especially one that drags on day-to-day, will result in significant costs to the lessor (primarily the costs of the onsite employees and consultants) and the lessor should be compensated for those costs.

Be very careful about increased rent or fees after the grace period because the lessee may argue that the increased rent is liquidated damages (or an election of remedies) precluding a claim for actual damages for a late return.

3. If a lengthy grace period is agreed, the lease should provide for a lease extension at an agreed rent at the lessor’s option if the aircraft has not been returned by the end of the grace period. The lessor should make sure that it has a complimentary delivery “out” with the next lessee–otherwise this option is useless.

4. Most leases will contain a provision allowing the lessor, at its option, after an a return event of default to take the aircraft back “as is” and complete the return maintenance itself. The lease agreement should be clear that any costs incurred by the lessor in performing the remaining return maintenance are to be reimbursed by the lessee and that the lessor taking over the return maintenance does not relieve lessee of its other obligations under the lease or waive any remedies available to the lessor arising out of the return event of default (such as retaining any security deposit).

In sum, a lessor can address the lessee’s concerns with missing the scheduled return date without substantial hardship, but the general point to make to lessees on this issue is that any solution needs to reflect the basic commercial agreement between the lessor and the lessee that the lessee is fully responsible for the condition and maintenance of the aircraft.