1. General and Contractual
1.1 What are the typical structures available for
financing the purchase of an aircraft?
Financing structures will generally vary based on whether an
airline or aircraft lessor is borrowing and on market dynamics.
Large airlines and lessors with corporate ratings are better able
to access the capital markets, both on a secured and unsecured
basis. In order to finance aircraft deliveries, airlines have
traditionally used a mix of bank debt, export credit financing and
leveraged tax leases, such as the JOLCO product, which has been
very popular in recent years. Airlines have also been very actively
tapping the sale-leaseback market, shifting the financing burden
onto the leasing community. Lessors who rely on secured financing
often use bank warehouse facilities to build inventory and then
look to refinance portfolios in the “ABS” or term loan
market. Term financings can also take the form of bank debt or
1.2 What are the key advantages/disadvantages and main
issues arising in relation to these financing
Aviation is a capital-intensive business. Industry participants
have spent the last decade or more educating an ever-broadening
investor base. As a result, deal volume has increased and
structures and terms have become more and more standardised –
even if the tax and legal complexity of these structures remains
high. The capital markets have provided a deep and liquid pool of
capital for lessors and airlines, and generally more flexibility on
covenants. But, in turbulent times, a disparate group of investors
cannot participate in workouts in the same way that a syndicate of
relationship banks can. Operating leases are generally viewed as
more and more advantageous, even for large airlines that can trim
their balance sheets and obtain more flexibility to match supply
and demand than with an owned fleet.
1.3 What types of leasing are possible under the laws of
your jurisdiction? What are their essential
Lease characterisation issues can arise in the tax, accounting,
bankruptcy and aircraft registration context. Generally, an
operating (or true) lease is distinguished from a capital (or
finance) lease based on whether the lessor (in the first case) or
lessee (in the second) bears the benefits and burdens of ownership,
though the specific tests applied can differ depending on the
context. So, a lease with a bargain purchase option, for example,
will generally be treated as a capital lease. In an operating
lease, the lessor will be treated as the owner of the asset for tax
and accounting purposes, entitling them to depreciation and placing
the asset on its balance sheet (subject to the use rights of the
lessee). A capital lease, on the other hand, results in the lessee
being treated as the owner for tax and accounting purposes, with
the lessor essentially viewed as providing a secured loan while
retaining title as security. Generally, a capital lease is also
treated as a financing under U.S. bankruptcy principles, meaning
that the lessee is considered the equity owner of the asset
notwithstanding that it does not have legal ownership. The lessee
under a capital lease will also be treated as the owner for Federal
Aviation Administration (the “FAA“)
registration purposes. There are, in addition, various synthetic
and hybrid lease approaches that can be deployed to achieve
different characterisations in different contexts.
1.4 Are there any proposals for reform in the area of
Tax reform, both internationally and domestically, is an issue
that could have a very significant impact on the structure and
location of aviation leasing and finance companies. Corporate tax
rates in individual jurisdictions, tax treaties between various
countries, and initiatives to restrict the movement of profits
across borders can all significantly impact the industry.
Concerns over climate change and aviation emissions remain at
the forefront (see answer to question 7.2 for details).
The COVID-19 pandemic and Russian invasion of Ukraine have
tested the wherewithal of the international treaty governing
possessory rights in aircraft. Compliance with the Cape Town
Convention remains generally high, but there have been many notable
exceptions of governments or local courts taking actions that are
not consistent with the treaty. We expect increased emphasis on
compliance at the governmental and commercial levels in the years
LIBOR transition issues are affecting the aviation community in
the same way as all other LIBOR-based loan arrangements.
1.5 Is it possible according to the laws in your
jurisdiction to enter into non-binding or partially binding
pre-contractual agreements (e.g. ‘letters of intent’) that
will NOT take effect as fully enforceable agreements?
Under New York law, parties may generally enter into letters of
intent (“LOIs“) that are non-binding, if
they expressly provide for this in the LOI. Absent such a
statement, there is a risk that an LOI will be treated as binding.
Typically, even with non-binding LOIs, provisions relating to
security deposits, exclusivity, expenses and governing law are
often expressed to be binding.
1.6 Is there a doctrine of ‘good faith’ in your
jurisdiction that applies to all pre-contractual agreement,
financing and leasing transaction documents, and the conduct of
parties connected to them?
Under New York law, even where a preliminary agreement is
intended to be non-binding, parties may nevertheless be deemed to
have a duty to negotiate in good faith. To determine whether such a
duty exists, a court will generally examine: (1) whether the intent
to be bound is revealed by the language of the agreement; (2) the
context of the negotiations; (3) partial performance; (4) the
existence of open terms; and (5) the necessity of putting the
agreement in final form. If a duty to negotiate in good faith is
found to exist, a breach could arise from a simple refusal to deal,
or from the imposition of new or more onerous conditions beyond the
open terms of the LOI.
2. Taxation and Related Matters
2.1 Which government authority in your jurisdiction has
primary responsibility for the accounting for and regulation of
revenue control and taxes?
The United States Internal Revenue Service (the
“IRS“) has the primary national
responsibility for taxes in the United States. In addition, the
states (and some localities) have their own independent tax
authorities that impose a variety of taxes that are potentially
relevant for transactions involving aircraft and engines,
particularly sales tax.
2.2 What are typically the taxes in your jurisdiction
that may arise in relation to a sale, a lease or a financing of an
aircraft or an engine?
U.S. corporations are subject to U.S. federal income tax on
their worldwide income, whether the income arises in relation to a
sale, lease or financing of an aircraft or an engine. If the income
is foreign source, a foreign tax credit may be available. Absent
tax treaty protection, a non-U.S. corporation generally is subject
to 30% withholding on U.S. source rent, meaning rent that is
attributable to flights that begin and end in the United States and
rent with respect to engines located in the United States. The
United States also imposes a 4% gross transportation tax applicable
to rent from flights that begin or end in the United States,
subject to potential relief under a treaty or reciprocal exemption.
U.S. source interest on a financing can be exempt under an
applicable income tax treaty or the portfolio interest exemption. A
non-U.S. corporation that is doing business in the United States is
taxed on a net income basis on its effectively connected income and
a branch profits tax, in each case subject to potential relief of
an applicable income tax treaty.
2.3 Is the provision of a current tax-residency
certificate by a payee sufficient for a lessee or a borrower
potentially subject to withholding taxes in your jurisdiction on
rental or interest payments to avail itself of treaty access and
the mitigation of tax liability?
A non-U.S. payee that is entitled to the benefits of a tax
treaty must provide the appropriate IRS Form W-8 to the applicable
withholding agent to avail itself of an applicable exemption from
U.S. withholding tax under a treaty or the portfolio interest
exemption in the case of interest, as well as to evidence an
exemption from FATCA withholding. Current tax-residency
certificates are not utilised in the United States.
2.4 Has the advent of BEPS (the Base Erosion and Profit
Shifting initiative of the OECD) had any effect as regards
structures in aviation finance and leasing or their
BEPS has had an effect, particularly with respect to
arrangements involving hybrid instruments and hybrid entities. In
addition, at the end of 2022, the European Union agreed on a
directive generally requiring their members to adopt Pillar 2
legislation by the end of 2023, imposing a 15% minimum tax.
Although the United States has not adopted BEPS or Pillar 2, it has
introduced its own anti-hybrid rules, most recently finalising
revised anti-conduit regulations, and a new corporate alternative
minimum tax effective for tax years beginning in 2023.
2.5 What are the typical thresholds in your jurisdiction
for which a permanent establishment may be triggered under the
terms of any relevant double-tax treaty or similar?
The typical permanent establishment thresholds include the
taxpayer having a U.S. office or other fixed place of business. The
activities of a dependent agent that has and habitually exercises
the authority to conclude contracts on behalf of the taxpayer can
also trigger a permanent establishment. In contrast, the activities
of an agent of independent status acting in the ordinary course of
its business does not trigger a permanent establishment.
2.6 Is the authority at question 2.1 likely to establish
a ‘look-through’ right or similar as regards a lender or a
lessor that is a special-purpose vehicle involved for the purpose
of tax treaty access?
Modern U.S. tax treaties have stringent limitation on benefits
provisions that must be satisfied in order for any company or
special purpose vehicle to access the tax treaty. The IRS also can
apply conduit regulations to deny treaty benefits with respect to
certain U.S. source income even if the company or special purpose
vehicle is otherwise eligible for the treaty.
2.7 Will the import of an aircraft into your
jurisdiction and/or the sale or leasing of the aircraft give rise
to any VAT, sales or use taxes or any customs import or excise
Although the United States does not currently have any national
value-added tax (VAT) or national sales or use taxes, most states
do have sales and use taxes, which often are relevant to
transactions involving the sale or lease of aircraft. Therefore, it
is important to determine whether state tax may potentially apply
to the transaction and the procedures for claiming any applicable
exception. For example, in an aircraft sale, it generally is
possible to transfer the aircraft in a state that provides an
exemption from sales or use tax. [With respect to customs import or
excise duties, the United States is a member of the Civil Aircraft
Agreement, under which aircraft and parts certified for use in
civil aircraft are duty free. However, as part of the U.S.
suspension of trade benefits from the EU arising out of the WTO
aircraft subsidy dispute, in 2019 the United States imposed a duty
of 15% on aircraft and aircraft parts from France and Germany. In
2020, the EU responded in kind. In March 2021, the United States
and the EU agreed to suspend for four months the additional duties
both had imposed as they sought a negotiated settlement.]
2.8 Are there any documentary taxes (for example, stamp
duty payable on the execution of documents)?
There currently are no U.S. federal documentary taxes such as
stamp duty payable on the execution of documents. Although the laws
of any relevant states would need to be examined in order to
confirm, in general, there should not be state documentary taxes on
the execution of documents in the aircraft finance context.
3. Registration and Deregistration
3.1 Which government authority in your jurisdiction has
primary responsibility for the regulation of aviation and the
registration of aircraft? Is it an owner registry or an operator
registry? If the aircraft register is an operator register, is it
possible to record the details of an owner or lessor and any
financier with an aircraft mortgage?
The U.S. Department of Transportation (the
“DOT“) is a federal executive branch
department and has responsibility for the regulation of
transportation within the United States. The FAA, which was
established by the Federal Aviation Act as an operating
administration of the DOT, has primary responsibility for the
regulation of all aspects of civil aviation in the United States
and its surrounding international waters.
The FAA maintains a registry for civil aircraft in Oklahoma
City, Oklahoma (the “FAA Registry“). The
FAA Registry is an owner registry whereby an aircraft may be
registered only in the name of the aircraft owner.
Conveyances affecting interests in registered aircraft, such as
leases and mortgages or grants of security interests, must be
recorded with the FAA in order to be valid against third parties
(see answers to questions 3.4 and 4.1 for further details).
3.2 What is the effect of registration of the aircraft?
Does registration on your national aircraft register confer proof
of ownership of the aircraft and/or engine?
The effect of registering an aircraft with the FAA Registry is
that the aircraft is made subject to the safety and airworthiness
regulations of the FAA.
Under Section 44103(c) of title 49 of the U.S. Code (the
“Transportation Code“), such
registration determines the owner for FAA purposes and establishes
the nationality of the aircraft for international purposes.
However, a Certificate of Registration is “not conclusive
evidence in a proceeding under the laws of the United States and
not evidence of ownership of an aircraft in a proceeding in which
ownership is or may be in issue”.
3.3 Can foreign-owned aircraft be registered on your
national aircraft register and are there limits or restrictions on
the age of aircraft that may be registered or
An aircraft must meet the requirements of Section 44102 of the
Transportation Code in order to be registered with the FAA
Registry. An aircraft may be registered only when the aircraft is
not registered under the laws of a foreign country and is owned
- a citizen of the United States;
- an individual citizen of a foreign country lawfully admitted
for permanent residence in the United States; or
- a corporation not a citizen of the United States when the
corporation is organised and doing business under the laws of the
United States or any state, and the aircraft is based and primarily
used in the United States.
With respect to citizenship, an aircraft owner that is a
corporation or association (which includes limited liability
companies) shall be determined to be a U.S. citizen if it is
created or organised under the laws of the United States or a
state, the District of Columbia or a territory or possession of the
United States, of which the president and at least two-thirds of
the board of directors and other managing officers are citizens of
the United States, which is under the actual control of citizens of
the United States, and which at least 75% of the voting interest is
owned or controlled by U.S. citizens.
With respect to usage, an aircraft is “based and primarily
used” under FAA guidelines if 60% or more of the flight hours
during each six-month period were accumulated during flights
between two points in the United States, as certified and reported
to the FAA.
To satisfy the voting component of the FAA requirements, the
shareholders of a corporation may establish a voting trust and
transfer at least 75% of the aggregate right to vote shares of the
corporation to an independent trustee who is a U.S. citizen (either
an individual citizen or an entity otherwise meeting citizenship
requirements) and who is not related to any other party.
The FAA also permits owner trusts with non-U.S. citizen
beneficiaries, provided that the ownership entity qualifies as a
U.S. citizen or U.S. resident alien and either (a) the
beneficiaries who qualify as U.S. citizens hold at least 75% of the
power and authority to influence, direct or remove the trustee, or
(b) the trustee has the express power and authority in respect of
the ownership and operation of the aircraft to take actions that in
its discretion are necessary to protect the interests of the United
States, without interference from the beneficiaries
(“Non-Citizen Trust“). In connection
with the registration of an aircraft in the name of an owner trust,
the trust agreement and each document affecting a relationship
under the trust agreement must be submitted along with the
application for registration for review and approval by the
The FAA does not place a limit or restriction on the age of the
aircraft that may be registered or operated.
3.4 Can aircraft leases be registered? If so, in what
circumstances? Must the lease be in a particular form if it is to
be valid and enforceable (for example, must it be in a particular
language or be notarised, legalised or apostilled)?
Leases and other types of conveyances, such as mortgages or
grants of security interests for aircraft, engines, propellers or
spare parts, can be recorded with the FAA and must be recorded with
the FAA in order to be valid against third parties.
The lease or other conveyance instrument itself need not be in a
particular form or be notarised, legalised or apostilled unless
requested by applicable state law. Most states, including New York,
do not require authentication. However, the FAA does have certain
procedural requirements for filing such an instrument, including
that it be submitted as an original or a duplicate original, or, if
neither is available, a true copy of an original. As an
alternative, the FAA has an established process for accepting
electronically signed instruments. In each case, the equipment must
be specifically identified and instruments relating to an aircraft
must include the make and model, manufacturer’s serial number
and FAA registration number.
3.5 How is deregistration affected and what steps can a
lessor take to deregister the aircraft on termination of the
The owner named in the Certificate of Registration must initiate
the deregistration of the aircraft subject to the rights of the
party authorised under the Irrevocable Deregistration and Export
Request Authorisation (an “IDERA“) (if
any) or a creditor of the owner that has been granted the authority
to deregister the aircraft. If an IDERA has been filed with the
FAA, the FAA Registry will honour a cancellation request only from
the person authorised under the IDERA or their designee.
In addition, following the expiry or termination of the lease,
an event of default and successful repossession or foreclosure, the
aircraft owner may unilaterally file a Certificate of Repossession
with the FAA, certifying that it has validly repossessed the
aircraft from the operator in accordance with applicable state law,
which will be honoured by the FAA.
The following must be submitted to the FAA Registry in order to
deregister the aircraft:
- a signed request for cancellation of the registration with a
complete description of the aircraft, including manufacturer name,
model designation, serial number and registration number, along
with the reason for cancellation (i.e., export to another
country) and the name of the country to which the aircraft is being
- documentary evidence satisfactory to the FAA that all senior
recorded interests have been discharged or that the holders of such
interests have consented to the cancellation; and
- written certification that all registered interests ranking in
priority to that of the requestor have been discharged or that the
holders of such interests have consented to the cancellation for
If the aircraft is subject to the Cape Town Convention and an
IDERA is on file, the IDERA-authorised party must also include with
its request a copy of the International Registry Search
Following the provision of the above to the FAA Registry and the
cancellation of the registration, the FAA Registry shall notify
that cancellation to the aviation authority of the country to which
the aircraft is to be exported.
If an IDERA has been issued, the operator of a leased aircraft
should not be able to block the deregistration by the holder of the
IDERA. In addition, following an event of default and successful
repossession or foreclosure, an aircraft owner may file a
Certificate of Repossession unilaterally with the FAA, certifying
that it has validly repossessed the aircraft in accordance with
applicable state law, which will be honoured by the FAA.
An IDERA is often used by secured parties in the United States
to provide an extra layer of protection to deregister an aircraft
from the FAA. As a practical point, note that major air carriers in
the United States do not typically agree to provide IDERAs or other
FAA powers of attorney.
4.1 Is it possible to create a mortgage over an aircraft
or engine in your jurisdiction? If so, what are the types of
aircraft mortgage and engine mortgage available and what
formalities are required in order to perfect it?
Yes. A mortgage over an aircraft or aircraft engine may be
created under applicable state laws, with New York law-governed
mortgages being the most common in aviation finance transactions.
The creation and perfection of security interests in aircraft and
aircraft engines are generally governed by Article 9 of the
relevant state’s Uniform Commercial Code (the
“UCC“). There is only one
“type” of aircraft or aircraft engine mortgage, and that
is a signed, written contract that complies with the applicable UCC
requirements. In particular, in order for the security interest to
be enforceable against the debtor by the secured party, it must
have “attached”. Attachment requires that (i) value be
given by the creditor for the security interest, (ii) the debtor
has rights in the collateral, and (iii) the debtor
“authenticates” (i.e., signs) a written security
agreement that provides a description of the collateral.
The steps required to be taken in order to perfect a security
interest in aircraft and aircraft engines vary depending on whether
the aircraft is registered in the United States. Where the aircraft
is not registered in the United States, the security interests
created under a New York law aircraft or aircraft engine mortgage
are generally perfected in the United States by filing a UCC-1
financing statement, including a description of the collateral,
with the applicable filing office. Where the aircraft is registered
in the United States, a UCC-1 financing statement is also commonly
filed with the appropriate state filing office. However, the
applicable UCC provisions are technically pre-empted by federal
aviation laws and regulations, which provide that security
interests in U.S.-registered aircraft are perfected by recordation
of a security agreement with the FAA. The United States is a
contracting state under the Cape Town Convention and applicable
federal law therefore also requires that, where a debtor is
situated in the United States for purposes of the Cape Town
Convention, or an airframe is registered in the United States,
“international interests” in the applicable
“aircraft objects” (in each case under and as defined in
the Cape Town Convention) be registered with the International
4.2 Can spare parts, including future parts, be subject
to the aircraft mortgage or engine mortgage (as the case may be)?
If not, are there any other forms of security that can be taken
over spare parts?
Yes, spare parts can be included in the collateral subject to an
aircraft or engine mortgage. Security interests in a pool of spare
parts may also be granted. Where the grantor is a U.S. certificated
air carrier, this security generally benefits from Section 1110.
This security should also be perfected by filing with the FAA, but
the security only applies while the parts are located in a certain
designated location. Therefore, security in spare parts is also
generally perfected by filing a UCC-1 financing statement in the
applicable filing office, as discussed above. Security interests in
spare parts cannot be registered under the Cape Town
4.3 Is there a register of mortgages or rights over
aircraft and/or engine?
Yes, as described in question 4.1 above, the FAA maintains a
register of mortgages over aircraft and engines.
4.4 What other forms of security can be taken over an
aircraft and/or engine and can these other forms be
Security over the aircraft can be indirectly taken by taking
security over the shares, membership interest or beneficial
interest in the entity holding title to the aircraft or engine.
Title to U.S. aircraft is most commonly held in an owner trust or a
limited liability company. A security interest in the beneficial
interest of an owner trust can be taken by entering into a
beneficial interest pledge agreement between the holder of the
beneficial interest and the secured party. A security interest in
the membership interest of a limited liability company can be taken
by entering into a membership interest pledge agreement between the
holder of the membership interest and the secured party. Such
security interests can be registered by filing a UCC-1 financing
statement in the appropriate filing office.
Additionally, non-consensual security interests can be created
over aircraft and engines under applicable state law, in particular
mechanic’s liens, hanger keeper’s liens and fuel
provider’s liens. In some cases, such liens may be recorded
with the FAA and at the International Registry, subject to
applicable state laws, including the UCC. In other cases, such
liens may only be perfected by the lienholder maintaining
possession of the aircraft or engine. Additionally, judgment liens
and federal tax liens may also be imposed. Such liens may not be
registered with the FAA or under the Cape Town Convention, but may
be filed with the relevant state or county.
4.5 What claims and rights would take priority in your
jurisdiction over a registered mortgage?
Section 9-333 of the UCC provides that, as a general matter,
possessory liens over goods that secure payment or performance of
an obligation for services or materials furnished with respect to
such goods in the ordinary course of business, whose effectiveness
depends on the lienholder’s possession of the goods, have
priority over other forms of perfected security interests, which
would include registered aircraft mortgages. Possessory liens are
governed by the laws of the state in which the relevant mechanic,
repairer, airport, etc. is located and possesses the aircraft or
engine, and the applicable laws vary from state to state.
4.6 What other forms of security can be granted over an
aircraft and/or engine lease?
Security over an aircraft or engine lease can be granted under a
New York law security agreement. No separate lease assignment is
required, provided that, where a lease is governed by the laws of a
jurisdiction outside of the United States, legal advice should be
sought in such jurisdiction as to whether any additional security
assignment documentation is required under the laws of that
A security interest in a lease agreement is perfected in the
same manner as an aircraft mortgage. As described in more detail in
question 4.1 above, a UCC-1 financing statement should be filed
with the appropriate filing office. Where the relevant aircraft is
registered in the United States, the lease and the related security
agreement should be filed with the FAA, and an international
interest in respect of the lease, together with a transfer of the
right to discharge the lease in favour of the secured party, and an
assignment of international interest in respect of the lease in
favour of the secured party, should be filed with the International
Registry pursuant to the Cape Town Convention.
5. Enforcement and Repossession
5.1 What are the circumstances in which a mortgagee or
owner can take possession of the aircraft and/or sell the aircraft?
What requirements must the mortgagee or owner comply
An owner that has leased the aircraft (i.e., a lessor)
may take possession of the aircraft after the lessee’s default
or upon termination of the lease following expiration of its term.
See UCC § 2A-525(2). The lessor may take possession
of the aircraft without a court order (exercise
“self-help” remedies) if it can do so without breaching
the peace and subject to any limitations in the lease. See
UCC § 2A-525(3). If the lessee physically opposes the
lessor’s repossession efforts, then the lessor may have to seek
a court order to take possession as attempts to wrestle control of
the aircraft likely would constitute a breach of the peace.
Following repossession, the lessor is not subject to restrictions
on its ability to sell the aircraft.
A mortgagee may take possession of and/or sell the aircraft
after the mortgagor’s default subject to satisfying the
requirements of the UCC and the underlying transaction documents.
See UCC §§ 9-609, 9-610. If the aircraft is in
the possession of a party other than the mortgagor, such as a
lessee or operator, and the lease or operating agreement is subject
and subordinate to the mortgage, then the mortgagee may exercise
the same “self-help” remedies available to lessors
(i.e., repossess the aircraft without a court order if it
can do so without breaching the peace). See UCC §
9-609. As in the case of a lease, if the lessee or operator
physically resists repossession, then the mortgagee may have to
seek a court order as battling for control of the aircraft likely
would constitute a breach of the peace. If the mortgagee, however,
has provided the lessee or operator with a covenant of quiet
enjoyment, then the mortgagee may not take possession until the
lessee or operator has defaulted under the lease or operating
agreement. As for selling the aircraft, the UCC allows the
mortgagee to sell the aircraft following a default subject to
satisfying certain requirements under the UCC (in addition to any
requirements under the mortgage). First, the mortgagee
must provide at least 10 days’ notice to the mortgagor and
interested parties (such as junior lienholders). See UCC
§ 9-612. Second, every aspect of the sale must be
“commercially reasonable” (including the amount of notice
provided to prospective buyers) – this requirement must be
satisfied independent of the 10-day notice to the mortgagor and
junior lienholders. See UCC § 9-610(b). A sale is
commercially reasonable if it is made: “(1) in the usual
manner on any recognised market; (2) at the price current in any
recognised market at the time of the disposition; or (3) otherwise
in conformity with reasonable commercial practices among dealers in
the type of property that was the subject of the disposition.”
See UCC § 9-627(b). Generally, concerns regarding the
commercial reasonableness of a sale arise when the mortgagee
markets and sells the collateral in a hasty manner.
If the mortgagee is unable to sell the aircraft or market
conditions are not favourable, then following repossession the
mortgagee may lease the aircraft as a mortgagee in possession and
later sell the aircraft.
5.2 What is the procedure for repossession of the
A lessor or mortgagee may exercise “self-help”
remedies to take possession of an aircraft without a court order if
it can do so without breaching the peace. If a party physically
resists the lessor’s or mortgagee’s efforts to repossess
the aircraft, then the lessor or mortgagee may have to seek a court
order from a state or federal court in the jurisdiction where the
aircraft is located, as attempts to seize control of the aircraft
likely would constitute a breach of the peace. The lessor’s or
mortgagee’s ability to exercise self-help remedies may also
depend on whether the airport where the aircraft is located is
willing to cooperate with the lessor’s or mortgagee’s
5.3 Will local courts recognise a choice of foreign law
in an aircraft mortgage? Are there any mandatory local rules that
apply, despite a choice of foreign law?
U.S. courts generally uphold contractual choice of law clauses,
including those in aircraft mortgage agreements, subject to certain
exceptions. One such exception is when the choice of law clause is
contrary to public policy. A clause may be contrary to public
policy if: the chosen law lacks a reasonable relationship to the
transaction; the contract is one of adhesion; or enforcement of the
clause would otherwise offend principles of fairness. Courts may
also consider whether the clause is pre-empted by a federal statute
(e.g., title 49 of the Transportation Code) or a bilateral
or multilateral convention or treaty (e.g., the Cape Town
Convention or Geneva Convention). As with other types of contracts,
a choice of law clause in an aircraft mortgage will typically only
govern substantive legal issues that arise between the parties. The
law of the particular forum in which a litigation is commenced will
govern procedural issues (e.g., scope of discovery,
ability to amend pleadings, availability of provisional
5.4 Will local courts recognise and enforce a foreign
court judgment in favour of a mortgagee or lessor? Are any interim
relief measures available?
Courts in the United States will generally recognise and enforce
a foreign court judgment without re-examining the merits of the
dispute, subject to the court being satisfied that the foreign
proceeding was fair. A foreign proceeding might be considered
unfair, for instance, if the defendant lacked sufficient notice or
if the tribunal ignored, or failed to address, key factual
evidence. In the United States, recognition and enforcement of
foreign judgments is governed by state law, which varies across
states, although most states have enacted a version of the Uniform
Foreign Money Judgments Recognition Act, which provides for
reciprocal recognition of judgments between signatories. As with
the enforceability of choice of law clauses, parties should also
consider what effect, if any, applicable treaties/conventions
Under New York law, foreign judgments are generally enforceable
when they are final, conclusive and enforceable where rendered. A
foreign judgment is considered conclusive under New York law unless
it was “rendered under a system which does not provide
impartial tribunals or procedures compatible with the requirements
of due process of law”, or if the foreign court did not have
personal jurisdiction over the defendant or subject matter
jurisdiction. See New York Civil Practice Law and Rules
(“CPLR”) § 5304(a). Other grounds for
non-recognition under New York law include: if the defendant did
not have adequate notice of the proceeding so as to prepare its
case; if the judgment was obtained by fraud; or if the judgment
conflicts with another final judgment. See CPLR §
5304(b). CPLR § 5304 was amended in 2021, inter alia,
to provide that a party resisting recognition of a foreign judgment
has the burden of establishing that a ground for non-recognition
exists. Id. § 5304(c); accord Malherbe v. Oscar
Gruss & Son, Inc., No. 1:21-CV-10903 (MKV), 2023 WL
199425, at *2 (S.D.N.Y. Jan. 17, 2023).
Once a foreign judgment has been recognised in New York, it is
enforceable in the same manner as a local judgment, and the parties
are entitled to avail themselves of the same tools as parties to a
locally issued judgment (e.g., judgment enforcement
measures, post-judgment discovery). As for the requirement that the
foreign judgment be “final”, New York courts typically
only recognise and enforce judgments that are dispositive on the
merits; recognition of foreign judgments granting provisional
relief is typically limited to circumstances involving compelling
public policy considerations. Under certain circumstances, however,
many U.S. jurisdictions allow the non-prevailing party in the
foreign proceeding to obtain injunctive relief to stay enforcement,
e.g., when an appeal is pending in the foreign
jurisdiction. See CPLR § 5404; Evoy v.
Amandio, 34 Misc. 3d 410, 413, 932 N.Y.S.2d 874, 877 (Sup. Ct.
N.Y. Cty. 2011).
5.5 Are powers of attorney from a local airline in
favour of a lessor or mortgagee likely to be effective to allow the
lessor or mortgagee to deregister the aircraft? Can such powers be
irrevocable, be governed by a foreign law and/or do they need to be
in any particular form for local recognition?
Yes, an IDERA executed, delivered and recorded with the FAA in
the form attached to the Protocol to the Cape Town Convention and
otherwise in compliance with FAA requirements is likely to be
effective to allow the lessor or mortgagee identified therein to
deregister the aircraft. Note, however, that major air carriers in
the United States do not typically agree to provide IDERAs. An
IDERA is an irrevocable instrument and does not typically include a
governing law clause. The IDERA should be in the English language
(or translated into English) but need not be certified, notarised
or legalised to be enforceable against a domestic party.
5.6 If recovery of the aircraft is contested by the
lessee and a court judgment is obtained in favour of the lessor,
how long is it likely to take to gain possession of the
The amount of time will depend on the terms of the court
judgment and the jurisdiction in which enforcement is sought.
5.7 To what extent is there a risk from the perspective
of an owner or financier that a lessee of aircraft or other
aviation assets in your jurisdiction may acquire an economic
interest in the aircraft merely by payment of rent and thereby
potentially frustrate any rights to possession or legal ownership
The answer depends on whether the lease is a capital (or
finance) lease or an operating (or true) lease. As discussed in
question 1.3 above, the lessee under a capital lease is generally
considered to be the equity owner of the asset under tax,
accounting, and U.S. bankruptcy principles. The lessee under a
capital lease will accordingly be entitled to all of the rights of
a mortgagor under a secured financing set forth in Article 9 of the
UCC. See questions 5.1 and 5.2 above. This includes the equity of
redemption, which provides that every mortgagor has the right, at
any time after an event of default but prior to the completion of a
foreclosure, to redeem the collateral by repaying the secured
obligations in full. By contrast, a lessee under an operating lease
has no legal ownership rights in the underlying asset. An owner
that has leased the aircraft (i.e., a lessor) may take
possession of the aircraft after the lessee’s default or upon
termination of the lease following expiration of its term.
See UCC § 2A-525(2). If a secured party has provided
the lessee with a covenant of quiet enjoyment, then the secured
party may not take possession until the lessee has defaulted under
the lease. If, on the other hand, a lessee has agreed that the
lease is subject and subordinate to the rights and interests of the
secured party under the financing, then the leasing may be
terminated and the aircraft repossessed upon the occurrence of an
event of default under the financing.
5.8 Are there any restrictions on the ability of the
lessor to export the aircraft from your jurisdiction on termination
of the leasing?
An export certificate of airworthiness is generally required
pursuant to the Federal Aviation Regulations. Otherwise, the export
of an aircraft that does not have any restricted or military parts
or avionics does not require a special licence, although certain
transfers are prohibited, including transfers to certain sanctioned
countries, persons or entities.
5.9 Are exchange controls prevailing in your
jurisdiction as regards payments in foreign currency? Will any
consents be required for the remittance of the sale proceeds
There are no exchange controls prevailing in the United States
or required governmental consents as regards payments in foreign
5.10 If the lease is governed by English law and a
judgment is obtained by the lessor in the English courts, can that
judgment be automatically enforced in your jurisdiction or will the
case have to be re-examined on its merits?
Enforcement of English judgments is not automatic in New York.
Rather, a judgment creditor must first get a New York court to
recognise the English judgment. In most U.S. jurisdictions,
however, recognition proceedings for English court judgments
– as with most foreign judgments – do not entail a full
re-examination of the case on the merits; rather, the scope is
limited to assessing if the judgment is final, conclusive and
enforceable where rendered. See supra question
5.4. New York courts have found that “the overall fairness of
England’s legal system, upon which [the New York] system is
based, is beyond dispute”, so English judgments are typically
re-examined only for jurisdictional purposes. See CIBC Mellon
Tr. Co. v. Mora Hotel Corp. N.V., 100 N.Y.2d 215 (2003)
(citing CPLR § 5304).
5.11 What is the applicable procedure for repossession
of an aircraft under other forms of security
The procedures discussed in response to question 5.1 for
mortgagees also apply to repossessions of aircraft under other
forms of security interests.
6.1 Has your jurisdiction ratified any of the following:
(a) The Chicago Convention of 1944 on International Civil Aviation
(the Chicago Convention); (b) The 1948 Convention on the
International Recognition of Rights in Aircraft (the Geneva
Convention); (c) The 1933 Convention for the Unification of Certain
Rules Relating to the Precautionary Arrest of Aircraft (the 1933
Rome Convention); and (d) The Convention on International Interests
in Mobile Equipment on Matters Specific to Aircraft Equipment (the
Cape Town Convention) and the Protocol to the Convention on
International Interests in Mobile Equipment on Matters Specific to
The United States has ratified the Chicago Convention, the
Geneva Convention and the Cape Town Convention. The United States
has not ratified the 1933 Rome Convention.
6.2 Has ratification of the Cape Town Convention caused
any conflicts or issues with local laws?
No. We note that the United States has not made a declaration
with respect to “Alternative A” on the basis that
existing law (i.e., Section 1110) was equivalent and
sufficiently robust. While several non-U.S. airlines have filed for
Chapter 11 in the United States in recent years, and creditors of
such non-U.S. airlines did not have the benefit of Section 1110,
U.S. bankruptcy courts have not had to apply Alternative A.
6.3 What is the legal position regarding non-consensual
rights and interests under Article 39 of the Cape Town
The United States had made a declaration, pursuant to Article 39
of the Cape Town Convention, that (a) all categories of
non-consensual rights or interests that, under U.S. law, have and
will in the future have priority over an interest in an object
equivalent to that of the holder of a registered international
interest shall to that extent have priority over a registered
international interest, whether in or outside insolvency
proceedings, and (b) nothing in the Cape Town Convention shall
affect the right of the United States, any entity thereof, any
intergovernmental organisation in which the United States is a
member state, or other provider of public services in the United
States, to arrest or detain an aircraft object under U.S. law for
payment of amounts owed to any such entity, organisation, or
provider directly relating to the services provided by it in
respect of that object or another object.
6.4 Has your jurisdiction adopted the remedies on
insolvency provided under Article XI of the Protocol to the Cape
No, the United States has not made a declaration to adopt these
insolvency remedies under the Protocol to the Cape Town Convention.
However, Article XI of the Protocol to the Cape Town Convention, in
particular Alternative A described therein, is considered to have
been modelled on Section 1110 of the U.S. Bankruptcy Code. Section
1110 provides a 60-day period akin to the “waiting
period” contemplated by Alternative A of the Protocol to the
Cape Town Convention, and provides comparable protections to
secured parties. Please see question 8.4 below for a more detailed
discussion of Section 1110.
6.5 What is the procedure to file an irrevocable
deregistration and export request authorisation under the Cape Town
The standard procedure to file an IDERA is to provide an
original copy of the IDERA in the form annexed to the Protocol to
the Cape Town Convention to FAA counsel, who then submits it for
filing with the FAA.
7. Liability for Damage and Environmental
7.1 Can the owner be strictly liable – liable
without a requirement to prove fault or negligence – for any
damage or loss caused by the aircraft assuming the owner is an
innocent owner with no operational control of the
Under Section 44112(b) of the Transportation Code, an owner of
an aircraft registered with the FAA can be liable for personal
injury, death or property loss or damage on land or water caused by
a civil aircraft, engine or propeller only if such equipment was in
the actual control of the owner. The majority of courts that have
considered the federal exclusion from liability under Section 44112
have construed it broadly as a safe harbour to pre-empt state
statutes and common law claims that impose liabilities on owners
(such as lessors under an operating lease) not in actual possession
or control. However, there is a minority view that would narrowly
construe the exclusion from liability and allow certain claims
under state law, such as tort claims for negligent entrustment of
property. As such, it is still recommended that “an innocent
owner” obtain broad indemnification from the operator covering
all operational risks, and that broad liability insurance covering
any such risks be required.
7.2 Does the EU Emissions Trading System (EU ETS), or
ICAO’s Carbon Offsetting and Reduction Scheme for International
Aviation (CORSIA), apply to aircraft and aircraft operators in your
jurisdiction? Will charges levied according to the EU ETS, or its
equivalent, give rise to any in rem rights in relevant aircraft
that are part of the fleet of the operator concerned and, if so,
will such rights rank in priority ahead of any mortgage interests
properly registered in the relevant aircraft and/or
On October 6, 2016, 191 member states of the International Civil
Aviation Organization (“ICAO“),
including the United States, adopted CORSIA, which calls for a
global, market-based measure to help the aviation industry meet its
goal of carbon-neutral growth, and agreed to its implementation in
phases in the years leading up to 2027, when virtually all
international flights will be subject to mandatory offsetting
requirements. Effective January 11, 2021, the Environmental
Protection Agency finalised a greenhouse emission standards
regulation for aircraft used in commercial and private aviation to
match ICAO’s aircraft carbon dioxide standards.
The EU ETS does not apply in the United States and charges
levied according to it would not give rise to any rights in
rem over an aircraft when it is located in the United States.
There are no statutory rights of detention in the United States;
however, the effect of some statutory provisions under federal and
state law may give rise to the right to detain an aircraft, such as
when an operator fails to pay airport charges or through the
enforcement of unpaid tax liens. Non-consensual preferential liens,
such as mechanic’s or fuel supplier’s liens, are permitted
in the United States on a state law level and may arise over an
7.3 What liabilities (actual or potential) could an
owner, lessor or financier of an aircraft incur in your
jurisdiction because of a failure to comply with local
environmental law and/or regulations on the part of an operator of
aircraft leased or financed by it?
Aside from FAA engine noise standards, there are no
broad-reaching federal environmental regulations that would affect
an owner, lessor or financer of an aircraft.
As a general matter, environmental issues have attracted
particular legislative and regulatory focus with a wide range of
environmental regulations applicable to airport activity and
equipment, including as to emissions standards and operational
activities requiring permits. The United States is party to the
Montreal Protocol and the Chicago Convention, which established
ICAO, and parties to the Montreal Protocol and ICAO have issued
amendments and resolutions to support environmental protections.
The current administration has indicated that it would consider
extending federal tax incentives and federal local guarantee
authority for clean energy projects. The U.S. Supreme Court case of
City of Burbank v. Lockheed Air Terminal established
federal pre-emption over environmental issues such as noise.
8. Insolvency and Searches
8.1 Are there any public registers in your jurisdiction
where a search can be carried out to determine whether an order or
resolution for any bankruptcy, bankruptcy protection or similar
insolvency proceedings has been registered in relation to an
operator or lessee?
Yes, all federal courts, including bankruptcy courts, maintain
electronic databases where interested parties can run searches to
determine whether a bankruptcy case has been commenced or to learn
about the status of a pending bankruptcy case.
8.2 In the event that an operator or lessee were to
become insolvent either on a balance sheet basis (assets less than
liabilities) or is unable to pay debts as they fall due, would an
operator or lessee be required to file for insolvency
Under the U.S. Bankruptcy Code, an operator or lessee of an
aircraft is not required to file for bankruptcy because it becomes
insolvent or is unable to pay its debts. Creditors, however, can
commence an involuntary bankruptcy against an operator or lessee if
certain conditions are satisfied.
8.3 Do the available forms of insolvency protection in
your jurisdiction involve the appointment of either an officer of
the court or a specifically court-appointed official to take
control of the operator or lessee (an ‘Insolvency
Official’) while in insolvency protection?
In liquidation cases under Chapter 7 of the U.S. Bankruptcy
Code, a trustee is appointed to liquidate and administer the
In most cases under Chapter 11 of the U.S. Bankruptcy Code, the
debtor remains in control of its assets and operations. But in
cases involving fraud, dishonesty, incompetence, gross
mismanagement or similar bad facts, creditors and other parties in
interest may ask the bankruptcy court to appoint a trustee to
operate the debtor’s business and manage the
8.4 Does the commencement of insolvency protection
involving the appointment of an Insolvency Official in your
jurisdiction have the effect of prohibiting the owner from taking
the following actions to enforce the lease after commencement of
such protection: (a) applying any security deposit held by the
owner against any unpaid amounts due under the lease; (b) accepting
payment of rent or other lease payments from the lessee, a
guarantor or a shareholder; (c) giving notice of default under the
lease; (d) obtaining a judgment or arbitral award for unpaid lease
payments; (e) giving notice to terminate the leasing of the
aircraft and/or engine; or (f) exercising rights to repossess the
aircraft and/or engine?
Immediately upon the commencement of a bankruptcy case, an
automatic stay or moratorium goes into effect, prohibiting
creditors from taking actions against the debtor or its property
without court approval, including (i) the commencement or
continuation of an action, (ii) the enforcement of a judgment,
(iii) any act to create, perfect or enforce a lien, (iv) any act to
collect or recover a claim against the debtor (including sending
collection letters), (v) the setoff or netting of claims or the
application of security deposits, (vi) the termination of an
unexpired lease or contract, and (vii) other exercises of
In Chapter 11 cases where the debtor is a U.S. certificated air
carrier, if the debtor fails to comply with certain requirements
with respect to aircraft equipment (including aircraft engines and
spare parts), then the automatic stay does not apply to the
aircraft equipment lessor, lender or conditional vendor after the
60th day of the order for relief (in voluntary
bankruptcy cases, this is the date the bankruptcy case was
commenced). Specifically, under Section 1110 of the U.S. Bankruptcy
Code, an aircraft lessor, lender or conditional vendor may demand
repossession, commence foreclosure proceedings or exercise other
remedies in accordance with the underlying agreement if, within 60
days after the order for relief, the debtor fails to (i) cure all
defaults, and (ii) agree to perform its obligations under the
underlying agreement. The 60-day period may be extended with the
consent of the aircraft lessor, lender or conditional vendor and
the bankruptcy court’s approval.
8.5 Can the commencement of insolvency proceedings have
retrospective effect in relation to any such actions taken before
commencement? If so, for what period can there be a look
Yes, certain transactions may be avoided or unwound in
bankruptcy. For example, the debtor or trustee may avoid transfers
to or for the benefit of a creditor made during the 90 days before
the commencement of the bankruptcy case that enable the creditor to
receive more than it would have received had the transfer not been
made and a Chapter 7 liquidation had occurred. The look-back period
for these “preferential transfers” is extended to one
year for the debtor’s insiders. Various defences protect
transfers made during the 90-day look-back period, including the
ordinary course of business defence. This common defence protects
transfers made (i) according to ordinary business terms or in the
ordinary course of business or financial affairs of the debtor and
the creditor, and (ii) on account of debts incurred in the ordinary
course of business or financial affairs of the debtor and the
The debtor or trustee may also avoid fraudulent transfers, which
include (i) transfers made with actual intent to hinder, delay or
defraud creditors (referred to as intentionally fraudulent
transfers), and (ii) transfers made or obligations incurred for
less than reasonably equivalent value while the debtor was
insolvent or had unreasonably small capital, or which resulted in
the debtor becoming insolvent (referred to as constructively
fraudulent transfers). The look-back period under the U.S.
Bankruptcy Code’s fraudulent transfer statute is two years
before the commencement of the bankruptcy case, although various
arguments may be made for invoking a longer look-back period.
Fraudulent transfers may also be avoided under applicable state law
where the look-back period is often longer than two years. For
example, in New York, actions to avoid constructively fraudulent
transfers must be filed within four years of the transfer or
obligation, and actions to avoid intentionally fraudulent transfers
must be filed within four years of the transfer or obligation or
within one year of when the transfer or obligation was or
reasonably could have been discovered, whichever is later.
8.6 Is there, either under law or as a matter of
practice in your jurisdiction, a period of time within which the
Insolvency Official will either ‘adopt’ the lease and pay
rent and other lease payments as an expense of the insolvency or
‘reject’ the lease and permit the owner to enforce such
rights as it may have under the lease? (a) If the lease is
‘adopted’, will the Insolvency Official also pay any unpaid
lease payments due as at commencement of the insolvency protection?
(b) If not or if the lease is ‘rejected’, would the
owner’s claim for any outstanding sums rank equally with other
ordinary unsecured creditors of the lessee?
The debtor can assume or reject unexpired leases at any time
prior to the confirmation of a Chapter 11 plan, unless the
bankruptcy court, for cause shown after notice and a hearing, fixes
an earlier date. If the debtor assumes the lease, then it has to
cure defaults (including by paying any amounts that were
outstanding as of the commencement of the case) and provide
adequate assurance of future performance. If the debtor rejects the
lease, then the lessor’s claim for breach of contract damages
and for amounts due as of the commencement of the case will be
treated as a general unsecured claim and will rank equally with
other general unsecured claims. The lessor will also have an
administrative expense claim for amounts due for use of the
aircraft equipment during the bankruptcy case (i.e., after
the commencement of the case but before the effective date of
rejection), and that administrative expense claim will have
priority over general unsecured claims.
8.7 Are there certain types of preferred creditors whose
claims will rank above claims of the owner?
If the owner’s claim is unsecured, then yes, certain claims
may have priority over the owner’s claim. The U.S. Bankruptcy
Code has a priority scheme that governs distributions to creditors.
Secured claims enjoy the highest priority; a creditor with a lien
or a right of setoff has a secured claim to the extent of the value
of the collateral or the amount subject to setoff. The U.S.
Bankruptcy Code then recognises certain priority unsecured claims,
giving highest priority to “superpriority” claims for
post-petition financing and the failure of adequate protection (if
the adequate protection granted to guard a secured creditor’s
collateral proves to be inadequate). Next are priority unsecured
claims for various categories, including administrative expense
claims for costs associated with administering the bankruptcy case,
employee wages, and certain taxes. General unsecured claims come
next in the priority scheme, followed by any subordinated claims
and the interests of equity holders.
8.8 If the aircraft is in the possession of a person
other than the operator or lessee at the commencement of insolvency
protection of the operator or lessee, for example, an independent
maintenance facility, will such person be entitled, under the laws
of your jurisdiction, to assert a lien arising under law or
contract over the aircraft in respect of amounts then due and
unpaid to such person by the operator or lessee?
Generally, providers such as maintenance, repair and overhaul
facilities can assert liens over aircraft in their possession for
repairs or service of the aircraft, although the laws of the state
where the provider is located will likely govern the scope and
extent of the provider’s rights.
9. Detention and Confiscation
9.1 Other than insolvency laws (see section 8), are
there any laws that may have the effect of defeating the
owner’s right in the aircraft – for example, government
requisition? Do the laws of your jurisdiction provide for any
compensation in such circumstances?
The U.S. government has a right to requisition all or any part
of a U.S. airline transportation system for government use during
times of war and is required under the U.S. Constitution to provide
just compensation for any such taking of private property for a
9.2 Are there any rights in relation to third parties to
detain or sell the aircraft pursuant to illegal activities, tax or
any other laws if the operator or lessee fails to pay when due? If
so, can the aircraft be forfeited and sold without the owner being
Third-party rights that may have priority over an owner’s
rights include the following:
- the right of the U.S. Customs Service to seize an aircraft for
transporting drugs (except for airlines involved in common
- the U.S. government’s requisition rights (see answer to
question 9.1 above);
- federal tax liens, which are filed with the relevant state or
county and cannot be filed with the FAA Registry or registered with
the International Registry;
- airport and air navigation authorities’ charges; and
- certain possessory liens (i.e., mechanic or fuel
provider) to the extent provided under applicable state law.
The types of liens and rights listed above would not generally
permit the holder to forfeit and sell the aircraft without the
owner being made aware.
The authors would like to thank Brian Beckerman (Pillsbury
Associate, Litigation) and Harsha Reddy (Pillsbury Partner, Tax)
for their contributions to this chapter.
Previously published by ICLG
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.