- 20 Jan 2023
- David Wyndham
- Aircraft Ownership
In business aircraft sale transactions, issues of clouded title can arise in various ways. Chris Kjelgaard investigates why these issues occur, asking the experts how to overcome them successfully...Back to Articles
They don’t arise all that often, but issues of clouded aircraft title occasionally present challenges to the successful completion of sales and purchases of business aircraft.
If they’re not addressed and rectified quickly, a clouded title problem can add considerably to both the cost of completing a sale-and-purchase transaction, and to the time required for the deal to close — giving the seller and buyer of the aircraft headaches they could well do without.
Scott Burgess, Principal and Partner of Fort Lauderdale-headquartered Aviation Legal Group, says there are several main reasons why issues of clouded title arise. In cases where the aircraft purchase is being financed by one or more third-party lender(s), clouded title problems can assume particular significance.
Often this is the case because the lender wants a clear, unassailable first-priority security interest in the aircraft as collateral for its loan, says Burgess — but if the title to the aircraft is not free and clear of all encumbrances, the lender cannot obtain the clear first-priority interest it seeks, and the completion of the transaction could be prejudiced as a result.
Possibly the most common way that clouded title issues occur is because one or more liens or mortgages remain outstanding on the aircraft at the time it is offered for sale, says Jonathan Russell, a Partner of London-based superyacht and aviation law firm Jaffa & Co.
Liens may be outstanding on the aircraft for services which the selling owner/operator of the aircraft has left unpaid — perhaps completely accidentally — such as airport landing fees and en route navigation fees payable to air navigation service providers.
Another relatively common source of outstanding liens comes in the form of mechanics’ liens for minor MRO bills — for instance, if a fee for removing or transporting an engine has remained unpaid after the maintenance on the engine has been completed and it is back in service.
Even if the statute of limitations has run out on a lien so that the lienholder cannot foreclose on the aircraft, the lien still exists and the buyer of the aircraft, together with their representatives, must decide whether to ask the seller to settle the outstanding debt, or file suit to claim title, says Burgess.
Clouded title can also result from administrative oversight in the form of the aircraft’s title documentation displaying old leases or sub-leases which were never formally documented as being terminated, he adds.
Title problems can arise even from simple spelling mistakes or typographical errors which identify inaccurately in the contract documentation the aircraft’s registration number, manufacturer’s serial number, or the make and model of the aircraft, according to Russell. A mistake in any of those basic details may well pose a problem for the national registry in which the newly sold aircraft is to be registered — and if a mistake exists in more than one of the aircraft’s basic identification details, the registry may not be able to register the aircraft at all.
Lenders in a business aircraft purchase may also be unsettled by any potential break in the chain of clear title for an aircraft which, in the course of its life, has been registered in two or more different national registries.
For example, Burgess illustrates, if an aircraft has moved from the US registry to another national registry, is then re-registered with a third national registry, and is now being purchased with a view to placing it with the US registry again, a break in the chain of title can occur. This is particularly so if the different registries have different characteristics, and can make the task of obtaining the documentation needed to demonstrate unequivocally that the title to the aircraft is clear even more difficult.
For instance, while the US registry is centralized with all liens, mortgages and other title documents to each aircraft being held, and it registers aircraft by its ownership (as an “owner registry”), other countries’ registries may not be centralized and may not hold all of the aircraft’s title documents. Canada and Mexico are two important non-centralized registries, notes Burgess.
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