First-step analysis: aviation finance and leasing in United Kingdom (England & Wales)

Overview

Conventions

To which major air law treaties is your state a party?

The United Kingdom is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).

The United Kingdom is a signatory to, and has ratified, the Chicago Convention (1944), which came into effect in the United Kingdom on 4 April 1947; and the Convention on International Interests in Mobile Equipment 2001 and the Protocol thereto on Matters Specific to Aircraft Equipment 2001 (collectively the Cape Town Convention), which came into effect in the United Kingdom on 1 November 2015.

The United Kingdom is a signatory to, but has not ratified, the following, and therefore the terms of these Conventions do not apply to domestic UK law:

the Rome Convention (1933); and
the Geneva Convention (1948).

Domestic legislation

What is the principal domestic legislation applicable to aviation finance and leasing?

The main legislation in the United Kingdom on aviation is the Civil Aviation Act 1982 and the Air Navigation Order 2009. European legislation has direct application in the United Kingdom. The Cape Town Convention has been implemented into United Kingdom law through the International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015.

Governing law

Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?

Subject to the relevant provisions of the Rome I Regulation (EC) No. 593/2008 and Rome II Regulation (EC) No. 864/2007, a contract may be governed by the law chosen by the parties provided that the choice is made clear or expressly demonstrated by the terms of the contract or the circumstances of the case. It is, of course, standard for contracts in relation to aircraft to contain an express governing law clause.

Following the Blue Sky case (Blue Sky One Limited and others v Mahan Air and another (2010) EWHC 631 (Comm)), the position of the English courts in relation to the taking of a mortgage over an aircraft that is governed by English law (in the sense that the parties have chosen English law as the lex contractus) is that, in relation to its proprietorial aspects, the mortgage must be created in accordance with the domestic laws of the jurisdiction where the aircraft is located when the mortgage is executed (ie, the lex situs), in other words without regard to international conflicts of laws, rules and the doctrine of renvoi. Otherwise, the mortgage may be declared void (in relation to its proprietorial aspects) by the English courts. To take the example considered in the Blue Sky case, an English law mortgage was held to be void against third parties because it had not been created in accordance with the domestic laws of the Netherlands, where the aircraft was physically located when the mortgage was created.

The Blue Sky case has had a considerable practical impact on aviation finance practice in that, when taking an English law mortgage over an aircraft or in effecting the sale of an aircraft, practitioners are now careful to ensure that the aircraft is physically located in England (or in English airspace) when the mortgage or sale instrument is executed, or in such other jurisdiction as will recognise an English law mortgage or bill of sale as a matter of domestic law. Where an aircraft is located in international airspace, it has become common to ensure that the mortgage or sale is recognised by the domestic laws of the aircraft’s state of registry, though this follows from an interpretation of the relevant section of The Conflict of Laws by Dicey, Morris and Collins, and was not decided in the Blue Sky case as such.

Under the Cape Town Convention, an ‘international interest’ is constituted over an aircraft object once the Cape Town Convention’s validity conditions for creation of that interest are satisfied. The regulations that implement the Cape Town Convention in the United Kingdom provide that there is no requirement to apply the common law lex situs rule in the case of an international interest and, as such, there is therefore no need for an aircraft to be located in England or flown into English airspace to create a valid ‘international interest’. This distinguishes an interest created under the Cape Town Convention from other interests created outside it. If a security interest is not an ‘international interest’, its validity under English law would still be determined by the application of lex situs and the Blue Sky case.

The UK mortgage register remains open post-ratification of the Cape Town Convention and financiers or lessors have continued to register any mortgage over a UK-registered aircraft at that register, as well as register the ‘international interest’ constituted by the mortgage at the International Registry. Most financiers or lessors continue to require a valid English law mortgage to be created in addition to an ‘international interest’, for example, where there are concerns as to enforcement in a non-Cape Town contracting state that may not recognise an ‘international interest’ but may recognise a validly created English law mortgage.

Title transfer

Transfer of aircraft

How is title in an aircraft transferred?

Title to an aircraft may be transferred by a bill of sale or contract of sale. Title reservation agreements, in terms of which ownership of the aircraft does not pass until fulfilment of the condition or conditions stated in the agreement, are also possible. Title may be transferred by physical delivery, or any other mechanism that evidences the intent to transfer title, but a bill of sale is the most common form of title transfer mechanism, not least because a future purchaser will expect to be provided with evidence of chain of title in the form of back-to-birth bills of sale (ie, bills of sale showing a continuous chain of title back to the original equipment manufacturer). For certain types of equipment (eg, engine life limited parts), an inability to produce back-to-birth documentation will almost certainly render the equipment valueless.

Transfer document requirements

What are the formalities for creating an enforceable transfer document for an aircraft?

The bill of sale or contract of sale should, for certainty, be in writing (though it is technically possible to have an oral contract of sale for an aircraft) and must contain an obligation whereby one of the parties, having the power to dispose of the identifiable object specified therein, binds himself or herself to transfer to the other the object for a price (or other consideration), which the latter binds him or herself to pay to the former. The document must be duly executed (signed and delivered). There is no need for the document to be translated, stamped, notarised, apostilled or legalised for use in the United Kingdom, although there may, of course, be requirements if the document is to be used in another jurisdiction.

Registration of aircraft ownership and lease interests

Aircraft registry

Identify and describe the aircraft registry.

Registration may be made in the name of either the owner or the operator of an aircraft, provided that such person is a ‘qualified person’. In this respect, the operator may register as a ‘charterer by demise’ and its status as such will be recorded in the Certificate of Registration issued by the CAA (without the name of the actual owner appearing on the certificate). This is pursuant to Part 1 article 5(4) of the Air Navigation Order (2009), which provides that, if an aircraft is chartered by demise to a person qualified under paragraph (1), the CAA may register the aircraft in the United Kingdom. This is true whether an unqualified person is or is not entitled as owner of a legal or beneficial interest in the aircraft.

Under Part 1 article 4(3) of the Air Navigation Order (2009), an aircraft cannot be registered in the United Kingdom if it appears to the CAA that:

the aircraft is registered outside the United Kingdom, and that such registration does not cease by operation of law upon the aircraft being registered in the United Kingdom;
an unqualified person holds any legal or beneficial interest by way of ownership in the aircraft or any share therein (unless the aircraft is chartered to a qualified person who effects the registration as charterer by demise);
the aircraft could more suitably be registered in some other part of the Commonwealth; or
it would not be expedient in the public interest for the aircraft to be or continue to be registered in the United Kingdom.

For the purposes of the Air Navigation Order (2009), pursuant to Part 1 article 5(1), a ‘qualified person’ comprises:

the Crown in right of HM government of the United Kingdom;
Commonwealth citizens, including British subjects;
nationals of any EEA state;
British protected persons;
bodies incorporated in some part of the Commonwealth, having their principal place of business in the Commonwealth;
undertakings formed in accordance with the law of an EEA state, having their registered office, central administration or principal place of business within the EEA; and
firms carrying on business in Scotland.

The rules on qualified persons date back to when British colonies did not have their own registration system. Nowadays, if the CAA receives an application from a Commonwealth citizen it may refuse the registration on the basis that it would be more practical to register the aircraft in the relevant national aircraft register.

The United Kingdom is not party to any International Civil Aviation Organization 83-bis arrangements.

Registrability of ownership of aircraft and lease interests

Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?

An ownership interest can be registered as described below.

The body responsible for the registration of aircraft in the United Kingdom is the Civil Aviation Authority (CAA), which maintains the register, called the UK Register of Civil Aircraft. The rules on registration are contained in the Air Navigation Order 2009. The UK Register of Civil Aircraft, maintained by the CAA, is not a register of legal ownership, and therefore registration does not constitute proof of ownership of a particular aircraft.

For the purposes of the Air Navigation Order (2009), pursuant to Part 1 article 5(1), a ‘qualified person’ comprises:

the Crown in right of HM government of the United Kingdom;
Commonwealth citizens, including British subjects;
nationals of any EEA state;
British protected persons;
bodies incorporated in some part of the Commonwealth, having their principal place of business in the Commonwealth;
undertakings formed in accordance with the law of an EEA state, having their registered office, central administration or principal place of business within the EEA; and
firms carrying on business in Scotland.

However, an unqualified person holding a legal or beneficial interest by way of ownership of an aircraft may still obtain registration if he or she resides or has a place of business in the United Kingdom and the CAA is satisfied that the aircraft can be properly registered.It is not possible to register an ownership interest against engines only, for example, engines that have been removed from the airframe to which they were previously attached, or spare engines.

A lease cannot be registered on the Registry for UK Civil Aircraft, and a lease interest in the aircraft or aircraft engines cannot be registered.

Ownership and leasehold interests that fall within the Cape Town Convention may be registered against an aircraft object at the International Registry.

Registration of ownership interests

Summarise the process to register an ownership interest.

To register aircraft on the UK Register of Civil Aircraft, Form CA1 is submitted either by the owner or the ‘charterer by demise’ eligible to register in accordance with the Air Navigation Order 2009 and by payment of the appropriate fee. Evidence of insurance, or a declaration that the aircraft will not fly until evidence of insurance has been supplied to the CAA, must also be supplied with Form CA1.

Full guidance can be obtained at www.caa.co.uk/aircraft-registration.

Title and third parties

What is the effect of registration of an ownership interest as to proof of title and third parties?

The registration of title to the aircraft constitutes prima facie evidence of ownership of the aircraft. However, such evidence is not conclusive and registration of title is not necessarily proof of title. For interests that fall within the Cape Town Convention, registration on the International Registry gives notice of the interest to third parties and protects the priority of the interest against subsequently registered interests or unregistered interests. A buyer of an aircraft object under a sale that is registered on the International Registry acquires its interest in that aircraft object free from an interest subsequently registered and from an unregistered interest, even if the buyer has actual knowledge of the unregistered interest.

Registration of lease interests

Summarise the process to register a lease interest.

The CAA does not allow for the registration of leases in the UK Register of Civil Aircraft.

A lease interest constituting an ‘international interest’ in a Cape Town Convention aircraft object is registrable on the International Registry. Registration is completed online in accordance with the International Registry regulations and procedures.

Certificate of registration

What is the regime for certification of registered aviation interests in your jurisdiction?

The UK Registry of Civil Aviation will issue the certificate of registration, which will include the following particulars:

the registration certificate number accorded to the aircraft;
the nationality and registration mark of the aircraft;
the manufacturer’s name and designation of the aircraft;
the serial number of the aircraft;
the name and address of every person entitled as owner to a legal interest in the aircraft or a share therein;
in the case of an aircraft that is the subject of a charter by demise, the name and address of the charterer. In such a case, the CAA will retain the name of the owner on file but will not make it available to the public; and
in the case where the aircraft is registered by virtue of the fact that an unqualified person resides or has a place of business in the United Kingdom, an indication that it is so registered.

The certificate of registration does not indicate whether the aircraft is mortgaged or not.

Deregistration and export

Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?

The CAA can cancel registration of an aircraft, if appropriate. As a matter of practice, cancellation of the registration requires the consent of all the parties registered as mortgagees in the Aircraft Mortgage Register in the case of a registered mortgage entered on the Register of Aircraft Mortgages created prior to 1 November 2015. If a registered mortgage is entered on the Register of Aircraft Mortgages that was created on or after 1 November 2015, the consent of the mortgagee (in terms of the Register of Aircraft Mortgages) is not required prior to deregistration.

If, at the time of the IDERA deregistration request, a registered mortgage is currently entered on the Register of Aircraft Mortgages that was created prior to 1 November 2015, the mortgage must be discharged or the mortgagee must consent in writing to the deregistration of the aircraft. If, however, a registered mortgage is currently entered on the Register of Aircraft Mortgages that was created on or after 1 November 2015, consent of the mortgagee (in terms of the Register of Aircraft Mortgages) is not required prior to deregistration on the basis that, when requesting deregistration the authorised party or certified designee must make a declaration certifying that all registered interests ranking in priority to that of the authorised party have been discharged, and that the holders of such interests have consented to the deregistration and export of the aircraft. The consent of the registered owner or other party on the CAA’s registration records is not required in relation to deregistration of the aircraft.

(In the case of an aircraft subject to a charter by demise, the CAA may as a matter of policy notify the owner before deregistration is effected.) If, after an aircraft is registered on the UK Register of Civil Aircraft, an unqualified person becomes entitled to legal or beneficiary ownership of the aircraft, the registration of the aircraft will become void and the certificate of registration must be returned to the CAA.

If the aircraft is the subject of an IDERA pursuant to the Cape Town Convention, the IDERA must be revoked by the authorised party named in the IDERA before the aircraft can be deregistered. The consent of the registered owner or other party on the CAA’s registration records is not required in relation to deregistration of the aircraft.

Powers of attorney

What are the principal characteristics of deregistration and export powers of attorney?

A power of attorney must be created in accordance with the provisions of the Powers of Attorney Act 1971, which (among other things) provides that a power of attorney must be executed as a deed. A power of attorney is revocable unless it is ‘connected with an interest’, which means a security interest. An irrevocable power of attorney will survive the insolvency of the creator of the power. There is no guarantee that the CAA, or any other relevant body such as an airport authority, will recognise a deregistration power of attorney, but it is nevertheless standard for a lessor or mortgagee to take such power of attorney in the expectation that it will be effective.

The Cape Town Convention, as ratified by the United Kingdom, allows for the issuance of an IDERA by the registered owner of an aircraft.

Cape Town Convention and IDERA

If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.

An IDERA may only be issued by the current registered owner of an aircraft (ie, the person in whose name the aircraft is registered), whether that be the actual legal owner or the operator (referred to in the United Kingdom as the ‘charterer by demise’). An IDERA must be in the form prescribed by the CAA in Form CA50. The form must be submitted to the CAA for recordation. The request to issue an IDERA must relate to an existing international interest created on or after 1 November 2015. Only one IDERA can be recorded and current at any one time.

An authorised party named in an IDERA can designate a certified designee by submitting the appropriate form (Form CA52) to the CAA. Only one designation may be in place at any one time.

The authorised party of an IDERA can request the deregistration of an aircraft by submitting Form CA54 to the CAA. If, at the time of the IDERA deregistration request, a registered mortgage is currently entered on the Register of Aircraft Mortgages that was created prior to 1 November 2015, the mortgage must be discharged or the mortgagee must consent in writing to the deregistration of the aircraft. If, however, a registered mortgage is currently entered on the Register of Aircraft Mortgages that was created on or after 1 November 2015, consent of the mortgagee (in terms of the Register of Aircraft Mortgages) is not required prior to deregistration on the basis that, when requesting deregistration the authorised party or certified designee must make a declaration certifying that all registered interests ranking in priority to that of the authorised party have been discharged, and that the holders of such interests have consented to the deregistration and export of the aircraft. The consent of the registered owner or other party on the CAA’s registration records is not required in relation to deregistration of the aircraft.

Security

Security document (mortgage) form and content

What is the typical form of a security document over the aircraft and what must it contain?

A mortgage is the typical form of security over an aircraft. Under English law, a mortgage over an aircraft comprises two things:

a personal contract to pay the debt; and
- the creation of a security interest over the aircraft to secure the repayment of the debt.

Mortgages of aircraft may be either legal or equitable and should be distinguished from the other forms of security available under English law (charges, pledges and liens).

There are no statutory requirements relating to the terms of the aircraft mortgages in England and, in practice, aircraft mortgages are ‘tailor-made’ to suit the parties’ requirements. It is not necessary to stipulate a maximum amount that may be secured by the mortgage, and almost invariably mortgages secure ‘all monies’ owed by the mortgagor (or other party) to the mortgagee. It is not necessary for the economic terms of the deal (principal, interest or repayment terms) to be reflected in the mortgage itself, though these will of course need to be ascertainable on enforcement (eg, usually by reference to the relevant loan agreement). It is permissible under English law for the mortgagor to provide security such as an aircraft mortgage for the debts of a third party, provided that there is ‘consideration’ for so doing or else the mortgage is executed as a deed.

The mortgage does not need to be in the English language though, for the purpose of proceedings in an English court, a certified translation will be required if the mortgage is not written in English.

To constitute an international interest under the Cape Town Convention, the mortgage must meet the requirement for validity of an international interest set forth in the Cape Town Convention.

Security documentary requirements and costs

What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?

The mortgage does not require notarisation, apostillation, legislation or stamping. It is common for the mortgage to be made by way of deed and the formalities for the creation of a deed should therefore be complied with. There are no stamp or other documentary costs as such.

Security registration requirements

Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.

The CAA maintains the Register of Aircraft Mortgages, pursuant to the Mortgaging of Aircraft Order 1972. There are no restrictions as to who can be registered as a mortgagee. A mortgage of an aircraft entered in the Register of Aircraft Mortgages has priority over any other mortgage of or charge on that aircraft, other than another mortgage entered in the Register of Aircraft Mortgages before the mortgage in question.

Applicants for registration of a mortgage must complete and provide to the CAA Form CA1577, together with a certified copy of the mortgage. The registration fee varies according to the aircraft’s maximum take-off weight (MTOW). Further detail is available on the CAA website (www.caa.co.uk).

A potential mortgagee of a registered aircraft can ‘preregister’ a mortgage with the CAA by entering a priority notice using Form CA1330 and paying a registration fee, which varies according to the MTOW of the relevant aircraft. The priority notice remains valid for 14 working days from and including the date of entry. During this period either the relevant aircraft mortgage must be registered or a further priority notice entered, securing a further 14 working days’ priority. The relevant mortgage, once registered with the CAA, will then take its priority from the date of registration of the original priority notice.

If the security document creates an international interest, registration of that international interest at the International Registry means that the security will take priority over subsequently registered interests and unregistered interests subject to certain exceptions. Registration is completed online in accordance with the International Registry regulations and procedures.

If the mortgagor is a company incorporated in England and Wales, it will be necessary to also register the mortgage at Companies House pursuant to the provisions of the Companies Act 2006, within 21 days of the creation of the mortgage. Otherwise, the mortgage will be void against an administrator, liquidator or secured creditor of the insolvent mortgagor.

Registration of security

How is registration of a security interest certified?

The CAA will confirm in writing to the applicant once an aircraft mortgage application has been successful. This will not state the priority of the mortgage, which is determined by the date of registration.

Effect of registration of a security interest

What is the effect of registration as to third parties?

An aircraft mortgage registered on the UK Aircraft Mortgage Register will take priority over all other unregistered or subsequently registered mortgages. Registration constitutes notice of the mortgage to all third parties, who are deemed to have express notice of all the details appearing in the Mortgage Register.

A search of the UK Aircraft Mortgage Register for entries made against an aircraft can be made by submitting Form CA350 to the CAA and paying the search fee. The result is usually available within a few hours (it being noted that the CAA is open 10 am-4 pm on working days).

It should be noted that certain interests may take priority over a registered mortgage, namely ‘liens for work done’ (ie, the right to retain an aircraft that may be exercised by an unpaid repairer of the aircraft) and statutory detention rights (eg, the CAA for unpaid Eurocontrol charges and the UK Environment Agency for unpaid EU Emission Trading Scheme (ETS) penalties). There is limited case law in England relevant to the priority of liens and detention rights, but the general view is that liens and detention rights will take priority over a registered aircraft mortgage, notwithstanding that liens and detention rights are not registrable.

Security structure and alteration

How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?

The concept of a security trustee is recognised in England and is commonly applied in granting of security over aircraft. A mortgage may be granted in favour of the beneficiary or in favour of a security trustee appointed or acting under a trust for the benefit of persons to whom a debt or other obligation is due.

The security trustee would be recognised as the mortgagee, and will be entitled to exercise all the rights in relation to the mortgage accorded to mortgagees. Accordingly, the mortgage will only refer to and recognise the security trustee as the person in whose favour the mortgage is registered, without any reference to the underlying lenders. The lender syndicate may therefore vary without any necessity to amend the mortgage.

Security over spare engines

What form does security over spare engines typically take and how does it operate?

A mortgage may be created over a spare engine but it is not possible to register such a mortgage on the UK Register of Aircraft Mortgages. If the mortgagor is a company incorporated in England and Wales, it will be necessary to register the spare engine mortgage at Companies House otherwise the mortgage will be void against an administrator, liquidator or secured creditor of the insolvent mortgagor. As with a mortgage over a whole aircraft, a spare engine mortgage is tailored by the parties to it.

When the spare engine is installed on an airframe located in England, the separate interests of airframe and engine owners or mortgagees will continue to be recognised, in other words England does not have a ‘doctrine of accession’ whereby title to a spare engine would automatically transfer to the owner of the airframe on which the engine is installed.

Enforcement measures

Repossession following lease termination

Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?

English law permits a lessor to repossess an aircraft without the need to obtain a court order (the ‘self-help’ remedy). In these circumstances, the lessor may only exercise such rights as have been granted to it under the lease, peaceably and lawfully. Accordingly the exercise of such rights on a self-help basis usually requires the lessee to accede to the exercise of the rights, and the more common course of action, in the more usual case where the lessee objects to repossession, is for the lessor to apply to court for a possession order.

The majority of cases arising out of the finance or lease of an aircraft are likely to be heard by the Commercial Court of the Queen’s Bench Division of the High Court in London. The lessor’s costs can be claimed procedurally and pursuant to express indemnity provisions in the transaction documentation as damages. We would expect there to be an element of irrecoverable costs; as a rule of thumb these would be approximately 25-30 per cent of total costs incurred.

While it is dependent on the court’s schedule, there is a good prospect of having the lessor’s claim finally decided within two months of service of the Claim Form. However, there are three court procedures that may be used to obtain swift judgment:

failure to acknowledge particulars of claim: in this case, judgment can be obtained in 14 days;
failure to file a defence: if the lessee fails to file a defence then judgment may be obtained in 28 days; and
no arguable defence: the lessor may proceed to summary judgment.

Enforcement of security

Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?

The mortgagee of an aircraft registered with the CAA may take peaceful possession of an aircraft following a self-help remedy. The mortgagee will have the power to sell the aircraft if that power is set out in the mortgage.

However, there are circumstances where it may be safest for the mortgagee to proceed by way of court order, for example:

where the mortgagor opposes repossession;
when there is uncertainty as to whether or not an event of default has occurred; or
where there may be competing third-party interests.

Self-help remedies, because they do not involve a court’s judgment on the rights of the mortgagee, leave open the risk of later claims by the mortgagor (or other parties having an interest in the aircraft) for wrongful interference with the aircraft, more particularly:

in the event of wrongful taking of possession by the mortgagee exercising a self-help remedy, damages may be very high;
the taking of possession may involve the mortgagee in the civil offence of trespass;
a private sale by the mortgagee (as ‘mortgagee-in-possession’) may be challenged on various grounds, such as the authority of the mortgagee to pass good title, the right to sell and the lack of sale at the best price reasonably obtainable; and
a judicial order will assist in demonstrating to third parties, such as airport authorities, that the bank’s right to seize the aircraft has arisen.

With respect to trespass, a standard mortgage will contain a right to enter premises to repossess the relevant aircraft. However, the right to enter upon any premises where the aircraft may be located is a right granted only by the mortgagor. It would not permit the mortgagee to enter the premises of third parties. This is a strong argument for proceeding by way of court order, unless whoever has possession of the aircraft is willing to grant the mortgagee access to it (and the aircraft’s technical records).

In a case of urgency, an injunction may be sought preventing the movement of the aircraft, before the issue of the mortgagee’s claim form (a freezing injunction). The application can be made quickly (within 24 hours or less if the evidence is ready). Where there are strong grounds for its justification (such as the possibility of the aircraft being removed from England), an application may be made without notice to the mortgagor supported by a witness statement. The mortgagee is obliged to disclose all relevant information, so as not to mislead the court. Failure to do so can have adverse consequences, such as the later release of the injunction and liability in damages to the mortgagor.

A completely private sale (ie, without any court involvement) of the aircraft is not generally possible except by exercising self-help remedies or by appointing a receiver. The mortgagee is obligated by law to obtain the best price reasonably obtainable. Judicial sale of the aircraft would be made pursuant to a court order and the court will specify the procedural requirements. A sale by public auction will often be required with certain notice requirements, for example publication in the national press and certain aviation publications. It may be possible for the mortgagee to request a private sale if it can be shown that a higher price would be obtained by such a sale.

Priority liens and rights

Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?

The following aircraft-related liens and rights could have priority over aircraft ownership or an aircraft security interest:

airport charges: providing the aerodrome authority the right to detain and sell the aircraft or any other aircraft for which the person in default is the operator at the time the detention begins. The application to sell the aircraft must be brought to the notice of persons whose interests may be affected (including the owner, lessor or mortgagee of the aircraft) to allow that person an opportunity of becoming a party to the proceedings;
air navigation charges (such as National Air Traffic Services and Eurocontrol charges): providing the CAA the right to detain and sell the aircraft or any other aircraft for which the person in default is the operator at the time the detention begins. The application to sell the aircraft must be brought to the notice of persons whose interests may be affected (including the owner, lessor or mortgagee of the aircraft) to allow such persons an opportunity of becoming a party to the proceedings;
licensing, public health, noise, emissions, patent or safety contraventions: providing the relevant authority with a right to detain the aircraft;
unpaid customs duties: providing customs authorities with a right to detain and, in some cases, impose forfeiture of the aircraft;
unpaid EU ETS penalties: providing the Secretary of State with the right to detain and sell any aircraft for which the person in default is the operator at the time the detention begins. The application to sell the aircraft must be brought to the notice of persons whose interests may be affected (including the owner, lessor or mortgagee of the aircraft) to allow those persons an opportunity of becoming a party to the proceedings;
tax law contraventions: providing the tax authorities with a right to detain and sell the aircraft;
possessory repairers’ liens: in circumstances where a repairer or an outfitter has, in its lawful and continuous possession, an aircraft on which it has bestowed labour, enhancing the aircraft’s value, that person will have a common law lien on the aircraft to the extent it remains unpaid for its labour. There are a number of prerequisites for such a lien to exist. Liens may also be created by contract; and
seller’s lien: giving an unpaid seller the right to detain the aircraft, stop the aircraft in transit if the buyer is insolvent and resell the aircraft.

It is believed by the main authorities in this area that the order of priority in respect of liens and detention rights will be as follows:

statutory detention rights, for example, in relation to Eurocontrol charges;
contractual liens created prior to the date of registration of a registered mortgage;
possessory liens;
registered mortgages in order of registration; and
unregistered mortgages.

Enforcement of foreign judgments and arbitral awards

How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?

In the absence of any bilateral enforcement agreement between the United States and the United Kingdom, English courts must rely on the common law system to enforce New York court judgments. Consequently, a separate debt claim may be brought in English courts to do so. The United Kingdom of Great Britain and Northern Ireland is party to the 1958 New York Convention.

Taxes and payment restrictions

Taxes

What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?

Corporation tax

Broadly speaking, a company carrying on a trade of leasing in the United Kingdom will be subject to UK corporation tax on the profits of that business. Rents will generally be taxable, although only the interest element of any receipts under a ‘long funding lease’ will be considered taxable income for these purposes. Deductions against rental income will generally be available for revenue expenditure incurred wholly and exclusively for the purposes of the trade, including for the interest (but not the principal) element of payments under any borrowing incurred on the provision of the aircraft.

Additionally, a UK lessor purchasing an aircraft for leasing could be entitled to claim capital allowances which it can deduct in computing its taxable profits. Capital allowances are intended to reflect depreciation of an asset on which capital expenditure has been incurred and may generally be claimed by the lessor in the case of operating and finance leases and by the user in the case of hire purchase, conditional sale and credit sale agreements.

VAT

The UK VAT regime with regard to the supply of aircraft is codified in the Value Added Tax Act 1994. To be zero-rated for VAT purposes, aircraft must fall under item No. 2 of Schedule 8 of the Value Added Tax Act 1994, which was itself implemented by section 21 of the Finance (No. 3) Act (2010). This item No. 2 says that: ‘[t]he supply, repair or maintenance of a qualifying aircraft . . .’ will be zero-rated for VAT purposes.

The VAT rules (HMRC Notice 744C, December 2010) therefore apply to the supply of an aircraft or aircraft equipment. HMRC considers that the word ‘supply’ in this context includes:

sale, import or acquisition of an aircraft or aircraft equipment; and
charter of an aircraft or aircraft equipment, including hire or lease.

While the supply of ‘qualifying aircraft’ is zero-rated, supplies of all other aircraft will be standard-rated (at the current rate of 20 per cent).

In note (A1)(b) to Schedule 8 of the Value Added Tax Act (1994), a ‘qualifying aircraft’ is described as any aircraft that ‘is used by an airline operating for reward chiefly on international routes’.

Following the decision of the Court of Justice of the European Union in the Cimber case (C-382/02), the test of a ‘qualifying aircraft’ is whether the airline itself operates chiefly on international routes and not whether a particular aircraft operates chiefly on international routes. In essence this means that supplies of aircraft will be zero-rated even if the aircraft operates only on domestic routes, providing it is used by an airline operating for reward chiefly on international routes.

In note (C1) to Schedule 8 of the Value Added Tax Act 1994, an ‘airline’ is defined as ‘an undertaking which provides services for the carriage by air of passengers or cargo (or both)’. The undertaking concerned may be a sole trader, partnership or company or other entity, but it is not necessary for the undertaking to be a single entity. For example, a VAT or corporate group of companies may be considered as an airline.

An airline will need to operate at least one aircraft, which it may own, lease or hire. This definition includes commercial business jet operators. However, HMRC states that if the business does not have an air operator’s certificate (AOC) this will provide an indication that the business is unlikely to be considered as an airline for this purpose (HMRC Notice 744C). If a business does not hold an AOC, it will likely be asked for evidence of how it is operating as an airline.

The airline must be providing passenger or freight transport on scheduled or unscheduled flights (or a mixture of both), and receiving consideration for that supply. This must be a business operation in nature for VAT purposes. There is a significant body of case law in relation to the requirements for a taxpayer to be operating a business for VAT purposes. However, there is no requirement for an airline to be operating at a profit.

An international route is any route that is not a domestic route within UK airspace. A non-UK airline that mainly flies between airports in its own territory should therefore be regarded nonetheless as international for these purposes.

Therefore, any UK airline that flies even only one route that is not a UK domestic route will be operating on international routes.

For an airline to be operating ‘chiefly’ on international routes, the non-domestic or international route operations of an airline must exceed its domestic route operations. The European Court of Justice in Cimber left it open to the national courts to assess the extent of domestic and international operations. They made it clear that ‘in doing so [the national courts] may take account of all information which indicates the relative importance of the type of operations concerned, in particular turnover’.

In the United Kingdom, HMRC has given advice to airlines in applying the test. They have stated that the test can be based on the value of turnover attributable to international routes compared with that attributable to domestic routes, the relative number of passengers carried, mileage or any other method that produces ‘a fair and reasonable’ result ‘capable of verification by HMRC’ (HMRC Notice 744C). In line with the advice of the court in Cimber, HMRC notes that turnover will be particularly significant when comparing the operations of an airline.

When considering whether an airline meets this test, HMRC will allow airlines to base their current position on a ‘backward look over [the] last financial year’. Airlines may also base the test on a shorter or rolling period if they prefer, but the period, frequency and parameters of the test must be consistent and must not be frequently changed so as to ‘manipulate a particular outcome’. In some cases, a forward-looking test may be allowed where material changes in the business have occurred or where business plans and projections support such a view.

Most aircraft are owned by special purpose companies, whose sole purpose is to own the aircraft. Such companies are often set up by leasing companies or banks. As such, many supplies will be to special purpose companies rather than ‘airlines’. However, HMRC considers that where supplies are provided through such ‘intermediaries’, as they term them, the supplier may ‘look through’ the transaction (or series of transactions) and treat their supply as zero-rated. This will only be possible if the ultimate consumer of the supply of either goods or services is an airline operating a qualifying aircraft, and if the entities in the supply chain are fully taxable for the purposes of the transaction so that no input tax restriction would occur at any point in the chain (ie, so that there would be no recoverable VAT).

Withholding tax

Lease rentals and instalment payments under hire-purchase agreements do not attract withholding tax and it is generally accepted that it will not apply to the ‘finance charge’ element of payments under conditional or credit sale agreements. Nonetheless, there remains a risk that payments under hire-purchase agreements could in some circumstances be regarded as annual payments for tax purposes and, for that reason, a lease will normally provide that the lessee will bear any withholding tax that may be imposed by ‘grossing up’ payments due to the lessor. It is standard from the lessor’s point of view to include such a provision, to cover the risk that withholding tax could arise as a result of a change of law, or of its interpretation.

Stamp duty

No stamp duty is payable in respect of the creation of an aircraft lease.

Exchange control

Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?

No restrictions apply except in relation to sanctions legislation.

Default interest

Are there any limitations on the amount of default interest that can be charged on lease or loan payments?

As a general rule, in the aviation finance and leasing context there are no such limitations.

Customs, import and export

Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?

No import or export duty is payable in respect of civil aircraft used for commercial purposes.

Insurance and reinsurance

Captive insurance

Summarise any captive insurance regime in your jurisdiction as applicable to aviation.

There are no requirements that insurance be placed with local insurers.

Cut-through clauses

Are cut-through clauses under the insurance and reinsurance documentation legally effective?

While there is limited case law in this area, cut-through clauses are considered to be legally effective.

Reinsurance

Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?

Assignments of reinsurance are legally effective, subject to usual prerequisites on the creation of any legally enforceable contract. An assignment of reinsurance will typically be provided if the insurers are located in a jurisdiction where a cut-through clause is legally ineffective.

Liability

Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?

Apart from independent liability in respect of their own acts and omissions, the only relevant circumstance is strict liability. Under section 76(2) of the Civil Aviation Act 1982, the owner of an aircraft has strict liability for loss and damage caused by the aircraft to third persons and property on the surface, although by section 76(4), liability will pass to a charterer by demise where the aircraft is chartered for a period of more than 14 days. The owner or lessor may be entitled to a contractual indemnity from the lessee.

Strict liability

Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?

Under section 76(2) of the Civil Aviation Act 1982, the owner of an aircraft has strict liability for loss and damage caused by the aircraft to third persons and property on the surface, although by section 76(4), liability will pass to a charterer by demise where the aircraft is chartered for a period of more than 14 days. The owner or lessor may be entitled to a contractual indemnity from the lessee.

Third-party liability insurance

Are there minimum requirements for the amount of third-party liability cover that must be in place?

Regulation (EU) No. 785/2004 (as amended by Regulation (EU) No. 285/2010) implemented in the United Kingdom by the Civil Aviation (Insurance) Regulations (2005), imposes insurance requirements on all air carriers and aircraft operators flying within, into, out of or over the territory of a member state. Air carriers (ie, air transport undertakings with a valid operating licence) must have aviation-specific insurance cover in respect of passengers, baggage, cargo and third parties (including property and persons on the ground). The insured risks must include acts of war, terrorism, hijacking, acts of sabotage, unlawful seizure of aircraft and civil commotion.

An air operator is defined as ‘the person or entity, not being an air carrier, who has continual effective disposal of the use or operation of the aircraft; the natural or legal person in whose name the aircraft is registered shall be presumed to be the operator, unless that person can prove that another person is the operator’.

Air carriers and operators must ensure that there is cover for every flight, whether or not the aircraft is owned, leased or operated through joint or franchised operations such as code-sharing or similar agreements. Penalties are imposed for non-compliance, including fines and imprisonment.

Commercial operations must obtain the following minimum levels of cover:

passengers: 250,000 special drawing rights (SDR) per passenger;
baggage: 1,131 SDR per passenger; and
cargo: 19 SDR per kilogram.

Third-party minimum insurance limits vary depending on the maximum take-off mass of the aircraft. There are 10 categories ranging from under 500kg (750,000 SDR) to over 500 tonnes (700 million SDR).

Update and trends

Key developments of the past year

What were the key cases, decisions, judgments and policy and legislative developments of the past year?

No updates at this time.