Avoiding the Pitfalls of Buying Foreign-Registered Aircraft

By Chris Younger
Principal, GKG Law

Business Aviation lawyers are being engaged by more and more clients who are purchasing foreign-registered aircraft that will be imported into the U.S. and registered with the FAA at closing. I think this is due primarily to the more robust nature of the business aircraft marketplace in the U.S.A. and the strong value of the U.S. Dollar in comparison to other currencies. In many of these transactions, a foreign seller agrees to sell an aircraft to a dealer who then agrees to resell the aircraft to a U.S. buyer. Furthermore, in many instances, a dealer agrees to acquire the aircraft, import it into the U.S., register it with the FAA and resell it. Business Aviation lawyers represent brokers and end-users in transactions that have been structured in this manner. There are several unique issues that the parties must address when engaging in these types of transactions. 

Of significant concern when representing a U.S. buyer of a foreign-registered aircraft is to be certain that the aircraft will qualify for a U.S. Certificate of Airworthiness (C-of-A) before the deposit becomes nonrefundable. This is a “chicken-or-the-egg” problem, because the FAA will not issue a U.S. C-of-A until after the aircraft is registered with the FAA (which of course typically occurs after the closing). However, the U.S. buyer does not want to close, take title to and register the aircraft in the U.S. only to discover after closing that a technical issue prevents the issuance of a U.S. C-of-A and may involve additional and, possibly, substantial expense. 

This is one reason that a broker or dealer will take title to the aircraft before selling it to the ultimate end-user. The dealer facilitates the completing of the transaction by handling the importation of the aircraft into the U.S. and its registration with the FAA to obtain the U.S. C-of-A for the aircraft. At closing, the dealer will convey title to the aircraft with a valid U.S. C-of-A.

Another common solution to this problem is for the buyer to hire an FAA Designated Airworthiness Representative (DAR) to inspect the aircraft and its records before the closing concurrently with the completion of the prepurchase inspection. This allows the buyer to obtain confirmation from the DAR prior to closing that the DAR has inspected the aircraft, is satisfied that it meets the requirements for issuance of a U.S. C-of-A, and that the DAR is prepared to issue the U.S. C-of-A as soon as the aircraft is registered with the FAA. Obtaining this confirmation is made a condition precedent to the obligation of the purchaser to close.

Determining the ownership and status of title for a foreign registered aircraft can be tricky. In one instance, a client was purchasing an aircraft that was (1) owned by a company formed in one country and owned by other companies that were formed in several different countries, (2) registered in third country, and (3) based in yet another country. Needless to say, it was challenging, time consuming and expensive to verify the identity of the aircraft owner, that the aircraft owners were all bona fide individuals or companies in good standing (and were not on any governmental blocked-persons lists) and that the aircraft was completely free of liens at closing.

The parties to these types of transactions must also be cognizant of the timing of deregistration of an aircraft from a foreign registry. The deregistration process sometimes takes a day or two, and could take longer in some countries. The FAA will not register the aircraft in the United States.until it receives word directly from the foreign registry that the aircraft has been deregistered. Consequently, the U.S. buyer usually wants the aircraft to be deregistered from the foreign registry and the notice of deregistration to be delivered to the FAA prior to closing, so that at the time of closing, the aircraft can be immediately registered in the U.S.

However, a foreign seller often refuses to deregister its aircraft until the purchase price has been paid in full at closing. This is most likely to occur if the seller is concerned that the buyer may default or back out of the deal after the aircraft has been deregistered. If this happens, the seller could be unable to move the aircraft until it is re-registered, which can take several days or possibly longer, depending on the country. In such cases, an acceptable compromise could be to have all closing documents (other than the confirmation of deregistration) and the entire purchase price placed in escrow prior to deregistration, together with irrevocable instructions from the seller requiring the escrow agent to deliver the purchase price to the seller as soon as the foreign registry delivers a notice of deregistration to the FAA. 
   
Another issue that the parties should consider is whether the aircraft will be eligible to be added to a U.S. charter certificate following closing. If so, the purchaser should have the Part 135 certificate holder’s representative involved in the prebuy inspection to determine there are no equipment issues, gaps or questionable entries in the aircraft’s records that would prevent it from being placed on the certificate holder’s Part 135 certificate. 

Other ancillary issues that often arise include a request by the foreign seller to be included as an additional insured on the buyer’s insurance policy for some period after closing and that the purchaser’s insurance covers liabilities from aircraft activity occurring prior to closing. The amount of coverage may be relevant as well since the foreign seller may request coverage limits that are higher than those in the U.S.A. or coverages that are not commonly provided to U.S. aircraft operators. 

Currency fluctuations may also affect an import transaction. In particular, since aircraft transactions are typically priced in U.S. dollars, if the dollar weakens relative to the seller’s currency, the seller will yield a lower purchase price for the aircraft in its currency. This may provide an incentive for the seller to default and walk away from the deal. Thus, it is important to provide for damages to be paid by the seller in the event of such a default in an amount that will offset the incentive for the seller to default in such a situation.

Some of the key issues to consider in back-to-back transactions involving a dealer relate to the status of the ultimate buyer’s deposit and the need for clearly defined contractual obligations on the part of all parties to both transactions and disclosure of each party’s role to the other parties to the transaction. 

The issue of escrow of funds is important to the buyer since it will not want its deposit to be used by the dealer to fund the dealer’s deposit obligations to the seller. It is therefore very important that the buyer clarify with all parties and the escrow agent that its deposit is being made only with respect to the transaction between the buyer and the broker or dealer. The seller will want to know that the dealer has some “skin” in the game so that if the dealer defaults on its obligations under the agreement between the seller and the dealer, the seller will be able to recover damages, including liquidated damages as a result of that default.

It is equally important that the dealer disclose its role to each the seller and the buyer and that the purchase and sale documentation between the dealer and each other party be substantially identical. That documentation should also contain a representation and warranty from the dealer that it has made adequate disclosures to every one of its roles as a dealer. The dealer needs to confirm to all of the parties that it is not acting as the agent of nor does it have any fiduciary duties to the other parties to the transaction. None of the parties should be left under the false impression that this is the case. 

Finally, it is imperative that all of the parties consider the sales and use tax consequences of a back-to-back transfer of title to an aircraft. A fly away exemption that applies to the transfer of title to the ultimate purchaser will not always apply to the dealer who will not be flying the aircraft out of the state in which closing occurs. The dealer may need to be registered as a sales tax vendor in the state where the closing occurs to avail itself of a resale exemption from that state’s sales and use taxes. These are important issues particularly because sales tax liabilities on multimillion-dollar aircraft will be substantial if they are incurred.

It is clear that an aircraft importation combined with a back-to-back title transfer involves the consideration and successful resolution of many thorny issues that all of the parties to the transaction, and their advisors must fully consider and analyze. The failure to do so can lead to unintended negative consequences that will result in very expensive lessons to learn from. Each of the parties to these types of transactions should collect a team of experienced and knowledgeable professional advisors at the outset of the transaction to avoid the possibility of learning these lessons the hard way.

ABOUT CHRISTOPHER B. YOUNGER
Chris Younger is a partner in the firm's Business Aviation Group. Chris focuses his legal practice on business aircraft transactions as well as issues relating to federal and state taxation and regulation of business aircraft ownership and operations. GKG Law is dedicated to crafting the best approach to meet clients’ needs. The firm provides quality legal advice that calls on our lawyers' seasoned judgment to create the proper blend of resources, timing and results and provide clients with unparalleled solutions to their legal needs. For more info go to www.gkglaw.com.

ABOUT NARA
NARA is a professional trade association comprised of selected aircraft sales and brokerage businesses that are NARA Certified and aircraft product/services companies that adhere to the highest professional standards that promote the growth and public understanding of the aircraft resale industry. All NARA members abide by a strict 14-point Code of Ethics that provides standards of business conduct regarding aircraft transactions. For more information about NARA’s 25-year legacy, its members and its code of ethics, visit the NARA website at www.NARAaircraft.com.
 

Posted May 6, 2015
Written by Devri Pitts