The Basics of Purchasing an Aircraft from the Buyer’s Perspective


 Prior to purchasing an aircraft, a potential buyer should consider retaining an independent qualified aircraft maintenance operator to assist in the selection and inspection of an appropriate aircraft. Once the buyer has identified an aircraft to purchase, it is customary for him or her to issue a non-binding letter of intent identifying the aircraft and engine make/model/serial numbers. The letter of intent also typically lists the proposed purchase price and deposit amount, identifies any third parties, such as an escrow agent and maintenance operator, and assigns additional costs to the parties. Because the letter of intent is non-binding, it may be cancelled by either party prior to the execution of the purchase agreement. Thus, all terms included in the letter of intent must be specifically re-stated in the purchase agreement to be enforceable.

Once the letter of intent has been executed by both parties, they can begin negotiating and drafting the purchase agreement. A standard purchase agreement begins by identifying the parties entering into the contract, as well as the property to be purchased, i.e., both the aircraft and the engines. Because engines are often removed for maintenance or other purposes, the engines must be separately identified from the aircraft to ensure each piece is successfully transferred from seller to buyer upon closing. In addition, an often overlooked fact is that liens can be placed on engines too.

The purchase agreement then lists the purchase price and any required deposit. Generally, it will also include a statement requiring the seller to ensure that all current and pending FAA inspections and manufacturer’s recommended maintenance programs have been completed on the aircraft. Notwithstanding, all used aircraft are purchased “as is, where is.” In the simplest terms this means you are purchasing the aircraft in its current condition, without the benefit of any warranty or guarantee. A pre-buy inspection by an independent maintenance shop allows the buyer to closely examine the aircraft to determine if the aircraft will be acceptable.

Upon completion of the pre-buy inspection, the maintenance shop will issue a list of discrepancies generally referred to as a “squawk list.” The squawk list will include both airworthy and non-airworthy items to be addressed. An airworthy item is a condition of the aircraft which affects the ability to maintain the aircraft’s airworthiness. A non-airworthy item is a condition which does not affect the aircraft’s airworthiness. A common example of a non-airworthy discrepancy is a flaw or tear in the interior upholstery of the aircraft.

A well-crafted purchase agreement will include a provision requiring the seller to correct all airworthy items prior to the closing of the purchase. Conflict can arise if the definition of airworthy is interpreted differently between the buyer and the seller. If the issues cannot be resolved, the buyer may cancel the agreement and, within the terms of the purchase agreement, may leave the seller responsible for all costs and fees, including the pre-buy inspection costs. Traditionally, the costs associated with non-airworthy items are born by the buyer, but there is room for negotiation here.

It is important to note that a non-airworthy item at the time of closing may turn into an airworthy item in the future. As the seller is not responsible to fix future airworthy items, this may eventually become a very expensive future cost for the buyer.

Prior to the closing, the buyer must have insurance in place to immediately cover the aircraft upon taking receipt. The seller is only responsible for losses which occur prior to the closing. This is an often overlooked and problematic area for a buyer as the costs resulting from the failure to properly insure the aircraft can be financially catastrophic.

Once the squawk list is completed, the buyer and seller typically have three to five business days to decide whether to proceed forward with the closing. The buyer will then issue an acceptance, conditional acceptance, or rejection of the aircraft. If the buyer accepts the aircraft, the buyer’s deposit becomes non-refundable. A buyer may also issue a conditional acceptance to ensure that all airworthy items are corrected prior to the closing. However, upon meeting the condition, the buyer’s deposit will become non-refundable. If the aircraft is rejected, then the deposit is returned to the buyer and the aircraft is returned to the seller. Once the aircraft has been accepted, the parties will usually close within three to five business days from the completion of all negotiated repairs, unless an extension is agreed to in writing by both parties. Finally, the parties must execute and file all necessary transfer and registration documents with the appropriate authorities to ensure a complete change of ownership.

Although the process of purchasing an aircraft is fairly established, each transaction is unique, and should be carefully considered and reviewed by an aviation attorney.  This can ensure that the interests of both the buyer and seller are fully addressed throughout the transaction and that ownership of the aircraft, and its engines, is properly transferred.

The information on this site is not intended to provide specific legal advice nor does it create an attorney-client relationship.  An attorney-client relationship may only be created through an explicit agreement with our firm.

IRS CIRCULAR 230 DISCLOSURE: To comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein.

Our use of a disclaimer does not change the high degree of care and attention that we devote to our tax advice. Moreover, the inclusion of the disclaimer does not indicate that penalties could be imposed on the transaction at issue, but rather merely indicates that the advice we have provided you in such communication does not preclude the IRS from asserting penalties. Finally, please be assured that the use of such a disclaimer to avoid unnecessary legal expenses is similar to the approach adopted by most other tax practitioners.

 

     
     
     

 

 


Disclaimer: The information on this site is not intended to provide specific legal advice nor does it create an attorney-client relationship. An attorney-client relationship may only be created by an explicit agreement with our firm.