Whether you are buying your first business jet or trading up from your first small aircraft to that larger, faster or longer range model, you’re excited and you think you’re prepared. You’ve researched the kind of aircraft you want and you think you’ve narrowed your selection down to just a few models you think will be perfect. You also have read quite a few articles and you know that you should talk through your ownership and use structure before you actually buy to avoid the pitfalls regarding the FAA flight company trap or unwanted tax consequences. But right now, you’ve found what appears to be the seller of the perfect aircraft. He’s got just the aircraft you think you want, and the price is a steal, and he’s put a ‘letter of intent’ in front of you and is pressing to have you sign it today so this one doesn’t get away. You think about sending it to your lawyer, but you’re thinking you’ve got time after you’ve got it locked in. The fact is, it’s mostly technical and not legal, and it’s only a letter of intent. So what harm could it do to sign now and send your deposit to the escrow company?
In this situation, there are two things you need to know immediately. First, a ‘letter of intent’ is still a contract and it may be binding on you and your deposit unless it says otherwise. At the very least, it may very well set the course of continuing negotiations in a way that is more favorable to the seller. And second, the standard in the industry is that when you buy that aircraft, the sale is “as is, where is” and you have no recourse on anything after you buy. So you need to know if there is a reason this aircraft is so much cheaper than other aircraft in the marketplace. And it is crucial that you understand the condition and history of your aircraft before you buy and before your deposit becomes non-refundable. But how does one do that?
To start with, you need the right team on your side. You may have already lined up your CFO and accountant to look at the ownership structure and you may have discovered that your insurance agent knows nothing about aircraft and has lined you up with an agent that knows the specialized market of aviation insurance. But you also need team members who understand the technical and contracting issues that come with aircraft acquisitions. This may well include an aircraft broker or possibly an aircraft management company that understands the market and the type of aircraft you are buying, as well as how to determine whether the deal you are getting is truly a deal. And, of course, an attorney who understands how to give you the right options once you know whether you should buy or not.
Once you’ve got your team, the inspection becomes pivotal to your choices and your options. So what do you and your team need to focus on to make sure your rights are protected? Some key considerations include:
- Who will actually do the inspection? No mechanic or maintenance facility knows all aircraft equally well. Aircraft are mobile, so consider choosing a shop that is an authorized representative of the manufacturer, or one that handles such aircraft regularly
- Who pays for the inspection? It is typical that the prospective buyer pays to evaluate the aircraft and the seller pays to correct discrepancies, but this can vary under certain circumstances. Are there circumstances where the seller can decline to perform the corrections if the buyer wants too many corrections? Are there circumstances where the buyer can walk away if the inspection findings are much worse than anticipated? Some of these situations are talked about below.
- What is an appropriate inspection scope? Buyers need to make sure they can review the aircraft adequately to find out what they need to know. But sellers want to make sure that the inspections are not so invasive that the aircraft might become unsalable after the seller is done. Most manufacturers have a standard pre-buy inspection or pre-buy survey scope that they recommend, and often those will be adequate. Barring such a manufacturer endorsed inspection scope, many people opt for doing the equivalent of an annual inspection of the aircraft. Be aware, however, that if there are known past issues with the aircraft (or conditions of concern you find along the way), you may want to ensure the right to do additional inspections as needed to assure an appropriate evaluation of the conditions.
- What constitutes a discrepancy that the seller must repair? Many sellers want to limit their potential liability to correcting “airworthy” discrepancies. But is that enough? Just because the aircraft can fly legally, perhaps there are other conditions that need to be repaired before the buyer is willing to pay a great deal of money for the asset. There are typical terms that parties will generally agree upon, but they also vary based on the circumstances. For instance, if the buyer intends to replace the interior of the aircraft anyway, many issues will be addressed in that process.
- Are there conditions where the buyer should have the absolute right to walk away? Some conditions are not fixable or at least not in an economically reasonable fashion. For instance, if there is a history of major repairs required on the aircraft, the value of the asset may be permanently reduced in the eyes of the marketplace and will affect resale value. Missing maintenance records can also make the aircraft irrevocably unairworthy. Also, extensive corrosion may also be so invasive that you may want a right to walk away.
- Are the aircraft or its engines on a maintenance plan? Power-by-the-hour maintenance service plans can be a useful way of handling future maintenance and equalizing the costs over time. Is the aircraft on such a plan or eligible for one? Is it transferable? And does such a plan affect the available scope of your inspection? For instance, some engine plans prohibit borescope inspections of the engines at the risk of voiding the plan.
- Is my deposit returnable if I just don’t want the aircraft? It’s not unusual that the parties will negotiate walk away terms under certain circumstances and that there is an appropriate allocation of costs and risks pre-closing. To a great extent, it depends upon what you negotiated in your letter of intent or purchase agreement.
FMJ’s Advice: All in all, each of these issues is negotiable in the pre-purchase negotiations, but you can also waive your rights to address these things if you are too quick to sign and move forward. If you assemble your team and exercise the proper due diligence up front, you should be able to protect yourself from the deal that is too good to be true.
If you need further information on these or related matters, contact Kevin Johnson at 952-995-9576 or kevin.johnson@fmjlaw.com. Click here to learn more about our Aviation & Transportation practice group.
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