Aircraft Closing Documents and the Role of the Closing Agent

Aircraft Closing Documents and the Role of the Closing Agent — Originally published in BusinessAir Magazine, March 2013, Volume 23, No. 3.

When purchasing a new or pre-owned aircraft, one of the key members of the transaction team is the escrow agent. Most aircraft escrow agents have their offices in Oklahoma City, Oklahoma, home of the Federal Aviation Administration’s (“FAA”) civil aircraft registry.

When purchasing an aircraft that will be registered in the United States, it is necessary to register the transaction with both the FAA aircraft registry and the International Registry of Mobile Assets (the “International Registry”), which is located in Dublin, Ireland. The International Registry was established in 2006, five years after a diplomatic conference held in Cape Town, South Africa, adopted a treaty intended to create consistent international standards for the registration of ownership and security interests in various types of mobile equipment, including aircraft. Escrow agents (as well as aircraft buyers, lenders and their legal counsel) all have to understand the requirements and procedures for perfecting filings with the International Registry.

Typically, upon the closing of an aircraft purchase, the escrow agent will file the FAA Aircraft Registration Application (AC form 8050-1), the FAA Bill of Sale (AC form 8050-2), a statement in support of registration if the buyer is a limited liability company, and a FAA Entry Point Filing Form International Registry (AC form 8050-135). In addition, if the buyer has immediate flying needs outside of the United States, the escrow agent will file a Declaration of International Operations.

The FAA Aircraft Registration Application is the last remaining multiple-page carbon paper form used by the FAA. The pink copy of the 8050-1 form, commonly referred to as the “Pink Slip,” serves as the aircraft’s temporary registration certificate for flying within the 48 contiguous United States. Generally within four to six weeks, the FAA issues the Certificate of Aircraft Registration (Form 8050-3). The 8050-3 is the aircraft’s permanent registration card and allows it to fly internationally. If an international trip is planned prior to the issuance of the 8050-3, the Declaration of International Operations is required.

The registration form and the aircraft bill of sale require original signatures for filing with the FAA. Once filed, the FAA will issue a code on the AC Form 135 that is used to complete the International Registry process.

The buyer and seller execute documents necessary for closing and send the signed originals to the escrow agent. The escrow agent tracks the incoming documents and notifies all parties when all of the documents needed for closing have been received. The escrow agent also prepares FAA title searches and International Registry priority searches to ensure that title to the aircraft is being transferred free and clear of any liens or encumbrances.

In addition to the closing documents, the escrow agent usually also handles funds related to the transaction. The initial deposit is sent to the escrow agent, who then establishes a file for the transaction and starts the lien search process. The escrow agent coordinates with the lender, Section 1031 like-kind exchange intermediary (if any), buyer and seller to prepare preliminary closing statements. The agent also collects all wire transfer instructions and initiates wire transfers as necessary throughout the closing process.

If there is a dispute between the parties and the deposit needs to be refunded, or if there is a holdback amount due to outstanding items on the aircraft being purchased, the escrow agent must remain neutral. The language of the purchase agreement will determine when and if funds should be dispersed.

If an escrow agent is not used and the funds are sent directly to the seller, there is no third party intermediary holding the funds who is obligated to follow any dispute processes outlined in the purchase agreement. If a dispute arises and seller has already received payment directly from buyer, then the buyer could be in a very weak negotiating position. For new aircraft, many manufacturers prefer not to escrow the funds; however, whenever possible, it is better to escrow the funds and have a neutral party manage them.

For international transactions, aircraft can be imported and added to the U.S. aircraft registry or exported and removed from the U.S. aircraft registry. The escrow agent will help file the documents necessary to coordinate the import or export of the aircraft. The escrow agent will also monitor the documents being processed by the FAA to ensure the documents are flowing along as necessary.

When hiring an escrow agent, be sure to hire a reputable company with ample support. The individual assigned to the transaction should be knowledgeable, responsive, proactive and communicate regularly on the status of the transaction. By hiring the right escrow agent, the actual closing call should proceed smoothly and take less than 30 minutes, because all of the hard work will have been completed prior to the call.

Please contact Amanda Applegate at 877-237-5398 or aapplegate@aerlex.com.