Protecting Your Interests–When an Aircraft Deal Dissolves

Protecting Your Interests–When an Aircraft Deal Disolves — Originally published in BusinessAir Magazine, June 2014, Volume 24, No. 6.

Over the years, most Sellers that I have represented believe their aircraft is in great condition and that no surprises or problems will be discovered during the pre-purchase inspection. Similarly, once Buyers I am working with have seen their potential acquisition and made themselves comfortable in the seats, they often believe they have found the perfect aircraft, and an emotional attachment is immediately formed. In these situations, I have found that emotion can often dictate the outcome of the transaction as much or more than a pure cost-benefit analysis.

Typically in aircraft transactions, the Seller is responsible for rectifying any airworthy discrepancies found during the pre-purchase inspection. Depending on the nature of the
items found, the Buyer normally has a chance to review the pre-purchase inspection report to determine if he or she would like to move forward with the purchase. By this point, the Seller almost always considers the aircraft sold, and the Buyer has started thinking of how they will personalize the aircraft once they own it. But when the Buyer decides not to proceed or when there is a dispute over an airworthiness item, sometimes the sale falls apart. As the saying goes, “hindsight is 20/20,” but given the investment involved in the sale of an aircraft, it is imperative that the purchase agreement clearly addresses a situation in which the transaction fails to close.

From a Buyer’s perspective, it is important to have the right to walk away for any reason or no reason. It is also crucial for the Buyer to walk away whole in the event the Seller reneges on the sale. For example, once the aircraft purchase agreement is signed, if the Seller finds another buyer willing to purchase for a higher value or without any pre-purchase inspection, the Seller may be tempted to sell to that party. The aircraft purchase agreement should not only state that the aircraft cannot be marketed once the agreement has been signed by both parties, but also have some provision to make the Buyer whole if the Seller defaults on the deal. These provisions should include the return of the deposit in full and reimbursement for any aircraft movement costs or pre-purchase inspection expenses. The Buyer should also consider requiring the seller to pay for the cost of documenting the transaction in the event the Seller backs out of the agreement.

In the ideal situation for the Seller, the aircraft would be sold “as is” with no pre-purchase inspection. However, in the current buyer’s market, that is usually not the case. Once the aircraft is moved and the pre-purchase inspection has begun, the Seller probably has incurred some real costs. In the event the Buyer elects not to move forward, Seller should make sure he receives compensation for the cost of moving the aircraft to the inspection location. The Seller should also consider drafting a purchase agreement that only allows termination if the aircraft does not meet the delivery conditions specified in the aircraft purchase agreement. The Seller’s loss is based on how long the aircraft has been in the pre-purchase inspection and how long it is going to take to return the aircraft to service. Another consideration in assessing the Seller’s loss is the number of potential buyers who were lost during this “false start.” A Seller might insist upon making the deposit non-refundable if the Buyer elects not to purchase the aircraft once the pre-purchase inspection has started unless the airworthiness discrepancies exceed a certain amount.

Making sure there is a meeting of the minds on procedures and disbursement of funds when a transaction does not move forward is very important. When a transaction fails, the parties can sometimes become adversarial. Having a clearly drafted agreement without ambiguity can prevent further disagreement and save significantly on legal fees.

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