The Process and Pitfalls of Escrowing Deposits for an Aircraft Purchase

The Process and Pitfalls of Escrowing Deposits for an Aircraft Purchase — Originally published in BusinessAir Magazine, March 2014, Volume 24, No. 3.

An aircraft buyer typically places a fully refundable deposit in escrow when entering into a letter of intent for an aircraft purchase. Most aircraft title and escrow companies are located in Oklahoma City, Oklahoma, because that’s where the Federal Aviation Administration’s Civil Aircraft Registry is located. The Registry is of key importance in all civil aircraft transactions since all original sale documents are filed with the Registry for the transfer of title. Normally, the disposition of the funds follows a standard procedure, but there are a number of issues that can arise in the course of the transaction that may affect the deposit.

Initially, the escrow agent confirms receipt of the deposit to the Buyer who wired the funds. The deposit is then held on behalf of the Buyer until the escrow agent receives written instructions from both parties confirming otherwise. Upon approval from the Buyer, the escrow agent will confirm to the Seller that the deposit has been received and that it applies to the Seller’s specific aircraft. The escrow agent will not disclose any information concerning the Buyer, the amount of the deposit, the source of funds or the aircraft associated with the deposit without the Buyer’s permission.

Even after receipt of the deposit is confirmed to both parties, the escrow agent will continue to treat the deposit as being under the exclusive control of the Buyer until the Buyer provides additional written instructions to treat the deposit in some other way. If the parties decide to move forward with the transaction, the letter of intent will be superseded by an Aircraft Purchase Agreement. The escrow agent acknowledges the Aircraft Purchase Agreement through an acknowledgement signature to that agreement or a special joinder provision added to the end of the Purchase Agreement. The Purchase Agreement provides the escrow agent with further direction as to how the deposit should be treated. Most commonly, the purchase agreement will have an acceptance certificate attached as an exhibit. Once executed and submitted to the Seller and the escrow agent, the deposit becomes non-refundable. The acceptance certificate usually states that the Buyer has accepted the aircraft following an inspection and that the deposit is non-refundable, subject to Seller’s correction of airworthiness discrepancies and fulfillment of the other conditions in the Purchase Agreement such as funding, delivery of closing documents, and clearing title.

If a default by Buyer or Seller occurs, or even if one is asserted under the Purchase Agreement, a demand letter will be sent to the escrow agent requesting a release of the deposit. The escrow agent almost always requires an agreement by both the Buyer and the Seller as to the disposition of the deposit before any funds will be released. In fact, it does not matter if the deposit is currently considered refundable or non-refundable under the terms of the Purchase Agreement. The escrow agent does not want to be in a position to interpret the Purchase Agreement. Therefore, if there is a dispute or if the Purchase Agreement is ambiguous in any way, no funds will be released until the two parties agree. Until the parties agree and send confirmation of such agreement to the escrow agent, the agent is unlikely to release the deposit.

In the event the parties fail to agree on where the deposit should be sent, the escrow agent will deposit the funds with a court of law, commencing an interpleader action in order to determine the ownership of the disputed deposit. Interpleader is civil procedure that allows a plaintiff to initiate a lawsuit in order to compel two or more other parties to litigate a dispute. In this case, the escrow agent would be compelling Buyer and Seller to litigate the dispute over the deposit. Because civil litigation is costly and time consuming, in most cases Buyer and Seller will eventually settle on the disposition of the deposit.

In order to avoid disputes over the deposit, Buyer and Seller should enter into a purchase agreement which contains precise language regarding the treatment of the deposit. The escrow agent should acknowledge the purchase agreement through its signature of the purchase agreement so that it is clear Buyer, Seller and escrow agent all know and understand the conditions placed on the deposit. Alternatively, Buyer, Seller and escrow agent can enter into an agreement separate from the purchase agreement like an escrow agreement. The escrow agreement must use precise language regarding the treatment of the deposit. Escrow agreements are being used more often today than they were ten years ago.

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