As an aircraft owner, there may be opportunities to lease your aircraft on an exclusive basis. This can happen with a Part 135 charter company or to an individual or company who needs temporary access to an aircraft, usually because their aircraft is down for extended maintenance, or they are waiting for their own aircraft delivery from a manufacturer. When evaluating the possibility of entering into an exclusive aircraft lease, there are important factors that must be considered and addressed in the perspective lease.
Lessee Without a doubt, the most important aspect for an owner who is entering into an exclusive lease is the identity of the lessee. Extensive due diligence should be performed on the lessee to make sure they have the financial stability to make the payments under the lease and that they have the right aviation team to manage, operate and maintain the aircraft to the in-depth requirements of the aircraft owner.
Territory Since the aircraft is a movable good, it is important to understand which areas of the world where the lessee will be operating the aircraft. Is the area of use going to be restricted to the continental United States or is the lessee going to have the ability to use the aircraft outside of the United States? A larger geographic area of use has greater risk to the aircraft owner, since it may be difficult to locate and/or repossess an aircraft in the event of a default under the lease.
Insurance Prior to entering into an exclusive lease agreement, the agreement should be sent to the insurance provider to make sure they will provide the required coverage, including listing the lessee as an additional insured. The insurance broker may have valuable input regarding the insurance provisions in the lease and therefore a draft of the lease should be provided to the insurance broker early in the negotiations.
Delivery Conditions and Return Conditions Prior to the start of the lease, it is important to determine the condition of the aircraft so there is a benchmark to reference when the aircraft is returned. The Aircraft should be returned in the same condition it was received, but if there is no baseline condition established, the return conditions may be more difficult. A complete list of the return conditions should be included in the lease, along with the details of how and when the lease return inspection will be performed. The lease should include specific details as to (i) who will do the inspection, (ii) who will pay to move the aircraft to the inspection facility, (iii) who will pay for the cost of the inspection and (iv) who will pay to correct any inspection discrepancies. It is also important to stipulate if the inspection will take place during the last month of the lease or after the lease termination.
Duration The duration of the lease will determine how important other aspects of the lease are, including the return conditions. The shorter the lease, the less risk to the owner of the aircraft.
Tax Considerations Consultation with an aviation tax expert prior to entering into the exclusive lease is a must. Income will be generated by the lease of the aircraft and an understanding of how that income will impact the tax planning done for the aircraft when it was acquired is important. The lease should also identify the party responsible for any taxes that may be payable on the lease payments.
Recordation The lease of the aircraft can be recorded with the FAA registry and with the international registry (if the aircraft is of a certain size). A determination as to whether the lease should be recorded will be necessary and often depends on the duration of the lease, the relationship of the parties, and where the aircraft will be operated.
Use Presumably the owner of the aircraft is entering into the lease of the aircraft to generate revenue. The parties will need to determine if the lessee will pay a monthly lease rate, regardless of the number of hours flown, or an hourly lease rate. If a monthly lease rate is selected, the parties will also have to determine if there is a maximum number of flight hours that can occur under the lease before a higher lease rate applies. If the lease rate is hourly, will there be a minimum amount due to the owner during the term of the lease? Also, it is important to determine if there will be any other use restrictions, such as a minimum hour to cycle ratio to prevent additional wear and tear on the aircraft, no smoking on the aircraft, and/or hangarage guidelines away from the home base. In addition, if the owner of the aircraft financed the purchase of the aircraft prior to entering into the lease, the lender may require the owner to obtain the consent of the lender to the lease arrangement.
Cost Allocation The parties will also have to determine who is responsible for costs and the lease should make it clear how and when such payments are made. Property tax, use tax, landing fees, fuel, maintenance, insurance, annual subscriptions, and monthly maintenance program costs are just a few of the costs that need to be allocated between the parties. The lessee must provide its own crew and pay for the crew, however, the cost allocation for some other items may be negotiable.
Inspection and Audit Rights The owner of the aircraft needs to have the right to audit and inspect the aircraft to make sure the aircraft is being maintained in an acceptable manner. This should not just be a provision in the lease, but an item that the owner of the aircraft actually exercises. How often and the scope of the inspection and audit will depend on two main factors: duration of the lease and the relationship between the parties. Another tool that the owner of the aircraft can use is to require the lessee to provide read-only access to the maintenance records. The pedigree of the aircraft can be dramatically impacted if the aircraft is not maintained, or the records are not accurate. As a part of the audit process, the aircraft owner should periodically have a title search run at the FAA to ensure that no unpermitted liens are placed against the aircraft during the lease.
While allowing an aircraft to be used on an exclusive basis by another party can generate revenue for the aircraft owner, there are risks that should be considered before relinquishing control of the aircraft. A thorough and thoughtful exclusive lease agreement should address all relevant factors to protect the aircraft owner and the aircraft.