More often than I would have thought possible, buyers and sellers are motivated by a variety of reasons to close on the purchase and sale of a pre-owned aircraft before the aircraft meets the delivery conditions specified in the aircraft purchase agreement (whether before the inspection has been completed and/or before the inspection discrepancies have been rectified). Sometimes it is because the buyer wants to close to start a major refurbishment to the aircraft and it would be more efficient to fix the discrepancies simultaneously with the refurbishment. Other times the seller wants the aircraft sold by a specific date for financial reasons, to make room for their newly acquired aircraft, or so the seller’s crew can leave for training on a replacement aircraft. Currently the most common reason is because of supply chain issues, such as when a particular part cannot be found, and it is a part that is not required to return the aircraft to service. Regardless of the reason, closing before the aircraft is in the delivery condition is becoming more common.
If the inspection is not complete at the time of closing, the risk to the buyer may be substantial because there could be unknown issues with the aircraft. Additionally, if closing takes place while the discrepancies are in the process of being repaired then additional, significant discrepancies could be found, but the buyer may not have any recourse.
If the parties understand the risks and elect to move forward and close before the aircraft is in the contractually agreed-upon delivery condition, there are two options. The parties can agree on a purchase price reduction based on the estimated cost to repair the discrepancies or the parties can agree on a holdback amount to be held by the escrow agent after closing, with the holdback used to pay for the repair the outstanding discrepancies.
A reduction in purchase price allows the parties to complete the transaction and have no further dealings with one another. The price reduction amount should be the estimated amount to correct the outstanding discrepancies plus an amount that represents the risk that the buyer is assuming by accepting an aircraft before it meets the delivery conditions. A short amendment is needed to document that the buyer is accepting the aircraft even though it does not meet the delivery conditions in exchange for the price reduction. The amount of risk being assumed under this option depends on the status of the inspection and/or the extent of the unrepaired discrepancies. One understated benefit of the price reduction over a holdback is that the transaction is completed, thus the seller has no further responsibilities, and the buyer is free to do whatever they want with the aircraft going forward.
Alternatively, a holdback allows the seller to remain responsible after closing for paying the cost of the repairs necessary for the aircraft to meet the delivery conditions and has less risk for the buyer. In this case, the buyer and seller must continue to interact until the repairs are completed and the holdback is released from escrow. The business terms in the holdback amendment may vary but should include all the following:
1. The amount of the holdback. This can be the estimated repair amount or a greater amount depending on the specific repairs needed.
2. Precisely what the holdback can be used for. Can the holdback only be used for the repair of the specifically identified discrepancies or for any other discrepancies found while the repairs are being completed.
3. A clear understanding of which party is responsible for any shortfall if the holdback is not enough to cover the repairs.
4. The process of how the holdback is released from escrow- irrevocable escrow instructions to release the holdback when the final invoice is submitted for the repairs or by mutual consent of both parties.
5. A deadline for how long the holdback can remain in escrow.
6. The escrow agent should be a party to the holdback amendment, and they should confirm they understand the terms prior to execution.
There can be legitimate business reasons to close on a pre-owned aircraft prior to the aircraft meeting the delivery conditions as originally agreed upon between the parties. When the parties desire an early closing, it is important that the risk allocation is considered in the financial terms and that the agreement of the parties is clearly documented, including, if necessary, the post-closing obligations of the parties and the responsibilities of the escrow agent.