Aircraft Leasing and Non-compliance on return or hand back

Within aircraft leasing the non-compliance on return or hand back can have severe and expensive implications; during a lease the operation of the aircraft is governed by airworthiness requirements and continued safety / compliance with the aviation authority requirements.

Following on from this then the end of lease will occur, and the aircraft is handed back to the lessor if it meets the lease return conditions – remember airworthiness compliance does not mean lease return compliance. The lease is about asset protection primarily and not airworthiness.

Considering this it means that for a lease return we need to prepare the aircraft and ensure compliance which will mean a thorough and complex review of the records.

We will be working to a date of return and what happens if we do not meet the date for any number of reasons is also covered in the lease agreement – if the aircraft is not compliant to the lease and it is not accepted by the lessor then as an example the typical statement from a lease return might state the following:

“If for any reason Lessee does not return the Aircraft to Lessor on the Expiry Date in accordance with the Redelivery Conditions then the following shall apply:

(i)   immediately rectify the non-compliance and to the extent the non-compliance extends beyond the Agreed Expiry Date, the Lease Term will be extended for such period as Lessor may determine, in its sole discretion. During such extension period:

(a)   Lessee shall not use the Aircraft in flight operations (other than in respect of demonstration flights or repositioning flights for redelivery);

(b)   all Lessee’s obligations and covenants under this Agreement will remain in full force and effect until Lessee returns the Aircraft in the accordance with the terms of this Agreement;

(c)   until such time as the Aircraft is returned to Lessor in accordance with the terms of this Agreement, instead of paying Rent, Lessee shall pay (XXX amount) . Payment shall be made promptly upon presentation of Lessor’s invoice. Following the end of the extension period, provided no Default is occurring, Lessor shall refund to Lessee such amounts paid pursuant to this sub-Section to the extent that they exceed the aggregate of (i) daily Rent for each day of the extension period, and (ii) such other amounts owing by Lessee under the Operative Documents (including, without limitation, by way of indemnity in respect of Losses suffered by Lessor as a result of Lessee’s failure to Return the Aircraft to Lessor in accordance with the provisions of the Operative Documents; and

(d)   until such Return, the Agreed Value shall be an amount equal to the Agreed Value on the day the Aircraft should have been returned to Lessor pursuant to this Agreement”

What this entails is basically that the aircraft cannot be used following the lease return date commercially and additionally an amount of money will be paid at a different rate now due to the late return of the aircraft, of which the lessor may or may not return some based on the impact of the late delivery.

It shows the importance of lease negotiation at the beginning of the process as the repayment rates and lease return conditions can become expensive and fast.

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