Advising a lender on drafting and negotiating an aircraft lease agreement
The lender’s legal counsel provided us with a draft aircraft lease agreement. The scope of our assignment was focused primarily on ensuring that our client’s interests were protected, tailoring the lease to mitigate financial exposure to the lender throughout the lease term and ensuring the aircraft’s residual value was protected. Given the situation’s uniqueness and the aircraft’s technical condition, the standard provisions of an operating lease had to be tailored significantly.
Some of the bespoke amendments we made to the lease included:
- Delivery of the aircraft to the lessee in “As is, Where is” condition, with an obligation of the lessee to restore the airworthiness of the aircraft against which the lender would issue credit notes to the lessee, which could be applied against future rent.
- Separating the lease rental to an amount per airframe and engine so that in the case of an engine shop visit, the lease rental would adjust downwards, and the risk of sourcing a replacement engine would be the responsibility of the lessee, with no obligation of the lender to provide financial assistance towards an engine shop visit or a replacement engine.
- At the lender’s discretion, providing flexibility in the lease to allow for receipt of rent and maintenance reserve payments in local currency under a dollar-denominated lease.
Outside of these bespoke amendments, we thoroughly reviewed all lease agreement terms and conditions to align the agreement with market standards and protect our client’s interests.
As a result of this work, our client was able to structure and negotiate an aircraft lease agreement, which mitigated several risks and instances of significant financial exposure to the lender. The amendments made, particularly with respect to the obligations to restore the airworthiness of the aircraft and removal of lender contributions towards engine shop visits, mitigated up to USD 10,000,000 in lender financial contributions, passing the majority of this risk and capital expenditure to the lessee and neutralizing our client’s cash flow position.
ACC Aviation has been working with this lender since 2014 across various aircraft financing and lease transactions and continues to be retained by the client.
Related case studies
ACC Aviation's asset management team recently assisted an HNWI in aircraft remarketing and disposing of a Boeing 737-300 aircraft. The aircraft, awarded to the client through a court-ordered settlement, belonged to the now-defunct Tayaran Jet.
ACC Aviation was engaged to perform the lease return process on our client’s behalf, performing the physical and technical inspection of the components, ensuring the components met lease return conditions, preparing and managing an open items list, and preparing the technical data room files in support of the remarketing process.
Our client set out to launch and manage a Shariah-compliant aircraft leasing fund with a targeted capitalisation of five billion dollars. The structure of the fund required a combination of equity and debt, with a targeted asset profile of new narrowbody and widebody aircraft.
Over ten months, ACC Aviation successfully supported a consortium of lenders to prepare and fully liquidate the non-performing portfolio, recovering significant amounts of capital for the lenders.