You’ve decided that you want to buy an aircraft. The first formal step in any aircraft purchase is typically the execution of a Letter of Intent or “LOI”. While an LOI is not a required document for an aircraft purchase, it can help prevent snags and often leads to more certain deal outcomes.
PURPOSE AND IMPORTANCE OF LOI
The primary purpose of an LOI is to express the parties’ understanding and agreement of the key terms of the transaction. LOIs are normally non-binding, except for certain provisions such as exclusivity (prohibiting the seller from shopping the aircraft to more buyers) and allocation of expenses (requiring each party to pay for certain transaction expenses). The LOI serves as the guidepost and foundation for the entire aircraft purchase process, including the negotiation of a more definitive agreement known as the Aircraft Purchase Agreement (or “APA).
LOIs provide security to both parties in a transaction. For example, if a seller is concerned about a prospective buyer’s ability to finance the transaction, the seller can require a deposit under the LOI which will legitimize the buyer’s financial situation. Under certain circumstances, a deposit can also act as a “break-up fee.” Or, if a seller is concerned about the amount of time the aircraft will sit on the market, a quick pre-purchase inspection period under the LOI can allow the seller to determine if the inspecting buyer is the right buyer, and, if not, continue to shop the aircraft to additional prospective buyers. Conversely, a buyer may be concerned that the seller is going to shop and sell the aircraft to another buyer while the buyer and seller are still negotiating; so, sellers normally push to include an exclusivity period preventing the seller from continuing to shop the deal while the seller is investing time and money into the aircraft negotiation and inspection process.
MATERIAL TERMS OF LOI
In the purchase of an aircraft, it is most common for the buyer to prepare and submit an LOI to the seller. Not every LOI is going to look the same, but it’s usually a short one or two page document and should include key terms that:
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- State the purchase price
- Describe the aircraft, engines, and equipment, as well as the documents used to transfer the items to the buyer at the close of the transaction
- State if the LOI is binding or not
- Detail the buyer deposit amount
- Confirm if and when the deposit becomes non-refundable
- Provide the name of the escrow agent
- Confirm if the escrow fees are to be split equally between buyer and seller
- Detail the expected physical condition of the aircraft at the time of delivery
- Outline the timing, scope, and cost of a pre-purchase inspection
- Determine that the aircraft has a clear title and no liens
- Establish timelines for future actions
- Decide which party is responsible for aircraft movement costs both to the pre-purchase inspection facility and to the closing location
- Acknowledge that the buyer has the exclusive right to purchase the aircraft for a specified time, and that seller will take the aircraft off the market and refrain from operating the aircraft for the same specified time
- Specify the expiration date of the LOI
Although an LOI may seem simple, it is a legal document. Therefore, it is crucial that it be drafted appropriately as not to create an unexpected contractual obligation or liability for damages if you fail to comply with the terms.
CONCLUSION
Under most circumstances, we recommend using an LOI because it is usually the most cost-efficient, desirable, and industry-standard vehicle to begin the aircraft acquisition process. Is an LOI always necessary? No, not always. For example, if a buyer is very well-prepared, has agreed to the material terms of an aircraft deal, and has already assembled its transaction team, it could make sense to skip straight to a well-written, buyer-favorable APA. The decision to use an LOI or skip straight to an APA is usually a decision that should be vetted with the transaction team including your aviation counsel and aircraft broker.
If you would like assistance in determining whether an LOI is appropriate for your circumstances, and if so, which material terms to include, please call us at the number below or email us at Counsel@BizjetLaw.com.