Acquiring an aircraft is a complex multi-step process that should be executed with a professional aircraft acquisition team. If you want to purchase an aircraft, you’d like the process to be efficient. The purpose of this article is to provide potential aircraft buyers with an overview of what to expect during the aircraft purchase process, as knowing what to do at the critical steps will protect buyer from unwanted costs and liability.
Assembling the Aircraft Acquisition Team
Whether you fly for business or pleasure, your excitement over possessing a new aircraft should not make you fall into preventable legal or financial difficulties. Enlisting the help of professionals, such as aircraft brokers, aviation attorneys, and mechanics makes the entire acquisition process smoother and ensures no surprises down the road. Aircraft brokers will assist you in finding the perfect aircraft for you, or if you’ve already selected one, advise on maintenance work needed or desired. Aviation attorneys can draft necessary legal documents to shield buyers from liability and taxes and conduct negotiations on your behalf. Experienced mechanics can ensure an efficient inspection process and identify unexpected deficiencies in the aircraft.
Aircraft Identification
Selecting the right aircraft is different for everyone. Perhaps a business needs a certain type of aircraft to get from point A to point B, you rode on a friend’s plane and want one for yourself, or you are just an avid fan of warbirds. Whatever the reason for purchasing an aircraft, the initial selection of an aircraft should suit the buyer’s needs. Aircraft brokers are commonly employed to ensure the buyer of an aircraft best understands the aircraft they are seeking to purchase and advise on possible maintenance work.
Letter of Intent to Purchase the Aircraft
Once the purchaser identifies an aircraft, they typically offer to purchase by sending a letter of intent (“LOI”). The letter of intent serves as a tentative proposal for the primary terms of the purchase agreement. The LOI typically binds neither party except for certain standard terms, and aviation attorneys frequently draft them. The LOI often includes a proposed purchase price, timeframe for inspections, and terms for the deposit. Once a seller accepts the offer, the buyer begins the steps of putting their deposit into escrow. LOIs may also provide the buyer, or the buyer’s agent, the right to conduct a visual inspection of the aircraft.
Deposit and Escrow
Escrow agents are frequently used in aviation transactions for two reasons: (1) to protect the interests of the parties to the transactions, and (2) to serve as a convenient avenue to submit documentation to the FAA. Ordinarily, the buyer will put down a 5-10% purchase price deposit, but this can vary depending on the seller and the aircraft sought.
Aircraft Purchase Agreement
After the escrow agent receives the deposit, the buyer and seller enter into an Aircraft Purchase Agreement (or “APA”). This is where the buyer and seller iron out the transaction details and memorialize them in writing. The purchase agreement serves as the legally binding contract to guide the rest of the transaction. Due to the authority and power of the purchase agreement, it tends to require more time to negotiate. Aviation attorneys can make this aspect of the transaction more efficient. The purchase agreement will set deadlines for pre-purchase inspections, remediation periods, and closing dates. After the parties execute the purchase agreement, the aircraft goes into a pre-purchase inspection.
Pre-purchase Inspection
A pre-purchase inspection is the buyer’s first opportunity to understand the condition of the aircraft. A pre-purchase inspection provides the relocation of the aircraft to an agreed-upon maintenance facility where it undergoes a comprehensive inspection of all parts and components. The purchase agreement can set the pre-purchase inspection duration, so it is essential to ensure the pre-inspection is conducted by an experienced maintenance facility when a pre-inspection window is short. At the end of the pre-purchase inspection, the maintenance facility will generate a list of discrepancies and the associated cost of fixing them. In addition to physical discrepancies, this is also an opportunity for the buyer to uncover legal deficiencies such as hidden liens, title deficiencies, outstanding taxes, FAA Form 337’s, and supplemental type certificates.
Post-Inspection Decision
The buyer, at this juncture, generally has three options. To accept the aircraft, reject the purchase or give a conditional acceptance.
- Accept: Accepting the aircraft at this point means the buyer is satisfied with the condition of the aircraft and will agree to proceed to closing in accordance with the terms of the APA.
- Reject: The buyer will generally have the right to walk away from the transaction without any adverse financial consequences to their deposit.
- Conditional Acceptance: A conditional acceptance means the buyer agrees to purchase the aircraft, conditional upon correcting certain discrepancies. Typically, the buyer and the seller will agree on the defects to be remediated, and it is then incumbent on the seller to fix, or remediate, the discrepancies on the aircraft. Once a buyer gives their conditional acceptance, their deposit is normally no longer fully refundable. The deadline for when the seller must complete the agreed-upon remediations is often referred to as the remediation period.
The Remediation Period
The buyer and the seller determine the timeframe for which the seller is responsible for making the necessary remediations. The remediation period usually is fixed in the APA. However, the parties are generally free to provide supplements to amend timeframes for remediation when necessary. Suppose the seller does not complete the agreed-upon work within the remediation period. In that case, the buyer can usually negotiate a reduction in the purchase price based on the remediations. Some APA’s may allow for a final visual inspection and/or an acceptance flight before the conditions are deemed satisfied, giving the buyer one final opportunity to confirm that all discrepancies have been remediated.
Closing
Once the buyer agrees to purchase the aircraft after giving their acceptance or conditional acceptance, the parties may proceed to closing. Closing involves the buyer delivering the agreed-upon purchase price to the escrow agent, who will ordinarily take care of the registration requirements with the FAA. Upon the escrow agents providing the Bill of Sale to the FAA, the title to the aircraft finally transfers to the buyer. The plane, at this point, must also be adequately insured. There are still lingering considerations after closing the buyer may wish to consider.
Post-Closing Considerations
Before the first flight, the parties should ensure that insurance coverage is in full force and effect. In addition, often aircraft transactions are subject to sales and use taxes. A buyer that purchases an aircraft in one state and moves it to another may have to pay use tax upon the relocation of the aircraft. Different tax jurisdictions have various tax exemptions for use taxes on aircraft. Checking to see if your aircraft may qualify for a common exemptions to state sales and use taxes applicable to aircraft can yield tremendous savings in taxes. An aviation attorney will counsel buyers of aircraft on strategies to mitigate the use tax imposed on newly acquired aircraft.
At Bizjet Law, we regularly counsel aircraft buyers through the entire aircraft purchase process. If you have any questions about any part of the process or generally would like legal counsel to assist you with the process, please call us at the number below or email us at Counsel@BizjetLaw.com.