Sarah Nilsson, JD, PhD, MAS
Sarah Nilsson, JD, PhD, MAS

Lease/Fractional

US airline fleet is now composed of far more aircraft leased than owned by the airlines operating them

Much of the litigation arising out of aircraft leases results from inadequate diligence in negotiating and documenting the details of the lease agreement

Leaseback: hybrid composite of sale and lease - where as part of the same wrap-around business deal the buyer purchases the aircraft from the seller then turns around and leases it back to the seller for the seller's use 

Lease: an agreement, a contract that permits someone else to use an owner's aircraft - aka lease forward

In any lease: (forward or back) the aircraft owner is referred to as lessor and the user as the lessee

Lessor: should check prospective lessee's credit rating before deciding to lease the aircraft to him

If lessee operates or has previously operated aircraft from others, inquire about their experiences with the lessee, especially timely payment and aircraft care and maintenance

Check also the potential for seizure of aircraft by law enforcement agencies if the aircraft is used for illegal purposes - even if aircraft owner is not directly involved in the scheme the aircraft may be seized and forfeited to the government if its owner fails to take reasonable measures to ensure that the aircraft is not being used for such unlawful activities

 

Netjets

 

Aircraft Lease Checklist

- description of aircraft

- name and address of registered owner

- name and address of lessee

- maximum certificated gross takeoff weight of the aircraft

- who is the operator responsible for compliance with FARs governing aircraft operations

- exclusive or non-exclusive use

- inspections and maintenance

- other expenses

- insurance

- crew expenses

- lease payments

- duration, renewal, and termination

Aircraft leasebacks developed primarily as an aircraft sales tool, the leaseback being offered as an incentive to encourage a person to purchase an aircraft she might not feel she could otherwise afford

Sales pitch: under the leaseback, buyer is told she will receive income from FBO's use of the aircraft (rental, charter or flight instruction) - this income will help cover monthly payments for aircraft's financing, inspections, and maintenance - buyer is told she can deduct as business expenses depreciation, insurance, inspection, maintenance, and storage expenses associated with aircraft ownership

BUT

Some dealers are required to purchases a set amount of aircraft annually whether or not they sell them - floor plan financing - so dealers have been known to sell below cost just to relieve the burden of the monthly payments of principle and interest - but in a leaseback the sales price becomes non-negotiable 

When the seller presents the leaseback it usually states that seller/lessee does not guarantee any minimum monthly use or payment - usually is either for one year or without a fixed duration - provides that either party may terminate the lease on relatively short notice (10-30 days) without having to show good cause for cancellation - provides that all maintenance will be done by seller/lessee's maintenance shop at seller/lessee's discretion but at owner's cost - maintenance costs can be deducted from rental payments due and if they exceed amount of rental payments due to the owner then the owner must pay the difference

Seller/lessee is continually faced with competitive incentive to keep newest aircraft on the flight line - meaning only keeping aircraft under leaseback for a max of 2 years (regular use by non owner pilots tends to age the aircraft fast!) - incentive to make more deals to make more commissions - if unscrupulous seller/lessee will defer needed maintenance when leased aircraft is in high demand for flight operations (especially when warranty is good) then attempt to catch up during slow periods or falsely bill owners for maintenance not performed (hard for owner to prove)

If owner backs out of leaseback she may find she has recaptured depreciation in the sale and now must file amended income tax returns and pay additional income taxes for the years the aircraft was owned

 

Beware of wet lease: aircraft owner leases aircraft with flight crew - too much like charter operation

 

Co-ownership: NOT A PARTNERSHIP - owners are co-owners not partners - recall the risk of vicarious liability with partners - should sign a legal document clearly setting out:

- responsibilities for costs

- means for resolving scheduling conflicts

- and other problems

 

Fractional Ownership: special kind of co-ownership - economical for users who will need aircraft for between 50 hours and 200 hours annually

For large and turbine-powered multi-engine - 14 CFR 91.501(c)(1) and (3) provide a very narrowly drawn exception permitting operation under Part 91 under a joint ownership or a time-sharing agreement

However only certain itemized expenses of the flight may be charged - meticulous documentation of these charges must be maintained to show compliance with the rule

 

A true fractional ownership program includes four interlocking primary agreements:

1. the aircraft purchase agreement (between seller and buyers)

2. A joint ownership agreement (among buyers/owners)

3. An aircraft management agreement (between buyers/owners and an aircraft management company)

4. A master interchange agreement (between buyers/owners of all aircraft owned by participants in the management company's fractional ownership program)

 

Each owner gets access to an appropriate aircraft without the associated management responsibilities for scheduling, crew (not included in light piston fractional ownership), hangar, insurance, inspection and maintenance, at a cost  that may be more favorable than either charter rates or full ownership

 

1/16 (1/32 for helicopters) are the smallest shares - 14 CFR 91.1001(b)(10)

To address safety concerns, the FAA created Fractional Ownership Aviation Rulemaking Committee (FOARC) through an Order in 1999.

The objective of the FOARC was to propose such revisions to the FARs and associated guidance material as may be appropriate with respect to fractional ownership programs.

FOARC was comprised of 27 members representing at least:

- 9 Part 135 operators

- 7 fractional ownership program managers

- 4 airframe manufacturers

- 3 traditional Part 91 corporate flight departments

- 9 traditional aircraft management companies

- 5 industry trade associations

In 2000, the committee presented its recommendations to the FAA

FOARC reached consensus that fractional ownership program operations should continue to be regulated under 14 CFR Part 91

However the committee unanimously recommended FAA adoption of a new subpart K to Part 91 to ensure adequate FAA oversight and surveillance of fractional ownership program managers equal to that experienced by Part 121 or Part 135 operators

 

Key features include:

1. clarification of responsibility for operational control

2. crew flight and duty time limitations

3. crew training comparable to Part 135 requirements

4. requirement for a drug and alcohol abuse recognition program for all personnel performing safety-related functions

5. aircraft equipment requirements by size, type and class of aircraft (cockpit voice recorder, flight data recorder, ground proximity warning system, thunderstorm detection equipment or airborne weather radar, TCAS) 

6. establishment of minimum runway length requirements

7. weather reporting requirements for instrument approaches

8. requirement for an FAA approved maintenance and inspection program

 

December 22, 2015 - Court decides that flight-sharing websites are illegal - re AirPooler and Flytenow

January 1, 2016 - FAA claims that airplane ride-arranging sites violate federal regulations

June 24, 2016 - Flytenow Flight-sharing Case Seeks Supreme Court Hearing

 

Air Charter Brokerage

 

ARGUS

Wyvern

best-practices-charter-brokering.pdf
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2016-federal-excise-tax-guide.pdf
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BrokerNoticeFinal Guidance.pdf
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Business_Aviation_Fact_Book.pdf
Adobe Acrobat document [2.2 MB]
NBAA_Charter_Guide.pdf
Adobe Acrobat document [2.1 MB]
NBAA_Airports_Handbook_2013.pdf
Adobe Acrobat document [493.5 KB]
NBAA_Airport_Advocate_Guide_2013.pdf
Adobe Acrobat document [427.9 KB]
Certificated_Packet_2012_final.pdf
Adobe Acrobat document [670.5 KB]
spa_v2.pdf
Adobe Acrobat document [110.8 KB]
ACFT_Renters_Checklist.pdf
Adobe Acrobat document [35.0 KB]
leasetermination.pdf
Adobe Acrobat document [55.7 KB]

Contact Me

Sarah Nilsson, JD, PhD, MAS

 

602 561 8665

 

sarah@sarahnilsson.org

 

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Legal disclaimer 

The information on this website is for educational purposes only and DOES NOT constitute legal advice. While the author of this website is an attorney, she is not your attorney, nor are you her client, until you enter into a written agreement with Nilsson Law, PLLC to provide legal services.

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