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Aircraft leasing Agreement and its effects post Covid 19

The lease is an agreement between two or more parties for the temporary transfer of property rights for a specific period of time in lieu of consideration. The party who transfers the property is termed as the Lessor and to whom the property is transferred is the lessee.

It is important to note that in such agreement the ownership of the property is not transferred and it is not a permanent transfer of the property as that will amount to sale, it is merely a transfer of rights conferred in the property from the owner of the property or Lessor to the lessee for a specific period of time in return of consideration which is termed as Rent or premium.

As owning big aircraft is an expensive and time taking affair, consequently, it makes the leasing of aircrafts a much more convenient option for the airline companies. There are a large number of legislations, viz. Directorate General of Civil Aviation (DGCA), the Reserve Bank of India regulations, Income Tax regulations, which the parties have to comply while executing an aircraft leasing agreement in India.

The lease is defined from section 105-117 of The Transfer of Property Act 1882 and also mention certain essential ingredients of a lease agreement which are as follows:

  1. Competency of the parties: The parties to the leasing agreement should be competent to enter into a contract as per law. The Lessor of the property should be the owner of the property and shall have absolute rights vested in the property.
  2. The Right of possession: the lessor stands the owner of the property and is vested with the absolute rights and the same is not transferred to the lessee, it is not an ownership transfer of an asset and only temporary interest is transferred to the lessee.
  3. Lease Rent/premium: Consideration for a lease can be taken in the form of a rent or premium.
  4. Acceptance of the lease agreement: The lessor shall accept to the duration of the lease, the consideration, and the other terms and conditions mentioned in the leasing agreement.
  5. Duration of Lease: the lease agreement is executed for a specific period of time which shall be mentioned in the leasing agreement, however relaxation can be given in that duration with the consent of the lessor and lessee.

Aircraft Lease

The aircraft lease or airlines lease is the agreement between the parties to lease aircrafts. It is a tool used by airline companies to lease aircrafts from other airlines or any other aircraft leasing company either to lessen the operational cost and financial burden of buying a new aircraft or to meet the temporary capacity needs. There are two types of lease which is generally operational in aircraft leasing business, those are:
  1. Wet Lease: In such a leasing arrangement, one airlines company lease the aircraft, Maintenance for the aircraft, the cabin crew and the insurance facility (AMCI) to the other airlines company or travel company. The payment in such a lease is made by the lessee on the basis of hours operated. However, the other expenses such as fuel expenses, airport fees, and any other duties, taxes, etc are provided by the lessee.
  2. Dry Lease: On the other hand, in dry lease arrangement the aircraft financing entity leases the aircraft to other leasing companies or banks without the Maintenance charges for the aircraft, the cabin crew, and the insurance facility. The lease generally operates for 2 years.
  3. Damp Lease: It is a wet-lease without cabin crew but the lessor provides an onboard trainer to guide the crew for a specific period of time.

Clauses In Leasing Agreement/Contract

In an aircraft leasing agreement, there are many complex clauses, therefore they should be drafted with the utmost attention and sincerity in order to avoid ambiguity in the terms and conditions of the contract. These clauses clearly mention the objective for which the agreement came into existence and further specify the rights, liabilities, and duties of the parties and are open to modifications in accordance with the will of the parties.

Few of the important clauses are as follows:
  1. Title: This clause contains the basic objective for which the agreement has been drafted, the parties between whom the agreement is being made, and the date from which it will come in force. It is like the preamble of the agreement.

    For example: In an Aircraft leasing agreement, the title can be as- AIRCRAFT LEASE AGREEMENT (this Agreement) dated on September 26th, 2019 (the Effective Date), by and between ABC Management LLC, a California limited liability company (Lessor), and CBA, INC., a California corporation (Lessee) etc.
  2. Lease of aircraft/ Delivery: In an aircraft lease agreement one of the important clause which has to be mentioned is when and where will the aircraft will be delivered by the lessor. It has to be mutually decided by the parties.
  3. Term/Duration of agreement: As the lease is executed for specific period of time, therefore the agreement should clearly mention the duration for which the lease is being executed. The clause can also contain whether the lease can be extended for any other specific period of time or not.
  4. Lease Payments: This clause contains the amount of consideration (rent/premium) to be paid to the lessor for the aircraft leased and includes the time period in which the payment has to be made, mode of payment and the expenses which shall form part of the consideration. In case of any foreign country transaction it shall also mention the currency in which the lease payment shall be made.
  5. Taxes: This clause specifies the amount of taxes, fees, and assessment imposed on the aircraft during the period of the lease.
  6. Maintenance responsibility: This clause contains the liability of the person who shall be responsible for the servicing, repair, inspection, maintenance and overhaul of the Aircraft.
  7. Inspection: This clause gives the right to the lessor to inspect the existence of the aircraft and other records in relation to the aircraft during the tenure of the lease.
  8. Legal title to the aircraft: It defines the legal ownership of the aircraft which remains with the lessor and further obstruct the lessee to not create, incur, assume or suffer to exist any lien with respect to the Aircraft or take any action that would otherwise dilute Lessor's unrestricted title to and ownership of the Aircraft.
  9. Insurance: It imposes liability on either of the party to cover the liability of the aircraft as per the rules and regulations prevailing in the country. In general, terms this liability is incurred by the lessee.
  10. Termination: It gives the right to the lessor or the lessee to terminate the contract on breach committed by the lessee or lessor in the Events of Default', occurrence of which shall terminate the contract between the parties.
  11. Governing Law/Jurisdiction: It defines the jurisdiction of the court of law in which the dispute (If arose) between the parties to the contract shall be submitted.
  12. Hell, or high-water: This clause imposes a liability on the lessee to pay the rent/premium amount to the lessor irrespective of any difficulties faced by the lessee and shall continue the payments without any obstruction.
  13. Force majeure: This clause discharges the liability of the parties to the contract due to any extraordinary event or happening which is beyond the control of the parties. This clause is sometimes regarded as contrary to the hell and high water clause.
The contract shall also contain other clauses such as amendment and waiver clause, severability clause, return conditions clause, representations and warranties clause, etc which defines the separates the liability of the lessor and lessee.

Aircraft Leasing Agreements Behaviour Post Covid-19

The COVID 19 pandemic has made the trade and business come to stand still, with each day the conditions worldwide have worsened which primarily leads to the imposition of the travel ban. The airline industry has been adversely affected due widespread of the pandemic COVID- 19 (commonly called as the coronavirus).

In countries like Australia, China, Japan, Malaysia, Singapore, South Korea, Thailand, Vietnam the impact on the number of passengers has seen a decrease up to 23% which has led to a loss of total passenger revenue of $49.7 billion. In Rest of The Asia Pacific, this number is less in comparison with a substantive decrease of 9% in number of passengers and total revenue loss of $7.6 billion, whereas the middle east being least effected at 9% loss in the number of passengers and $2.3 billion loss of revenue.[i]

The aviation industry in developing nations like India have shown the most destructive effects where almost 30 lakhs jobs are at stake. Further, in order to prevent the spreading of this pandemic, the government announced international as well as domestic travel ban followed by the countrywide lockdown. The aviation industry has taken a large toll due to this travel ban which resulted in loss to stakeholders and the stock value of such companies has crashed drastically. The direct impact of the current situation will be reflected in the airlines leasing agreement which are being executed between different companies.

As the companies are not able to earn their revenues, subsequently they will not be able to make on-time payments of the rent or premium due which can further lead to premature termination of the lease by the lessor due to non-payment or by the lessee due to increased idle resources. One of the major concerns in such contracts are hell or high-water clause as well as the force majeure clause.

Hell, Or High-Water Clause, as mentioned above, this clause imposes a liability on the lessee to pay the rent amount to the lessor irrespective of any difficulties without any default, which in the current scenario can create a conflict between the companies' due to non-availability of resources.

As the lessee company will have more idle resources available which will lead to premature termination of the lease to save extra cost burden on the company. In this scenario, the lessor company should try to step in the shoes of the lessee and should allow for deferred payments of rent to avoid premature termination of the lease which is a loss on both the ends.

Another matter of concern is the Force Majeure clause which discharges the liability of the parties to the contract due to any extraordinary event or happening which is beyond the control of the parties. In general, terms this clause may or may not be present in the airlines leasing contracts but if it is mentioned then another question arise is whether this pandemic qualifies for the definition of such clause.

In moral terms, it should be allowed a privilege of this clause but with certain exceptions. If we elaborate this clause this leads to an implied termination of the contract as due to an uncertain event the contract cannot be performed.

However, the parties to the contract should try to come to a conclusion to temporary terminate the contract and resume it as soon as things are back to normal. This will lessen the burden on both the parties as the lessee will save the cost on payment of rent and the lessor will not lose any future income due to premature termination of the lease. Many countries are supporting the aviation industry to recover from this impact through bailout packages.

Besides government providing financial help, companies themselves have to do some efforts to save each other in such an emergent situation and come up with a solution which is, if not beneficial but temporary relief to the loss suffered by both the parties to the contract.

  1. Date source: IATA press release No. 12, Dated- 05/03/2020
Written By: Anmol Mishra

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