A redelivery checklist for operating lessors – 10 things not to forget

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It goes without saying that operating lessors put a great deal of planning and work into placing an aircraft on lease and delivering it to their customer. Redelivery may seem like a distant prospect in comparison and occupies few of our thoughts – at least until the process has become time-sensitive. To avoid unexpected pitfalls, or overlooking a critical piece of the puzzle, it pays to give thought to the redelivery process well ahead of time, and to seek advice and assistance as required. This checklist is intended to help operating lessors manage a smooth redelivery process to avoid losses, delays and disputes.

1. Redelivery conditions

Technical teams will carefully review the redelivery conditions set out in the operating lease, which are, helpfully, often in a separate schedule. However, do not forget to check the rest of the lease for other undertakings or deadlines. These will likely include taking the aircraft out of service at a certain time, making certain documents available or the operator's co-operation with return, export and deregistration. Make sure to diarise key milestones, follow up to make sure they have happened and warn lessees in good time about penalties, such as step-ups in rent. Bear in mind that, following the High Court's ruling in Pindell v. AirAsia [2010] EWHC 2516, even if the indemnities in your lease purport to cover "any losses" they may not in fact always cover all losses that a lessor may suffer from a late redelivery or another breach of a redelivery condition.

2. Deviations and discrepancies

Expect deviations from the redelivery conditions and negotiation over how these will be remedied, by whom, and at whose cost. The lease may well not cover every eventuality. From a legal and documentary perspective, it is prudent for the lessor and the operator to sign a redelivery certificate to document discrepancies, as well as asking the operator for a non-incident statement (if not expressly contemplated in the lease). Lessors may also consider taking the opportunity to negotiate for the outgoing operator to perform work required to put the aircraft in the delivery condition required by a follow-on lessee. Often, the follow-on lessee will undertake its delivery inspections at the same time as the lessor is undertaking redelivery inspections and these will need to be carefully managed by the lessor.

3. Security deposit and end of lease adjustments

The outgoing operator will expect the return of its security deposit (make sure to check what the lease says about when it must be returned and the circumstances in which it may be retained), whether in cash or a letter of credit and maintenance reserves will need to be applied in accordance with the lease for any redelivery qualifying events. The lease may also have a complex end-of-lease adjustment or compensation mechanism. In either case, it is prudent to work through the mechanism in good time and in detail, preferably with the involvement and cooperation of the operator. There is plenty of scope for confusion and disagreement, so it is essential to have a firm understanding of the mechanism detailed in the lease in order avoid last-minute delays with redelivery (and the knock-on effect on delivery under the follow-on lease).

4. Deregistration and export

Deregistration and export of an aircraft is not always fast or straightforward, so take local advice well beforehand. Certain jurisdictions can be paper-heavy and may require submission of more documents than initially assumed. Documents may also need to be notarised or apostilled, which can add to potential delays. Do not forget that this could also require the involvement of financiers where there is security over the aircraft registered in the jurisdiction or if a financier's interest is noted on the aircraft's Certificate of Registration. Similarly, take local law advice in the jurisdiction where the aircraft will be registered following redelivery, not least because it may affect what documentation is required from the previous registry.

5. Security

Existing security documentation or security filings may need to be released (which may affect the deregistration process) and cooperation and consent of financiers may be required.

6. Warranties

Replacement airframe and engine warranty documents need to be considered and put in place (including for any off-lease period).

7. Cape Town

International Registry registrations for the lease agreement will need to be discharged and in certain jurisdictions that might mean taking advice on obtaining AEP codes. Where AEP codes are required, local counsel will likely need to be involved to obtain them and carry out the discharges.

8. Run-off insurance, maintenance and storage

In addition to obtaining a run-off liability insurance certificate from the operator (and making sure it covers the right indemnitees, including financiers if there are any), operating lessors will need to ensure that insurance is in place for (i) any ferry flight and (ii) ground risks during any off-lease period. It is also now the lessor's responsibility to arrange maintenance (e.g. pursuant to a manufacturer's product support arrangements) and storage, this is of particular concern if the aircraft is not being immediately re-leased to another operator.

9. Ferry flights

It will often be up to the lessor to organise any required ferry flight away from the redelivery location. If the outgoing operator agrees to reposition the aircraft, then it is prudent to document the arrangement to determine how this will be done, at what cost and how the risks associated with the flight are allocated.

10. Follow-on lessee

If there is a follow-on lessee, a key point to bear in mind when considering all of the above is to always ask yourself "How does this dovetail with our commitments to the incoming lessee?". For instance, can redelivery and deregistration be completed in the required time for delivery to the new lessee? Will the aircraft be in the required delivery condition and can the incoming lessee assist in any way (e.g. agreeing to accept the aircraft subject to discrepancies)?

The golden thread running through all of this is to be well prepared. Understand the terms of the lease, anticipate local law requirements and seek assistance well in advance. Keep that in mind and redelivery need not be a bumpy landing.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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