Aircraft Purchase Agreement: The Roadmap to a Successful Transaction

It always surprises me when a buyer is unsure about using a purchase agreement when buying an aircraft. They no doubt used a purchase agreement if they have purchased homes or other large, expensive assets. Yet, many of these same buyers are willing to spend the same amount of money, and in many cases a great deal more money, to purchase an aircraft without the protection of a written aircraft purchase agreement.

Aircraft purchase agreements should be used in almost every aircraft sale transaction. First, the law in most states requires that a contract for an amount greater than $500 be in writing in order for it to be enforceable. This is called the statute of frauds. Although exceptions to this legal doctrine exist, complying with the law is usually safer than hoping you will be able to take advantage of an exception.

Further, using an aircraft purchase agreement can help avoid confusion and misunderstandings. If the agreement clearly explains how and when the transaction will happen and what is included in the deal, the greater the likelihood that the buyer and seller will each know the other party’s expectations and the less chance for surprises or misunderstandings.

The number and complexity of the terms that should be included in an aircraft purchase agreement will often times be dictated by the type and value of the aircraft itself. Although by no means inclusive, the following terms provide a good place to start.

Identify the Parties

The agreement should identify who is selling and who is buying the aircraft. Although this sounds simple, the identity of each party isn’t always clear. It is very common for aircraft to be registered in the name of a corporation or limited liability company (LLC.) In those situations, the individual with whom the buyer is negotiating is not the owner of the aircraft and should not be listed as the seller. Rather, the registered owner of the aircraft – the LLC or corporation reflected at the U.S. Civil Aircraft Registry (Registry) as the registered owner – should be identified as the seller.

The buyer on the other hand, can be an individual, a corporation, an LLC or even a trust. If the buyer is an individual, that person will be listed and upon registration will be recorded as the owner of the aircraft. To fully take advantage of release and indemnity language, the seller may also want to consider having an individual buyer’s spouse execute the purchase agreement.

If a corporation or LLC will be registering the aircraft, the purchase agreement should identify that entity as the buyer. Alternatively, an individual can sign an agreement as the buyer. As long as the buyer is allowed to assign his or her rights under the agreement, that individual could still assign the agreement to a corporation, LLC or trust prior to closing. The corporation, LLC or trust will then take title to the aircraft without the individual ever entering the chain of title. From a liability perspective, this can be important.

Identify the Aircraft

The aircraft purchase agreement should identify the aircraft in as much detail as possible. At a minimum, it should include the make, model, N-number and serial number. Sometimes parties will identify the aircraft generically, such as a “King Air 200.” But that isn’t particularly helpful since the King Air 200 was manufactured by a variety of different companies (e.g., Beech, Beechcraft, Raytheon Aircraft Company and Textron Aviation). Although complete accuracy isn’t required, a quick search of the Registry should provide the parties with accurate information.

Additionally, the aircraft description should include a list of all avionics, logbooks, handbooks, additional equipment, spare parts and any accessories the parties agree are included in the transaction. If the seller intends to retain certain items, those items should be identified and specifically excluded from the transaction. By taking the time to detail exactly what is and isn’t being sold, the parties can prevent misunderstandings at delivery.

Purchase/Sale Price

The agreement should specify how much is being paid for the aircraft. It should also include if the buyer will be giving the seller a deposit or earnest money, and what happens to the deposit? Will the money be placed in escrow or simply held by the seller? If an escrow agent is not involved, the buyer will need assurance that the deposit will not simply disappear into the seller’s pocket, making recovery difficult, if not impossible, if the transaction does not close. The agreement should also state under what conditions the deposit must be refunded and, alternatively, under what circumstances the seller may keep the deposit if the deal does not close.

The buyer’s method of payment should also be stated. Is it a cash transaction or will financing be involved? If financing is involved, the buyer may want to include language that makes the transaction contingent upon the buyer obtaining financing on terms acceptable to the buyer. That way, if the buyer isn’t able to obtain satisfactory financing, the buyer will not be forced to complete the purchase on financially unacceptable terms.

Documents

The agreement should include a statement about which documents the seller will sign and deliver to the buyer at closing. Usually this includes a Warranty Bill of Sale, an FAA Bill of Sale (FAA Form 8050-2) and a signed current Registration Form (FAA Form 8050-3). If any liens or mortgages are recorded against the aircraft, applicable releases will also be required. The agreement may also specify that the buyer will file an Application for Aircraft Registration (FAA Form 8050-1) and any other necessary documents at closing.

Pre-purchase inspection

In most transactions, the buyer will want to have a pre-purchase inspection performed on the aircraft. The purchase agreement can specify who will perform the inspection, what qualifications that individual must possess, where the inspection will take place, the scope of the inspection, and whether a test flight will be conducted. Also, the buyer should make the agreement contingent upon the buyer’s satisfaction with results of the inspection. The agreement should also address which party is responsible for what expenses related to the inspection. Although the buyer is usually responsible for the expenses associated with a pre-purchase inspection, that isn’t always the case.

Warranties

It is possible to include a variety of warranties in the purchase agreement where the seller makes certain representations regarding the condition of the aircraft (e.g., warranties of airworthiness, merchantability, fitness for a particular purpose, etc.)

From a buyer’s perspective, the warranty of title is probably most important, as it ensures the buyer receives title to the aircraft free and clear of any liens or mortgages. Although the buyer will still want to obtain a title search of the Registry’s records for the aircraft, having the warranty of title included in the purchase agreement will provide some recourse to the buyer for any undisclosed liens or interests in the aircraft.

Most sellers will want to include a disclaimer in the purchase agreement stating that the buyer is purchasing the aircraft “as-is, where-is." The agreement will go on to say that the seller is not making, nor is the buyer relying upon, any representations or warranties regarding the condition of the aircraft. And it may also specifically state that the buyer is only relying upon its own investigation, inspection and evaluation of the aircraft.

The seller wants to complete the transaction without having to worry that the buyer will later claim that the aircraft has a problem for which the seller is responsible. So, the seller does not want to represent that the aircraft is in any particular condition (e.g., airworthy.) When the deal closes, the aircraft is sold to the buyer in its existing condition without any promises by the seller about that condition. Not only does this “as-is, where-is” language protect the seller, but it also protects other parties, such as seller’s aircraft broker, who are involved in the transaction.

If the buyer is having a thorough pre-purchase inspection performed by a qualified mechanic familiar with the specific aircraft, inclusion of this language in the purchase agreement is probably not a great concern for the buyer. The buyer simply needs to understand that once the deal closes, the buyer will not have any recourse against the seller if problems with the condition of the aircraft are later discovered.

Waiver and Release of Liability

The seller will want waiver and release of liability language in the purchase agreement that limits potential liability for injury or damage sustained by the buyer arising out of use of the aircraft. This should appear in bold, all caps letters to make sure it is obvious and not buried in the fine print of the purchase agreement.

This type of language will not release a seller from responsibility for the seller’s intentional acts or gross negligence, nor will it prevent possible claims from the buyer’s minor children or from a third party who is injured or damaged by the buyer’s use of the aircraft. However, it should prevent the buyer, and the buyer’s spouse if the spouse has signed the purchase agreement, from suing the seller if a preexisting defect in the aircraft causes an accident that results in injury or damages.

What Remedy Does an Aircraft Purchase Agreement Provide?

An aircraft purchase agreement is not a 100 percent guarantee that a buyer or seller will not be sued. In this litigious world, I don’t know that such a guarantee is possible. Further, the purchase agreement alone does not make anyone do anything. If a buyer or seller does not want to comply with that party’s obligations, the purchase agreement will not change that. However, the purchase agreement does provide a basis upon which to go to court and have a judge make the non-performing, or “breaching,” party comply with the agreement.

If the purchase agreement is drafted clearly and with enough detail, it may be possible to have the court specifically enforce the agreement. An example would be where a buyer refused to complete a transaction even though the seller and the aircraft complied with all of the purchase agreement terms. In this situation, a court could force the buyer to complete the purchase.

Alternatively, the court may award monetary damages for losses incurred by the non-breaching party. An example of this occurs when a seller refuses to return a deposit even though the buyer has complied with all of the terms of the purchase agreement and has a right to the return of the money. In this situation, a court could enter a judgment against the seller in the amount of the unreturned security deposit.

An aircraft purchase agreement is a valuable tool to ensure that each party to an aircraft purchase transaction receives what is expected. It prevents confusion and misunderstanding and provides security that a party will have recourse if the other party to the transaction fails to perform as required. With comparatively minimal up-front time and expense, both buyers and sellers can protect their interests and maximize the likelihood of a successful closing.