Grounded!

Is there ever a right way to terminate an aircraft lease?  Maybe not, but there are certainly some wrong ways.

What practical steps should an aircraft lessor take terminating a lease agreement?

Here we focus on the position under English law, which governs mant aircraft leases, but there are general takeaways.

English case law

Though not involving aircraft leases Phones 4U Ltd (in administration) v EE Ltd [2018] EWHC 49 highlights some of the problems that can arise when a party terminates a contract hastily.

The case was brought by Phones 4u (a retailer of mobile phone handsets in the UK) seeking unpaid commission from EE (a mobile phone network provider, also in the UK). EE counterclaimed seeking common law damages because of a ‘repudiatory breach’ which took effect when Phones 4u ceased trading. EE argued in court that this repudiatory breach entitled them to terminate the agreement and resulted in a loss of bargain for which damages were sought.

The termination notice sent by EE to Phones 4u relied on a contractual provision to terminate and the notice was silent on any right arising under common law. The court found that EE’s termination notice exercised a contractual right to terminate. If damages were to be sought under common law, the termination letter should have stated this was the case. While the letter “reserved” other rights that EE may have (such as claiming damages atcommon law), this reservation fell short of exercising those rights. The notice was defective.  EE’s counterclaim was dismissed.

An English court with an English law aircraft lease before it, will likely look closely at the wording used in a termination notice. The notice must clearly express the legal basis under which the right to terminate arises. This is particularly important to an aircraft lessor wishing to preserve a common law right to claim damages arising from a breach of the lease. These could include the loss of future payments under the lease or the costs associated with putting the aircraft back to its delivery condition.

Content of termination notice

Assemble all relevant facts at an early stage, before the termination (and any subsequent repossession) process begins. A lessor should collate evidence of the lessee’s defaults, missed payments and the like.

The termination notice should confirm the date of the original lease; the names of the parties and the serial (MSN) number of the aircraft which is the subject of the lease. It should specify whether a termination fee is payable, and if so, confirm the amount. Mention should be made of the retention (or otherwise) by the lessor of the deposit paid by the lessee. Also not a bad idea to refer to any costs associated with the return of the aircraft to the lessor (such as maintenance expenditure required to bring the aircraft up to the stipulated return condition) and comment on the assumption of operational control of the aircraft.

The termination notice will have to precisely mirror the notice provisions prescribed in the original lease.

Timing and service of termination notice

Lessors will often coordinate the service of a termination notice to coincide with the aircraft’s presence in a favourable jurisdiction. This assists the repossession. Another tactic that lessors use is to serve the notice of termination when they know the aircraft is scheduled to undergo routine maintenance.

Every country around the world has an aircraft registry where details of the ownership and possessory rights in an aircraft are held. The service of a termination notice will impact upon those possessory rights, and so the lessor should notify the local aviation authority at the same time. The aviation authority, in turn, will then approach the airline following service of the notice. The lessor can gauge from the airline’s response whether the airline will consent to the repossession. Often they do not, and seek to challenge the legal validity of the termination notice.

Aircraft lease termination checklist

Review and be familiar with the actual contract, having a good understanding of what the termination provisions provide for.

Quantify any losses that may flow from a termination of the lease or underlying agreement – for example the value of future payments under a lease, lifting liens over an aircraft, putting the aircraft back in redelivery condition. Document, but also mitigate those losses where possible.

If decision is made to terminate, immediately send the notice demanding the aircraft (including all spare parts and aircraft documents) be returned to lessor and that all parts be installed on the aircraft.

• Review and be familiar with the actual contract, having a good understanding of what the termination provisions provide for.
• Quantify any losses that may flow from a termination of the lease or underlying agreement – for example the value of future payments under a lease, lifting liens over an aircraft, putting the aircraft back in redelivery condition. Document, but also mitigate those losses where possible.
• If decision is made to terminate, immediately send the notice demanding the aircraft (including all spare parts and aircraft documents) be returned to lessor and that all parts be installed on the aircraft.
• Draft the termination notice. This can be a letter, or something more formal and headed “Termination notice”. Clear and unequivocal language to be used. Set out material facts and all legal grounds for termination - both in contract and in common law. Mention, identify and particularise all possible breaches.
• Don’t rely on the phrase “we reserve our rights”. As the recent case suggests a right reserved does not equal a right which is exercised.
• When drafting the notice or indeed any communications at this stage be mindful of the fact that what you write may end up being scrutinized by a Judge sitting in court down the line. Pause and consider the consequences of what you are saying before you press “send”.
• Send the notice to the lessee (and guarantors, if any) requiring immediate payment of amounts in arrears and damages for breach of Lease (including value of future payments, lifting liens, putting Aircraft in redelivery condition).
• Send the notice by email, attaching a read receipt. Follow this by sending a hard copy by courier, or some form of registered post. Keep a record of the communications.

This alert is for information only and is not legal advice.