Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 3As noted in Part 1 of this series, Federal Aviation Administration (FAA) rules govern the ownership, operation and use of private aircraft. Most private aircraft are operated under Part 91 or Part 135 of the Federal Aviation Regulations. For reasons discussed below, it is imperative for the family business owner of a private aircraft to determine whether the Part 91 or Part 135 rules govern the owner’s operation of the aircraft and to strictly comply with such rules at all times.

The Part 91 rules govern the operation of a private aircraft for non-commercial purposes. Examples of Part 91 operation of a private aircraft would be flights taken by employees on aircraft owned by their employer for business purposes; personal flights taken by the owner of the aircraft; flights taken by the owner’s family members or friends; and other similar flights that do not involve any charge or fee paid by the passengers for the value or costs associated with the flight. The Part 91 rules are generally less restrictive and less costly from a compliance standpoint than the Part 135 rules, which are discussed below. In most cases, the owner of a private aircraft will structure the ownership, operation and use of the aircraft to fall within the Part 91 rules.

The Part 135 rules govern the operation of a private aircraft for “compensation or for hire.” For example, if the owner of a private aircraft takes a group of friends on a ski trip and charges each passenger a proportionate share of the value or costs associated with the flight, the flight is considered as one for compensation or hire and the owner must comply with the Part 135 rules. Similarly, if the business owner of an aircraft makes the aircraft and pilot(s) available to other businesses to use, for a fee or charge, the business owner must comply with the Part 135 rules with certain very limited exceptions. Charter operations involving a private aircraft are governed by the Part 135 rules.

The Part 135 rules for operating a private aircraft are more stringent than the Part 91 rules, involve additional expense for compliance, maintenance and pilot training and certification, and require that the owner-operator of the aircraft hold a Part 135 certificate issued by the FAA. Obtaining a Part 135 certificate involves significant expense and can take six months or longer. The operation of a private aircraft under Part 135 also requires that the operator report and pay the Federal Excise Tax of 7.5 percent on the amount of compensation received by the owner for any flight operated under Part 135.

The failure to comply with the Part 91 or Part 135 rules, as applicable, can have catastrophic consequences for the owner of a private aircraft. For example, if the owner mistakenly believes that the operation of the aircraft is governed under the Part 91 rules when in fact the Part 135 rules apply to the owner’s operation of the aircraft, the insurance coverage for the aircraft may be voided and the owner may be subject to civil penalties of up to $25,000 for each violation of the applicable rules. For these and other reasons, an owner of private aircraft should consult with legal counsel experienced with the Federal Aviation Regulations governing the ownership, operation and use of private aircraft.

Is Your Family Business Getting Political? 5 Things to Consider <i>Before</i> Donating to Political Candidates and Political OrganizationsThe First Amendment broadly protects political speech, and every citizen has a fundamental right to participate in the political process, including making contributions to political candidates and political organizations. However, like any fundamental right, political speech has its limits. Political contributions are heavily regulated by governments and public perception, and you and your family business should consider the following before making a political contribution.

1. It is better to ask for permission than forgiveness.

Campaign finance laws (laws that regulate and restrict political contributions) vary greatly by jurisdiction, and restrictions on political giving can come in many different shapes and sizes. In particular, donors should always be mindful of whether there are applicable contribution limits, prohibitions or disclosure requirements when making a contribution. Penalties for violating these rules can be very significant, including potentially hefty fines and, in rare instances, incarceration. Depending on the circumstances, making a political contribution can even result in canceling a government contract or making a contractor ineligible to bid on government contracts in some jurisdictions. Accordingly, it is critical that donors do their own due diligence or seek counsel to confirm that their political contributions are compliant with the applicable rules before making a contribution.

Also, note that you should not rely solely on a candidate’s or fundraiser’s word that a proposed contribution is OK. They do not represent you and do not always know how the rules apply specifically to you or your business.

2. You are the company you keep.

When you contribute to a candidate or a political organization, you are expressly endorsing them. You may be supporting them for a very specific reason, but you are generally associating yourself and potentially your business with that candidate or organization when you make a contribution. Accordingly, it is critical to seriously vet all political contributions, especially if it is a political organization.

Further, the world of campaign finance is generally very transparent. Despite what you may have heard about “dark money” in politics, there are very few options, if any, to effectively participate in elections confidentially. You should assume that any political contribution that you make will either be reported in a public filing or will otherwise be discoverable by the general public and the media. Accordingly, if you are concerned about being associated with a candidate or an organization – think twice before you contribute.

3. Never reimburse a political contribution.

Although political laws vary from jurisdiction to jurisdiction, one rule is consistent everywhere – it is illegal for an individual or entity to reimburse another individual or entity for making a contribution to a political candidate. Not only is it a violation of campaign finance laws, it is a felony in most jurisdictions. While most campaign finance violations will not result in jail time, this is one violation that could. Simply put, never pay or reimburse anyone for making a political contribution.

4. Give with no strings attached.

Never make a request of a candidate or officeholder when making a political contribution. Similarly, never mention a political contribution when making a request to a candidate or officeholder. Political giving and lobbying requests should not be made contemporaneously. Not only is it frowned upon and makes most candidates and officeholders uncomfortable, it could be a crime depending on the circumstances. There is a time for lobbying and making requests, and there is a time for fundraising. Those times are never the same.

5. Elections can affect you and your business.

Participating in elections and supporting candidates makes a difference. Not only is it a fundamental right, but supporting certain candidates and political organizations can often be in the best interest of both you as an individual and your business. There are risks with everything you do in life, but the risks involved with making political contributions can be mitigated.

Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner Part 2As discussed in Part 1 of this series, the first step in purchasing a private aircraft typically involves the preparation of a letter of intent (LOI) or other nonbinding offer for the purchase of the aircraft. The LOI sets forth the principal terms for the purchase and sale of the aircraft, including:

  • a detailed description of the aircraft and its systems (customarily an exhibit to the LOI);
  • the purchase price and deposit;
  • the identity of the escrow agent that will hold the deposit and close the aircraft purchase transaction;
  • the scope of the pre-purchase inspection of the aircraft;
  • the location of the inspection facility;
  • a schedule for the inspection process and the closing; and
  • the expiration date of the offer to purchase the aircraft.

The next step is for the purchaser’s legal counsel to prepare a draft of the Aircraft Purchase Agreement (APA). The APA, which incorporates the primary terms of the LOI, is the binding legal agreement between the parties setting forth their respective rights and obligations for the purchase and sale of the aircraft. While it is not uncommon for the seller’s legal counsel to prepare the first draft of the APA, it is almost always in the best interests of the purchaser for his or her legal counsel to prepare the first draft of the APA.

A well-drafted APA serves as a roadmap for the purchaser and seller to proceed smoothly from the signing of the APA to the closing of the aircraft purchase transaction and delivery of the aircraft by the seller to the purchaser. A discussion of all the material terms, conditions and requirements customarily included in an APA is beyond the scope of this blog post. Accordingly, the following discussion focuses on several of the more important provisions of the APA that are essential to protecting the purchaser’s interest in the aircraft purchase transaction.

Pre-Purchase Inspection

The purchaser of an aircraft must take to heart the Latin phrase “caveat emptor,” or “let the buyer beware.” In most aircraft purchase and sale transactions the purchaser is responsible for determining that the aircraft is in the condition expected by the purchaser. The purchaser typically assumes the risk of any defects, damage, deficiencies or other conditions affecting the aircraft at or after the time that the purchaser accepts delivery of the aircraft from the seller. Accordingly, it is imperative that the APA permit the purchaser to perform a comprehensive inspection of the aircraft, its systems and its logs and records.

A pre-purchase inspection is typically conducted at a “service center” operated by the manufacturer of the aircraft, although there are independent facilities that can perform pre-purchase inspections of aircraft. The pre-purchase inspection typically involves an extensive inspection of the mechanical components and avionics systems of the aircraft, as well as a test flight of one or two hours to evaluate the operation of the aircraft. It is generally preferable for the purchaser to select a service center or other facility that has not provided routine maintenance services or performed repairs on the aircraft for the seller to ensure a neutral inspection and inspection report. It is customary for the purchaser to pay the costs of the pre-purchase inspection and the costs for the seller to reposition the aircraft from its home base to the service center or other inspection facility.

Upon completion of the pre-purchase inspection, the service center or other inspection facility will provide an inspection report to the purchaser identifying any defects, damage, maintenance deficiencies, repair items and other conditions affecting the aircraft discovered during the performance of the inspection. A “purchaser friendly” APA will provide the purchaser a specific period of time within which to review the inspection report and decide whether to proceed with the purchase of the aircraft.  If the APA is more “seller friendly,” the purchaser may not have the right to terminate the APA following the pre-purchase inspection unless the seller declines to correct any conditions identified in the report that affect the airworthiness of the aircraft, also known as  “discrepancies” or “airworthiness discrepancies.”

Assuming that the purchaser elects to proceed with the purchase of the aircraft following the pre-purchase inspection, the parties will typically negotiate the seller’s obligations to correct any discrepancies and other conditions identified in the inspection report. In most cases the seller will bear the expenses of correcting any discrepancies that affect the airworthiness of the aircraft. Other work performed on the aircraft that is not required to ensure the aircraft is airworthy may be paid by the seller, the purchaser, or shared between them depending on the terms of the APA and the negotiations that ensue following the pre-purchase inspection.

Once the discrepancies have been corrected and any other agreed-upon work on the aircraft has been performed, it is customary to conduct a second test flight to confirm that the work was performed properly and that the aircraft is operating in accordance with the manufacturer’s specifications and tolerances. Assuming that the second test flight is successful, the parties will in most cases proceed immediately to closing the purchase and sale of the aircraft and the actual delivery of the aircraft by the seller to the purchaser.

Closing and Delivery of Aircraft 

At the closing, the escrow agent will:

  • confirm receipt of the documents and funds required for the closing;
  • deliver the purchase price to the seller, less any amounts required to satisfy any liens on the aircraft;
  • deliver an FAA Bill of Sale and a Warranty Bill of Sale to the purchaser; and
  • record the FAA Bill of Sale and purchaser’s FAA Aircraft Registration Application with the FAA.

Upon taking physical delivery of the aircraft, the purchaser will deliver to the seller a delivery and acceptance receipt. It is important for the purchaser to realize that after closing and accepting delivery of the aircraft, the purchaser has little or no recourse against the seller for any conditions affecting the aircraft that are discovered post-closing, so “caveat emptor.”