Private Aircraft Ownership

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.”

Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 1 Access to private aircraft can provide productivity and other benefits for a family-operated business and improve the quality of life for the business owner and his family. However, purchasing, owning and operating a private aircraft requires careful consideration of a number of business, legal, tax and regulatory issues. These issues make it imperative that a small business owner consult with legal and tax counsel to ensure that the owner’s interests are properly represented in the purchase of the aircraft, that the owner purchases and operates the aircraft in a tax-advantaged structure, and that the owner operates the aircraft in strict accordance with the rules and regulations of the Federal Aviation Administration (FAA). This blog post provides an overview of several of the numerous issues that should be considered when purchasing, owning and operating a private aircraft and will be followed by additional blog posts providing a more detailed discussion on each of the issues raised below.

Initial Purchase of Aircraft

The first step in purchasing a private aircraft is often the preparation of a letter of intent (LOI) or other similar non-binding document setting forth the proposed terms for the purchase and sale of the aircraft.  The LOI is typically prepared by the purchaser and presented to the seller for consideration. Once the parties reach agreement on the general terms for the purchase and sale of the aircraft, the LOI is signed and legal counsel for the parties will prepare the aircraft purchase agreement (APA). The APA is particularly important to the purchaser as it provides the purchaser with rights to perform a thorough pre-purchase inspection and to perform other due diligence to ensure that the aircraft is in the condition represented by the seller or the seller’s broker.

Compliance with FAA Regulatory Requirements (Parts 91 and 135 Operations)

Privately owned aircraft are operated under either Part 91 or Part 135 of the FAA rules. Part 91 governs the operation of private aircraft for non-commercial, private carriage uses (e.g., flights for business and personal and family flights). Part 135 governs the use of private aircraft for charter flights and other commercial uses. Failure to comply with the FAA rules for the operation of a private aircraft can result in significant fines and liabilities, including the loss of insurance coverage for the owner and operator of the aircraft.

Liability of Owner/Operator of Aircraft

Owning and operating a private aircraft have the potential to expose an owner/operator to catastrophic loss. Many owners and operators are surprised to learn that they can be held liable for incidents of loss even when they are not piloting—or even onboard—the aircraft. Most risks associated with the ownership and operation of a private aircraft are not mitigated simply by titling the aircraft in the name of a separate legal entity, such as a corporation or limited liability company. Rather, the FAA extends legal and regulatory responsibility for flight operations to anyone who has “operational control” of the aircraft.

Sharing an Aircraft

Owners of private aircraft may enter into various types of arrangements to share ownership and/or use of an aircraft with others. Examples of such arrangements are leases, time sharing agreements, joint ownership, and charters. Each arrangement presents certain FAA regulatory compliance issues, risk allocation issues, and federal and state tax issues. This is true irrespective of whether the owner is sharing the aircraft with related parties (e.g., a subsidiary company, family members, etc.).

This is Part 1 in a series of blog posts by Wood Herren addressing various issues pertaining to the purchase, ownership and operation of private aircraft by family business owners. Stay tuned for Wood’s next post in this series, which will address other protections that an aircraft purchase agreement may provide a purchaser.