Private Aircraft Ownership

Aircraft Purchase, Ownership and Operation: Protecting the Interests of a Family Business Owner – Part 4As noted in Part 1 of this series, owners of private aircraft will often want to share ownership and/or use of their aircraft with others. In most cases the motivation for sharing ownership and/or use of an aircraft is to defray the significant costs and expenses associated with the purchase and maintenance of the aircraft, purchasing or leasing a hanger for storage of the aircraft, employing a pilot or pilots and other crew to operate the aircraft, insuring the aircraft, and other similar costs and expenses. For these and other reasons, it is common for owners of private aircraft to enter in various types of arrangements to share ownership and/or use of their aircraft with others. However, any such arrangements must comply with the Federal Aviation Administration rules for the operation of private aircraft, namely, Part 91 of the Federal Aviation Regulations (FARs), which were discussed in greater detail in Part 3 of this series. The following are the more typical arrangements for sharing ownership and/or use of a private aircraft permitted under the FARs:

Aircraft Dry Lease Agreement

It is common for a small business or individual owner of a private aircraft to make the aircraft available for use by others at times when the owner is not using the aircraft. This is often accomplished by what is referred to as an “aircraft dry lease.” An aircraft dry lease is an arrangement whereby the owner leases the aircraft to another party (lessee) and the lessee is required to provide its own pilot or pilots and pay the costs of fuel and other expenses incidental to the lessee’s operation of the aircraft. The FARs require that the owner and the lessee enter into an aircraft dry lease agreement, which provides, among other things, that the lessee is to have “operational control” of the aircraft at all times that it is operated by the lessee. This means that the lessee, rather than the owner of the aircraft, is deemed to be responsible for the operation and control of the aircraft while it is being used by the lessee, thereby placing primary liability upon the lessee for any accidents or incidents that occur during the lessee’s use of the aircraft. The financial arrangements under an aircraft dry lease vary from one lease to another but generally include an hourly charge for the operation of the aircraft, a flat fee (daily, weekly or monthly) for the lessee’s possession of the aircraft during the lease term, and reimbursement or sharing of certain costs related to maintenance, repairs and/or insurance.

Time Sharing Agreement

In situations where the owner of a private aircraft would like to make the aircraft available for use by others under a lease arrangement, but the owner prefers that the owner’s pilot(s) operate and control the aircraft while it is being used by the lessee, the owner and lessee may enter into a time sharing agreement. A time sharing arrangement differs from an aircraft dry lease arrangement in that the owner is deemed to retain “operational control” of the aircraft even though it is being leased to and used by the lessee. The two arrangements also differ on account of strict limitations imposed by the FARs on the amount that the owner of the aircraft may charge the lessee for its use of the aircraft. The lease charges under a time sharing arrangement are limited to twice the cost of fuel used in the operation of the aircraft plus the following incidental expenses associated with the operation of the aircraft: (i) travel expenses of the crew, including food, lodging and ground transportation; (ii) hangar tie-downs costs; (iii) insurance obtained for the specific flight(s); (iv) landing fees, airport taxes and similar charges; (v) flight food and beverages; and (vi) other limited incidental costs associated with the flight(s). In contrast, there are no limitations on the amount of rental fees and other charges that an owner may charge a lessee under an aircraft dry lease arrangement. Payments by a lessee to an owner under a time sharing agreement are generally subject to a 7.5 percent federal excise tax.

Aircraft Charter Agreement

Another opportunity for the owner of a private aircraft to generate revenue to defray the expenses associated with ownership and maintenance of an aircraft is to make the aircraft available for charter by others. Because most owners of private aircraft are not authorized to provide charter flights under Part 135 of the FARS (see Part 3 of this series for a discussion of Part 135), an owner will typically contract with an aircraft charter services company (charter operator) to place the aircraft on the charter operator’s Part 135 certificate. This makes it possible for the charter operator to provide charter flights using the owner’s aircraft when the owner is not using the aircraft. The charter operator will typically retain between 15 and 20 percent of the net charter flight revenues and remit the balance to the owner. The charter operator is responsible for all aspects of the operation of the aircraft during any charter flights, including providing the pilot(s) and other crew for the flights.

Joint Ownership Agreement

A joint ownership agreement provides for the ownership of a private aircraft by multiple individuals and/or companies who enter into an agreement regarding their respective ownership of the aircraft, the rights of each owner to use the aircraft, and the manner in which the owners will share the costs and expenses of owning, maintaining, insuring and operating the aircraft. In a joint ownership arrangement, a single owner assumes responsibility for employing and providing the pilot(s) and other flight crew to operate the aircraft for the benefit of all of the owners. The salary, benefits and other costs and expenses incurred by the owner employing the pilot(s) and other flight crew are shared among the owners in the manner provided in the joint ownership agreement.

The forgoing is a general overview of the more common arrangements for the owner of a private aircraft to “share” the aircraft with others and receive compensation for doing so. There are a variety of other arrangements for sharing ownership and/or use of aircraft, including co-ownership, fractional ownership, and interchange arrangements. All such arrangements are governed by and must be conducted in strict accordance with the FARs. The owner of a private aircraft should consult with experienced aviation counsel before entering into any arrangement whereby the owner makes the aircraft available for use by others in exchange for any compensation, reimbursement or other remuneration.

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.

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.”