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Negotiating an Aircraft Lease Arrangement

Aircraft leasing is a multi-billion international industry providing a suitable medium for companies who wish to operate a fleet of aircraft, without the benefit of having extended cash-flow or large pool of funds to fully own or finance the ownership of aircraft.

Leasing is also typically utilized by companies who wish for flexibility of operational fleet planning, or by companies located in jurisdictions which may penalize ownership of non-locally produced aircraft by the imposition of heavy taxes. Our past newsletters (Issues 39 and 40) discussed on the basic parameters of aircraft leasing.

The focus of this article will be on the more intricate dealings and items/issues to consider when structuring and negotiating aircraft lease agreements.

Before getting started on aircraft leases, similar to other contracts, clarity must first be made whether the party being represented is the lessor or the lessee.

Since each party has specific concerns and requirements which have to be fulfilled, understanding the varying dynamics of a lessor and a lessee will go a long way in meeting the clients’ strategic needs and concerns with regard to lease agreements.

The major differentiating factor between aircraft leases from other forms of lease are that aircraft leases have heavy technical and multi-jurisdictional references to them, and the challenge involves reducing the technical terms of both parties into a more understandable language for the benefit of both parties and their advisors, without sufficiently appreciating the jargon typically employed in such arrangement.

Be that as it may, the negotiating power for aircraft leases tend to favour heavily on the lessor, who is ultimately the (legal and/or beneficial) owner of the aircraft. Certain lessors may choose to adopt a ‘take it or leave it’ approach when negotiating aircraft lease agreements, while other lessors may be more accommodating to lessee’s requirements.

In most cases, the final say would still rest with the lessor, and although the lessee may request for specific special cases where amendments may be necessary, these requests will still be subject to the lessor’s willingness to accede to such request.

The following are key concepts typically discussed in structuring and negotiating leases:


The ‘Three Rs’

Specifically (r)ent, (r)eserves and (r)edelivery condition, are the main cost factors for both lessor and lessee in any lease arrangement, and can be the most hotly discussed commercial item for a lease.

Lawyers involved in lease negotiations must always ensure that contractual provisions relating to the three Rs are discussed in detail, and fully understood by the technical representatives of the lessee to ensure that there are no nasty surprises and hidden costs that may arise during the lease term.

Additionally, from the perspective of a lessor, redelivery condition is very important, as the condition of the aircraft dictates the viability of the aircraft to continue to be leased.

At times, lessors may demand that the lessee rectify any damage or issues with the aircraft to the satisfaction of the lessor, fair wear and tear excepted. Not excluding fair wear and tear on the remedial works may be financially painful for a lessee to bear if the lessor has a tendency to be meticulous regarding the redelivery condition.


Quiet Enjoyment

A standard clause usually found in aircraft lease agreements, quiet enjoyment right granted to the lessee allows the lessee to have full, uninterrupted use of the aircraft during the lease term without any obstruction and/or interference by the lessor or its financiers.

This is a crucial clause to request from the perspective of a lessee, and should often times be a non-negotiable item. Obstructions and interference on the operations of the aircraft would more often than not result in a grounded aircraft.

A grounded aircraft is possibly the worst position for both the lessor and the lessee, as every moment an aircraft is grounded equates to loss of steady revenue stream for the lessee and consequently the lessor.

Additionally, longer duration of aircraft being grounded has been known to be mechanically detrimental for the engines and ancillaries of the aircraft.

This undertaking of quiet enjoyment should be given by all parties who have interest in aircraft, thus from a lessee’s perspective, a study of the ownership chain of the aircraft may be necessary to ascertain this.



Leases will usually require the lessee to indemnify the lessor in two main areas – operational indemnity and tax indemnity.

Operational indemnities involve claims or losses arising from operation of the aircraft, including damage and total loss. This indemnity may extend to all interested parties in the lease chain, but as a lessee with full operational and maintenance control over the aircraft, this item should be readily foreseeable and controllable by the lessee.

What may pose to be a bigger concern to lessees pertains to tax indemnities. This is because the lessor presumes the lessee is aware of both the tax structure in the lessee’s country of operation/ incorporation, and presumes that the lessee understands how this tax structure gels with the lessor’s often times complex tax efficient structures which may span different jurisdictions, and may include a tax-friendly country (see below on Tax and Tax-Friendly Jurisdictions).

When advising lessees, it is therefore vital to ensure the scope of the indemnity, whether the item to be indemnified is within the lessee’s control, and who the lessee will be indemnifying.



Leases will generally include requirement for the lessee to take out certain insurance policies, which may include policies on war, based on the lessor’s study of the lessee’s jurisdiction.

Although the terms of the insurance are very important to consider, lessors may also request for the lessee to assign the account in which the proceeds of the insurance will be paid out to, specifically in their favour, to allow lessors to have full control of all possibilities and permutations relating to the operations and/or an unfortunate event to befall the leased aircraft.



Rights to sublease the aircraft may, depending on circumstances, be a key item for lessees in operational management of the aircraft, as there may be times when lessees are unable to operate the aircraft to its maximum commercial advantage.

In these instances, both the lessor and the lessee have commonly vested interest to ensure that the aircraft makes the money that it is required to make, and thus lessors may allow subleasing of aircraft as a way to recoup the commercial viability of the aircraft.

When advising lessors, care must be taken on the parameters of the sublease arrangement, and to what extent the lessee is permitted to deviate from the terms of the lease, if at all.

Additionally, in considering giving consent to sublease, be it for single or multiple levels, the lessor would have to carry out some degree of due diligence for risk profiling and management purposes.


Assignment & Novation

The expansion of the leasing and aviation industry as a whole has led to the mushrooming of lessors and lessees in the international market.

The business of lessors involves not only raising finance and leasing aircraft, but also trading aircraft for profit if the opportunity arises.

Additionally, lessees have increasingly global operations, and may wish to bring the aircraft to another subsidiary in a different jurisdiction to operate, where there may be more projects (and profits). Due to this, requests for assignment and novation of lease have become increasingly common.

Although general assignment terms in lease agreements may follow boilerplate clauses along the line of ‘assignment only with the consent of the other party’, such consent must be carefully considered by both lessor and lessee specific to their position, as the consent given may include preconditions to be met and achieved by the other party.


Security Deposit & Maintenance Reserves

Depending on the lessor’s relationship and comfort level with the lessee, the lessee will typically be contractually required to provide security deposit or maintenance reserves to the lessor as part of the preconditions of the lease.

In such circumstances, lessors may hold millions of dollars of lessee’s money. As a lessee, the primary concern will be whether the security deposit will be refundable, and what measures may result in the forfeiture of the deposit.

Additionally, a lessee may request for substitute methods of security deposit, which may include letters of credit. Lessors will then have to ascertain the veracity and authenticity of such letter of credit before agreeing to the same. This can be as simple as calls and correspondences to issuing banks to ensure such documents are authentic and bankable.


Used Aircraft

If the lease relates to a used aircraft, a prudent lessee should seek various contractual protections from the lessor that there are no existing liens affecting or attaching themselves to the aircraft which relate to a previous operator’s use.

A lessee may also request for inspection rights over the aircraft prior to accepting delivery, as the condition of the aircraft may affect the usage pattern and even the level of airworthiness of aircraft, as different jurisdictions may have differing airworthiness standards.


Tax and Tax-Friendly Jurisdictions

Lessors and sublessors deal with large sums of rental every month, and with leasing houses being a very lucrative business, it is a commercially sound decision to operate from tax-friendly jurisdictions. Specific tax-friendly jurisdictions for aircraft leasing include Ireland, Labuan (for Malaysia), and Singapore.

Thus, before entry into any form of lease, discussions between lessee and lessor, together with internal and external tax experts may be necessary to structure an effective lease chain, which will involve various cross-border and cross-jurisdictional elements.

This will then involve the incorporation of subsidiaries spanning different countries. Doing so will allow parties to best appreciate tax saving measures by ensuring a tax efficient structure, at the same time not crossing the fine line between a tax-efficient structure, and tax evasion.


Specific Jurisdictional Regulatory Concerns

When negotiating aircraft leases, a keen understanding of the various jurisdictional intricacies and the various signatories to which such jurisdiction is a part of will be very important when determining the structure and terms of lease.

For example, in Malaysia, with the introduction of the Malaysian Aviation Commission (MAVCOM), certain commercial elements which were once handled by the Department of Civil Aviation (DCA) have been absorbed by MAVCOM, with the DCA having to handle purely technical matters relating to civil aviation. Thus, items relating to Air Service Licenses and Permits which are prerequisites for running commercial flight business, are now handled by MAVCOM, with the DCA issuing and renewing Air Operators’ Certificate and MRO certifications for maintenance companies.

Additionally, each state may have specific requirements for registration of aircraft and aircraft airworthiness, and this will be a key point to consider when negotiating lease agreements.


Potential Local Law Security/Mortgage Concerns

It is common practice that lessors do not own aircraft outright, as these aircraft tend to be financed by or secured with various financial institutions. A more difficult challenge would involve dealing with the lease of an aircraft by a lessor, which is financed by a group or syndicated financiers, with each having a say in processes and structuring of lease. With the inclusion of financiers’ interests, securities for leased aircraft will then become another dice in the equation, as financiers will need assurance that their rights over the aircraft are not diminished until the full redemption of the facility with the lessor.

Perhaps an interesting case to highlight the importance of local law security that made waves in the international aviation industry in 2010 was that of Blue Sky One Limited and others v Mahan Air and another1, where it was held that even if English law is the governing law, the local law mortgage processes will have to be respected and applied for by the parties, without simply resorting to the mortgage and security processes of the governing law of the lease agreement. As such, it is vital to establish, be it contractually or otherwise, that both the lessor and the lessee have made sufficient efforts in ensuring that the aircraft is duly registered and enforceable in its proposed jurisdiction of operation.

The above is just a glimpse of the myriad of issues to be considered when negotiating aircraft lease agreements, but a final advice to those keen on leasing aircraft is to ensure that a strong advisory team is established spanning technical, commercial, financial, tax and legal aspects in order to effectively structure and negotiate a favourable position. This will undoubtedly allow a beneficial and less painstaking experience throughout the tenureship of leasing an aircraft.


1 [2010] EWHC 631


Written by:

Norhisham Abd Bahrin (Partner)

Ahmed Ezzedin Mohammed (