Upon Receipt of the Inspection Report…

Upon Receipt of the Inspection Report… — Originally published in BusinessAir Magazine, October 2016, Volume 26, No. 10.

In most cases, when purchasing a preowned aircraft, the buyer pays for a pre-purchase inspection in order to evaluate the condition of the aircraft. A pre-purchase inspection normally consists of a complete review of the aircraft’s records and a survey of the aircraft’s current condition. Depending on the type of aircraft and, in some cases, where the aircraft has been located or stored, additional inspection items may be added to the standard survey. Upon completion of the inspection, the inspection facility issues an inspection report. This report includes a list of discrepancies or “squawks” found during the inspection in both the aircraft and the records. The inspection report also includes an estimate as to the cost of correcting each of the discrepancies found.

WHAT DOES A BUYER DO UPON RECEIPT OF THE INSPECTION REPORT?

It is my firm conviction that the foundation for successful use of an inspection report starts before the aircraft even arrives at the inspection facility. Laying that foundation includes all of the following:

1. Clear language in the purchase agreement as to what a discrepancy is, who pays to repair the discrepancy, and, if there is a dispute between the parties as to whether an item really is a discrepancy or who pays for the discrepancies, a clear provision for how such disputes are resolved.
2. With regard to selection of the inspection facility, first the facility must be familiar with the type of aircraft being purchased – but beyond that, it must be a neutral party. If the inspection facility chosen is also the same service center that has been maintaining the aircraft, there is an inherent conflict and a different facility ought to be selected.
3. Buyer should hire a full-time technical representative to oversee the entire inspection process. Spending the money to have a technical representative present for all, or the majority of the inspection, is money well spent.

If the proper foundation has been established, then when the inspection report is received, the next steps should be clear. The discrepancies listed on the inspection report may include items that must be remedied by the seller prior to closing at seller’s expense. Items that don’t meet the definition of a discrepancy under the carefully crafted purchase agreement are, therefore, the buyer’s responsibility.

Assuming the purchase agreement is clear and a technical representative who understands how to read the discrepancy report is available, sorting the discrepancy list would seem easy. However, my experience is that many items on the report are not necessarily black-or-white. More often than not, there is some amount of negotiation that occurs between the seller and buyer regarding responsibility for squawks. The aircraft consultants, brokers, technical representatives and attorneys often play an important role in these negotiations. On occasion, the two parties can’t agree on who must pay for a discrepancy. In such a situation, having a clear dispute resolution mechanism included in the purchase agreement is critical and often allows a neutral party to make the appropriate determination, enabling the deal to move forward. Once the responsible party has been identified for each discrepancy, the parties will sign a technical acceptance form and the necessary repairs will be completed.

There is often ambiguity on the responsibility for certain discrepancies – regardless of how carefully the purchase agreement is drafted. Having the right team of negotiators, the right language in the agreement and an appropriate dispute resolution clause can sometimes be the difference between keeping a deal going and having a deal fall apart. Laying the foundation before the aircraft arrives will allow for more success and, as a result, happier buyers.

Please contact Amanda Applegate at 310-392-5200 or aapplegate@aerlex.com.