Expecting the Unexpected — Originally published in BusinessAir Magazine, January 2015, Volume 25, No. 1.
I was recently reminded of just how important it is to determine who bears the risk of loss between the time a letter of intent (“LOI”) is executed and the closing of the sale of the aircraft.
In my most recent experience, I was advising the buyer in an aircraft transaction. In the middle of our negotiations regarding the terms of the purchase agreement, the aircraft was struck by a snow plow!
In fact, this is not the first time I have been in the middle of a transaction when the aircraft has experienced some type of damage. In this most recent experience, we were only days away from signing the purchase agreement. However, even if the purchase agreement had been executed, I had included appropriate language to deal with this type of situation. If the purchase agreement is drafted in an appropriate manner, then in the case of such an incident, the agreement would outline exactly what must happen, what the options are for both parties and how it impacts the closing, if at all.
In order to protect a buyer from potential liability exposure prior to owning the aircraft (and prior to binding any insurance on the aircraft), the following conditions should be considered for inclusion in the purchase agreement:
1. The risk of loss should not pass to the buyer until the minute the bill of sale is filed with the Federal Aviation Administration (“FAA”), transferring title in the aircraft to the buyer.
2. In the event any damage occurs to the aircraft prior to closing, the buyer should have the right to terminate the agreement. In some instances, sellers will push back on this absolute right to terminate and will want to include language regarding the extent of allowable damage. For example, if the damage costs less than $100,000 to repair and does not result in the generation of an FAA Form 337 (“Major Repair or Alteration”), then the seller may insist that the buyer close. Having a clear understanding between the parties written into the purchase agreement is the best way to avoid any potential conflicts.
3. The purchase agreement should obligate seller to insure the aircraft until closing and if buyer is paying for the pre-purchase inspection, then buyer should be added as an additional insured under seller’s policy prior to starting the pre-purchase inspection. Additionally, if buyer is doing any work to the aircraft at its own expense prior to closing, the buyer should also be listed as an additional insured.
4. The language in the purchase agreement should be as broad as possible. It is impossible to predict the various events that may occur between the time the purchase agreement is executed and when the closing is scheduled. Including a Force Majeure provision with specific deadlines will help in these instances.
When purchasing or selling an aircraft, it is important to expect the unexpected. Crazy things can and often do happen. While it is not possible to write a contract to include all possible scenarios, it is possible to minimize the impact of an unexpected event. Making sure a buyer isn’t obligated to purchase an aircraft which just experienced major damage should be a key element of every purchase agreement.
Please contact Amanda Applegate at 877-237-5398 or firstname.lastname@example.org.