Mitigating Risks When Improving an Aircraft Prior to Ownership — Originally published in BusinessAir Magazine, January 2020, Volume 30, No. 1.
More often than expected, I have clients who want to do work on an aircraft before they own it. It is logical, since often times the aircraft is already down for a pre-purchase inspection or is undergoing a major inspection. The purchaser is often anxious to have the enhancements made to the aircraft as efficiently as is feasible so they can start using the aircraft for its intended purpose immediately after closing.
I have seen some purchasers save weeks of downtime by having the improvements or future inspections done concurrently with the pre-buy inspection and/or major inspection. The true savings to the purchaser is the number of days the aircraft would have been out of service but is not due to reducing the timeline through combining the work desired by the purchaser and the work required prior to closing. Before the purchaser pays for work to be completed on an aircraft he does not own, the purchaser should do a risk assessment and put a plan in place to mitigate such risk. Possible risks include the following:
First, is the pre-purchase inspection far enough along that the purchaser is absolutely certain the aircraft will be able to meet the delivery conditions? Recently, I represented a purchaser who wanted to perform upcoming inspections on the aircraft which were due soon but not prior to the expected closing date. Doing the upcoming inspections at the same time as the repair of the outstanding discrepancies would have potentially saved about 10 days of downtime on the aircraft. However, the seller and inspection facility had a very difficult time correcting the open discrepancies (i.e. certain systems continued to fail after being reported as fixed). However, at this point the purchaser’s ability to reject the aircraft was hindered by the financial investment the purchaser had already made in the aircraft.
Second, is the purchaser certain that the seller will sell the Aircraft to the purchaser? Do the parties trust each other to follow the written agreement? If the purchaser is required to pre-pay for the work they want done in advance, which is typically the case, how would the purchaser get his money back if the seller refused to complete the sale of the aircraft. Certainly, there would be a legal remedy, but litigation is expensive, time consuming and emotionally draining. In an event of the breach by the seller, are the parties responsible for their own legal fees for enforcement or is that burden shifted under the agreement?
Third, if the aircraft is damaged and/or destroyed while the work is being performed and the parties elect not to move forward with the transaction, then the seller is entitled to the insurance proceeds. Is the seller willing to distribute some of the proceeds to the purchaser for the investment the purchaser made in the aircraft prior to closing? If so, this should be documented in a short written agreement between the parties.
Finally, what if, during the course of the improvements being made to the Aircraft by purchaser, the inspection facility discovers additional discrepancies which would render the aircraft to no longer be airworthy and/or in the delivery condition required at closing. Is seller willing to pay to have the additional discrepancies repaired which would not have otherwise been discovered, if not for the purchaser’s additional work to the aircraft? It is unlikely that seller would be willing to pay for these items and has purchaser given up the right to require seller to pay for these items?
If the parties agree that purchaser can do certain work on the aircraft prior to closing, a written agreement should be signed by both parties to supplement the agreement if the agreement did not originally contemplate this additional work. The agreement should cover the work being allowed, terms of payment, risk of loss, obligations to close, attorney fee allocation if not in original agreement and clearly state what happens if new discrepancies are found as a result of the purchaser’s improvements or inspections.
Purchasers can save days or weeks of downtime by having improvements or future inspections done concurrently with the pre-buy inspection and/or major inspections but it is important to evaluate the potential risks of doing so and mitigate such risks by documenting the purchaser and seller’s agreement with regard to the purchaser’s work.