Aerlex Law Group

The Buyer Financing Contingency: Worth a Seller’s Consideration

08-august-2016

The Buyer Financing Contingency: Worth a Seller’s Consideration — Originally published in BusinessAir Magazine, August 2016, Volume 26, No. 8.

When purchasing a pre-owned aircraft, a buyer, in many cases, may plan to finance some or all of the purchase price for the aircraft. If financing isn’t available through a commercial lender, the buyer may be willing to pay cash for the acquisition. But the buyer may also decide not to move forward with the purchase. In a situation in which the buyer must have financing in order to purchase the aircraft, a financing contingency in both the letter of intent and the purchase agreement is worth considering. Current aircraft purchase agreements rarely include financing contingencies, which seems at odds with today’s market.

Many sellers and aircraft brokers are adamantly against considering a financing contingency. I don’t understand that objection in today’s buyer’s market. In a matter of weeks, the buyer can confirm if financing is available. If approved, it may take the lender a few weeks to put the loan documents in place. Given that there are not as many buyers as there are sellers today, it seems that sellers should consider permitting such a provision. In most instances, a willing lender can be found for a qualified buyer. The worst case scenario for the seller is that the buyer can’t obtain the financing and the aircraft returns to market.

The seller or seller’s broker will argue that by allowing this provision, the seller may miss out on another active buyer during the time it takes the would-be buyer to confirm financing. However, in the case where the number of days an aircraft is listed continues to increase, I think this is highly unlikely. A willing seller who can exercise patience, especially when dealing with a first-time buyer, is more likely to close a transaction than a seller who has limited flexibility. It is likely that the next seller on the list with a similar aircraft may be more flexible. In a buyer’s market, creative sellers and their brokers will close more sales and have more success by accommodating the constraints of a buyer’s loan position with a financing contingency. This is a realistic and important option when the alternative is a flat-out “no” that will end the deal.

There is also a possible middle ground when considering a financing contingency. The contingency can be limited by stating that the buyer must obtain a commitment and funding pursuant to a loan within, say, thirty days (30) after execution of the purchase agreement, or perhaps no more than a certain number of days after the completion of the pre-purchase inspection. If the buyer moves forward with the pre-purchase inspection, then the buyer is already invested in the aircraft. Additionally, a buyer may agree to pay for any transactional costs that arise if they are unable to obtain financing and decide not to move forward with the purchase.

Since there is little risk of losing another buyer in the few weeks it will take for a buyer to obtain financing approval, agreeing to a financing contingency is worth considering to get a deal done.

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