What are some important, but easily overlooked items in an aircraft dry lease agreement that lessees need to read and understand? Gerrard Cowan asks a selection of industry experts...
Dry leases require lessees to source their own flight crew, presenting a range of unique challenges – and opportunities. But what are the key “small print” items that business jet lessees should study in any contract?
Michele Wade, a partner at Jetstream Aviation Law, says there are many items a lessee should consider before signing a deal to lease an aircraft. For instance, they should ask questions of the lessor, obtain professional advice on anything they do not understand, and ensure the final written lease addresses the important terms.
In a dry lease, Wade says, the lessee will write two checks – one for the lessor for the lease of the aircraft and another to the independent source providing the crew.
“The lessee may want to inspect the aircraft and review the records before signing the lease,” she adds. “The aircraft lease will generally not contain any representation from the lessor as to the condition of the aircraft.”
Moreover, the lease may contain a representation that the lessee will operate the aircraft in compliance with applicable laws and regulations, and so the lessee must confirm that the aircraft operations comply with such requirements (such as Federal Aviation Regulations in the US).
Any operation that does not comply will risk the insurer denying coverage if a claim is made, while the FAA may seek penalties, Wade warns.
“Nor should the lessee be an entity formed primarily to operate the leased aircraft,” she adds. “A sole purpose entity operating the aircraft may appear to be an escape from liability, but sole purpose entities are not eligible to operate aircraft on passenger-carrying flights under Part 91, which makes any such flight they conduct an illegal operation.”
With larger aircraft there should be a ‘truth-in-leasing’ clause at the end of the lease, Wade adds. “The lessee has ‘operational control’, and the responsibility and liability that accompanies operational control. Because the lessee has operational control liability, it is important to confirm that the lessee’s operations are covered by the insurance.”
And, in the US, relevant state departments of revenue may impose a sales or use tax on lease payments, Wade highlights, so lessees should determine if they must pay such a tax.
Potential for Millions of Dollars of Liability
David M. Hernandez, Business Aviation & Regulation Sub-practice Chair at Vedder Price, says he is astonished “that people lease aircraft and expose themselves to potentially millions of dollars of liability and regulatory enforcement without any idea whatsoever of the risks”.
This article was published by AvBuyer on December 20, 2023.
