Aviation Bill neglects English aircraft mortgage glitch

Source: Flightglobal.com
This story is sourced from Flightglobal.com

A Civil Aviation Bill introduced to the UK parliament last month fails to address a major discrepancy in English law aircraft mortgages, which industry players say is driving business away from London-based aviation law firms and into the hands of their New York counterparts.

Top UK aviation lawyers in the lex situs working group (LSWG) wrote a letter to the Department for Transport last year urging that "legislation should be adopted to provide for clear, simple and appropriate rules for the creation of mortgages over aircraft [] and for the transfer of title thereto - rules which give primacy to the governing law chose by the parties."

The LSWG, which was set up last year by Philip Shepherd QC of London-based barristers chambers XXIV Old Building to tackle inconsistencies in English law, put forward the inclusion of "related specific legislation in the Aviation Bill" as a viable solution.

The Civil Aviation Bill, which is pending scrutiny by a public bill committee in the House of Commons, focuses on reforming the framework for airport economic regulation, modernising the functions of the Civil Aviation Authority and reforming the licensing scheme for "air travel organisers".

However, in a reply from the Department for Transport last week, obtained by Aviation Exchange, Mike Penning MP, parliamentary under secretary of state, wrote to Shepherd that: "The scope of the Bill does not enable addressing the issues around English mortgages which you raise [] before legislating on this, the government would need to be satisfied that all alternatives to regulation were explored first, and that any financial and other impacts were fully assessed."

Neither Penning nor Shepherd was available for comment.

English law currently dictates that when aircraft ownership changes, the validity of the mortgage is determined by the laws present in the aircraft's location (known as lex situs).

This has given rise to the highly-publicised Blue Sky case, involving PK AirFinance US Inc.'s attempts to repossess two Boeing 747-400s after UK group Balli Aviation defaulted on its loan repayments. A UK High Court eventually found the mortgage to be invalid as one of the aircraft had been located in Amsterdam at the time of purchase and it failed to be recognised by Dutch law.

In its letter to the Department for Transport, the LSWG suggested an alternative solution to the issue by ratifying the Cape Town Convention; an international treaty designed to facilitate the financing and leasing of aviation equipment by reducing creditor risk and improving legal predictability.

However, there is debate as to whether Cape Town ratification would remove the lex situs problem as the convention would need to be ratified by all the relevant countries involved in a given deal. "Ratification by the UK would not be a fix for many transactions; such as an English law secured financing of a Japanese-owned aircraft that is leased to a Dutch airline and registered in the Netherlands," said Gavin Hill, aviation finance partner at Vedder Price London, speaking in November.

It is not uncommon for aircraft to fly extra legs exclusively to be within UK airspace when a mortgage is closed, but this practice is widely considered unattractive from a commercial perspective. For example, in a deal completed at the end of last year, it is understood that Emirates Airline declined to fly its new Airbus A380 (MSN 077) through UK airspace via Hamburg, so the transaction had to be carried out using New York law mortgage.

In some cases, second English law mortgages are being created or if there is any uncertainty then a New York law mortgage is required, Paul Briggs, head of aviation at UK-headquartered law firm Bird & Bird explained. "English law is often the governing law of choice for business people and financiers throughout the global aviation industry but if a New York law mortgage is required, there is a risk that all transaction documents will be governed by New York law which could have a pre-eminently damaging effect on the London aviation legal and financing community," he said.

Even if the Cape Town Treaty were a viable solution, "the London industry could be permanently damaged by the time UK ratification is effective", according to Briggs, who described the situation as "urgent".