This article is written by Nihar Ranjan Das, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction 

“Aircraft leasing”– very few people might have heard about this term. Yes, most of the airlines lease aircraft instead of buying them, but why?

Let’s take an example: a few days back according to the Gulf News report, while chatting with Ray Sisson (Senior Vice President of “GECAS”) quoted that- “Emirates, Qatar Airways, Etihad Airways and Gulf Air now rely on aircraft leasing as a key tool in their fleet management.”

It will definitely raise some questions in our mind about why such huge airline companies need to lease an aircraft! 

So, in order to clear things, let’s understand what is Aircraft leasing?

What is aircraft leasing?

To make it easier to understand, let’s take an example of property or house loan. A person is looking to buy a property or house but he doesn’t have sufficient cash to purchase the same, for that reason he proceeds to the bank and borrows a sum of money to purchase the same by executing a loan agreement of 10, 15 or 20 years. Each month he will pay his loan amount and can use his property however he wants (as per the conditions of the agreement, of course). After successfully completing the Term of the Agreement, he can use, sell, rent or live in it, as per his choice.

Similarly, aircraft leasing works almost the same. An airline is looking to expand its business but doesn’t have enough funds to purchase an aircraft straight away. So they contact an aircraft leasing company to fulfil their demand immediately.

There are three types of lease which is generally operational in Aircraft leasing Agreement, those are:

• Wet lease

In such a type of lease, an airline wet leases an aircraft, the leasing company provides everything including the aircraft, pilots and cabin crew itself. Also the leasing company takes care of maintenance and insurance of the aircraft. Basically the leasing company provides ACMI (Aircraft, Crew, Maintenance, and Insurance) services, which will operate under their own Air operator’s certificate.

The payment term in such a type of lease is made by the lessee on the basis of hourly operation. However the other expenses including the fuel, airport charge and other expenses are borne by the lessee.

• Dry lease

In such a type of lease, an aircraft financing company leases the aircraft to other leasing companies without the maintenance charges for the aircraft, the cabin crew and the insurance facility. In some cases if the airlines has sufficient crew, but no aircraft. So they contact a leasing company for short-term leasing to temporarily solve their fleet shortages.

It also works great for the biggest airlines, as they have huge crew facilities so they can prepare new recruits to join on an immediate basis on a huge scale. So they can assure highest quality services with their own crew training.

• Damp lease

Such type of lease is a mixture of both dry and wet leases (Hence the name). When an airline asks for a damp lease, the leasing company will provide the aircraft, pilots and insurance also. But the agreement for a damp lease will be slightly changed.

In some cases the airline might have a lot of free cabin crews available, but they lack the engineering personnel to cover the demand of the maintenance operation- here the damp lease comes into the picture. They loan the aircraft and the pilot that come with it, insurance, maintenance personnel but they don’t require the cabin crew so their lease will be cheaper. 

Aircraft leasing agreement and its clauses

Before jumping into the Aircraft leasing agreement, we shall first understand the legal provisions and applicable laws associated with such types of agreements.

• First, we should understand that in such types of agreements neither the ownership of the property transferred nor it is a permanent transfer of the property. It is basically a transfer of rights from the owner of the property or lessor (Aircraft Leasing Company) to lessee (Airline Company) for a specific period of time in return of a consideration (Rent/premium).
• As it is understood that owning an aircraft is an expensive and time consuming affair, the option of leasing of aircrafts makes the thing more convenient for the airline companies. But for doing the same a large number of approvals of different Govt. Authorities and applicable laws shall be followed in India, like DGCA (Director General of Civil Aviation), the Reserve Bank of India regulations, Income Tax regulations, must have to comply while executing an Aircraft leasing Agreement in India.

In an Aircraft Leasing Agreement, there are some important clauses, which should be drafted with utmost attention in order to avoid any future disputes in the terms and conditions of the agreement.  

Important clauses of aircraft leasing agreements

• Lease of aircraft and Delivery: In aircraft lease agreement this is one of most important clauses, in which it has to be mentioned when and where the lessor shall deliver the aircraft.
• Term: The Aircraft Lease Agreement is executed for a certain fixed period of time. So it shall be clearly mentioned the duration for which the lease is being executed. It shall also be mentioned that if there is any extension available for any other specific period of time or not.
• Lease payments: This Clause is the most important part of any agreement. Here it is to be mentioned that the amount of consideration shall be paid to the lessor for the leased aircraft and it also includes the payment schedule, mode of payment and which expenses are exactly included in the consideration. It shall also be mentioned the currency in which the lease amount shall be paid.
• Taxes: this clause specifies the amount of taxes, fees or any other state and governmental taxes imposed on the aircraft during the period of lease.
• Maintenance Obligation: This clause must be drafted according to the requirement of the airline company. It specifies the liability of the person who shall be responsible for the maintenance, service, repair and overhaul of the aircraft during the time period of lease agreement.
• Insurance: This clause makes sure that which party is liable to cover the liability of the aircraft as per the country’s rule and regulation but in most of the instances the liability incurred by the lessee only.
• Termination: This clause gives the right to both the parties to terminate or end the relationship upon breaching of any term and condition of the agreement.
• Governing law or jurisdiction: It defines the territorial jurisdiction of the court of the law, which shall be applicable if any dispute arose between the parties in the contract.
• Hell or high-water: This clause defines the liability on the lessee to the pay the rent/premium to the lessor irrespective of any difficult situation or condition faced by the lessee but the payment shall be done without any delay. 
• Force majeure: This clause defines that the affected party shall not be liable or otherwise responsible for any delay or default in, or failure of performance resulting from or arising out of or in connection with any event which are beyond his reasonable control, and such delay, default or failure of performance shall not constitute a breach by either party.

Aircraft leasing agreement behaviour post COVID-2019

• With the sudden grave of Covid-2019 in India, all the trade and businesses literally come to standstill. The impact of Covid-2019 is not just limited to the people only but also fully affected the operation of businesses eventually affecting the overall economy.  Due to the lockdown, it forces many businesses to shut temporarily. In some cases, it has become difficult and in some cases, it is impossible for them to fulfil their contractual obligations.
• The aviation industry in developing countries like India is mostly affected due to such pandemic. In order to prevent the spreading of COVID-19 the Government imposed a ban on all domestic as well as international travel ban followed by the countrywide lockdown and the result as we can see: “As per the IATA statement the Covid-2019 pandemic is expected to impact more than 29 lakh jobs in the Indian aviation and dependent industries.”
• The Aviation industry due to such travel bans is currently facing a huge loss to all their stakeholders and the stock value of such companies has crashed intensely. The direct impact of the current situation also reflects in the airline’s leasing agreement, which has already been executed between different companies.
• Now the situation forces the airline companies to ground their fleet amid this pandemic, for which they are not able to earn their revenues. Subsequently, they are not in a situation to make on time payment of the rent or premium due, which may further lead to premature termination of the lease by the lessor due to non-payment or by the lessee due to its increased idle resources. For now the major concerns in aircraft leasing agreements are the hell or high water clause as well as the Force Majeure clause.
• Hell or High –water clause, as mentioned above this clause imposes a liability on the lessee to the pay the rent/premium to the lessor irrespective of any difficult situation or any condition faced by the lessee without any delay, which in the current situation may create a conflict between the parties due to non-availability of resources.

• In the other case the lessee having more idle resources available, may lead to premature termination of the lease to save some extra cost burden on the company. In this situation the lessor will try to step in the shoes of the lessee and may allow the lessee for the late payment of rent to avoid the premature termination of the lease, which is a loss on both the sides.

• Undoubtedly the Force Majeure clause has a great role in the current situation. Force Majeure actually defines an ‘event or effect that can neither be anticipated nor be controlled’. The Supreme Court of India while referring to an English case “Lebeaupin v Crispin” stated that Force Majeure clause’s intention is “to save the performing party from the consequences of anything over which he has no control”.

• If a party trying to invoke the Force Majeure clause, some of the things to be borne in mind are: 

1. The responsibility lies on the party who wants to invoke such a clause.
2. Try to perform his best endeavours to find an alternative way to mitigate such event before invoking the Force Majeure clause.
3. Or else should try to terminate the contract temporarily and again resume it as soon as the things are back to normal.

Conclusion

Yes, it is true that the Covid-2019 situation is challenging the business all over the world and so also there is no exact answer or solution when it comes, how to manage the contractual challenges brought on by the Covid-2019. The only thing might help and protect the party is, before doing any action must take a healthy recommendation from any experienced Commercial attorney to fight these types of challenges.

However, the Government is trying hard to provide suitable financial help and the companies also have to do some efforts to save each other in such an importunate situation and come forward with a solution which may not be beneficial but may provide temporary relief to the loss suffered by both the parties in the agreement.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: