Analysing the Effects of the Cape Town Convention on Four Selected Issues That Hinder the International Financing and Leasing of Aircraft and Engines

Abstract

The intent of this publication is to address four significant issues that have played a major role in the international aviation finance and lease practice. These matters are covered by the ‘Convention on International Interests in Mobile Equipment’ and the ‘Protocol on Matters specific to Aircraft Equipment’ (Cape Town Convention, 2001). First, the article addresses the existing national secured interests of the lessees (operator-lessees) of aircraft. For example, in the United States, the Kingdom of the Netherlands and other countries the airlines can obtain these important secured rights. Also at the global level an operator-lessee needs adequate protection of its financial interests when the lessor defaults or becomes insolvent. This contribution submits that the national secured interests of operator-lessees are governed by the Cape Town Convention. Secondly, the fundamental problem of the non-consensual rights that can be established in aircraft is discussed. Where certain requirements are met, under the Cape Town Convention the holders of national liens may be protected. These third-party rights have priority over the registered international interests of the financiers, lessors and operator-lessees. Anecdotal evidence corroborates that several (major) stakeholders are not aware of this important fact which may have a grave impact on their own interests. Thirdly, the contribution investigates the legal effects of choosing the applicable law in aviation finance and lease agreements. For instance, continuously it is proposed that the laws of New York and England provide adequate and modern aviation-related property law regimes. This publication contends that worldwide many lawyers do not appreciate that any choice of law clause in an agreement only has a very limited effect. This theory is endorsed by the Cape Town Convention. Fourthly, the negative consequences of the alleged application of the doctrine of accession to aircraft engines finance and lease transactions are reviewed. This controversial theory dictates that under all circumstances the owner of the aircraft becomes the owner of the engine as soon as the latter object is installed in the former. The Cape Town Convention stipulates that engines are separately financed and leased from the aircraft. Finally, some concluding remarks are made.