Escrow, title and registration: securing a business jet purchase in Europe

Three mechanisms protect a business jet purchase made from Europe. Escrow releases the funds only once the agreed conditions are met. The title search establishes that no lien encumbers the aircraft. Registration fixes the aircraft’s nationality; together with the place of closing, it has tax and regulatory consequences to be examined with your advisers. All three are settled before closing, in the purchase agreement.

Almost every page on aircraft escrow describes the American process: many transactions close through agents based in Oklahoma City, home of the FAA Aircraft Registry. That process applies when the aircraft is on the United States register. Once the aircraft, or you, are in Europe, further questions arise. Here they are, in the order in which they arise, to be settled with your lawyer and your tax adviser.

Our business aviation acquisitions work covers the search for the aircraft and the introduction to its seller. Escrow, title and registration are then dealt with between you and the seller, with the advisers you appoint. The earlier steps, from the mission to the inspection, are set out in our guide to buying a pre-owned business jet.

Aircraft escrow: what the agent holds and what releases it

The escrow agent is a neutral third party. The agent receives the deposit and then the price, holds the bill of sale and the lien releases, and acts only on written instructions accepted by all parties. On closing day, documents and funds are released at the same time, which reduces the risk of a seller collecting the price without filing the transfer documents.

Under the American model, that day follows a set order. The agent first pays off, out of the price, the loans and liens on the aircraft, using the payoff statements and releases the seller’s creditors have lodged in advance. The balance then goes to the seller, and the agent files the releases and the bill of sale with the authority. The seller delivers the aircraft at the agreed closing location.

Your protection lies in the escrow agreement and the acquisition agreement, which together set the conditions for release. The questions to put to your lawyer:

• which law governs the escrow agreement, and which court would hear a dispute?
• who controls the deposit, and until when? In what circumstances does it pass to the seller?
• in which currency are the deposit and the price paid, and who bears the exchange risk between signing and closing?
• which documents trigger release: signed technical acceptance, evidence of deregistration, International Registry entries, the export certificate of airworthiness?
• can a sum remain in escrow after closing, for work still to be carried out?

Aircraft title search: the FAA, the register of origin and serial numbers

The title search identifies any liens on the aircraft before you pay. At the International Registry, it is run against the object, identified by the manufacturer’s serial number.

For an aircraft on the United States register, the FAA keeps the file in Oklahoma City: registered owners, recorded security interests, airworthiness information. The FAA does not carry out title searches itself; a lawyer or a specialist firm reviews the file. Some liens arise under the law of individual states and may not appear on the federal register.

For an aircraft on a European register, the search is made with that register and under its law. In France, an aircraft can be deregistered only once the rights recorded against it have been discharged: a mortgage must be released by its creditor, and a recorded lease removed.

Three checks to ask for:

• does the search cover every register on which the aircraft has appeared, not just the last one?
• does it cover the airframe and each engine, identified separately by serial number?
• on what date is it closed off, and will it be updated on the eve of closing?

The Cape Town Convention: the International Registry, the sale and the IDERA

The Cape Town Convention and its Aircraft Protocol created the International Registry, which establishes the priority of interests in airframes, engines and helicopters. Priority follows the order of registration. A business jet generally falls within its scope: it covers airframes certified to carry at least eight people, crew included, and jet engines of at least 1,750 lb of thrust, each engine being an object separate from the airframe.

The registry does not only hold lenders’ interests. The sale itself can be registered, in the names of seller and buyer, and a registered interest has priority over interests registered later and over unregistered ones. The registrations for a transaction can be prepared in advance in a virtual closing room, then consented to together on the day. For an aircraft on the United States register, access goes through the FAA, with which the party files an entry form to obtain an authorisation code.

If the purchase is financed, your lender registers its international interest and may ask you for an IDERA, the irrevocable deregistration and export request authorisation provided for in Article XIII of the Protocol. Once recorded, it reserves to the lender the right to have the aircraft deregistered and exported. Each State decides whether to apply that article, so the State you choose for registration matters here too. Two points remain to be settled with your lawyer: who will make the registrations on your behalf, and whether a search after closing will confirm that the interests of the seller and its lenders have been discharged.

Registration by country: European registers and registers outside the EU

An aircraft has the nationality of the State in which it is registered, and can be registered in only one State at a time (Articles 17 and 18 of the Chicago Convention). Article 19 leaves the rules on registration and transfer to each State’s own law: each register therefore sets its own conditions.

Business aviation uses EU registers, such as those of France (F-) and Malta (9H-), and registers outside the EU, such as those of the Isle of Man (M-), Guernsey (2-), Aruba (P4-) and San Marino (T7-), as well as the United States register (N). Depending on the register, the conditions concern the nationality or place of establishment of the owner, private or commercial use of the aircraft, a local representative and the ownership structures accepted.

Registering outside the EU does not take the aircraft outside European rules. Regulation (EU) 2018/1139 applies to aircraft registered in a third country when they are operated by an operator established, residing or with its principal place of business in the Union. If you live in Europe, a foreign register is therefore weighed with your advisers, on the understanding that it does not settle the regulatory question on its own.

A change of register follows the order set out in our guide: deregistration from the previous register, an export certificate of airworthiness (EASA Form 27 when leaving the EU, inspection by an FAA designated representative when leaving the United States), the ferry flight, then registration on the new register. The equipment required by the FAA and by EASA is not always the same, and a modification approved by one is not always validated by the other.

To be settled with your advisers:

• who will be the registered owner, you, a company or a trust, and does the intended register accept it?
• who will operate the aircraft, and from which country?
• does the aircraft meet that register’s equipment and airworthiness requirements, and who pays for any work needed to comply?

Closing location, free circulation and import VAT

Where the aircraft is when ownership passes has tax consequences. Within the EU, the supply of goods that are not transported takes place where they are located at the time of supply (Article 31 of the VAT Directive). An aircraft that enters the EU without being in free circulation there is imported, and import VAT becomes chargeable in the member state where it is located on entry (Articles 30, 60 and 70 of the same Directive). Temporary admission, which allows an aircraft for private use to enter the EU free of VAT and duties, applies to an aircraft registered outside the EU and owned by a person established outside the EU.

The place and timing of closing are also a point of friction between the parties. The seller wants to be paid when filing for deregistration in its own country; you will not release funds until the aircraft is registered in yours; in between, deregistration can take several days. The drafting of the closing clause can reconcile the two requirements. The closing location, the governing law and who pays for ferry flights and the export certificate are best settled at the letter of intent stage. Some States require original signatures, or notarised or apostilled documents, which needs to be arranged before the agreed date.

The questions to put to your tax adviser:

• where will the aircraft be at the time of sale, and what VAT does that supply give rise to?
• in which member state will it be released for free circulation, and when?
• will the VAT paid be recoverable, given the ownership structure and the intended use?

Conclusion

None of these mechanisms is decided on the day of closing. Escrow and the title search are arranged from the letter of intent onwards. The register and the place of closing have lasting tax and regulatory consequences, and are settled with your lawyer and your tax adviser before the letter of intent.

We present the aircraft with the records the seller provides, and your advisers receive them before the title search begins.