Split closings are challenging and time consuming. A sale of an aircraft will usually consist of the sale of one airframe and its titled engines (each an object). When the titled engines are not affixed to the titled airframe, each object moves independently from one another. This means that the objects are often not simultaneously located in the same jurisdiction. When faced with this fact pattern, parties often consider closing the sale of the aircraft on the basis of a split closing.
What is a Split Closing?
A split closing occurs when legal title to an airframe and legal title to the engines are transferred from a seller to a purchaser in sequence as and when an object arrives at its closing location. This differs from a standard closing when legal title to each object is transferred from the seller to the purchaser simultaneously.
A split closing will require additional documentation, tailored mechanics for the transfer of legal title of each object, and close co-operation between (among others) the seller, the purchaser, the airline, the financier(s) and their respective advisors. While providing flexibility, it is important the additional documentation and closing process are managed correctly to ensure the sale proceeds smoothly.
Key Considerations for Sellers and Purchasers
Split closing arrangements are usually put in place on very short notice to facilitate a sale of an aircraft that would otherwise not be possible without attracting adverse tax consequences.
The primary risk that sellers and purchasers must avoid when moving from a standard closing process to a split closing process is adopting a new procedure that brings in uncertainty or undesirable economic outcomes. A successful split closing requires the parties (and their advisors) to be clear on what the split closing document suite is, and how it will operate to achieve a successful transfer of legal title for each object from the seller to the purchaser. The parties should also be clear on how the document suite will operate if the parties elect to postpone the closing sequence and re-transfer title to each object back to the seller, and which party will assume any tax risk for such re-transfer(s) of title. A shared understanding of the intended new process is paramount.
Split closing arrangements require additional agreements to properly document (among other things) the sequential transfer of legal title of each object, the timing for the transmission of the purchase price, the re-transfer of legal title to each object in the event of a closing postponed by the parties, and in the case of secured financings the creation of security interests. Such arrangements must contain adequate provisions to ensure that both the seller and the purchaser are aligned as to which jurisdictions are suitable closing locations for each object and when legal title to each object will pass from the seller to the purchaser. This is especially so when objects are located within the USA, where tax advice may differ from state to state. Consideration should also be given to any temporary leasing and insurance arrangements that are necessary to facilitate the split closing – for example whether the seller and the purchaser should enter into temporary head-leases (or whether the purchaser should grant a “licence to use” or bailment to the seller) to cover the period during which the seller has transferred legal title to an object to the purchaser, but the operating lease agreement (between the seller and the airline) applicable to the aircraft has not yet been novated or assigned (from the seller to the purchaser). Furthermore, the document suite should reflect any relevant tax advice and set out which party is responsible for tracking and confirming the location of each object during the closing sequence.
Local law counsel in the state of registration should be consulted to ensure that any split closing arrangements are compliant with requirements imposed by the laws of the state of registration, including any filing requirements. Where the titled aircraft is registered with the Federal Aviation Administration (FAA) in the USA, further complexities can arise as the airframe may need to be grounded at the point of transfer of legal title until the fly-wire is provided by the FAA.
Additional practical considerations must also be addressed by the seller and the purchaser, such as the timing for sending, receiving, releasing and returning funds, as well as ensuring all required corporate authorities are in place to authorise the execution of the split closing document suite.
Key Considerations for Secured Financiers
All split closing arrangements will need to dovetail with the terms of any existing secured financing, as well as any new secured financing. Incoming secured financiers typically expect to receive a security interest in all objects simultaneously (rather than on a per object basis) as a condition precedent to advancing funds. The form of that security interest, the timing of its creation, and any filing requirements relating to it will need to be discussed and settled in advance of closing.
Secured parties typically elect not to advance funds or take security interests on an object by object basis as (i) pre-existing financing and security documents are not usually drafted to cater for this scenario, (ii) the parties may not have allocated a value to each object, and (iii) any outgoing secured parties usually require payment of the debt amount in full to avoid releasing security over a single object ahead of the discharge of the entirety of the secured obligations. This is particularly significant given that if the parties elect to unwind the closing sequence and consequently new security interests were taken by the outgoing secured parties, such new security interests would be subject to the rules of priority and fresh hardening periods.
Parties will also benefit from an early discussion with their respective advisors as to how and when funds will be transmitted from the incoming financiers and the purchaser, and adequate protections for the return of those funds to the incoming financiers and the purchaser (together with any interest) should the parties choose to postpone the closing sequence.
SGR’s Global Transport team, sitting across Europe and the USA, can leverage its extensive experience in closing aircraft sales worldwide to assist with split closing arrangements. If you have any questions regarding the above, please contact the author or a member of the Global Transport Practice group.