CAUTION AHEAD —Transparency (or lack thereof) in the Back-to-Back Aircraft Purchase and Sale Transaction

  An article by Michael L. Dworkin recently published in the Exclusive Aviation Bulletin AeroPodium Expert -Issue 14 - June 2021

            You are a potential aircraft buyer.  You contact Broker advising that you are looking for a certain aircraft type, with certain equipment and not more than X cycles/time in service.  Broker says that he’ll look around and see what’s available and will get back to you.  Nothing is discussed or agreed to with respect to Broker’s compensation.  No brokerage agreement is negotiated or executed.

             Sometime later, Broker contacts you and advises that there is an aircraft available at a certain price and forwards you the aircraft specifications.  What Broker does not disclose to you is that, anticipating that you will acquire the aircraft, Broker has entered into a letter of intent with the Seller under which Broker will acquire the aircraft at substantially less than the sale price quoted to you, and then “flip it”--reselling it to you, resulting in Broker making some 6 times more than it would under a standard commission agreement.  Broker doesn’t disclose this to the Seller either.

             Aside from the lack of transparency, there are several potential problems in this situation:

 1.       There is an inherent conflict of interest.  How can Broker serve as your broker (owing you some modicum of if not fiduciary, but at least some ethical responsibility) and at the same time, be the seller with whom you may have some potential adversarial or antithetical interest?  In plain English, which hat is Broker wearing?

2.      Aside from the conflict of interest vis a vis Buyer, what if anything has Broker represented to Seller?  Has Seller been led to believe that Broker was acting on its behalf?

3.      To the extent that a “middleman” is involved, but not necessarily in the chain of title, any warranties of clear title contained in the aircraft purchase agreement may be rendered virtually meaningless;

4.      Given delays in filing and recording ownership and security interests with the US FAA aircraft registry brought about by the COVID-19 pandemic, there is a distinct possibility that records relating to changes in aircraft title, ownership and security interests could be in “no man’s land” for 24-48 hours prior to being date stamped as received.  While this might not seem very long, most aircraft are high value assets and someone with nefarious motives could conceivably cloud the aircraft’s otherwise clean title in that short period of time;

5.      To the extent that Buyer may have paid a premium for the aircraft because it has been enrolled in airframe, engine, component and avionics manufacturer’s extended warranty and/or reliability programs, are these programs now assignable? Arguably, if they were not assigned Broker, this break in the chain may cause any program in which the aircraft had been enrolled to lapse.  Additionally, can these programs be assigned and re-assigned back-to-back?

6.      Neither Seller nor Buyer will be in contractual privity.  This may preclude Buyer from seeking or pursuing any contractual remedies to which the parties might otherwise be entitled had Buyer purchased the aircraft directly from Seller;

7.      Neither Buyer nor Seller know the true price for which the aircraft was sold and purchased; and

8.      Just from the standpoint of appearances, it looks and smells bad.

 We recently encountered just this situation.  An all-cash aircraft sales and purchase transaction between a highly motivated, well-qualified buyer and a motivated seller almost ended up on the rocks.  A broker, who had never been formally engaged by the buyer, literally held the aircraft hostage demanding payment of the grossly inflated compensation to which the broker claimed it was entitled had it “flipped” the aircraft, causing both buyer and seller to walk away from the transaction.  When the broker realized that if the transaction did not go forward, it would receive absolutely nothing, the broker relented, eventually agreeing to compromise its claim for something closer to the customary commission.  However, neither the buyer nor seller were willing to go forward without the broker executing a written agreement under which it waived all claims, released the parties and covenanted not to sue.  Yes, the transaction went forward, but it came very close to being scuttled and encountered delays and additional costs in dealing with the broker’s machinations.

 The moral(s) of this story: 

 1.      When acquiring an aircraft, each party should know exactly with whom it is dealing.  Who are the real parties in interest?  Who is the seller?  Who is the buyer/end user?

2.      Whether you are a seller or a buyer, if you engage a broker, insist upon a written brokerage agreement clearly setting forth the commission and compensation that the broker will receive upon completion of the transaction.

3.      If you are a buyer, before you execute any letter of intent leading up to the negotiation of an aircraft sales and purchase agreement, perform a title search of the aircraft.  If the letter of intent is addressed to anyone other than the registered owner of the aircraft, STOP!

4.      If you are a seller, know who your customer and ultimate end user are.  Given possible foreign export controls and concerns over international money laundering, this is essential for the seller’s legal protection.

5.      Ensure that the aircraft sales and purchase agreement are between the registered owner of the aircraft and the ultimate end user.  Making sure that the real parties in interest are at the bargaining table not only ensures transparency but may be required given those concerns set forth in Paragraph 4 above.

6.      While there may be some circumstances in which a back-to-back transaction may be appropriate, closely examine whether these circumstances outweigh the risks.