back to back aircraft transactions: how to identify a b2b
October 24, 2019
Michelle Wade and Philippe Renz explore basic principles and compliance challenges of back to back aircraft transactions
A company’s flight department is told to locate an aircraft to purchase that meets the needs of the company. Initially, the flight department must be aware of the market for its selected make and model of pre-owned aircraft. In addition, the flight department personnel involved in the aircraft purchase need to know how to identify a back to back (also called a B2B and a flip) transaction. There are several indications that the aircraft transaction may be a B2B, but they are subtle and easily overlooked if the company is not actively looking for these indicators. Consequently, knowing the indicators, asking questions and including contractual protection mechanisms can help protect the company’s interests.
What is a B2B?
A B2B aircraft transaction involves the current owner of the aircraft (Owner) who enters into a contract to sell the aircraft to an intermediary (Intermediary) and the Intermediary enters into a contract at the same time to sell the aircraft to the buyer (Buyer). Accordingly, on the closing date, title to the aircraft transfers from the Owner to the Intermediary (without registration in the name of Intermediary) and then immediately transfers to the Buyer and the Buyer registers the aircraft with the aviation authority.
The aviation transactions industry is aware of B2B transactions, however few aircraft buyers or sellers are aware of B2B transactions. In a B2B, the Buyer and the Owner do not have a direct contractual relationship, even though the transfer of title from Owner to Intermediary to Buyer is nearly simultaneous. Some brokers are also dealers and they purchase an aircraft, register it in their name, have upgrades performed and then market it for sale. These transactions are transparent and do not fall within the scope of this article.
An Example of a B2B
One way a Buyer can inadvertently become involved with a B2B is through an individual claiming to be a broker for the aircraft owner. This individual approaches the flight department offering a specific aircraft and quoting a tentative sales price. The individual does not represent the owner of the aircraft, but after the flight department shows interest in the aircraft, the broker begins negotiating with the Owner to purchase the aircraft for a reduced price, then offer the aircraft to the Buyer at an increased price. The difference between the two charges is the broker’s payment.
When to Use a B2B?
There are times when it is beneficial to utilize a transparent B2B. Ordinarily, if each party is aware of the B2B, the other parties and the costs, then each party negotiates for its desired terms.
If the flight department elects to purchase an aircraft registered in a foreign jurisdiction and the Buyer and its lender want to purchase an aircraft already registered in the Buyer’s selected registration jurisdiction, the broker, as the Intermediary, enters into a contract with the Owner to purchase the aircraft and the Intermediary enters into a substantially similar contract with the Buyer to sell the aircraft to the Buyer after the aircraft is registered by the Intermediary in the Buyer’s desired jurisdiction with a certificate of airworthiness issued by the aviation authority of that jurisdiction. The transaction is transparent to all parties, the parties agree on who pays for the various parts of the B2B transaction and consequently the Buyer knows it is paying the broker, as Intermediary, to perform additional services beyond serving as a broker for the Buyer. This transparency allows each party to address its risks in the transaction.
A B2B transaction may arise because the flight department wants to hire a broker to advise it with respect to the purchase, but the company will not pay a broker. A broker may become involved by becoming the Intermediary which purchases the aircraft from the Seller and sells the aircraft to the Buyer. Although the flight department may be aware of the B2B, the company executives, lawyers and tax advisors may not receive the necessary facts when negotiating the terms of the purchase.
Some buyers, do not want their name disclosed to the Owner, and accordingly want to use a B2B to disguise their identity. Notwithstanding the desire for privacy, purchase agreement terms, export control and anti-money laundering laws and regulations may require disclosure of the name of the new owner and the source of the funds used to purchase the aircraft.
Know the Seller and the Owner
If the flight department wants to ensure it has all of the facts, it should first check the name of the “Seller” in the purchase agreement against the name of the registered owner of the aircraft. Some aviation authorities, such as the United States, register an aircraft in the name of the owner, which allows a Buyer to easily identify the Owner. In jurisdictions where aircraft are registered in the name of the operator, the Buyer can require the Seller to provide copies of each bill of sale in the chain of ownership back to the initial purchase from the manufacturer.
If the “Seller” in the purchase agreement is not the owner of the aircraft, ask why the owner is not a party to the purchase agreement. Listen to the answer and if the answer does not alleviate all of the concerns, thoughtfully consider a response and the next step.
Purchase Agreement Negotiations – Ask Questions
Consider the amount of time between when the flight department sends the Seller a purchase agreement draft and when the Seller responds. Does the response time seem excessively long? Is the flight department just anxious to arrive on time for its scheduled slot at the inspection facility? A longer response time may be due to the unavailability of a decision-maker, but it may also indicate that the aircraft purchase involves a B2B. Consequently, ask more questions.
When the flight department receives a revised draft of the purchase agreement from the other party, do the comments respond to the flight department’s comments or at least acknowledge those comments? Can the person negotiating on behalf of the other party explain the changes made to the purchase agreement and can they explain why they ignored some of the comments the flight department provided? A B2B requires the Intermediary to negotiate two contracts and the Intermediary may significantly underestimate the time required by the Intermediary to negotiate with two different parties and document the agreement of two different parties while not informing those parties of the B2B transaction. Consequently, this can result in an extended period of purchase agreement negotiations and may even result in new terms being introduced into a purchase agreement near the end of the negotiation process. If this occurs, then ask more questions.
Who has Rights to the Deposit?
One of the risks of a B2B involves the deposit. If a company, as the Buyer, places a deposit in escrow, the company believes its deposit will apply only to the purchase agreement to which it is a party. The Buyer sending the deposit does not want the Intermediary using the Buyer’s deposit to become the deposit for the contract between the Intermediary and the Owner.
At this point in the transaction, the escrow agent may ask questions about why it appears that two transactions involve the same funds for the deposit under both contracts. In many jurisdictions, an escrow agent must (for anti-money-laundering and other governmental requirements) know all of the parties in order to perform governmental required due diligence checks.
The Buyer wants to retain its rights to its deposited funds per its purchase agreement. If the Intermediary did not place an additional deposit into escrow for the contract between the Intermediary and the Owner and then the Intermediary defaults under that contract, there is a risk that the Owner may terminate its contract with the Intermediary and receive the Buyer’s deposit, even though the Buyer has not defaulted under its contract with the Intermediary. In the event of a dispute over the deposit, the escrow agent may place the deposit with a court and require the parties to participate in a court proceeding to determine who receives the deposit. The Buyer may have difficulty recovering the amount of its deposit and its other costs from the Intermediary. In addition, if the Owner defaults and the Intermediary is unable to convey the aircraft to the Buyer, the Buyer may have claims against the Intermediary, but may be unable to collect from the Intermediary.
The Inspection and Conflicts of Interest
The Buyer will want to determine the scope of and oversee its pre-purchase inspection. When a broker is the Intermediary in a B2B, conflicts regarding the scope of the pre-purchase inspection may arise between the Buyer and its broker if its broker is the Intermediary. The Buyer’s goal is to obtain an airworthy aircraft following a thorough pre-purchase inspection during which discrepancies have been identified and then repaired, even if it requires an additional two weeks to close, while the Intermediary’s goal may be to promptly close. The Buyer’s desired inspection scope may be rejected by the Intermediary and may never be conveyed to the aircraft’s Owner if the Intermediary in the B2B is focused on closing as soon as possible.
The Buyer also wants to send representatives to the inspection facility, receive a copy of the inspection report, and have its representatives on any test flight allowed by the purchase agreement. In a B2B transaction, there are two “buyers” and if the ultimate Buyer is denied any of these standard rights in the purchase agreement or during the inspection period, then ask more questions.
Financing the Purchase – Lender Concerns
If the Buyer obtains financing, the timing of the release of the lender’s funds can be challenging. A lender may not release its funds to a party (Intermediary) which does not have title to the aircraft.
Taxes – B2B Complexities
Tax issues must be reviewed in a B2B. If the Intermediary is in the chain of title, how does this affect the transfer tax planning performed by the Buyer’s team? If a Buyer does not plan for transfer taxes for the double transfer involved in the B2B because Buyer is unaware of the B2B, Buyer is at risk of tax claims and even at risk of a lien on the aircraft for taxes which may be owed because the transaction was a B2B.
Changing Aircraft Registries – Additional Complexity
If the aircraft is registered on one jurisdiction’s registry when owned by the Owner and the Buyer will be registering the aircraft with a different registry, this adds significant complication to the documentation and the closing process of a B2B. The Owner’s registry may de-register the aircraft and notify the recipient registry that the Intermediary will be registering the aircraft. If the Intermediary fails to register the aircraft or is not eligible to register the aircraft at the recipient registry, the Intermediary may not have a valid method to transfer title to the Buyer and the Buyer may have released its funds to the Intermediary, only to discover that Buyer does not receive good title to the aircraft due to the B2B.
Protecting Your Interests
The Buyer expects its representatives to protect the Buyer’s interests in the aircraft purchase transaction. Consider the reaction of the Buyer’s executives if, after closing, the CFO discovers an internet ad with a photo of the purchased aircraft with a “sold for $xxx” banner. The $xxx amount is $150,000 less than the purchase price that the company, as the Buyer, paid to purchase the aircraft.
In an industry that has significant cross-border transactions, laws and regulations adopted in one jurisdiction may only chase B2B transactions to another jurisdiction. Two major aviation industry associations, the National Business Aviation Association and the National Air Transportation Association, adopted ethics codes, however they are guidelines. An Intermediary can craft a B2B, regardless of these association guidelines. Consequently, the best way to avoid B2Bs is with contractual mechanisms and oversight.
Aircraft sellers and buyers deserve transparent transactions for their purchase and sale transactions. Flight departments do not constantly buy and sell business aircraft and consequently may be unaware of how to identify a B2B. Without governmental regulation or industry self-regulation, the most effective way for sellers and buyers of aircraft to protect themselves is through adoption of contractual protection mechanisms to reduce the risks of hidden B2Bs.
Michelle Wade and Philippe Renz launched Clean Aero to improve transparency and ethics in the market of aircraft sales and acquisitions. To learn more visit at www.clean.aero