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Vedder Thinking | Articles United Kingdom: Aircraft Repossession and Recovery

Newsletter/Bulletin

Recent European airline bankruptcies have highlighted the need to take care when formulating aircraft repossession and recovery strategies. An owner or financier will want to ensure that a successful recovery of its aircraft from the defaulting airline is not followed by the detention and/or loss of its aircraft because of the rules that apply at the fly-out destination or the location chosen for the maintenance and/or storage of the aircraft.

The risk of detention and sale is present in one guise or another in most jurisdictions – in the United Kingdom (UK), the risk is most commonly associated with unpaid Eurocontrol navigation charges (including the notorious "fleet-wide lien") and, more recently, unpaid civil penalties under the European Union’s Emissions Trading Scheme insofar as it relates to aircraft (EU ETS).

This article summarizes the detention and sale regime in the UK, explains how the risk of the Eurocontrol fleet-wide lien can be handled and highlights the available protection for owners and financiers in the context of the EU ETS legislation. This article does not discuss other detention rights that might be exercised against an aircraft in the UK.

Airport and Air Navigation Charges

Overview – First, a recap on the power of the United Kingdom Civil Aviation Authority (UK CAA) to detain and sell aircraft. The power applies in relation to the non-payment of airport charges (i.e., charges payable for the use of various UK airport facilities)1 or air navigation charges (i.e., charges payable for the supply of services by the UK National Air Traffic Services, the Danish and Icelandic authorities and Eurocontrol).2 The detention and sale regime with respect to aircraft is effectively the same for both airport charges and air navigation charges.

Detention Right – The applicable legislative provisions grant a detention right over an aircraft in favor of the UK CAA in two situations:

1 Where it is the aircraft in respect of which charges were incurred, which charges remain unpaid (whether or not incurred by the person who is the operator at the time when the detention begins; i.e., when an owner or financier is exposed to the risk of prior operators); and

2 Where it is one aircraft in the fleet of aircraft, in relation to which the person in default is the operator at the time the detention begins (this being the so-called "fleet-wide lien").

Any person repossessing an aircraft is therefore not liable to have it detained in the UK (a) if the aircraft itself has not incurred any charges that are unpaid and (b) if the person in default is no longer the operator of the aircraft.

Managing the Fleet-Wide Risk – An owner or financier can effectively deal with the fleet-wide risk by terminating the lease agreement before its aircraft enters the UK. This was affirmed in a 2010 English court case relating to the now-defunct operator Zoom Airlines3, which stated that the election to terminate must be made before the aircraft is detained. Any such termination should be effected before the aircraft reaches the UK, as the detention right may be exercised upon arrival in the UK and (notwithstanding a subsequent termination of the lease agreement) cannot be removed until such time as the unpaid sums are paid or the UK CAA elects to sell the aircraft.

Airport Coverage – The UK CAA’s power to detain aircraft is restricted to so-called designated airports, many of which were listed in an order of the Secretary of State for Transport in 2009 and include aerodromes from Bournemouth to Blackpool, Cambridge to Carlisle and Liverpool to Lydd.4

The Secretary of State is able to supplement the list of designated airports by Amendment Order.5 Prior to an Amendment Order being made, the Department of Transport enters into consultation with the aerodrome concerned, the UK CAA and other interested consultees.

The effect of the 2009 and subsequent legislation has greatly increased the number of airports covered, and as a result has made it very difficult for the owner or financier of a commercial aircraft to position its aircraft beyond the reach of the UK CAA.

Sale Right – The right to sell an aircraft is consequent upon the aircraft’s detention. Pursuant to the provisions of – in relation to unpaid airport fees – the Act and, in relation to unpaid air navigation charges, the Eurocontrol Regulations, the UK CAA has the power, with the leave of the court, to sell the aircraft if due amounts are not settled within 56 days of the date on which the aircraft was detained.

EU ETS

Overview – The provisions in relation to the EU ETS6 impose the same ultimate sanction as those for unpaid airport fees and unpaid air navigation charges. However, the procedure is different, and there is (probably) increased protection for owners and financiers.

Detention Right – The power to detain an aircraft rests, in England and Wales, with the UK Environment Agency (and not with the UK CAA). The power may be exercised in two circumstances:

1 In relation to UK-administered aircraft operators who have failed to pay any civil penalty within six months of the due date. Civil penalties generally result from failure to comply with ETS regulations (including reporting requirements) or a failure to surrender allowances; and are generally due within one month of the date on which notice to pay is served; and

2 In relation to European Union (EU) operators who are subject to an operating ban under Article 16(10) of the EU ETS Directive.7

The detention right operates on a fleet-wide basis, since its reference point is necessarily the operator and not the aircraft.

The first limb applies only to any operator that is specified as administered, for the purposes of the EU ETS, by the UK under Commission Regulation (EC) No. 748/2009, which covers the majority of UK operators plus those international carriers for which the UK has been allocated administrative responsibility.

Under the second limb, any aircraft operator operating within the EU may have its aircraft detained if a Member State applies for an operating ban under Article 16(10) of the EU ETS Directive. In this way, if an airline fails to comply with implementation of the EU ETS in Malta, for example, its aircraft may still be detained in the UK by the UK Environment Agency, provided that Malta has filed an application for an operating ban under Article 16(10) of the EU ETS Directive.

Protections Against Detention – An aircraft cannot be detained, continue to be detained or be sold if (i) following detention, the UK Environment Agency no longer has reason to believe the defaulting operator is the operator of the aircraft or (ii) the defaulting operator or any other person claiming an interest in the aircraft demonstrates to the UK Environment Agency’s satisfaction that the defaulting operator is no longer entitled to possession of the aircraft, in particular by virtue of the termination of any lease with respect to the aircraft.8

The legislative provisions do not state whether the operator must have ceased to be the operator, or whether the lease must have been terminated, before the exercise of the detention right. The fact that the provisions are written in relatively broad terms suggests that lease termination after detention should be effective to cause the release of an aircraft.

Assuming that the transaction includes a lease to the operator, a mortgagee (as "a person claiming an interest in the aircraft") should not rely solely on its enforcement of the aircraft mortgage as a trigger to release the aircraft. A mortgagee would need to be able to demonstrate that the lease has also been terminated to be confident of securing the release of the aircraft.

Geographical Coverage – The geographical scope of the UK Environment Agency’s detention power is greater than that of the UK CAA. Rather than using a list of "designated airports," the EU ETS Regulations encompass "any area or space . . . for the landing and departure of aircraft."9 Every aerodrome operator must provide assistance to the UK Environment Agency in detaining the relevant aircraft.

Sale Right – An aircraft may be sold, with the leave of the court, if sums due are not settled within 56 days of the date on which the aircraft was detained. Where the UK Environment Agency has detained an aircraft under the first limb, it must give at least 21 days’ notice to any relevant party (which includes the owner and/or mortgagee) before proceeding with any sale.

Summary

To summarize:

  • An owner or financier must carefully select its fly-out destination and maintenance/storage location.
  • The (perhaps overstated) Eurocontrol fleet-wide risk in the UK can be effectively addressed by timely lease termination.
  • Timely lease termination should also protect against ETS detention and sale risk.
  • Recovering mortgagees should not rely on repossession as mortgagee alone.
  • It will be more than difficult to find a recovery location in the UK that is outside the reach of the UK CAA and the UK Environment Agency.

1 S. 88 Civil Aviation Act 1982 (the Act).
2 Reg. 4 Civil Aviation (Chargeable Air Services Detention and Sale of Aircraft for Eurocontrol) Regulations 2001 (the Eurocontrol Regulations).
3 Global Knafaim Leasing Limited v. The Civil Aviation Authority [2010] EWHC 1348 (Admin).
4 Sch. 1 Aerodromes (Designation) (Detention and Sale of Aircraft) (England and Wales) Order 2009 lists Bembridge, Biggin Hill, Birmingham, Blackpool, Bournemouth, Bristol, Bristol (Filton), Cambridge, Cardiff, Carlisle, Coventry, Cranfield, Doncaster/Sheffield, Durham Tees Valley, Exeter, Farnborough, Gloucestershire, Humberside, Leeds/Bradford, Liverpool, London City, London (Gatwick), London (Heathrow), London (Luton), London (Stansted), Lydd, Manchester, Manston, Newcastle, Norwich, Nottingham East Midlands, Oxford, Redhill, Southampton, Southend, Wolverhampton.
5 At the time of writing, only Cotswold Airport has been so designated by Amendment Order.
6 Generally, the Aviation Greenhouse Gas Emissions Trading Scheme Regulations 2010, as amended from time to time (the ETS Regulations).
7 Directive 2003/87/EC, as amended from time to time.
8 Reg. 43 of the ETS Regulations (which provision includes further circumstances in which an aircraft is to be released).
9 "Aerodrome" means any area of land or water that is designed, equipped, set apart or commonly used for affording facilities for the landing and departure of aircraft and includes any area or space, whether on the ground, on the roof of a building or elsewhere, that is designed, equipped or set apart for affording facilities for the landing and departure of aircraft capable of descending or climbing vertically. Reg. 48 ETS Regulations/s. 105 Civil Aviation Act 1982.

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