Buying or selling an aircraft involves a myriad of people, paperwork, checklists, processes and procedures that need to be carefully orchestrated from start to finish. Leading off the purchase or sale transaction is typically the letter of intent (LOI) or purchase offer. No transactions are ever the same but each LOI does have some common elements that need to be addressed or at least contemplated since this sets the tone of the transaction as well as to ensure a successful conclusion.
We like to say that buyers and sellers should fight like cats and dogs over price and the rest should fall into place in a way that is fair and equitable. As a buyer you don’t want to go in too low and the seller choose not to counter or worse yet, choose not to engage.
As a seller, your goal is to counter in a way that elicits further offers with the hopes of reaching the realm where you’d accept a deal.
Every offer should clearly spell out when the deposit goes nonrefundable. In a “soft deal” the buyer has the right to walk away up to a certain point in the transaction (typically within a day or two of the delivery of the results of the pre-purchase inspection).
In a “hard deal” the deposit becomes nonrefundable at the signature of the purchase and sale agreement meaning that, as long as the seller fixes the agreed upon discrepancies, the buyer is obligated to consummate the transaction barring any damage or other macro affect on the value of the aircraft.
A buyer and seller need to have an understanding of the general delivery condition of the aircraft. Items such as damage, status of logs/records as well as the airworthiness of the aircraft so that a definition of what a discrepancy will be should be fleshed out and agreed upon within the LOI.
An understanding of the pre-purchase inspection is vital. Striking a balance between too detailed or not providing enough direction about what the buyer would like to see inspected is the challenge with outlining the pre-purchase inspection.
At a minimum, it should spell out where the aircraft shall be inspected, who is responsible for the costs to inspect, the rectification of any discrepancies and any timing aspects regarding the total duration.
PREPARATION OF THE PURCHASE AND SALE AGREEMENT
Ask any broker or aviation lawyer about who has the right to draft the subsequent purchase and sale agreement and you’ll be presented with several answers each with their own defensible argument why they are right. Sellers like to think they should be able to serve up the first cut of the draft. Buyers will argue they are making the offer so they too should have the right.
Hashing out who prepares the first draft within the LOI will save from having each side racing to complete a draft and worse yet, shifting the focus from putting together an amenable deal.
The LOI should set forth a basic timeline for the major transaction milestones such as:
- How many days from the execution of the offer is the deposit due?
- How long does the buyer have to decide if they conditionally accept the aircraft after the inspection (in the case of a soft deal).
- How many days do the parties have to close after the rectification of any discrepancies and the aircraft’s return to service?
- Perhaps the most important timing item is how long is the offer in effect and how long the parties have to consummate the purchase and sale agreement. Not having one or both of these items in the LOI can have disastrous effects for either the seller or buyer depending on which side you are on.
Clearly spelling out who is responsible for the cost of the various movements of the aircraft and at what rate helps lay the ground work for a more detailed definition in the subsequent purchase and sale agreement. Both parties should remember the guidelines set forth for charging or recouping those costs are spelled out clearly in 14 C.F.R. 91.501(d). It also may be a good idea to spell out such items as where the aircraft will be moved for any visual inspections, the pre-buy location and the delivery location.
Depending on the situation, the depth of detail the parties want to delve into and any special circumstances associated with the transaction, one or both parties may want to address such items as confidentiality, governing law, binding versus non-binding, and taxes.
The items above are a few of the most important items that should be incorporated into an LOI. The framework agreed to by the buyer and seller in the LOI will serve as the bridge to lead to the more formal and robust aircraft purchase and sale agreement used to provide the detail that will then guide the sale and purchase of the asset.
Given the expectations it sets forth between the parties, it is important to strike a balance. An LOI that is too detailed can unnecessarily slow down the process. An LOI too basic can lead to the unrealistic expectations from both parties when the first draft of the subsequent purchase and sale agreement is served up. The goal is to strike a balance in order to get a deal moving.
There is no hard or fast rule about involving either your internal legal counsel and/or also involving outside aviation legal counsel at this stage. It typically comes down to each client’s preference, culture or comfort level with buying and selling aircraft. In addition, the deal structure, such as a first time purchase or the need to incorporate a 1031 Like-Kind Exchange, will also often dictate how many additional players will need to be consulted throughout a client’s organization in order to come to terms on an LOI. Regardless, the goal is crafting an LOI that both parties will use to reach an accord and move the deal into the next phase with the eye towards closing the deal.