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Post-Closing Headaches

Even after the deal has ostensibly concluded, a lot can go wrong with an aircraft transaction. This advice can help buyers and sellers avoid problems.

If you’re buying or selling a business jet, you may be looking forward to some relaxation after the transaction is finalized. Unless you give careful thought to post-closing matters in advance, however, your biggest headaches may still lie ahead when you seal the deal.

A business jet has the capacity to cause catastrophic damage, and no seller in his right mind wants to be responsible for its performance after closing. Imagine, for example, getting a call from the buyer of your jet claiming that you are responsible for damages caused by or to the aircraft because you failed to maintain it properly. To protect the seller from this kind of liability, business jet purchase agreements require that the buyer accept the aircraft at closing “as is, where is.” 

Such clauses can run to a couple of pages in the purchase agreement and are generally printed in capital letters to ensure the buyer pays attention. However, courts typically interpret aircraft purchase agreements with great care, so simply providing an “as is, where is” clause or customary disclaimers is by itself not a 100 percent guarantee that a case cannot be made for the seller’s post-closing liability.

The seller, in any event, is rarely altogether free of post-closing obligations. The best examples are liens and claims on the aircraft owing to the activities of prior owners, including the seller, such as liens for unpaid taxes and claims by service centers for unpaid maintenance expenses. To protect the buyer, the purchase agreement and “warranty bill of sale” delivered at closing should contain the seller’s representations and warranties of good and marketable title to the aircraft, free and clear of all liens, encumbrances, security interests, leasehold interests, and the like.

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This assurance, however, is only as good as the seller’s ability to pay and the buyer’s ability to collect. Aircraft are often owned (and thus sold) by shell companies that have no other assets in the hope of shielding the owner, and then seller, from aircraft-related liabilities. Further, if the seller is, for example, an oligarch residing in Remotestan, collecting from him to discharge liens discovered post-closing may prove expensive and time-consuming at best and completely futile at worst. Consider having the seller’s obligations for clear title guaranteed by a person or entity with the wherewithal to discharge them. Buyers should also consider purchasing title insurance, which can provide protection for a host of title issues. [See “Should You Buy Title Insurance?” —Ed.]

Beyond this, the seller may be responsible for shipping loose equipment or spare parts to the buyer after closing. If there is any concern about the seller living up to this obligation, the buyer should make sure these items are delivered in advance of closing. The seller may also be responsible for paying to fix discrepancies on the aircraft that the parties agree can be addressed after delivery. For fixes where the actual cost of repair is unknown or only estimated, the buyer should hold back a portion of the purchase price in escrow at least sufficient to fix the problem under a worst-case scenario. Alternatively, the obligation can be “cashed out” by reducing the purchase price payable at closing. 

If the aircraft is delivered with a “loaner” part while its own part is repaired or a replacement is located after closing, provision should be made not only for the cost of repair or replacement but also for the cost of renting the loaned part, shipping the repairable part to and from the repair facility, removing the loaned part, installing the new part, and shipping the loaned part home. If the part (an engine, for example) is covered by a maintenance program, it may pay for some or all of these costs.

The seller is not the only one who may have post-closing obligations. Purchase agreements, for example, sometimes require the buyer to change the tail number after closing, reserving the existing number for the seller’s future use. The parties should be prepared for this to take several months. But the buyer’s post-closing headaches are more likely to involve issues that have nothing to do with the seller, such as refurbishments, equipment upgrades, and minimizing taxes. 

Tax issues pose a special challenge. An important tax often neglected by buyers is sales tax on parts and loose equipment not installed on or physically present with the aircraft at closing. Many business jet sales close in jurisdictions like Massachusetts where no tax applies to aircraft sales. However, if at the time of closing an engine is being repaired in a state that imposes a tax on the sale of aircraft parts, that state may tax the value of the engine because it was physically present in the taxing state when title to the engine passed to the buyer. A 6 percent sales tax on a $2 million engine would come to $120,000, an expense worth not ignoring. 

Interestingly, though a jet sale is itself not subject to tax in New York, that state taxes the value of the “ancillary property” delivered with it, such as china, crystal, flatware, artworks, small appliances, and bedding. You can avoid the sales tax by taking delivery of such property in a state that doesn’t impose tax, but if you’ll base the aircraft in New York and the ancillary property will be shipped there after delivery, in theory New York can assess compensatory use tax when it arrives.

Use-tax issues also apply to the aircraft itself. Some states presume that if you fly into them within a certain time after acquiring the airplane, you must have purchased it with the intent of using it within their borders and, therefore, you owe use tax. I remember reading about a business titan who sued his law firm for (among other things) not advising him to avoid flying his brand-new Gulfstream to Florida immediately after he bought it. Similarly, to avoid use tax in a given state, it may be necessary to take business flights outside the state before flying there.

Such flights can help with federal taxes as well. To qualify for 100 percent bonus depreciation for income tax purposes, all the flights in the year an aircraft is acquired and placed in service must be for qualified business use. If you take delivery of your jet in December and your only flight that month is to Aruba for the holidays, your business use of the aircraft that year will be zero. 

If you’re planning to refurbish or add equipment to the aircraft right after closing, be sure to do your homework in advance. Otherwise, your jet may be parked for weeks waiting for parts, equipment, or fabrics to show up. Carpets often have an especially long lead time. 

Consider flying for a while rather than rushing to make final decisions. Over time, your pilot may talk you out of installing lightning detection, your CFO may talk you out of repainting the aircraft this year, and you may talk yourself out of recovering the couch.

Meanwhile, with any luck, you can relax a bit.