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Feb/Mar 2000

General Aviation Law

Practical Aviation Law

AIM/FAR 2000

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SW Aviator Magazine
3909 Central NE
Albuquerque, NM 87108
Phone: 505.256.7031
Fax: 505.256.3172

Legal Perspective: Purchase Agreements
by Duane F. Keating, Esq.

This is an article I’ve been wanting to write for quite some time! Mainly, because I remain surprised at the number of people with the knowledge, sophistication, business experience and money who spend $50,000 to $500,000 or more on an airplane without having a purchase agreement. They often rely on an agreement the Seller has prepared, or worse one which was copied from an “old one they had from an earlier purchase!” In fact, the title for this article comes from an actual phone call.

I know some people will think I'm being self-serving when I say that buying an airplane without having a purchase agreement that is tailored to your specific transaction, either by you or an attorney, is like preparing a do-it-yourself will or trust. You are entitled to that opinion. Sometimes it’s better than nothing. Most of the time it’s not. My practice includes Estate Planning, (wills, trusts, etc.). I have seen wills that were prepared, using will kits, computer software programs, etc. I really have nothing against them. I, or another attorney, will usually get to charge someone, one way or the other. It's really a “pay me now or pay me later” situation, with the “pay me later” usually being considerably more expensive. But then in the case of wills the person drafting it doesn’t really care anymore! Remember, in contracts, wills, clothes and other similar matters–one size doesn't necessarily fit all.

If you have considerable experience buying or selling aircraft, then you might be able to prepare your own purchase agreement, without any help from an attorney. My advice is, and always has been, if you can afford to lose the money, then it’s not a problem. Either don’t prepare a purchase agreement at all, or don't worry about it. If you can’t afford to lose it, it’s worth every cent you pay to someone to look over the agreement before you sign it.

There is a difference between being cost efficient and being foolish! The phrase “Penny wise and pound foolish” has been around a long time, and might be even more applicable today. And it’s the same, no matter what you buy or sell. I recently sat through a hearing where a person bought a piece of property, thinking all was okay. He had just found out that the prior owner had failed to get a building permit for a remodel that was done on the property! Guess who had to pay for the permit, along with the costs to bring the building up to code? Not the prior owner, at least not at this point. “But that's different” you say, “that involves a house and several thousands of dollars.” Hmmm... I guess your right! So then let's get to our current subject.

In today’s used airplane market, most sellers, brokers and agents use purchase agreements. (Usually, ones that they have prepared.) It should set forth everything that is important –material–to the sale. All of the important points of the transaction should be set forth in this agreement. Let’s look at some of the things that you need to consider when buying and airplane. These points should be included in a purchase agreement, whether you prepare it or someone else does. Since most “form” documents are prepared by the seller (when was the last time you went to buy something and whipped out your trusty “Buyers Agreement”), they tend to favor the Seller. Make sure the language reflects what you understand the agreement to be. Delete, or change by hand, those provisions that you do not agree with.

This may seem like an obvious one, but make sure the person “selling” you the aircraft is indeed the owner. I had one occasion where the airplane had never been transferred to the current “owner.” This person obviously could not “sell” it because he didn’t own it! It was taken care of, but what if it had not been caught? The "new" owner would have had to get a Bill of Sale from the prior owner, who might not be required to do it. The last word on who the owner is and the status of liens against aircraft, is the FAA's registry in Oklahoma City. Get a title search before you commit to buy, or at least make the sale contingent on the results of such a search. It’s not expensive and might save you a great deal of grief later. Make sure the names of each party to the agreement are in the agreement, along with their address and capacity. I talk about corporate authority below, but if one of the parties is a corporation, make sure the agreement spells that out.

“Why a Bonzair 127 of course,” you might respond, everyone knows what that is! Of course, but what goes with it and what condition are it and all its parts and equipment in. Has it ever been damaged? Is there any corrosion? Does it include the radios you saw in the picture? Etc., etc? If the seller (and we’ll include brokers and agents here) says the DME is broken, but we’ll fix it, get it in writing! If there was a spec. sheet included in the “package” you received, include it (incorporate it into the agreement as an exhibit), if the engine, airframe and prop times are important and the airplane is represented to have certain equipment, make sure that’s included as well - with specificity. These are all representations that you as a buyer are relying on and they must be in the agreement if you want to enforce them. If you are the seller, then make sure what you state in your advertising information is accurate, or make sure you have the agreement state that what is in it is all that was represented to the buyer.

Sometimes, I include the serial numbers of the equipment, to insure that what comes with the plane is actually what I expected, what was represented, and that it is not stolen. I always refer to the aircraft by its make, model, N number and serial number, and sometimes I include the same for engines and props, if it is important. Have, or will, all ADs been complied with, and who is going to sign them off if that is part of the transaction? Is a current annual included, or an overhaul of the prop(s) or engine(s)? These are just some of the considerations you must include. The written agreement will probably have an “integration clause” in it, that says that any agreements, written or oral, that precede this one are no longer valid, and that this agreement represents the “entire” agreement between the parties. Anything you relied on prior to the written agreement that’s not in it will be difficult, if not impossible, to enforce.

Obviously you include the agreed upon selling cost. This is generally understood by almost everyone, but there can be some hidden problems here as well. If you’ve put down a deposit, under what terms do you get it back? It needs to be spelled out here, not in an “understanding” over the phone with the seller or his/her agent. When and how will payment be made? Will any of the funds be held in escrow? (Something I strongly suggest if there is the slightest possibility of a misunderstanding.) Will it be necessary to escrow funds over a long period of time while something is being taken care of–like removing a lien the owner didn’t know about? (It happens more often than you think!) How will payment be made: cash, check, cashier’s check, wire transfer, bearer bonds, gold bullion? Spell it all out here, so that both you and the other party understand it.

When and where will the transfer of the airplane and the funds take place and is “time of the essence?” In other words, is time important to this transaction? This is important if you are buying the airplane for business purposes and you need it by a certain date. It’s also important for who bears the loss if it spontaneously combusts on the ramp or during the signing a thunderstorm rolls through and deposits grapefruit size hail on your beauty! It's also for your insurance company, so they will know when they are responsible for any loss or damage. It’s always a good idea to make sure that the aircraft is bound by your insurance company prior to the date of delivery. Coverage will not be available until you actually have an “insurable interest” in the aircraft, but when that happens can be debated, and its better to have the policy in place, so you can debate it.

If it’s important that you get the airplane at a certain time, make sure it’s in the contract. Most purchase agreements either are silent on the matter, which means the Seller will have a reasonable time within which to provide you with the aircraft, or release the Seller of any delivery requirements. If it's important put it in and provide for daily damages, if the time frame is not met. If it’s still not met then you as the Buyer will have the opportunity to rescind the agreement. (Make sure this is one of the reasons for the return of your deposit, by the way!)

More than likely, unless your Harrison Ford or Ted Turner, or just won the lottery, you’re buying a used aircraft. Normally the seller or his agent will “disclaim all warranties.” What does that mean, and is that what you want? What it means, is that as soon as you give the Seller the money and he gives you the keys, if something breaks, or Bonzair Aircraft Company comes out with a mandatory Service Bulletin, or what's worse the FAA issues a “new” AD the next day, saying that all the bolts in the airplane must be checked for tightness before it can be flown again, you're stuck with the airplane, and the cost, until it’s done! And the Seller has your money! You’re probably stuck, though with some rights, even if you find out that there was damage to the airplane that was not disclosed! Unless it’s in the purchase agreement, chances of getting your money back, or damages, are fair to none–and at best it will cost you more money in attorneys fees.

Most Purchase Agreements use the “magic words” AS IS, and NO WARRANTY EXPRESS OR IMPLIED. If these are in the purchase agreement, make sure you are satisfied with the aircraft’s condition before you accept it and sign, because you won’t be able to send it back.

In almost every case you should deal with the issue of inspections. Whether you’re the buyer or the seller you will want some reference to this very important part of the agreement in the agreement itself. The inspections I’m referring to are those of the logs, the AD log, and the airplane. This is not the article, and I’m not the professional, to talk about what should be included in the airplane inspection, or even if one should be performed, but I can relate countless horror stories of buyers who relied on the representation of a “fresh annual,” only to find out that basically nothing was done, but a sign-off. Most people are surprised to discover that since you did not contract with the shop that did the work, or performed the annual, you probably do not have any claim against them for any problems that arise later. Deal with it in the contract. If you are the buyer and are going to require a pre-purchase inspection ( I wouldn’t think of buying an airplane without one), and want it to be an annual you should contract with the mechanic to do the work. You may negotiate with the Seller what he will pay for or fix, if anything, but it will be your bill. If the airplane doesn't pass muster, wouldn’t you rather know before it's your hangar queen? If problems arise later, you can then make a claim against the shop that did the annual. If you don’t do any inspections or reviews of logs, and the purchase agreement says either you did, or you had the opportunity and declined, it will be presumed that you did and you will not be able to say later that you relied on the Seller’s representations about something such inspections or reviews would have shown.

What happens if one party defaults? Either the plane isn’t delivered on time, or the buyer can’t come up with the money, or the plane turns out to be not as represented in the written agreement. How these disputes are handled can become very important. This can range from arbitration to choice of forum questions (which state will have jurisdiction and where suit will be brought.) These can have very far reaching consequences. If you live in New Mexico or Arizona, do you really want to go to New York or Florida to defend or pursue a lawsuit? This could give one side or the other a very big bargaining position, just because of the expense to travel there. If you want arbitration, how will it be handled? How will the arbitrators be chosen? Who pays the costs of arbitration? What rules will apply?

Another very important matter to consider, especially if you are in New Mexico, is that attorney’s fees are not automatically awarded to the winning party. In fact, with few exceptions, unless the contract provides for it, the court cannot award attorneys fees, so it should be in the contract. This takes us to what state law will control, and this is another matter that should not be taken lightly. The law in New Mexico, Colorado, Oklahoma or Arizona, may be and probably is different from that in Ohio, or Louisiana.

There are several other provisions that should be included, such as a representation that each party has the authority to sign the agreement if a corporation, partnership or LLC is involved. What representations are made about the plane’s condition? How will modifications to the agreement be handled, if allowed, heading provisions and, of course the signature provisions–does it need to be signed before a notary, is a seal required, etc. When dealing with a corporation or partnership you should obtain a resolution that states what the corporation has decided to do and that the person signing has the authority to do it. All of these should be addressed in the agreement.

You’ve found the airplane of your dreams and you and the owner have come to an agreement on the price. Or, you’ve found the sucker of your dreams and you and he have come to agreement on the price. Whichever scenario you choose, everybody is happy before the actual sale “closes.” A good purchase agreement can keep it that way after the sale. Remember, if you can’t agree on a written purchase agreement, then maybe it’s because each of you have a different idea of what is being sold, for how much, and under what terms! Maybe you really don’t have an agreement. Read the agreement totally. Understand it’s terms and what it requires - if you don't understand it get someone who does. If you don’t like a provision have it changed or deleted, after all it's your purchase agreement and you won’t be able to say later that you “thought it was in the agreement.” Good luck, and I hope you do find your dream airplane at a price you can afford!

The purpose of this article is informational only, and is not intended in any way, to establish an attorney- client relationship. Before relying on anything contained herein you should consult with an attorney, as the facts and circumstances of each matter vary widely as does the law, which can also vary significantly from state to state. Something that may appear simple, usually is not and may have many more issues.

Duane Keating is an attorney in Albuquerque, New Mexico where he practices law in the areas of FAA and NTSB Certificate and Medical enforcement Actions, Elder Law, Medicare/Medicaid and Estate Planning, Business and Real Estate Law. He has been in practice over 20 years, is a member of the NTSB Bar Association, the Lawyer Pilot's Bar Association and is an AOPA Panel Attorney. He holds a Commercial License with ASEL, AMEL and Instrument ratings and is a CFI - Instrument and Multi-Engine. He can be reached at 505-332-4657 or by writing, 1000 Eubank, NE, Suite B, Albuquerque, NM 87112.

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