As the situation worsens from day to day, further catalysed by the imposition of travel bans at both a national and transnational level, market players have been forced to re-evaluate their commercial strategies. This may very well include the restructuring of leasing arrangements as it becomes more imminently likely that a lessee will be unable to make lease payments. Whilst a default in lease payments may entitle a lessor to a termination of the lease, this wouldn’t generally be in the lessor’s interest given the current economic climate, including in particular the fact that demand for aircraft is currently low and the lessor will have difficulty in placing the aircraft (particularly at the same pre-COVID-19 rent).
The ‘Hell or High Water’ Clause
The implications of the COVID-19 on an aircraft lease agreement vary from one agreement to another, depending on the terms and conditions set out in the said agreement and the governing law thereof.
Standard commercial operating lease agreements generally governed by English law typically do not include force majeure clauses and are characterised by two principal features: 1 the first feature relates to the delivery of the aircraft to the lessee on a ‘as is, where is’ basis, whilst the second feature involves the inclusion of a ‘hell or high water’ clause, rendering the lease a net lease. Arguably, taken together, these two features leave the lessee helpless in a situation where the lessee’s use of the aircraft, through no fault of its own, is suddenly severely curtailed.
The latter feature, in particular, is key to understanding the implications of Covid-19 on airlines as such clauses render the lessee unconditionally and completely responsible for payment of the rent, irrespective of the unforeseen circumstances which have affected the airline’s operations. Effectively, a ‘hell or high water’ clause places an absolute, irrevocable and unconditional obligation on the lessee to make the necessary lease payments, notwithstanding the happening of any circumstance of any nature whatsoever, which conditions the lessee’s use of the aircraft.
The operation of the ‘hell or high water’ clause must be considered in tandem with the delivery of the aircraft on an ‘as is, where is’ basis. Once the lessee accepts the aircraft at delivery, the lessee is often required to take on most of the operational and financial risk with the lessor’s obligations being limited to the bare minimum. This is desirable and expected, particularly in the context of finance leases, since it provides an incentive to the lessor to procure the necessary funds for a finance lease transaction. Naturally, this places a lot of importance on the delivery and acceptance procedure of the aircraft.
How does this Relate to the Concept of Force Majeure?
Therefore, whilst the acceptance of the aircraft by the lessee (evidenced by means of the issuance of acceptance certificate) guarantees the protection of the lessor, at the same time, this restricts if not completely prohibits the lessee from relying on any of the protections attributable to the concept of force majeure. Accordingly, whether or not the lessee is able to invoke force majeure (or any other similar concept such as the frustration of the contract) is dependent on the literal text and governing law of the contract.
The reality is that for several lease agreements, the issue is not simply a question as to the correct interpretation of the force majeure clause but rather whether force majeure features at all in such an agreement. Given the characteristic features of operating lease agreements, as described above, it seems that the concept of force majeure is incompatible with both the text as well as the intention behind such leasing agreements.
The Way Forward
The lessor in an operational lease is therefore left with two options: adopt a strict approach and allow the lessee to default under the lease agreement and thus resume possession of the aircraft; or renegotiate the terms of the agreement in such a way which allows the struggling lessee to temporarily stall lease payments.
In the latter scenario, the lease payments may be simply deferred to a later date rather than excused in their entirety. However, whether this is optimal for the lessor depends on the particular circumstances, including its liquidity and, or the commitments of the other parties (typically finance parties) involved.
1 These features very often also feature in finance leases and thus, arguably, a similar treatment can be applied to finance leasing arrangements where these agreements cater for equivalent provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.