Focus on Aircraft Transactions in the UAE
China Focus
Mamoon KhanPartner,Banking & Finance
Arina GidwaniSenior Associate,Banking & Finance
Kay NgAssociate,Banking & Finance - China Group
In the dynamic aviation industry, aircraft financing and leasing play a critical role in enabling airlines to expand their fleets, manage costs, and maintain operational flexibility. Over recent years, Chinese lessors and banks have become key players in this sector, providing innovative financial solutions and substantial capital. Their involvement underscores China’s growing influence and commitment to supporting global aviation growth. At Al Tamimi & Company, we are at the forefront of facilitating aircraft financing and leasing projects in the region. This article provides insights into the UAE market.
The UAE and the GCC region generally are seeing an increase in cross-border aircraft financing and leasing transactions and asset-backed securitisations (“ABS”).
ABS play a significant role in the aircraft financing landscape by providing an additional layer of capital and liquidity for transactions. In the context of aircraft leasing, ABS structures allow financial institutions to pool aircraft leases and issue securities backed by these assets. This approach enhances the availability of financing by enabling lessors to access capital markets, crucial for expanding fleets and managing financial resources.
navigating multiple jurisdictions: Understanding the legal requirements of different jurisdictions is essential for successful transactions. Our team is experienced in managing these complexities;
addressing cultural and commercial factors: Effective negotiation and relationship-building are crucial in cross-border deals. We ensure that cultural and commercial factors are considered; and
ensuring documentation compliance: Accurate and compliant documentation is critical. Our expertise guarantees that all legal requirements are met.
We focus below on certain notable factors for foreign lessors and financiers to keep in mind when considering a transaction with or involving a UAE lessee:
The UAE General Civil Aviation Authority (the “GCAA”) maintains a national aircraft register. Established in 1996, the GCAA oversees civil aviation and aircraft registration in the UAE. To register an aircraft, it must be owned or operated by a UAE national entity or individual. The aircraft can also be owned by a foreign entity, provided it is operated by a local UAE operator.
The market practice is that the registration process is led by airline operators and all submissions to the GCAA for aircraft registration are made through the operator. The GCAA requires constitutional documents and signing authority in respect of each entity that will be named on the aircraft certificate of registration. Parties should keep in mind that certain documents must be submitted in original form and there are also notarisation requirements which can affect timing.
The UAE is also an Authorising Entry Point (“AEP”) under the Convention on International Interests in Mobile Equipment (the “Cape Town Convention”). Therefore, interest bearers of an aircraft registered in the UAE must retrieve a code from the GCAA as the designated AEP before making a registration with the International Registry. The GCAA issues AEP codes for various interests and rights, including international interests, assignments, subrogation, and notices of national interests. At present, it is not necessary to obtain an AEP code for aircraft engine IR filings, as these can be made directly on the IR website.
Federal Decree Law No. 50 of 2022 Issuing the Commercial Transactions Law (the “CTL”) provides the relevant provisions for mortgages over movable assets, which apply to aircraft. While there are no specific aircraft mortgage provisions in the Aviation Law, the CTL stipulates that the mortgagee must have possession of the aircraft. Although the CTL does not explicitly define the conditions for satisfying the possession test, the following practices are generally accepted in the market.
installing fire-proof nameplates on the aircraft and engines, indicating the mortgagee’s security interest;
recording the mortgagee’s interest on the aircraft’s certificate of registration issued by the GCAA; and
registering the mortgage as an international interest under the Cape Town Convention.
From a UAE enforcement perspective, UAE law recognises the principle of freedom of contract, which theoretically also extends to choice of law provisions. In practice, however, UAE courts are reluctant to recognise the choice of a foreign law as the governing law of an agreement on grounds of public policy and tend to apply UAE law. Accordingly, it is important that key UAE legal requirements are satisfied.
It is possible to file a foreign law mortgage with the GCAA and the mortgagee’s interest would be noted on the aircraft certificate of registration. While not strictly necessary as the UAE is a party to the Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment (together the “Convention”), this filing can be beneficial and would also help to satisfy the possession test under the CTL.
The Convention was concluded in Cape Town on 16 November 2001. The Convention was ratified by the UAE and came into effect in the UAE on 1 August 2009 providing more certainty to financiers and lessors and reducing risk when entering a new market.
When ratifying the Convention, the UAE made a number of Declarations under the Convention. One of which is that where Convention remedies are available to the lessor without the need for an application to court (so called self- help remedies), such remedy may only by be exercised in the UAE by application to court.
Additionally, interests registered on the International Register create international interests (as defined in the Convention) over the aircraft and engines and generally, save for recommended local registrations, no other filing, registration or governmental approval is necessary to perfect or protect the rights of the lessor to the aircraft.
The GCAA also recognises the concept of the Irrevocable De-registration and Export Power of Attorney (“IDERA”) which allows the person (usually the lessor) in whose favour the document is issued to exercise those rights and remedies contemplated by the Convention, as adopted and implemented in the UAE. Where financing is in place, the GCAA will also record a certified designee whereby the authorised person under the IDERA can effectively assign its rights under the IDERA. Pursuant to the UAE Civil Aviation Regulations, the GCAA has confirmed that it will honour a request for enforcing IDERA where:
the request is properly submitted under a recorded IDERA; and
the Authorised Party or, its Certified Designee, certifies to the GCAA that all registered interests ranking in priority to that of the creditor in whose favour the authorisation has been issued have been discharged or that the holders of such interests have consented to the de-registration and export.
The procedures and requirements for attachment applications in the UAE are governed by the Federal Law 42 of 2022 Promulgating the Civil Procedure Code, as amended (the “Civil Procedure Code”). The Civil Procedure Law allows a creditor, an owner of an asset or a plaintiff with a valid claim against a defendant to attach an asset in possession of the other party. Therefore in the event of a dispute over the right to possession of an aircraft, the lessor may pursue attachment of the aircraft by court proceedings in a UAE Court. Such proceedings against the aircraft are called retrieval proceedings and from the lessor’s perspective are usually based on proving that it is the owner which is claiming ownership of the aircraft from another party who is in actual possession.
An attachment of the asset claimed may support retrieval proceedings provided a prima facie claim can be proved by way of documentary evidence. An attachment application is filed by UAE based lawyers on behalf of the party applying to the UAE court. This is an ex-parte application to a duty judge who makes a prompt decision on the merits of the proposed attachment. This attachment is based solely on the documents provided as evidence and a brief verbal explanation by the applicant’s lawyer. There is no scope for affidavits, witnesses or significant (lengthy) verbal argument. If the attachment application is successful, an attachment order is granted by the judge and sent by the court bailiff for attachment of the aircraft. Within 8 days of any successful attachment application, a substantive action needs to be filed in support of the attachment proceedings. Failing this, the attachment order will be considered void.
If the substantive action is successful, and all the appeal stages have been exhausted, the lessor can then proceed with the execution of the judgment through the relevant court execution department.
At Al Tamimi & Company, our banking team advises Chinese lessors and banks in the Middle East region. We offer comprehensive guidance on the impact of local law on financing and leasing documentation, ensuring that all legal considerations are addressed. Our team is adept at drafting local law security documents and reviewing foreign law mortgages to ensure compliance with key provisions of UAE law. We also assist with the registration of aircraft and aircraft mortgages with the relevant Aviation Authority, ensuring adherence to regulatory requirements. Additionally, we provide UAE legal opinions covering registration of the aircraft with the relevant Aviation authority, Convention matters and lex situs opinions.
For further information,please contact Mamoon Khan, Arina Gidwani and Kay Ng.
Published in September 2024
