Boom in private jets: Why their legal situation is similar to that of superyachts

The coronavirus pandemic has given the private aviation industry a huge boost: when scheduled flights largely ground to a halt and people wanted to avoid crowds, those who could afford it resorted to private jets. Between 2019 and 2023, the number of private aircraft worldwide increased by 6.45% annually, which corresponds to an overall increase of 28.4%. Between December 2023 and February 2024 alone, the global fleet increased from 25,993 to 26,454 private aircraft. And once you have experienced the comfort of a private flight, you hardly seem to want to do without it. The advantages are numerous: no more stress and crowds at security, complete flexibility and considerable time savings.

While yachts are primarily intended to make the finer things in life even more beautiful, the private jet (also) fulfils a different purpose: moving from one place to another as efficiently and comfortably as possible - for example from the office chair to the sun deck of your own yacht.

From a legal perspective, there are some parallels: Yachts and private jets are movable assets that are financed and built or bought second-hand. They are registered in ship or aircraft registers; they are insured, have a crew and are operated privately or commercially by specialised managers. However, there are also some special features that should be considered with regard to private jets. In the following, we will highlight the key aspects in relation to the purchase.

I. General considerations before buying a private jet

As with a yacht, the first thing to do with a private jet is to clarify which requirements it must fulfil in order to meet the needs of the buyer. The following questions, among others, should be considered: How many passengers should the private jet be able to carry at the same time and in what comfort? How many flight hours per year are you aiming for? Is transatlantic range required? Does it need to be possible to fly to airports with short runways? Should the aircraft also be used commercially, i.e. chartered out? How fast does the WLAN on board need to be?

Once all the parameters have been set and potential properties have been found, the next step is the contractual implementation.

II Procedure for the sale or purchase of a used private jet

When buying a used yacht in Europe, the standard contract of the Mediterranean Yacht Brokers Association ("MYBA") is used as a basis. This provides both the buyer and the seller with a basic legal framework that is customised to the individual needs of the contracting parties. There is no such standardised contract for private aircraft that is commonly used in practice. Although this basically offers scope for a completely free design of the purchase agreement, in individual cases it can also lead to the buyer or seller presenting an unbalanced, incomplete or, in the worst case, contradictory draft contract.

There are also sensible and recommendable procedures for private jets to ensure that a purchase or sale is handled as smoothly as possible for both parties. It is conceivable that certain principles of the MYBA standard contract could also be transferred to the structure of the purchase contract for a private jet.

Letter of intent and appraisal of the private jet

The MYBA purchase agreement for yachts includes detailed provisions for a test drive and inspection of the yacht's condition. When buying or selling private jets, on the other hand, a distinction is often made between the purchase agreement itself and a letter of intent (LoI) to be signed in advance.

As a letter of intent is not yet a purchase agreement, it is widely assumed that there is no risk of entering into further, legally binding obligations by signing the LoI. However, caution is advised here: Because depending on its specific form, the letter of intent may very well contain certain legally binding obligations. In order to avoid unpleasant surprises and possible breaches of contract, we strongly recommend that you do not sign such documents prematurely, but have them legally reviewed in advance and amended if necessary.

The letter of intent is usually concluded prior to the appraisal of the private jet and sets out the exact conditions of the appraisal. Depending on the specific form - similar to the MYBA standard contract for yachts - the time, place and duration of the inspection, the costs to be borne, the company carrying out the inspection, the scope of the inspection and details of the subsequent test flight can be specified.

As a rule, the letter of intent stipulates that a down-payment or deposit must be made before the appraisal is carried out. The down-payment should be held by a neutral third party and the escrow agreement should be carefully formulated. In particular, the circumstances under which the down-payment is to be refunded should be clearly regulated. In order to create a certain level of commitment on the seller's side, a so-called no shop period clause is a good idea. With this clause, the seller undertakes to grant the prospective buyer an exclusive right to purchase the aircraft for a limited period of time and not to conduct any other contractual negotiations during this time.

At the end of the appraisal, the buyer's expert usually draws up a list of minor or major defects. Depending on the form of the letter of intent, the discovery of certain defects can lead to the cancellation of the purchase process or to renegotiation of the purchase price. It is also conceivable that the seller will be obliged to rectify the defects. The appraisal is therefore of crucial importance. With this in mind, technically experienced appraisers and mechanics, ideally with an aviation inspector's licence, should always carry out the technical inspection of the private jet and, in addition to assessing the general condition, also check the documentation, the so-called life file of the private jet.

Purchase agreement for the aircraft

The actual purchase agreement sets out the final purchase price and all the terms and conditions of purchase, such as the transfer of risk, any representations and warranties and the payment terms (leasing, financing). However, even the letter of intent can - subject to a satisfactory appraisal - contain initial specifications of a purchase agreement to be concluded (such as purchase price, handover date, etc.), which must then be included in the purchase agreement accordingly.

The second-hand market for private jets is international. If a contract does not contain a choice of law clause in favour of a specific law, the applicable law - at least within the European Union - is based on the seller's domicile in accordance with the Rome I Regulation. However, there are various deviations from this principle which must be assessed in each individual case and can lead to legal uncertainties. In order to avoid ambiguities, we recommend that you always agree on a choice of law and jurisdiction clause. And not only in the purchase contract, but already in the letter of intent!

Takeover, transfer and authorisation

Before signing the purchase contract, important planning steps should also be carried out, for example with regard to the takeover, authorisation or registration and necessary inspections and repairs.

The following questions should be considered when clarifying insurance and tax issues as well as any compliance requirements: In which country should the private jet be authorised and registered? What documents are required for this? Are flight operation licences required? How can and may the private jet be transferred to which hangar or hangar? Does the pilot to be employed by the future owner of the aircraft have the required flight licence for the aircraft model? The answers to these questions depend on the individual case and can lead to various organisational challenges and costs. It is imperative that these are thought through in good time and then implemented in the purchase agreement negotiations. The involvement of a suitable operator can also be helpful here.

III Conclusion

The purchase of a private jet is a complex and often internationally orientated matter that requires both technical and legal support. The parties should therefore begin with careful planning before concluding the contract and seek legal and technical advice.

Experts for all questions of yacht law

The yacht lawyers Dr Tim Schommer (tim.schommer@clydeco.com) and Dr Volker Lücke (volker.luecke@clydeco.com) have been advising yacht clients in Germany and abroad for over 18 years. They advise on the planning and construction phase, the purchase and sale, the owner structure, yacht operation including insurance, crewing and charter as well as the handling of damage and third-party claims.