Is the UK’s ratification of the Cape Town Convention premature?

Is the UK’s ratification of the Cape Town Convention premature?

What will the ratification of the Cape Town Convention (CTC) mean for the UK aviation industry? Jonathan Russell, senior associate, and Zohar Zik, consultant, at Holman Fenwick Willan (HFW), explain why they believe the UK’s ratification of the CTC is not necessarily a positive step and why the timing of the ratification seems premature.

Original News

The UK government has ratified the CTC on International Interests in Mobile Equipment and the associated protocol on matters specific to Aircraft Equipment. The CTC and Protocol will enter into force in the UK on 1 November 2015.

What does this mean for the UK? Can ratification be welcomed as necessary and positive progress, or are there any drawbacks?

We do not believe the ratification is necessarily positive progress for the UK. The CTC was designed to provide a uniform, global standard for providing security over ‘aircraft objects’ by aligning the administrative and judicial systems in less developed countries—who want access to aircraft finance—with those countries who either manufacture aircraft or want to gain access to underserved markets.

It is therefore no surprise that the US—together with Ethiopia, Ireland, Malaysia, Nigeria, Oman, Panama and Pakistan—was one of the first contracting states to ratify the CTC in order to facilitate the likes of Boeing and EXIM bank gaining access to potential customers in Africa, the Middle East and Asia.

This is not the case in the UK, which has a highly regarded legal system and a Civil Aviation Authority which is both reliable and predictable. Ratifying the CTC will only place an additional administrative and financial burden on airlines who are unlikely to benefit from it due to the ‘home country’ rule. In addition, given the relatively small number of countries that have ratified the CTC, the timing of the UK’s ratification seems premature.

We also question why the UK did not seek to condition its ratification upon making amendments to the CTC to correct certain inherent shortcomings of its original drafting, for example:

  • we believe the failure to address an anomaly in the definition of an ‘aircraft object’, which does not include uninstalled helicopter engines, is a missed opportunity
  • we would have also sought to change or cancel the ‘home country’ rule as part of the package, so as to ensure UK airlines can really benefit from the ratification by gaining access to the Cape Town discount

The change to the lex situs rule—in so far as international interests are concerned—is welcome but the change has not gone far enough. It should have been universally applied and not limited to international interests—notwithstanding the fact that it could have been achieved by a separate piece of legislation.

If the government wanted to make it clear that it treats aviation assets as a specific asset class, it should have foregone ratification pro tem in favour of reversing the lex situs principle for all aviation assets instead.

How will it affect aircraft financing and mortgages? What practical measures should be taken?

We do not think it will have a major impact save that the requirement to make registrations on the International Registry will create extra costs for operators. Arguably, there will be no need to obtain a lex situs opinion but, due to remaining ambiguity regarding the lex situs rule, we believe lawyers will be unable to give a clean opinion, so the practice of ensuring that an aircraft is over international waters, or hangared in the UK, when the mortgage is executed, will continue.

On a practical level, due to the fact that the International Registry only includes consensual transactions—all parties to a transaction must approve the recording of an international interest in writing and to do so each party to a transaction, eg the seller, buyer, lender, lessee and or sublessee must register as a transacting user entity (TUE) and identify an individual within the organisation who will act as an administrator. While registering as a TUE is unavoidable, the administration of registrations of international interests may be largely outsourced to a professional user entity (PUE), thereby reducing the overall administrative burden on the TUE.

What does it mean for legal practitioners?

Some UK lawyers will be aware of the potential business that ratification may generate. For example, many US firms have high turnovers of work generated by acting as PUEs on behalf of financiers, some UK firms may hope to replicate this. However, this is the type of work that some clients resent having to pay for—especially when they know that this is really a paper exercise with no real value in practice.

Any final observations?

Essentially, we believe the CTC is not a bad idea but, since only a handful of countries have ratified it to date, we question the rationale for the UK ratifying it now. If the UK had decided to repeal the ‘home country’ rule and make necessary amendments to the CTC, this would have been a different story.

However, sadly in our view, the ratification at this juncture is not necessary—it brings no real benefit to most, if not all, UK airlines and operators—while coming at price that they will either be unwilling, or unable, to bear.

Since joining HFW in October 2008, Jonathan has developed an international practice with a strong focus on general aviation matters, particularly the financing of corporate and private jets and he currently acts for financiers, owners and operators advising on a range of lease and loan financing structures. In addition to his general aviation practice, Jonathan also advises on commercial aircraft transactions, including aircraft sale and purchase, operating leases, sub-leases, lease novations and amendments.

Zohar is an aviation lawyer with particular expertise in aviation finance and leasing transactions, complex commercial contracts and regulatory matters. He has advised extensively on fleet management issues, such as aircraft procurement, purchase and disposal, operating leasing, sub-leasing, lease novations and amendments and end of lease returns. Zohar also has in-depth experience in advising on commercial agreements for the aviation industry of all types, including contracts for the purchase of buyer’s furnished equipment, fuel, catering and maintenance services, and for capacity trading, such as charter and wetlease agreements.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

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About the author:

Neil specialises in banking and asset finance transactions with a particular emphasis on shipping finance, aviation finance, renewable energy finance and in providing corporate finance transactional support. Neil qualified as a solicitor with TLT in 2004 and worked as a finance solicitor in both the Bristol and London offices before joining the asset finance team at DLA Piper.