Cape Town Treaty: Perfecting Interests in Aircraft Under the New Law, The

ELT, Jul/Aug 2006 by Pollack, Todd

Aircraft lessors will need to promptly change their closing procedures to meet the new rules. Otherwise, their aircraft interests may not be perfected.

Prior to March 1, 2006, in order to perfect an interest in a U.S.-registered aircraft, a lender or lessor only needed to file documents with the Federal Aviation Administration. Today, that requirement has changed because of the new Cape Town Treaty (formally, the Convention on International Interests in Mobile Equipment and the related Protocol on Matters Specific to Aircraft Equipment). Although the familiar FAA filing requirements remain in place, the Cape Town Treaty requires an additional stepregistering the interest with the International Registry of Mobile Assets created by the Treaty. Compliance is essential, because failure to register under the Cape Town Treaty will result in the aircraft interest being unperfected and potential loss of priority in the secured equipment-even with respect to a later creditor who has actual knowledge of the unregistered interest.

In short, a U.S.-registered aircraft must be registered at the FAA, and the interests in the aircraft must be filed at the FAA and registered under the Treaty.

What is the Treaty?

On March 1, 2006, the Cape Town Treaty became effective in the U.S. and eight other countries that, as of June 1, 2006, have ratified it. It applies when the obligor in the transaction is situated in a country that has ratified the Treaty. The stated intent of the Treaty is, generally, to expand the sources and lower the costs of aircraft financing by establishing a central, international registry for the creation, enforcement, perfection and priority of interests in "aircraft objects" (defined in the Treaty as airframes, aircraft engines, and helicopters). Although the Treaty creates a new registration system, it does not dismantle the pre-Treaty filing and registration system in the U.S.

The Cape Town Treaty creates an electronic (internet) registry that is accessible 24 hours a day, seven days a week and 365 days a year. The registry is "located" in Ireland (but really located in cyberspace, so where it is located for administrative purposes has little practical effect). Only interests are registered (for example, "security interest in airframe X in favor of lender Y"); the mortgage or lease itself is not filed.

To What Interests Does it Apply?

Aircraft Objects-The Cape Town Treaty applies only to denned aircraft objects. The aircraft objects that are subject to the Treaty are:

1. airframes that are certified to carry at least eight persons (including crew) or in excess of 2750 kg (6063 lbs) of cargo,

2. helicopters that are certified to carry at least five persons (including crew) or in excess of 450 kg (992 lbs) of cargo, and

3. jet engines that have at least 1750 pounds of thrust or turbine/piston engines that have at least 550 rated takeoff shaft horsepower.

The Treaty applies to interests in all such objects that meet these specifications, regardless of whether the aircraft is used for business, commercial or personal purposes. Propellers, aircraft/engine parts, and floating inventories of spare engines are not included in this list, and are not covered under the Treaty. security interests in such equipment should be perfected against U.S. debtors in the same manner as before the Treaty. In addition, interests in airframes and engines that do not meet the foregoing size and power specification fall outside the jurisdiction of the Treaty and should continue to be perfected by other means.

Registrable Interests-Basically, the Cape Town Treaty provides a registration system for security interests and leases. One kind of interest that must be perfected under the Treaty is referred to as an "international interest." An international interest is the security interest under a security agreement or a title reservation agreement (conditional sales), or a lessor's interest under a lease. Also registrable are assignments, bills of sale (which the Treaty calls "contracts of sale"), subordination agreements, subrogation agreements, prospective assignments, prospective sales, and prospective leases, and amendments, discharges (terminations and releases), and extensions of those interests.

Prospective Interests-Parties may "pre-register" under the Treaty, by registering "prospective" interests. Registering a prospective interest allows a party to gain a priority position that (upon perfection) will relate back to the date of the registration. As long as the prospective interest filing sufficiently describes the final transaction, no second registration will be required upon closing of the transaction. If the transaction for which a prospective interest is perfected does not close, no actual interest is created and the filed prospective interest has no effect. Regardless, the parties to such a failed transaction should register a discharge of the prospective interest, because the interest will remain on the Registry until it is discharged.