The first part of this article (published in The Business Observer, 12th January 2017) dealt with the strategy underpinning the new aviation laws and changes to the law of sale and promises of sale in so far as they related to aircraft and aircraft engines. This part picks up on the contract of lease, regulatory aspects of financial leasing and interest rate rules in leases.
Contracts of lease
Article 1526 of the Civil Code was also amended to the same effect in relation to the leasing of aircraft, which is probably even more important than sales, because for every sale there are probably five leases of the aircraft, if not more. Once again the necessity of a judicial letter – too formalistic and local – which has to be served on the lessor or the lessee, probably both overseas, to terminate a lease of an aircraft has been disapplied and the parties can agree on the methods for notices to each other which can be in writing or even by electronic means. As Maltese law tends to have a bias in favour of possessors of things under leases, when there is a default, a mere notice and demand to return the asset does not usually work due to lessee non-cooperation. This then turns into a veritable nightmare with a lot of delay when the default could be as obvious as the failure to pay the rent!
The law has now been turned around to ensure that when notices of termination for defaults are given, not only should it not be necessary to have the Courts confirmation that a default has taken place, but the court is required to support the lessor in repossessing the aircraft “as expeditiously as possible”. This is the only economically acceptable approach which the parties to any lease of aircraft agree to in standard terms. Indeed this is reflected in the Cape Town Convention which Malta ratified in 2010. Here we see Maltese law coming in line with its international obligations in a clear manner to avoid any ambiguity in the courts. The Cape Town Convention would in any case prevail over the Civil Code on this point. This clear provision will now avoid argument in a court as to whether there is a conflict between the Code and Cape Town and whether Cape Town prevails and how. A judge who is not an expert on aviation would reasonably require some time to absorb these kind of revolutions in this little island, not realising that the aviation world out there has long abandoned the rules reflected in our Civil Code.
The reaction in Malta would be to consider the effective dispossession of a lessee in default almost shocking, disregarding that the inefficiencies in repossession would make Malta a jurisdiction which is totally unacceptable to the aircraft leasing industry. No amount of tax incentives, geographic position, pleasant and competitive work places or friendly populations will make up for inefficiency of the law, often unjustly appearing to be the inefficiency of the courts but sometimes assisted by an inefficient or insensitive court system. What our law now states is that if the lease is unjustly terminated, then the lessee can seek damages which is a better reallocation of risk between the parties, one which is normally reflected in an international aircraft leasing contract and its pricing.
Another interesting little detail in this provision is that the same powers are given to the holder of a mortgage over the aircraft. This means that the real party taking risk, being the financier of the aircraft, can enforce the remedy of repossession directly, which is again consistent with Cape Town, and reflects the re-arranged economic allocation of risk in case of a default. This avoids the need for the mortgagee to take a pledge of the lease contract or an assignment of the powers of repossession from the lessor and allows the mortgagee to hop-scotch over the lessor directly to the lessee and take possession directly, without going through its own debtor – the lessor, assuming of course that the lessor does not cure the default himself. It thus avoids the duplication of remedies, the risks of two persons defending the repossession application on different grounds and so on. In a situation where the lessor and the mortgagee have aligned interests, then it makes the whole process very efficient and protective of their combined interests based on identical risks.
Finally the definition of “default” is clarified to state clearly where these strong remedies apply. Arguing over whether a situation or action by the lessee is, or is not, a default may take months before a court. Now the law states the parties can agree on the list of defaults and these also include, apart from breaches of the express lease agreement, a change in the financial condition of the lessee or action which deprives the mortgagee of the level of security it expects to have with his own debtor, the lessor. So if the lessee, for example, fails to insure the aircraft, as required in the lease and naturally in the mortgage, the mortgagee would be able to use this ground of default to repossess the aircraft directly from the lessee.
These rules reflect the major step taken in Cape Town where it is recognised that a lease can be recorded as an international interest and it then has the powers similar to those of a mortgage. Lease is treated as security which is quite anti-intuitive. This had been reflected in the Aircraft Registration Act in 2010 in what is probably one of the most evident shifts of legal policy in the Maltese Civil law system in recent years. It is now echoed in the Civil Code provisions on leases.
The above developments apply to leases of any kind, be they operating or financial leases. One of the issues which Maltese Law posed in this regard is that financial leasing was treated as a regulated activity under the Financial Institutions Act. This meant that financial lessors, usually SPVs would theoretically need a licence from the MFSA to carry out a financial lease. There were arguments that a single aircraft SPV with one financial lease would not be regular activity in Malta and the law would not apply, but in practice, on advising foreign lessors of the need for regulatory enquiry, it was typical to see Malta being dropped as an option. Most SPVs are set up and operated by credit institutions in any case so regulation of an SPV was seen as an unnecessary cost and burden. By means of a specific amendment to that law, financial leasing of aircraft and ships is now exempt from regulation, even if the SPV is registered or operates in or from Malta and even if the aircraft flies the Maltese flag.
The conditions for the exemption is that the SPV is owned and controlled or financed by regulated entities as defined in relevant EU directives which apply in Malta, and if there is an intermediate trustee, then one looks through it for interpretation. Secondly, the SPV’s objects have to be limited to financial leasing of aircraft and ancillary activities, to the exclusion of other types of assets or activities.
This amounts to the removal of what operators consider to be the major obstacle to Malta being used as a centre for the leasing of aircraft, which in practice is the larger opportunity for the island when compared with registration of aircraft which should have less focus when determining strategic policies for the development of Malta as a centre for aviation businesses.
Malta has always had rules restricting the maximum rate of interest one can contractually agree upon – 8%. This is now academic given the low interest rate environment. It is however always a reservation in legal opinions and certainly the object of enquiry in reviewing international agreements, as this is considered to be a public policy rule. Since the late 1990’s many rules have come in to carve out international agreements so as to remove a serious obstacle to growth of international business in Malta. In this review process, the law has now been clarified to state that debts and obligations secured by a mortgage or due under a lease of an aircraft or aircraft engine, whether registered in Malta or otherwise, and whether governed by Maltese law or not, are not subject to interest rate limitations, limits on compounding and the like which appear under the Civil Code or any other law. The most relevant reason for this amendment is that aircraft leases are now covered explicitly. To date the exemption provisions were mainly focused on ships and financial transactions.
This note deals with side issues to the main discussion on aircraft ownership, operations and financing. They are however important issues which simplify the discussion when it comes to using Malta as a jurisdiction for aviation matters. They confirm the wide scope of Malta’s approach when developing the aviation industry and show the Government’s continuing commitment to make the process smooth, to realign risk assessment of underlying rules of law and generally to make Malta a more feasible option for financiers, lessors and operators of aircraft and aircraft engines.
Max Ganado is senior partner at GANADO Advocates who led the team within the firm which was responsible for drafting the amendments to the laws referred to in this article.