The commercial air transportation is a big industry that continues to grow rapidly. This growth can be explained by various reasons such as globalization, population increase and booming in tourism. However, the biggest handicap remains to be the financing of aircraft due to high expenses. This problem is widely dealt with leasing currently and this solution seems to be even more common in the future.
Aircraft leases maximize efficiency and practicality which provide an ability to reach even more destinations. An aircraft leasing may take place as an operating lease or finance (capital) lease. This article will focus on operating lease.
An operating lease may briefly be defined as any lease which is not a financial lease. The lessor’s expectation to receive the aircraft back while it still has a useful economic life, remain of the aircraft as an asset for the lessor and not appearing on lessee’s book as a liability are main factors regarding an operating lease. Almost half of the commercial aircraft are subject to operating leases today due to above-mentioned benefits.
Legal Framework in Turkey
Code of Turkish Civil Aviation, also known as the Law no. 2920, is the main legislation regarding the aviation industry in Turkey. The Code mentions leasing and chartering contracts at 118th and 119th articles. According to 118th Article, ‘Relevant provisions of the Turkish Code of Obligations shall apply to dry leasing while wet leasing, leasing the whole or part of an aircraft or charter contracts shall be subject to the relevant provisions of the Turkish Commercial Code. Provisions of international agreements are reserved.’
Law no. 2920 attributes to other codes instead of providing specific regulations. However, it is important that the Code also makes a reference to international agreements. International agreements, such as the Cape Town Convention, aims to harmonize the interpretation of aircraft lease. Therefore, it is important that domestic legislation doesn’t contradict its provisions. The regulation is also in line with the 90th article of the Turkish Constitution which states that ‘International agreements duly put into effect have the force of law’. Thus, provisions of the international legal instruments are incorporated into national legislation which made Turkey an even more considerable option for aircraft leasing.
Types of Leasing Agreements
Pursuant to Turkish legislation, there are three types of aircraft lease: short term wet lease, wet lease, and dry lease. If the aircraft is operated under lessee’s operating license then the lease must be considered as a dry lease while a wet lease means that aircraft is operated under lessor’s operating license. The main difference between them is lessor provides also a complete crew/only cockpit crew to the lessee beside of an aircraft by a wet lease agreement. A wet lease is considered short-term wet when it is made for a time less than 3 days.
Parties of lease agreements can be local or foreign entities. The Directive for Rules and Procedures of Aircraft Leasing regulated different procedures by its appendixes depending on nationality of parties. According to the Directive, a local entity is commercial air transportation which is accredited with regard to the Commercial Air Transportation Regulation (SHY-6A) and holds a valid operating license. On the other hand, a foreign entity is defined as a commercial air transportation which accredited with regard to ICAO Appendix 6 by a Civil Aviation Directorate of a state that is member of International Civil Aviation Organization and holds a valid operating license.
Short-term Wet Lease
None of the short-term wet leases require prior approval. Parties may conclude such agreements just by fulfilling requirements that set out at related appendixes. However, it is important to note that passengers shall be informed no later than boarding about actual operator in all kind of wet lease agreements.
Wet lease agreements that take place between local operators don’t require prior approval. On the other hand, the situation changes when a foreign operator involves. When a local operator provides aircraft to a foreign operator the Directorate shall be notified at least 15 days before the operation. This notification condition increases to 30 days when the local operator is the receiver. In both scenarios, parties must obtain approval of the Directorate to complete the process.
In case of dry leasing, parties shall notify the Directorate at least 120 days before the operation. These agreements enter into force following sign of the ICAO 83 Bis Agreement. It is important to note that an aircraft which has been leased by a foreign operator shall be bound by cabotage law due to 31st Article of the Law no. 2920. Hence, such an aircraft can’t be used in domestic flights regarding commercial transportation of passenger, cargo or post.
Form of the Leasing Agreements
As it is put in the Law no. 2920, the written form is the primary condition for validity. Beside of this, General Directorate of Civil Aviation (the Directorate) declared a circular in order to provide a more specific guide for leasing agreements.
The leasing agreements must;
- precisely contain names and/or trade names and correspondence addresses of natural persons or legal entities who are party to the agreement,
- explicitly include fundamental information regarding aircraft such as type, registry, and registration number,
- specify the validity period,
- indicate transparently operator’s liability regarding the operation, maintenance and, insurance of the aircraft,
- state that insurance obligations which arose from 132nd and 138th articles of the Law no. 2920, Regulation on Financial Liability Insurance For Turkish And Foreign Civil Aircrafts Landing Or Taking Off Within The Borders Of The Republic Of Turkey and Regulation On Third Party Liability Insurance Compulsory For Turkish And Foreign Civil Aircrafts Flying In The Turkish Airspace shall be discharged by the operator,
- indicate that licensed flight and technical personal whom will be assigned in operating aircraft shall be employed by the operator in the commercial air transportation business.
Additionally, a specimen of signature or statement of signature that shows parties who signed the agreement are authorized to represent and/or sign in favor of related natural person or legal entity must be presented. The copies of valid financial liability insurance and third-party liability insurance certificates are also necessary in order to complete the process.
In case of the importation of an aircraft from abroad by an ordinary rent; notarized translation of the Agreement and original documents that proves authorization of signatory parties must be provided. These documents must contain apostille.
In addition to all these, the Directorate also requires notarized original document of annulment contract in the event of annulment of the leasing agreement.
Termination of Leasing Agreements
Leasing agreements may terminate due to provisions of the agreement, consent of the parties or requirement of related legislation. First of all, the agreement shall be terminated when the duration is ended and parties did not renew it. Parties may also annul the agreement mutually or a party may annul the agreement bilaterally when such a power is given by the agreement.
In addition to them, cancellation of leasing approval or flight permit by the Directorate or foreign civil aviation authority with regard to the legislation in force shall terminate the agreement. Moreover, suspension or cancellation of operating license of one of the operators or stopping of their flights shall terminate the agreement as well.
As the Directive provided, when a foreign operator is blacklisted within the context of the SAFA program, the leasing agreements which provide aircraft to the local operator shall be terminated. Such a consequence also arises in terms of a dry lease agreements if a local operator provides aircraft to a foreign operator which is blacklisted under the same program.
In case of an early termination concerning leasing agreements, the Directorate shall be informed by the local operator in writing as soon as possible.
Last but not least, non-compliance with the rules that set out in the Directive shall be subjected to administrative sanctions.
In conclusion, aircraft leasing has vital importance for the aviation industry. Turkey regulated this area in detail in order to create a more clarified and secured legal atmosphere for participators. As a consequence, many legal instruments are brought into force. Hopefully, this attitude will enhance the specialization in Turkish aviation law.
Author: Kaan Erdoğan, LL.M
Ibid, p. 20.
Aviation Working Group, Regulatory Policies and Principles Applicable to Aircraft Leasing, p. 3.