Rachel Thomasen is associate in Holland & Knight's London office
In the course of an aircraft lease negotiation, the lessee will typically seek to ensure that the lessor provides an express covenant to the lessee that for so long as no default has occurred and is continuing under the lease, the lessor will not disturb the lessee's quiet use, possession and enjoyment of the aircraft. Some lessee's go further and press for lessor to covenant as to itself as well as any person claiming through the lessor (such as the lessor's financier, the owner — if different from the lessor — or an assignee or transferee of the lessor).
However, should the lessor ultimately be responsible for ensuring that a third party lawfully claiming through it respects the lessee's right to "quiet enjoyment?" Does the fact that such person has provided a quiet enjoyment covenant directly to the lessee absolve the lessor of the obligation to ensure that such third party respects the lessee's quiet enjoyment rights?
Positions Adopted in Aircraft Lease Agreements
In practice, the lessor and the lessee commonly agree to one of the following two positions: (1) the lessor covenants that (x) it will not interfere with the lessee's quiet enjoyment rights and (y) no party lawfully claiming through the lessor will interfere with the lessee's quiet use, possession and enjoyment of the aircraft; or (2) the lessor covenants that it will not interfere with the lessee's quiet enjoyment rights and it will ensure that any owner or financier provides its own separate, direct quiet enjoyment covenant to the lessee contained in a "quiet enjoyment letter." The significant difference between positions (1) and (2) being that in the case, for example, of a breach by lessor's lender of lessee's quiet enjoyment, the lessee in (1) would make a claim for damages against lessor while the lessee in (2) would make such claim against the lender.
During recent lease negotiations in which Holland & Knight participated, the scope of the quiet enjoyment covenant was a significant issue for lessor and lessee. The lessor offered to make the covenant as to itself and to provide a quiet enjoyment letter from its lender (ie, position (2) above); however lessee took the position that it should receive a quiet enjoyment letter from lessor's lender AND the lessor itself should covenant that its lender would not interfere with the lessee's quiet enjoyment rights. The lessee argued that its main relationship was with the lessor and so the lessee should not have to rely on the credit of a third party bank with whom it had no involvement other than the fact that it was the lessor's lender. Conversely, the lessor argued that the fact that the lessee was receiving a quiet enjoyment letter from its lender should be sufficient (especially in the case where the lender is a renowned international bank of arguably better credit than the lessor itself). The lessor further argued that it could not account for the actions of an independent third party and could only procure that such party provided a direct covenant to the lessee that it would not interfere with the lessee's quiet enjoyment of the aircraft.
Cape Town Convention Position
The Cape Town Convention on International Interest in Mobile Equipment (the Convention) does not determine responsibility for breach of quiet enjoyment rights. Article XVI(1) of the Aircraft Protocol to the Convention provides that in the absence of a default within the meaning of Article 11 of the Convention, the 'debtor shall be entitled to the quiet possession and use of the object in accordance with the agreement' as against its creditor or the holder of any interest to which the debtor's right or interest would be subject to. Thus, while the Aircraft Protocol to the Convention recognizes a lessee's right to quiet enjoyment, as the lessee is only entitled to such rights "in accordance with the agreement," it is important that the lease is clear regarding the position adopted for preservation of the lessee's quiet enjoyment rights.
Importance of Drafting
In light of the above, it is important to make clear in drafting the quiet enjoyment covenant in a lease who has the ultimate responsibility for ensuring that a third party lawfully claiming through the lessor does not breach the lessee's quiet enjoyment rights under the lease. While in most leasing transactions, the risk of interference with the lessee's quiet enjoyment of the aircraft by the lessor's lender should be relatively low (particularly if such lender is a reputable financial institution), during the term of the lease, the ownership structure or the financing parties in respect of the aircraft may change. Lessees will of course want to be adequately protected against breaches of its quiet enjoyment rights. Lessors should err on the side of caution in covenanting with the lessee that it will not, and will procure that any party lawfully claiming through the lessor will not, interfere with the lessee's quiet use, possession and enjoyment of the aircraft.
Please contact Holland & Knight if you would like to discuss quiet enjoyment covenants and how best to reflect these provisions in aircraft operating leases.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
