Why Deals Collapse, and Strategy to Avoid it.

Why Aviation Deals Fail When Pen Comes to Paper

Aviation transactions often fail for reasons that have little to do with the aircraft, the financing, or the legal documents. More often, the problem is a fundamental mismatch in expectations between the parties, and the fact that those differences are discovered too late in the process.

In many aircraft acquisitions, sales, leases, management arrangements, and other aviation transactions, the parties spend substantial time discussing a deal before realizing they never actually agreed on what the deal was supposed to be, “Pen-to-Paper”.

Common areas of disagreement include:

• • Price and payment structure, nuanced by inspection findings;
  • Timing and closing expectations;
  • Inspection and maintenance responsibility;
  • Delivery condition;
  • Taxes and deposits; and
  • Other closing requirements, possibly discussed and not documented.

By the time those issues surface, both sides may already have invested significant time, expense, and negotiating capital.

That problem becomes particularly acute when unresolved business terms are handed to legal counsel with the expectation that the lawyers will “work them out” in the documentation. That is a very efficient way to spend resources and elevate frustration.

Lawyers can and should:

• • Identify legal risks;
  • Refine contractual protections;
  • Allocate liability;
  • Address regulatory and tax concerns; and
  • Recommend changes necessary to protect their clients.

But counsel is not routinely the originator of the fundamental business bargain. When the parties have materially different expectations about the economics or essential obligations of the transaction, contract negotiations can become an expensive exercise in discovering that no agreement existed in the first place.

A more efficient approach is to establish meaningful commercial alignment before extensive drafting begins. The parties should have at least an agreement in principle concerning the essential elements of the transaction:

• • Price;
  • Payment structure;
  • Timing;
  • Term;
  • Condition and delivery requirements;
  • Principal obligations; and
  • Other material business points.

That does not mean every issue must be settled before counsel becomes involved. In fact, it can be helpful to involve aviation counsel early, particularly where FAA regulatory issues, tax planning, ownership structuring, financing, international operations, or unusual liability concerns are involved.

Legal review will frequently result in adjustments to the commercial understanding given the interplay between FAA regulations and business goals.

The important distinction is between refinement and reinvention.

When a transaction reaches counsel, the gap between the parties should be manageable, not a chasm. The lawyers should be documenting and protecting a substantially understood transaction, not discovering for the first time that the buyer, seller, lessor, operator, or other party envisioned an entirely different deal.

The most successful aviation transactions therefore begin with disciplined communication:

• • Identify the important business terms;
  • Test assumptions;
  • Surface disagreements early; and
  • Document the principal points in a term sheet or letter of intent where appropriate.

Then bring counsel into the process to structure, protect, and complete the transaction.

In aviation, as in flight planning, problems are far easier to address before departure than after considerable time, expense, and momentum have already been committed.