Part A
Question 1
Freddy Leasing Limited (“Freddy”) is an aircraft leasing company that is incorporated and tax resident in the Republic of Ireland and has been in business for just over 10 years. Freddy has a portfolio of forty aircraft leased to commercial airlines across the globe. All the aircraft are subject to secured debt financing with European banks. Several of the operating leases are due to expire in late 2024 / early 2025. Freddy’s commercial team is focused on finding new lessees for these aircraft as soon as possible, but competition with other lessors is fierce.
Freddy is in the early stages of negotiating a non-binding letter of intent (“LOI”) with an airline in Australia, Gili Airways (“Gili”) for the operating lease of two used A320 aircraft for 12 years. These aircraft are due to return from the current lessee in 6 months. Gili is a very profitable airline with consistently strong financial results over the past 15 years and is part of a hugely successful Australian travel services conglomerate. Freddy’s commercial team are very keen to add Gili as a lessee customer.
Freddy also leases one A330 and one A320 aircraft to a small airline in Greece, MoveOver Air (“MOA”), pursuant to standard operating lease agreements. MOA is reliant on strong passenger demand during the summer months to generate enough revenue to pay lease rentals and is often in arrears during the winter months. This year, due to forest fires in Greece, passenger demand is very weak, and MOA’s financial condition is deteriorating quickly. Each operating lease provides for
(i) fixed monthly rental ($220,000 for the A320 and $420,00 for the A330),
(ii) typical events of default,
(iii) monthly maintenance rent, and
(iv) security deposits ($440,000 cash for the A320 and $840,000 in a letter of credit for the A330).
(a) The draft LOI provides that Gili will pay (i) $500,000 cash security deposit at delivery of the aircraft, and (ii) monthly cash maintenance rent throughout the lease term. Gili does not agree that it should pay these amounts and instead has suggested (i) it will provide a security letter of credit of $250,000 from a domestic retail bank in Australia, and (ii) it will pay end of lease compensation instead of monthly maintenance rent. Gili states that other lessors have agreed to these conditions. Advise Freddy on what to consider when assessing these proposals.
(b) Freddy typically sets up Irish incorporated special purpose companies (“SPCs”) to lease aircraft to lessees. Freddy’s tax team has advised that Ireland does not have a double-tax treaty with Australia. Explain how this will affect the leasing structure with Gili and propose an alternative structure.
(c) In the LOI negotiations, Gili is refusing to accept that the lessor should have inspection rights over the aircraft. Gili states that it should have rights to quiet enjoyment over the aircraft at all times, as it takes all operational risk during the lease term. Explain whether Freddy should accept this position.
(d) Freddy recently received a notice from an insurance broker that MOA has not paid its insurance premium for July 2024. As a result, the broker states that the insurance policy cover for the leased aircraft will be cancelled in 30 days. MOA subsequently confirms to Freddy by email that it intends to pay the insurance premium next week, before the cancellation is effective, but that to save costs, from July 2024 it intends to amend the insurance coverage by reducing the aggregate limits and increasing the deductibles. Advise Freddy on (i) what provisions of the operating leases it should review now, and (ii) what contractual remedies may be available to it under the operating leases if the insurance policy is cancelled.
(e) MOA’s financial condition continues to deteriorate over the summer. To reduce operational costs, MOA decides to stop operating the A330 aircraft for the rest of the year and subsequently stops all payments of rent and maintenance rent. Arrears of $1,200,000 have accumulated. MOA continues to operate the A320 aircraft daily, and it has become a key revenue generator for the airline on domestic routes. MOA is making all the rent and maintenance rent payments under that lease. MOA’s legal team has advised it to rely upon the cross-default and cross collateralisation clauses in the leases. Explain (i) the difference between cross-default and crosscollateralisation in the context of operating leases, and (ii) how these clauses can be used by Freddy in this situation to improve its position.
