In transactions involving debt financing, lenders typically require the owner of the aircraft, as borrower, to grant a mortgage over the aircraft in favour of the creditor(s) to secure the underlying debt. In addition to enabling the mortgagee to take possession of the aircraft following default, mortgages ensure that in the event of insolvency of the mortgagor, the mortgagee will rank above other creditors to the extent of the value of the aircraft. As a related matter, secured loans benefit from a more favourable risk weighting for capital adequacy purposes. English law mortgages have always been a popular choice. However, following the decision of the English court in Blue Sky One, creditors have been seeking alternatives such as New York law mortgages. This briefing sets out the advantages and disadvantages of each, as well as the options available to creditors.

1. briefingnote
June 2014
Aviation
Aircraft Mortgages
BEIJING DUBAI GUANGZHOU HONG KONG LONDON PARIS PIRAEUS SHANGHAI SINGAPORE
Associated offices: ATHENS BUCHAREST JAKARTA SINGAPORE YANGON 1
In transactions involving debt financing, lenders typically require the owner of the aircraft, as borrower, to grant a
mortgage over the aircraft in favour of the creditor(s) to secure the underlying debt. In addition to enabling the
mortgagee to take possession of the aircraft following default, mortgages ensure that in the event of insolvency of the
mortgagor, the mortgagee will rank above other creditors to the extent of the value of the aircraft. As a related matter,
secured loans benefit from a more favourable risk weighting for capital adequacy purposes. English law mortgages have
always been a popular choice. However, following the decision of the English court in Blue Sky One, creditors have been
seeking alternatives such as New York law mortgages. This briefing sets out the advantages and disadvantages of each, as
well as the options available to creditors.
The decision in the Blue Sky One case
The English High Court in Blue Sky One Limited
& O’rs v Mahan Air & Ano’r [2010] held that
aircraft should not be treated differently from
other tangible assets and that it is the lex situs
of the aircraft which determines whether a
mortgage is validly created over it. If an aircraft
is registered in a different jurisdiction to its lex
situs, a mortgage which is valid under the laws
of the state of registration but which is not valid
under the domestic laws of the lex situs
jurisdiction will not be valid under English law.
The court also held that English law will look
only to the domestic laws of the lex situs
jurisdiction without reference to its conflict of
laws rules in deciding the issue of validity of the
mortgage.
Creditors: consider Basel II treatment
The terms of the Basel II Accord require banks to
which it is subject and which have obtained the
relevant approvals from their regulators to
establish that they have legally effective and
enforceable security under applicable law over
the aircraft in the relevant jurisdiction if they
wish to use that security to reduce the risk
weighting of any loan (and the capital adequacy
costs of making the loan available).
What is the Cape Town Convention?
The Cape Town Convention is an international
treaty that prescribes international standards for
the registration of contracts of sale, security
interests, leases and conditional sale contracts,
as well as various legal remedies for defaults
under financing agreements, including
repossession. The Protocol to the Convention,
which applies specifically to aircraft and aircraft
engines, came into force on 1 March 2006 and
to date has been ratified by 46 countries.
English law mortgages
English law mortgages are considered relatively mortgagee-friendly. No taxes
or duties are payable to create or perfect English law mortgages and there
are no restrictions as to who can be a mortgagee. They also allow the
mortgagee the right of "self-help", that is, the ability to repossess the
mortgaged aircraft and then to either sell it privately, operate it or lease it to
a third party following the occurrence of an event of default (or other
contractually stipulated circumstances) under the mortgage, in each case
without first obtaining a court order. The availability of this remedy
materially reduces the cost of enforcement of the mortgage. The English legal
system is also attractive to aircraft financiers because of its long history of
jurisprudence and statute which is well developed in the area of aviation
finance.
The Blue Sky One case solidified the principle that it is the lex situs of the
aircraft that determines whether an English law mortgage is validly created
over such aircraft. The lex situs is the jurisdiction in which the aircraft is
physically situated at the time the mortgage is created.
As such, in order for an English law mortgage to be valid, the aircraft must be
located in England or within English airspace at the time of execution of the
mortgage (which should be confirmed in writing by the pilot of the aircraft).
However, this is often commercially impractical as the aircraft may be based
elsewhere in the world and may not be scheduled to operate on a route to
England at the time of closing. The expense of flying the aircraft to England
may be excessive and there may be other operational, regulatory and tax
concerns.
If the aircraft cannot be flown into English airspace, an alternative is for the
aircraft to be flown into a qualifying jurisdiction or its airspace at the time of
execution of the mortgage. A qualifying jurisdiction is one in which an
English law mortgage creates a valid security interest over the aircraft under
the domestic law of that jurisdiction. Parties will generally rely on local
counsel in that jurisdiction to provide advice and a lex situs opinion
confirming this.

2. Briefing Note – June 2014 © Stephenson Harwood 2
Furthermore, if an aircraft subject to an English law mortgage is physically located in international airspace at the time
the mortgage comes into effect, it is only if such a mortgage is valid under the domestic laws of the lex registri of the
aircraft that the mortgage will be valid under English law. This can be confirmed by local counsel in the state of
registration in the form of a lex situs opinion.
Ultimately, the highly movable nature of aircraft and the geographical location and operational requirements of
airlines means that it may not be possible to position an aircraft in England at the time of execution of an English law
mortgage. Therefore, the validity of the English law mortgage and the parties' rights and remedies will always require
an analysis of the lex situs at the outset.
Execution formalities
An English law mortgage is usually executed as a deed so that the mortgagee has the benefit of statutory powers
conferred by the Law of Property Act 1925, such as the right to appoint a receiver, and so that the power of attorney
granted by the mortgagor to enable possession by the mortgagee upon enforcement is valid.
Perfection requirements
A mortgage over an aircraft registered in the UK Register of Civil Aircraft may be registered in the Aircraft Mortgage
Register (so long as it is not created as a floating charge and does not cover spare parts only) to secure the benefit of
first priority.
Where the mortgagor is an English company the mortgage will also need to be registered at Companies House. Failure
to do so will render it void against a liquidator, administrator or any creditor of the mortgagor.
New York law mortgages
New York law mortgages share many of the same characteristics as English law mortgages such as the remedy of self-
help and established jurisprudence.
A significant advantage New York law mortgages have over English law mortgages is that the lex situs rule does not
apply. In other words, the lex situs of the aircraft is immaterial to establish the enforceability of the New York law
mortgage by the mortgagee.
However, a disadvantage of both New York and English law mortgages is that, if the aircraft is not located in New
York/England at the time of enforcement, the New York/English courts do not have "in rem" jurisdiction over the
aircraft and local law in the jurisdiction where the aircraft is located would apply with respect to repossession of the
aircraft. Such local laws may not include self-help, non-judicial foreclosure and other remedies available under New
York/English law. Typically the aircraft will need to be repossessed under local law, if possible, and brought to the
United States/England before a foreclosure sale is conducted.
Both English and New York law mortgages also carry the disadvantage that creditors will need to deal with
governmental and judicial authorities in the state of registration of the aircraft. Creditors will still need to procure the
deregistration of the aircraft prior to repossession and sale of the aircraft pursuant to enforcement of the mortgage.
Execution formalities
There are no particular execution formalities for New York law mortgages. They do not need to be executed as deeds or
witnessed. They only need to be signed by a signatory with full authority and capacity.

3. Briefing Note – June 2014 © Stephenson Harwood 3
Perfection requirements
Where a U.S. registered aircraft is subject to a New York law mortgage, the security interest will need to be perfected with
a filing at the U.S. Federal Aviation Administration. As the U.S. is a Cape Town contracting state, to the extent that the
aircraft mortgage creates an international interest capable of registration under the Cape Town Convention (the
“Convention”), it should be registered with the International Registry of Mobile Assets located in Ireland that is
administered by the International Civil Aviation Organisation. For non-U.S. registered aircraft, a filing of a Uniform
Commercial Code Financing Statement in the relevant jurisdiction in the U.S. will need to be made (typically the District
of Columbia for most foreign debtors or foreign air carriers).
Malaysian law mortgages
The law in Malaysia on aircraft mortgages remains uncertain and, as such, the recommended practice is to follow the
same rule as English law mortgages. Consequently, it is the lex situs of the aircraft that determines whether a mortgage
is validly created over it. Therefore, in order to be certain of a valid Malaysian law mortgage, the aircraft must be located
in Malaysia or Malaysian airspace at the time of execution, or alternatively, in a qualifying jurisdiction or its airspace.
Execution formalities
Malaysian law mortgages follow English formalities and typically need to be executed as a deed. As the mortgage will
usually contain a power of attorney, the execution of the power of attorney must be attested.
Perfection requirements
A Malaysian law aircraft mortgage will need to be registered with the Malaysian Department of Civil Aviation within 30
days of the creation of the security interest. To the extent that the aircraft mortgage creates an international interest
capable of registration under the Convention, it should be registered with the International Registry of Mobile Assets. If
registered under the Convention, it is not strictly necessary to also register the mortgage with the Malaysian Department
of Civil Aviation but it is best practice to do so.
Where the mortgagor is a Malaysian company, the mortgage will need to be registered with the Companies Commission
of Malaysia within 30 days of the creation of the security interest to benefit from first priority. Where the mortgagor is a
Labuan-incorporated entity, it will also need to be registered with the Labuan Offshore Financial Services Authority.
The power of attorney contained in the mortgage will also need to be registered at the High Court in Malaysia by
submitting a copy of the whole mortgage.
Singapore law mortgages
Singapore law mortgages follow the same rule as English law mortgages. It is the lex situs of the aircraft that determines
whether a mortgage is validly created over it. In order to be certain of a valid Singapore law mortgage, the aircraft must
be located in Singapore or Singapore airspace at the time of execution, or alternatively, in a qualifying jurisdiction or its
airspace.
Execution formalities
Singapore law mortgages are generally made by way of deed (although they are not required to be) and under seal
because in the case of a Singapore mortgagor company, the Memorandum and Articles of Association often indicate that
it is the appropriate manner of binding the company.

4. Briefing Note – June 2014 © Stephenson Harwood 4
Perfection requirements
There is no register for mortgages or rights over aircraft in Singapore. However to the extent that the aircraft mortgage
creates an international interest capable of registration under the Convention, it should be registered with the
International Registry of Mobile Assets.
If the mortgage does not create an international interest capable of registration under the Convention and the mortgagor
is a Singapore company or a company registered with a place of business in Singapore, then the mortgagor is required to
register the mortgage with the Accounting and Corporate Regulatory Authority in Singapore.
Other local law mortgages
Mortgages governed by laws of jurisdictions other than those mentioned above may arise depending on the features of,
and parties to, a particular transaction. Important points to note when considering other local law mortgages generally
are:
a. certain jurisdictions do not have the concept of aircraft mortgages, such as in Austria and Thailand;
b. certain jurisdictions may require substantial duty to be paid on aircraft mortgages in order for them to be perfected,
making them financially unattractive, such as Spain and Sweden;
c. certain jurisdictions may require mortgages to be enforced through mandatory court procedures, which may be
lengthy, unpredictable and financially inefficient; and
d. creditors may have concerns as to their ability to enforce their rights before courts in certain jurisdictions where there
may be a lack of established jurisprudence.
Conclusion
Transaction parties still have a variety of options as to which type(s) of mortgage they should execute. New York law
mortgages and English law mortgages are quite similar, and choosing between the two may simply come down to the
convenience of New York or England, if an action is to be brought in those courts. There may be circumstances in which
creditors may decide to execute both an English law (or New York law) mortgage and a local law mortgage. For example,
where an English law mortgage is taken and the aircraft is located in another jurisdiction at closing and the lex situs
opinion is adverse, then a local law mortgage may be executed in the jurisdiction in which the aircraft is located at closing
and an English law mortgage may be executed (or deemed to become effective) when the aircraft is next in either English
airspace (or the airspace of a qualifying jurisdiction). However, creditors will need to consider the cost of taking two
mortgages as well as potential issues with relevant jurisdiction and conflicts of laws. Our recommendation would be for
creditors to seek legal advice early to ensure that the right type of mortgage is executed to achieve the commercial
objectives and minimise legal, regulatory and jurisdictional risk.

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