Delivery Conditions: Fundamental Assumptions that an Aircraft Buyer Assumes When Agreeing on Price
By: Stewart Lapayowker
October 20, 2020
An offer to purchase an aircraft customarily includes a variety of terms, chief among them the purchase price that the buyer will pay and a list of technical delivery conditions (inspections current, airworthiness directives complied with, complete records, etc.). During the pre-purchase inspection, the inspection facility performs an independent evaluation of the aircraft and issues a report identifying airworthiness or other issues that it found. Then, if the buyer accepts the technical condition of the aircraft subject to correction or repair of discrepancies from the agreed upon delivery conditions, typically the Seller is obligated to repair them at the Seller’s expense and return the aircraft to service.
The delivery conditions consist of the fundamental assumptions that the buyer is making when the buyer agrees to a price for the aircraft. The buyer is assuming that, for this price, the condition of the aircraft will satisfy the delivery conditions and be good to go at closing.
Take the example of a buyer that offers to pay $10 million for an aircraft. The seller responds to the offer asking that the seller have the right to terminate the agreement if the seller doesn’t want to do the repairs or the repairs exceed a certain dollar amount, so the buyer is left with the decision whether to move forward and invest in the inspection with the potential of paying for repairs that the seller does not want to do, or terminating. That’s just not the deal. Why would a buyer agree to spend money on an inspection only to have the seller decline to repair the discrepancies from the agreed upon delivery conditions? And is it fair for the buyer to commit itself to buy the aircraft only to have the seller decide not to (practically) sell?
The seller may be thinking “well, if I spend that money (on the discrepancy repairs) then I can sell the aircraft to someone else for more!” Um. Yeah. Nah. That’s not how it works. Any other buyer will only pay what the plane is worth in the assumed delivery condition. So that logic breaks down. But the practical problem for a seller who takes these positions is that once airworthiness discrepancies are discovered, the repair facility will not return the aircraft to service and allow it to leave until the seller spends the money and the issues are corrected. So, Seller needs to spend the money anyway!
Any formal appraisal (whether for financing or otherwise), and valuation resources (such as vRef or JetNet) assume that the aircraft is in an airworthy condition, current on maintenance and without damage as a fundamental basis for valuation. Change the assumption, and presumably a buyer would offer less.
The more that the parties can be educated in advance, the more efficient the market will operate and the quicker deals will come together.