Non-Citizen Owner Trusts

In early May 2010 the issue of non-US citizen owner trusts was dramatically thrust into the limelight, and on 13 May equally dramatically withdrawn. It had been suggested that the Federal Aviation Administration of the United States (FAA) was to announce that it would bring to an end the approval by the FAA aeronautical Center Counsel's office of 'non citizen owner trusts' set up under the provisions of FAR Part 47, §47.7 and had taken steps to stop aircraft registrations at the request of those trusts. There are a large number of aircraft currently owned and registered in accordance with this procedure and it was uncertain whether aircraft currently registered under 14 CFR 47.7 (c)(3) were to be subject to retroactive review.

It seemed that the principal issue was the fact that non-U.S. citizen beneficiaries are given operational control of the subject aircraft following its registration in the name of the owner trustee. There is a suggestion that where such operational control remains with a US operator, the FAA may give its offices discretion to review such trusts on a case by case basis, but the principle seemed to be clearly established, that the FAA did not want to see the registration in the US as a 'flag of convenience'..

This initiative would apply to all United States aircraft registered on behalf of Non-U.S. Citizen beneficiaries whether these are commercial, corporate or private aircraft. Members of the influential Association of Aircraft Title Lawyers made forceful representations to the FAA on 4 May 2010 expressing their concerns about this initiative and these were endorsed a few days later by a number of substantial commercial and business aviation bodies. Their arguments were (among others) that the retroactive application of such a ruling could invalidate the registration of the aircraft concerned and have an adverse effect on their insurance cover, impact on their title and would probably constitute a default under lease and mortgage loan arrangements with the consequence that the aircraft may all have to be grounded until the issues had been resolved.

A letter was sent on 13 May by David Grizzle, Chief Counsel of the FAA to the National Business Aviation Association in response to these representations countering the alleged suggestions and stating that "we are not challenging the registration of aircraft currently registered under Non-Citizen Trusts." He went on to say "As a result of a number of recent cases, however, we are conducting a more comprehensive review of Non-Citizen Trusts to ensure compliance with existing law, and determine whether any improvement should be made. In this regard, we do not contemplate any immediate changes to agency practice."

So the rumours were clearly true and the FAA appears to have been caught on the hop and granted a hasty reprieve, but how long will it last? We are working with specialist US counsel on behalf of affected clients and will be very happy to assist you in the event that you have the conduct of any such transactions.

Triennial Aircraft Registration

It is also advisable to track moves by the FAA to review the re-registration requirements for aircraft registered in the United States. Currently the owner of an aircraft is required under FAR 47.51 to complete a Triennial Aircraft Registration Report relating to the status of the aircraft. This is intended to update the data on the Registry and the owner is required to certify that the aircraft is still registered or, in the alternative, that it has been sold, destroyed or that the certification address has changed. As the title suggests the report has to be submitted to the FAA Civil Aviation Registry at intervals of three years. However, the initiative for launching the process which generates the report remains with the FAA which is required by the regulations to provide the owner with a form on which the report is made. The owner of the aircraft then has 60 days to respond to the request and to submit the completed form. The FAA will not send the form until there has been a period of 36 months during which 'there has been no registration activity on an aircraft'. Failure to respond constitutes grounds for the suspension or revocation of the Certificate of Aircraft Registration, but it appears that if the form is not received by the owner the obligation to complete it falls away. It is not surprising, therefore, that the FAA is showing limited enthusiasm for the enforcement of this requirement.

The FAA is now proposing an entirely new system which will supersede and replace the requirement for a Triennial Report. It justifies the new procedure on the grounds that it needs to increase and maintain the accuracy of aircraft registration information in the Civil Aviation Registry. It is currently proposed that all registration certificates issued prior to the date of the new rule would expire at the end of a three month re-registration period which would be set for each registration certificate with reference to the month in which it was originally issued. It will then effectively limit the validity of fresh aircraft registrations by requiring owners to resubmit the registration application form 8050-1 every three years. Under the proposed scheme the FAA will give the registered aircraft owners 120 days written notice of expiry of the registration certificate, but the burden of compliance with these regulations will rest entirely with the owner. If the owner fails to renew the certificate it will no longer be valid and the registration number allocated to the aircraft will be cancelled. Non-receipt of the notice will not be an excuse for the owner's failure to complete the registration application form.

Critics of the new scheme argue that this will place too great a burden on the FAA which will not be able to cope with the work required in the installation of the new procedures and the management of the transition and have argued that the FAA should, as an alternative, concentrate on the enforcement of the current Triennial Aircraft Registration Report procedure which, for want of a better expression, has fallen into disuse.

If these rule changes go ahead they will have a significant effect on the management of a large number of aircraft and stern objections have been raised from a number of quarters. It is generally believed that the revised rules will be published this summer, but whatever form these new rules take, it is important that all N-registered aircraft owners review the status and the accuracy of their registrations in order to avoid problems associated with the validity of their insurance policies and their satisfaction of their financing covenants. It is equally important for banks and other financial institutions including lessors to follow these developments as part of their asset management and covenant monitoring programme.