The Cape Town Convention
By Gregory J. Reigel
© 2006 All rights reserved.
If you are selling, purchasing, leasing, financing or otherwise acquiring an interest in an aircraft or turbine engine, you need to be aware of the Cape Town Convention. The Cape Town Convention is an international treaty that went into effect March 1, 2006 and it applies to many twin-engine and most jet aircraft. Technically speaking, the Cape Town Convention is comprised of two documents: The Cape Town Convention on International Interests in Mobile Equipment (“Convention”) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (“Protocol”). Many people simply refer to the Convention and the Protocol collectively as the Cape Town Treaty. (For purposes of this article, I will simply refer to the Convention and the Protocol collectively as “the Treaty”). This article will discuss what the Treaty is, why it is important and what it will mean to the U.S. aircraft market.
What Is The Treaty?
The Treaty creates new laws governing transactions involving subject aircraft and engines that change or supercede conflicting laws within a country governed by the Treaty (also referred to as a “Contracting State”). The Treaty addresses transaction issues including perfection of ownership, security interests/liens and possessory rights such as leases, default, remedies and insolvency. The Treaty applies to a transaction that (1) meets the aircraft/engine size requirement; (2) involves an international interest; and where (3) at the conclusion of the transaction, the subject aircraft/engine is registered in a Contracting State or the aircraft/engine owner or debtor is situated in a contracting state.
The United States and seven Contracting States (Ireland, Panama, Pakistan, Oman, Nigeria, Malaysia and Ethiopia) have ratified or acceded to the Treaty and it has been in effect since March 1, 2006. In connection with its ratification of the Treaty, the U.S. also amended many U.S. laws to comply with the Treaty (e.g. Federal Aviation Regulations, Title 49 of the United States Code, and the Uniform Commercial Code).
The aircraft and engines subject to the Treaty include: (1) Aircraft that are type certificated for at least eight (8) persons including crew; or goods in excess of 2750 kilograms (6,062 pounds); (2) Helicopters that are type certificated for at least five (5) persons including crew; or goods in excess of 450 kilograms (990 pounds); and (3) Aircraft engines having at least 1750 lb of thrust or at least 550 rated take-off shaft horsepower. The Treaty does not contain any provisions for registering propellers. International interests under the Treaty include aircraft sales, aircraft security agreements, aircraft lease agreements, aircraft conditional sales agreements, aircraft liens, assignments, subordinations etc.
The Treaty established an International Registry that allows registration of international interests in aircraft and equipment that are subject to the Treaty. The International Registry is located in Ireland, but registration is performed through its website: www.aviareto.aero. The computer driven system is available 24 hours per day, 7 days per week.
Why Is The Treaty Important?
The Treaty is important because it pre-empts existing laws in Contracting States and it changes the manner in which interests in subject aircraft and engines are documented, recorded and enforced. Under the Treaty, the first party to register an interest in a subject aircraft/engine with the International Registry will have an interest prior and superior to all other interests. Documents evidencing interests in subject aircraft/engine(s) must still be recorded with the FAA. However, it is important to keep in mind that the filing with the International Registry will supercede the priority date of any documents filed with the FAA Registry. Simply put, if you have an interest in a subject aircraft/engine, you must be the first to file with the International Registry or you will lose to other competing interests. (This is a significant change from prior U.S. law under which a filing party would not have priority over an unrecorded interest if that filing party had actual notice of the unrecorded interest at the time it filed with the FAA Registry).
Additionally, the Treaty allows a party to file a “prospective international interest” to perfect its interest in a subject aircraft/engine prior to closing the transaction. The typical situation involves a creditor perfecting its security interest in an aircraft/engine prior to closing and funding of the transaction. Both parties must consent to the filing of the prospective interest with the International Registry. If the transaction then closes after the prospective interest is filed with the International Registry, the priority date relates back to the date of the filing of the prospective interest. However, if the transaction does not close, no interest is created and the prospective interest has no effect. (Although technically it will still appear as a cloud on the aircraft’s/engine’s title unless it is released.)
What Does The Treaty Mean To The U.S. Aircraft Market?
Title Search. Unfortunately title searches have now become more expensive for aircraft/engines subject to the Treaty. Not only must the FAA Registry be searched to confirm aircraft/engine registration and status of pre-Treaty liens etc., but the International Registry will also need to be searched. Additionally, it is also taking a longer time to receive the results of a title search because the International Registry is not processing such requests as quickly and efficiently as one would expect. Hopefully this delay is simply the result of the International Registry’s infancy and will be reduced as the International Registry becomes more adept at processing such requests.
Registration With The International Registry. Each party to an aircraft transaction will need to register as a transactional user entity (“TUE”). The one-time fee for this registration is $200.00. If a party anticipates more than two subject aircraft transactions within the next five years, it will be more cost-efficient register for the five-year period and pay the $500.00 fee. Each party will need to use a single computer for the registration because the International Registry assigns a digital security certificate for the transaction that the TUE must download. The same computer must then be used to complete the transaction. Registration approval is supposed to occur within 48 hours. However, the initial volume of TUE registrations has resulted in a delay of up to several days for receipt of a TUE registration approval.
Once registered, a TUE may also appoint a professional user entity (“PUE”) to assist with transmitting information to the International Registry. PUE’s include title companies, attorneys, aircraft tax consultants etc.
Filing With The FAA Registry. Parties to an aircraft transaction will still need to file transaction documents with the FAA Registry. In addition to such documents as a bill of sale, application for registration, security agreement, lease etc., FAA Form 8050-135 will also need to be filed in order for the FAA to provide the parties with an authorization number to complete the transaction with the International Registry. If a prospective interest has been filed, the transaction documents must be recorded with the FAA Registry within 60 days of the filing of the prospective interest with the FAA Registry.
Completing The Transaction. Once the authorization number is received from the FAA Registry, a party must then go to the International Registry’s website, log-on and complete an electronic form asserting an international interest against the subject aircraft/engine. The International Registry will then send an e-mail message to the second party to the transaction seeking consent to the filing. If the second party consents to the filing, a permanent record of the registration will be created at the International Registry and perfection is then completed. This record can be searched and will appear as an interest in the subject aircraft/engine(s). If the second party does not consent or does not respond to the International Registry’s e-mail message within 36 hours, then no interest is created or perfected.
Costs. The Treaty has definitely added costs to transactions involving subject aircraft and engines. In addition to the costs of registering as a TUE, the International Registry charges registration and search fees for a subject aircraft ranging from $35.00 to $100.00. This does not include the increased attorney and title fees a party will incur to comply with the Treaty’s requirements.
As of today, the Treaty is the law of the land and must be complied with if a party wants a perfected and enforceable interest in an aircraft subject to the Treaty. In the aftermath of the deluge of TUE registrations following March 1, 2006 and the resulting delays, it has been suggested that congress increase the seating configuration and weight requirements in order to exempt the many twin-engine and jet aircraft that are currently subject to the Treaty. However, such a change will most likely not occur anytime soon, if at all. As a result, a party entering into a transaction involving any aircraft/engine(s) subject to the Treaty should consult with an aviation attorney familiar with the Treaty to make sure that the transaction is documented appropriately and properly recorded with both the FAA Registry and the International Registry.