Letters of Intent are common in pre-owned business aircraft transactions, enabling buyers and sellers to outline the broad terms of a deal. As simple as they sound, there are many potential errors for buyers to avoid, as Gerrard Cowan highlights.
Essentially, a Letter of Intent (LOI) offers the potential for a meeting of the minds between sellers and buyers on the major commercial terms of an aircraft transaction. Though it is typically non-binding, it is important to get your LOI right – for good reason…
A good Letter of Intent sets an expectation that the parties will negotiate exclusively and in good faith with each other to try to reach the terms of a definitive aircraft purchase agreement, explains Jonathan M. Epstein, a Partner at law firm Holland & Knight.
Ideally, the LOI is a relatively short document of two to three pages, written in plain English and covering a range of details. At the most basic level, it should set the purchase price and require a refundable good faith deposit to be placed with an agreed escrow agent, Epstein says.
Additionally, the agreement should define whether the transaction will be a ‘hard deal’, meaning that after signing the purchase agreement the buyer can only reject the aircraft for limited reasons (such as the discovery of material damage history), or alternatively a ‘soft deal’ where the buyer can reject the aircraft after the inspection without cause.
The LOI will also identify the general scope of the pre-purchase inspection and test flight, and set forth the condition that the aircraft must be in to accept delivery – for example, with “all systems functioning normally, current on all maintenance with no extensions, no material damage history, etc,” Epstein illustrates.
On top of these requirements, it may address who will pay for ferry and test flights, as well as any unique issue that may the deal if not negotiated up front. It should expressly state that the LOI is non-binding, except for binding confidentiality provisions, and that it expires if it is not executed by a certain date, though providing for some exclusivity until terminated.
Finally, it is important that LOIs contain ‘know your customer’ language, Epstein says, particularly in international deals, requiring the counterparty to identify their beneficial ownership.
This article was originally published by AvBuyer on January 8, 2024.
