7 May 2021
The Global Aircraft Trading System (GATS) is a fully electronic system designed to facilitate certain aircraft trading and financing transactions. This system seeks to streamline these often time consuming processes while at the same time increasing transparency and confidence in trading through the use of standardised processes and by recording GATS transactions on a secure e-Ledger which is searchable by any persons with a GATS account. In this article, we discuss some considerations for lessees, lessors and financiers thinking about whether GATS is right for their transaction.
GATS is a voluntary system which seeks to achieve the above outcomes through the use of a GATS trust structure. In a GATS aircraft transaction, the relevant aircraft is legally owned by a trust created on the GATS platform (GATS Trust) for which a professional trustee company acts as trustee.
Currently, GATS Trusts are able to be established under the laws of the United States, Ireland or Singapore; so parties should consider which jurisdiction is right for their transaction (including with reference to tax considerations and to ensure that the trust structure is recognised in all relevant jurisdictions). As with the owner trustee / beneficial trustee structure common in the above jurisdictions, bare legal title to the aircraft is held by a trustee of the GATS Trust on behalf of a beneficiary who has beneficial ownership of the aircraft, is beneficially entitled to the income of the trust, and who is entitled to direct to the trustee. Where the aircraft is traded, the beneficial interest in the GATS Trust is able to be transferred, rather than legal ownership of the aircraft, with less disruption to the underlying lease documentation.
Some documentary considerations
When looking to structure a GATS compliant structure, there are a number of important documentary considerations for the parties to take into account. These include:
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The lease agreement for a GATS aircraft will need to incorporate certain provisions to integrate usage of the GATS platform. The Aviation Working Group (AWG) has published template transfer provisions recommended for GATS aircraft leases (GATS Transfer Provisions). Whilst the documents to be executed electronically on the GATS platform are standardised and cannot be amended other than as permitted on the platform, there is no legal requirement for the GATS Transfer Provisions in the lease to be standardised; so parties should approach this aspect of negotiations as they would ordinarily.
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The lease should contain both the usual transfer / assignment provisions and the GATS Transfer Provisions. This is to accommodate the possibility that a transfer or security assignment occurs outside of the GATS platform. As an overarching concept, the use of GATS should not lead to a different outcome whether transfers are effected outside or within the GATS platform, including as to any increased costs protection as a result of the transfer of the beneficial interest in the GATS Trust.
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The “GATS Advance Requirements” are the conditions of transfer or assignment required to be satisfied by the lessor. The template provisions provide that if the lessee fails to confirm satisfaction of a GATS Advance Requirement within the prescribed period the condition is deemed to be waived. While this is favourable to the lessor to ensure a timely implementation of the transfer or assignment, this timeline needs to be carefully considered by lessees to ensure that it is sufficiently long to allow them to respond (including obtaining any internal or other approvals required to proceed with the proposed transaction) or if the time limit should be deleted particularly if there is no such time limit for satisfaction of the usual transfer / assignment conditions.
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In order to initiate a beneficial interest transfer or security interest transfer (each a GATS Transfer) the lessor will need to deliver a “GATS Transfer Advance Notice”. On the transfer closing date, a “GATS Transfer Notice” or “GATS Security Transfer Notice” (as applicable), which effects the transfer and the relevant amendments to the lease agreement, will be delivered by the lessor. The forms of these notices should be attached to the lease agreement, and the amendment provision in the lease agreement should allow the terms of the lease to be amended as contemplated by the applicable transfer notice which will be unilaterally issued by the lessor without the need for further documentation signed by the parties.
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As mentioned above, a notice in respect of a GATS Transfer will be issued by the lessor without the lessee signing or acknowledging the same. Lessees may wish to consider additional provisions in the lease around the delivery of such a notice to give themselves greater comfort around the process. These might include a requirement that:
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a draft of the “GATS Transfer Notice” and “GATS Security Transfer Notice” should be provided in advance to lessee for their review and to obtain internal approvals or KYC clearance (particularly if there are any changes to the servicer or payment account); and
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the “GATS Transfer Notice” and “GATS Security Transfer Notice” will only be effective until and unless delivered in the form agreed by lessee and lessee has confirmed that the GATS Advance Requirements are satisfied or waived.
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In the case of the a GATS security interest transfer, the lessee may wish to address in the “GATS Security Transfer Notice” and “GATS Security Transfer Confirmations” certain matters typically included in the notice and acknowledgement. These might include:
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an agreement by the secured party to assume the lessor’s obligation to return security deposit or maintenance reserves (if applicable), and to provide recognition of rights confirmations;
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specify that any enforcement notices delivered by the secured party prevail over the security transfer notice in the event of inconsistency, in order to avoid conflicting instructions from the secured party stepping into the shoes of the lessor in the event of enforcement; and
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specify that performance of lessee’s obligations under the lease agreement in favour of the secured party in the event of enforcement should constitute good discharge of such obligations owed to the lessor.
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The parties should also consider the other necessary changes in a GATS lease to cater for leasing through a trust structure with legal title and beneficial ownership of the aircraft held by separate unrelated entities (especially in the context of financings) which are not covered in this article.
As the above considerations show, while GATS has the potential to reduce the burden of what should otherwise be routine transactions in the aviation industry, the parties (and lessees in particular) must be careful to ensure that the use of the system does not result in unintended consequences, or the diminution of lessees’ rights on transfers.
For further information, please contact:
May Tai, Managing Partner, Herbert Smith Freehills
