Posted by & filed under What Do You Need to Know Before Buying Your Jet?.

 Private Jet Sales:
The Letter of Intent and Purchase Agreement

The letter of intent (LOI) and purchase agreement are the two formal written arrangements between the buyer and seller in the aircraft sales transaction. A buyer indicates serious interest by sending an LOI to the seller. The LOI is step one in a transaction and structures the deal. The purchase agreement is a legally binding sales contract that must be reviewed and carefully agreed upon by all parties involved. The LOI is to the proposal as the purchase agreement is to the wedding.

The LOI is a concise document of engagement which may or may not be legally binding in your respective state. Typically, for the absence of doubt, we explicitly state that it is not binding. The LOI lays out the framework for the transaction. Standard points include the purchase amount, a clear title status, the airworthiness and operational status of the aircraft, and the timeframe for both the pre-purchase inspection and deposit placement. Sometimes, we will receive an LOI which has been written by the buyer which addresses specific “what if” instances. While these particular callouts are useful when those instances do occur, an experienced broker knows that it is more useful to make generalized statements that encompass even more than the “what if” instances. It is not uncommon to omit a prudent statement at a later date. You might ask, “If the LOI isn’t binding, then why even have one?” Because it encourages the buyer and seller, who are engaged, to work together in a timely manner to place a deposit, work out a binding purchase agreement, and carry out a pre-purchase inspection.

The purchase agreement is often the most time-consuming and complex nut and bolt part of a deal. It is the user manual for the transaction, ideally covering all possible scenarios in black and white. Elements that must be addressed include price, deposits, closing details, contingencies, delivery, title transfer and warranties, taxes, pre-purchase inspection and verification of equipment, aircraft condition and modifications, and the state of jurisdiction. The best advice is to seek professional guidance, with an accountant, aircraft attorney, and broker to assist in the many facets of the transaction.

The most consequential contract verbiage pertaining to the physical aircraft is the terms and conditions of the pre-purchase inspection of the aircraft and the logbooks, where most of the value sits. The location, duration, scope, and resolution of discrepancies should be addressed. If the inspection does not take place in a flyaway state, (where there is no sales tax on airplane sales) then the aircraft must be moved where a closing would occur in conjunction with a title & escrow company and the FAA. We routinely give the buyer ample time to inspect the aircraft and examine areas of their choosing, thereby reducing risk on the seller’s part. In virtually all contracts, the only warranty surviving after closing is the clear title. This is because of the “AS IS” clause which states how, after closing, the purchaser is responsible for the care and custody of the asset.

Next week, we will discuss the pre-purchase inspection in detail.

Subscribe to the Welsch Aviation Blog here.