Legal Insights
A last‑minute email lands: your client is not just purchasing or leasing two twin‑engine aircraft – two spare engines are now part of the deal. Now the questions start. Should the spares sit in the same SPV as the aircraft, or in a separate vehicle? What if the aircraft are held in separate SPVs? Are they leased assets or held under a bailment? If one aircraft needs an engine from the other SPV’s spare, who authorizes that, and what happens to the lease covenants? What if the spare is at a Maintenance, Repair, and Overhaul (MRO) shop in another country when the lessee defaults? These are the kinds of Friday-afternoon problems that surface in small and mid-market cross‑border transactions where the institutional infrastructure of a portfolio lessor is not in place. Get the structure wrong and you risk breaching two leases at once, losing lender consent, or watching your collateral sit in a third party’s possession while you sort out competing claims.
When Infrastructure Fails: The Mid-Market Spare Engine Gap
In large institutional transactions, collateral packages are built with engines in mind from the start, often with centralized parts or consignment SPV and program-level documents governing swaps across a fleet. In small and mid-market deals, parties frequently try to replicate that discipline without the infrastructure. Each SPV may “own” one aircraft and a spare, but there is no clear cross-use right, no inter-SPV bailment or sublease, and no tracking protocol.
In practice, this surfaces as missing engine schedules, inconsistent serial number references, unclear chain of title, engines swapped over time without updated documentation (or a buyer expecting to swap them without a structure that facilitates it), security interests granted by one entity while possession is with another, or engines sitting in MRO facilities abroad when default hits. These elements require deliberate attention in small and mid-market cross-border deals.
The Legal Reality: Engines Are Not Accessories
Engines are not accessories for the airframe. Under the Cape Town Convention, airframes and engines are separate “aircraft objects,” and interests in each must be created and perfected independently. In the United States, engine interests are perfected through the International Registry and local law (typically the UCC), not FAA “title” records; in Europe, parties rely on Cape Town registrations coupled with local law perfection and contract constructs. Registration, filing, and Cape Town considerations for engines may differ materially from assumptions made for the aircraft.
The Contractual Trap: SPV Structure and Lease Gaps
The contractual challenges fall into two categories: ownership structure and lease documentation.
The threshold question is whether spares should sit in the same SPV as the aircraft or a separate vehicle. Consolidating spares with the aircraft simplifies documentation and avoids inter-SPV coordination, but it also means a default on the aircraft lease puts the spare at risk. Separate SPVs can isolate credit exposure and allow different financing terms but require deliberate cross-use mechanics. The right answer depends on deal size, financing structure, and whether the parties anticipate regular interchange. For small and mid-market transactions with common ownership and a single lender, consolidation often makes sense. For larger or multi-lender structures, separate SPVs with documented cross-use rights may be worth the complexity.
Even once structure is settled, the lease documentation may create problems. When leases refer to “the Aircraft (including spare engines)” without serial-specific schedules, they create gaps that surface at the worst moment. The ambiguity extends to title, security interests, interchange rights, insurance coverage, and repossession mechanics. Most aircraft leases include covenants requiring the lessee to keep engines installed except for maintenance and prohibiting installation on unpermitted aircraft. When two SPVs each own an aircraft and a spare, and the operator installs one SPV’s spare on the other’s aircraft without authorization, both leases may be breached. The fix is pre-approved cross-installation rights, but that requires thinking about spares as standalone assets at the drafting stage.
The Operational Reality: Legal Risks When Engines Leave the Airframe.
Engines do not stay bolted to airframes indefinitely. They cycle through scheduled shop visits for overhaul, unscheduled removals for repairs, and routine swaps when operators need to keep aircrafts flying while an engine is under maintenance. A typical narrowbody engine visits an MRO facility every five to seven years for full overhaul, with interim shop visits for module repairs or life-limited part replacements. During these periods, which can last weeks or months, the engine sits in a third party’s possession, often in a different jurisdiction.
Engine pooling and swap arrangements add another layer. Operators sometimes participate in pooling programs, either formal third-party pools or informal arrangements among related lessees, where engines are shared across multiple airframes to maximize utilization and minimize AOG (aircraft on ground) time. In a swap, an operator removes a malfunctioning engine and installs a serviceable replacement, returning the original after repair. These arrangements are operationally efficient but legally perilous if documentation does not address title, risk of loss, maintenance responsibility, and what happens when default occurs while “your” engine is on someone else’s aircraft or in an MRO abroad.
The Fix: Structuring And Drafting Keys
The cure is to treat spare engines as standalone assets with their own lifecycle, rights, and remedies, papered deliberately rather than referenced casually. Take these necessary steps:
- Define the Spare Engine Precisely and Do It Early. Identify spares at term sheet stage. Use serial‑numbered schedules for each engine. Be explicit whether a spare is part of the leased asset or provided under a separate bailment. If leased, align economics and remedies with the aircraft lease. If bailed, state conditions, duration, and recall rights, and ensure terms dovetail with security documents.
- Build Spare Engine Cross-Use Mechanics. Where multiple SPVs sit under common ownership or financing, draft an inter‑SPV bailment or sublease permitting cross‑installation subject to conditions: airworthiness standards, life-limited parts (LLP) tracking, location limits, return conditions, and automatic recall on default. If there is third‑party debt, secure lender and insurer consent up front. Carve out pre-approved cross-installation rights in each lease, referencing the inter-SPV bailment or sublease and specifying the conditions under which engines may be swapped. Without that carve-out, routine operational decisions can trigger default.
- Track Insurance and Records Wherever the Spare Engine Goes. Ensure hull and liability coverage explicitly tracks the engine on and off wing and across airframes, storage, and transit. Align loss payee, additional insured, and lender clauses across all parties. Mandate real-time updates to technical logs and LLP records when a spare is installed or removed, with audit rights and digital copies to the owner or security trustee.
- Anticipate Spare Engine Enforcement, Especially at MRO Facilities. In distress, a spare engine at a different airport or country can be harder to retrieve than the aircraft. MROs typically have possessory liens for unpaid maintenance, meaning they can refuse to release the engine until paid, even if the debtor is the lessee rather than the owner or secured party. In the U.S., mechanics’ liens can be particularly aggressive; in some states, the lien attaches for any unpaid balance, not just work on that engine. Draft for location reporting, storage obligations, and cooperation for export and customs clearance, and ensure the MRO acknowledges the secured party’s interest. Pre-clear logistics vendors for bonded transport so that when default hits, you are not scrambling to move the engine while it sits exposed to competing claims.
Conclusion: Treat The Spare as a Standalone Asset
For those new to cross-border aviation collateral, “Grounded by Complexity: The Challenges of Cross-Border Aviation Collateral” explains why international registration alone is insufficient and how domestic law can undermine priority and enforcement.
For a deeper dive into building a travel-ready security stack, including a practical roadmap covering IR discipline, domestic filing regimes (UCC, Companies House, civil law notarial acts), insurance structuring, records controls, and contractual safeguards, see “Security That Travels: Cross-Border Perfection in Aviation Finance.”
Handled this way, a surprise spare can be an asset, not a risk. The discipline you bring to defining, structuring, and operationalizing spare engines often determines whether value is preserved in the ordinary course and recovered in distress. For practitioners in Miami, Dublin, or anywhere cross-border aviation deals close on tight timelines, that discipline starts with treating spare engines as what they are: independent, mobile, high-value assets that deserve their own place in the deal structure from day one.
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This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
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