One of the significant features of the Cape Town Convention^[1]was the creation of an international registry whereby all security interests, leases and similar interests relating to aircraft equipment would be registered and, subject to certain exceptions, accorded priority based on the order of registration. Due to the life expectancy of aircraft objects, and the fact that these aircraft objects often change hands (in some cases several times) and may be subject to financings and subsequent refinancings, it is essential to ensure that registered interests are discharged once they cease to be effective.^[2]

Discharge of an international interest is made solely by the lessor, in the case of a lease, or a secured party, in the case of the security agreement. Failure to properly discharge an interest could create issues in connection with the subsequent sale or financing of the related object as the financier or purchaser would be uncertain as to whether such object was truly free of all competing interests. Until recently, the ability to discharge interests was complicated and it was difficult (particularly in leveraged structures) to be sure the party who controlled the exercise of rights and remedies also possessed the right to discharge all related interests which were reflected at the International Registry. The Regulations and Procedures for the International Registry (as established under the Cape Town Convention) (the “Revised Regulations”) were implemented in the Fall of 2010. Among other changes, the Revised Regulations include updated rules and procedures that govern the transfer of rights to discharge international interests.^[3]As part of the implementation of the Revised Regulations, the operator of the International Registry, Aviareto,^[4]simultaneously implemented a software change to the International Registry that enables a right to discharge registrant to transfer such right to another transacting user entity.

The International Registry before the Revised Regulations

Prior to the implementation of the Revised Regulations, if an international interest was assigned to a third party, the right to discharge the underlying international interest remained with the assignor and could not be transferred. This inflexible mechanic posed various problems.  

Consider the following example:

Lessor leases an airframe to Lessee and an international interest is registered in respect of such lease. Lessor thereafter grants a security interest in such airframe to Secured Party, and such interest is registered along with an assignment of the associated rights comprised of the lease. 

Prior to the Revised Regulations, the Secured Party would be permitted to discharge the assignment of the international interest, but the Lessor would remain the only party authorized to discharge the underlying international interest relating to the lease. This could result in the Secured Party being unable to discharge the interest in respect of the lease without enlisting the assistance of the Lessor (and given the scenario described, such assistance may not be forthcoming). If Secured Party were to successfully repossess the airframe, foreclose on its lien and terminate the lease, the public record at the International Registry would nonetheless still reflect an undischarged interest (in respect of the lease) and the Secured Party would be unable to effect such a discharge.^[5]

The International Registry after the Revised Regulations

The Revised Regulations solve the issues illustrated in the previous section by allowing a right to discharge to be transferred from one transacting user entity to another.^[6]Once a right to discharge has been transferred, a notation will be made on the aircraft object’s priority search certificate below the interest that is the subject of such transfer. The notation will reflect the date and time the right to discharge transfer was completed, the name of the transferring party and the name of the transferee. 

The transfer can be initiated by the holder of the right to discharge (i.e., the transferring party) or the party requesting the assignment of the right to discharge (i.e., the transferee). In either case, the non-initiating party must consent to the request to transfer the right to discharge within 36 hours of the request, otherwise, the pending transfer will drop off the International Registry and the transfer will need to be reinitiated. 

Parties also should keep in mind that a right to discharge transfer may be part of a “registration session” at no additional cost, or it may be performed independently at a later time for a fee of U.S. $100 per transfer.^[7]     

Practical Impact

Parties should be mindful that an assignment of an international interest does not automatically transfer the right to discharge the underlying international interest.  In addition to international interest and assignment registrations that may be contemplated by a transaction, parties should also be conscious of the transfer of the associated right to discharge. Failure to properly address control over the right to discharge could, in certain scenarios, give rise to situations where undischarged interests remain of record as “clouds” on unencumbered ownership of the underlying aircraft object.

In transactions in which registrations were made prior to the Revised Regulations, parties are also well advised to revisit such registrations to determine whether transfers of the pertinent right to discharge are necessary, and, if so, parties should coordinate to ensure such transfers are promptly completed.