Introduction
An aircraft engine is not merely a technical component of an aircraft. In modern aviation finance, it can operate as a separate high-value asset capable of being leased, financed, transferred, installed on different aircraft and subjected to proprietary and security interests independently from the airframe.
An airline’s financing requirements are therefore not limited to acquiring entire aircraft.
An operator may purchase a new engine, lease a replacement engine, finance a spare-engine portfolio, sell an existing engine and lease it back, or combine aircraft and engine financing with long-term maintenance arrangements.
For this reason, an Aircraft Engine Lease Agreement should not be treated as an ordinary equipment lease.
Ownership, maintenance obligations, life-limited parts, shop visits, installation on substitute aircraft, maintenance reserves, insurance, international registration, sanctions, default and repossession all require careful contractual treatment.
At international level, the central legal framework is the 2001 Cape Town Convention on International Interests in Mobile Equipment and the Aircraft Protocol.
ICAO explains that the Cape Town system was created to provide certain and opposable rights over high-value and inherently mobile aviation assets, including airframes, aircraft engines and helicopters, addressing uncertainty created by differences between national systems governing security interests, title retention and leases.
Aircraft Engines as Separate Legal Assets
An aircraft engine does not necessarily remain attached to one airframe throughout its economic life.
An engine may be removed for maintenance, replaced by another unit, transferred to a shop visit facility and subsequently installed on another compatible aircraft.
This mobility creates an important legal question:
What happens to ownership of a leased engine when it is installed on an aircraft owned by somebody else?
The Aircraft Protocol addresses the issue directly.
Article XIV(3) provides that ownership of, or another right or interest in, an aircraft engine is not affected by its installation on or removal from an aircraft.
This principle is fundamental to international engine leasing.
Installation of the engine on another person’s airframe does not, under the Cape Town framework, automatically transfer ownership of the engine to the owner of that airframe.
What Qualifies as an “Aircraft Engine”?
The Aircraft Protocol does not cover every aviation engine.
Its definition includes jet-propulsion aircraft engines producing at least 1,750 pounds of thrust, and turbine- or piston-powered aircraft engines having at least 550 rated take-off shaft horsepower, subject to the other requirements of the Protocol.
The definition also includes relevant modules and installed, incorporated or attached accessories, parts and equipment, together with associated data, manuals and records.
Airframes, aircraft engines and helicopters constitute the Protocol’s principal categories of “aircraft objects.”
This illustrates why technical records are legally significant in an engine transaction.
The value and usability of an aircraft engine can depend heavily upon the availability of reliable maintenance records, LLP documentation, modification history and traceability.
The Engine Lease Agreement
An engine lease normally grants the lessee possession or use of a specified aircraft engine while legal ownership remains with the lessor.
The Cape Town Convention defines a leasing agreement as an agreement under which a lessor grants possession or control of an object, with or without a purchase option, to a lessee in return for rent or another payment.
Several structures may be used.
Operating Engine Lease
The lessor retains ownership while the airline uses the engine for an agreed term and must return it in the contractual redelivery condition.
Finance Lease
The transaction may function primarily as long-term financing, potentially including a purchase option.
Where the transaction involves a Turkish regulated financial leasing company, Türkiye’s Financial Leasing, Factoring, Financing and Savings Financing Companies Law No. 6361 and related BDDK regulations may also become relevant.
Short-Term Replacement Lease
An airline may require a replacement engine while its own engine undergoes a shop visit.
In such transactions, delivery and redelivery timing may become commercially critical because an unavailable engine can directly affect fleet operations.
Identification of the Engine
Precise identification of the asset is fundamental.
Under Article VII of the Aircraft Protocol, an aircraft object can be identified for Convention purposes through the manufacturer’s serial number, the manufacturer’s name and the model designation.
An engine lease should therefore accurately specify matters such as the:
manufacturer;
model;
engine or manufacturer’s serial number;
configuration;
installed modules;
LLP status; and
technical records.
A generic description such as “one turbofan engine” may create unacceptable uncertainty in a high-value transaction.
Life-Limited Parts
One of the most technically complex elements of engine leasing concerns Life-Limited Parts, or LLPs.
Certain engine components may only be operated for a specified number of cycles or within defined life limits.
Consequently, two engines of the same model may have very different economic values depending upon factors including their remaining LLP life, cycles, hours, maintenance history, shop-visit status and performance condition.
An engine may therefore remain technically operational while having suffered significant economic deterioration during the lease term.
This explains the importance of detailed maintenance-reserve and redelivery mechanisms.
Maintenance Reserves
Many operating leases require maintenance-reserve payments in addition to basic rent.
Payments may be calculated by reference to flight hours, cycles or other utilisation measures.
The purpose is generally to allocate future major maintenance expenditure between lessor and lessee.
The contract should address issues such as who owns reserve amounts, when reimbursement becomes available, what documentation is required, what happens where actual shop-visit costs exceed accumulated reserves, and whether unused balances are refundable.
The treatment of reserves following an Event of Default should also be expressly addressed.
Power-by-the-Hour Arrangements
Aircraft engines are frequently supported through usage-based maintenance arrangements commonly described as Power-by-the-Hour structures.
Under such structures, the operator’s payments may be tied to actual engine utilisation rather than requiring it to bear unpredictable major maintenance costs as they arise.
Legally, such structures require careful coordination between the engine lease, OEM support arrangement and any MRO agreement.
Where an engine fails, a subsequent dispute may require the parties to determine whether responsibility lies with:
the engine lessor;
the OEM;
the maintenance provider; or
the airline’s own operation of the engine.
Contractual interfaces therefore matter.
Engine Interchange and Installation on Other Aircraft
An engine lessee may need to install the leased engine on different compatible airframes during the lease period.
The lease should consequently regulate the permitted aircraft types, countries of operation, subleasing or wet-leasing arrangements, pooling, maintenance locations and circumstances in which the engine may be installed on an airframe owned or operated by another party.
The Cape Town rule protecting engine ownership despite installation is particularly important in this context.
Article XIV(3) expressly preserves ownership and other interests in an aircraft engine despite installation on or removal from an aircraft.
Where the engine travels into a jurisdiction outside the relevant Cape Town framework, however, applicable local property law may still require separate analysis.
The International Registry
One of the principal innovations of the Cape Town system is the International Registry.
The Convention and Aircraft Protocol establish an international electronic registration framework for interests in high-value aviation assets.
A qualifying lessor’s interest under a leasing agreement may constitute an international interest under the Convention. Security interests and title-reservation interests can similarly fall within the framework.
Registrations may concern international interests, prospective international interests, assignments, sales and other registrable transactions.
The ICAO Council acts as the Supervisory Authority for the aircraft International Registry. Aviareto Ltd. was reappointed by ICAO in 2023 for a fifth five-year term as Registrar beginning 1 March 2026.
Accordingly, International Registry searches and registrations remain a central element of aircraft and engine finance closings in 2026.
Priority of Registered Interests
The Cape Town Convention provides a powerful priority rule.
Under Article 29, a registered interest takes priority over an interest subsequently registered and over an unregistered interest.
This priority generally applies even where the holder of the earlier registered interest had actual knowledge of the competing interest.
This significantly changes transaction due diligence.
A purchaser or financier should not rely solely upon a seller’s contractual representation that an engine is free of liens.
International Registry searches should be conducted to establish whether prior registered interests exist.
If a prior financier has registered an international interest against the same engine serial number, discharge of that registration may become a condition precedent to closing.
Principal Aviation Financing Structures
Aircraft engines and other aviation assets may be financed through several structures.
Secured Lending
The borrower owns or acquires the engine and a lender advances financing secured by the asset.
Where the requirements of the Cape Town Convention are satisfied, the security interest may qualify as an international interest.
Finance Leasing
A financier or lessor acquires the asset and leases it to the operator over a longer period.
Operating Leasing
The lessor retains ownership and significant residual-value exposure while the operator obtains temporary use of the engine.
Sale and Leaseback
The airline sells an engine it already owns to an investor or leasing company and immediately leases it back.
This structure can release capital while allowing continued operational use of the asset.
Portfolio Financing
A financing may cover multiple aircraft or engines.
In such transactions, each engine must nevertheless be accurately identified and analysed, particularly for title and International Registry purposes.
Turkish Aircraft Mortgages and Standalone Engines
Turkish law contains a specific statutory regime governing mortgages over registered aircraft.
Article 70 of the Turkish Civil Aviation Act No. 2920 permits an aircraft mortgage to be created by agreement between owner and creditor together with registration. SHGM’s official procedures similarly state that registration in the Turkish Civil Aircraft Registry constitutes the aircraft mortgage and enables it to take effect against third parties.
A distinction must nevertheless be made between:
an aircraft mortgage recorded against a Turkish-registered aircraft, and
an international interest in a standalone aircraft engine under the Cape Town regime.
The Aircraft Protocol deliberately treats airframes and aircraft engines as separate aircraft objects.
A financing party should therefore not simply assume that every proprietary security arrangement affecting an aircraft automatically constitutes an effective security interest over an independently owned third-party engine.
The Cape Town regime, applicable Turkish property law, the engine’s location and the relevant contractual structure should be considered separately.
Türkiye and the Cape Town Convention
Türkiye ratified the Cape Town Convention and Aircraft Protocol, and the Convention entered into force for Türkiye on 1 December 2011.
Türkiye also declared that Article VIII of the Aircraft Protocol would apply.
Article VIII permits parties, in qualifying circumstances, to choose the law governing their contractual rights and obligations under agreements, sales, related guarantees and subordination agreements.
This is particularly significant for cross-border engine leasing.
A Turkish airline and a foreign lessor may, for example, structure an agreement subject to English law, depending upon the transaction.
That choice does not necessarily displace mandatory rules concerning aviation regulation, insolvency, property rights or public policy.
Türkiye’s Internal Transaction Declaration
Türkiye has also made a declaration under Article 50 of the Convention.
Subject to Article 50(2), Türkiye declared that the Convention and Protocol do not apply to qualifying transactions that are entirely internal transactions in relation to Türkiye.
Accordingly, it is not sufficient merely to establish that an engine is located in Türkiye.
The Convention analysis requires examination of the parties, the asset and the relevant connecting factors.
Insolvency and Alternative A
One of the most important concerns for an engine lessor or financier is airline insolvency.
A lessor’s contractual ownership does not necessarily mean that immediate physical repossession will be straightforward once formal insolvency proceedings have begun.
Türkiye made a declaration applying Alternative A of Article XI of the Aircraft Protocol to all types of insolvency proceeding, with a waiting period of 60 calendar days.
Under Alternative A, subject to its detailed requirements, the insolvency administrator or debtor must give possession of the aircraft object to the creditor by the relevant deadline unless applicable defaults are cured and future contractual obligations are undertaken.
Pending possession, the Aircraft Protocol requires preservation and maintenance of the aircraft object and its value in accordance with the agreement.
This regime can materially affect the credit analysis of an aircraft or engine financing transaction.
Speedy Relief in Türkiye
Türkiye has also made declarations concerning Article X of the Aircraft Protocol.
For certain forms of interim relief concerning preservation of the aircraft object, possession, control, custody and immobilisation, Türkiye specified a period not exceeding 10 calendar days. For certain remedies involving leasing, management, sale or application of proceeds, the corresponding period is 30 calendar days.
Türkiye has further declared under Article 54(2) of the Convention that Convention remedies not expressly requiring application to a court may be exercised without court action or court leave.
Nevertheless, physical enforcement in a particular case may still be affected by local possession, customs controls, airport authorities, maintenance facilities, court attachments and competing third-party rights.
Maintenance Liens and Non-Consensual Rights
An engine owner may encounter third-party claims even where its own interest is registered.
For example, a maintenance organisation holding physical possession of an engine may claim a lien or retention right for unpaid maintenance charges where local law allows such a remedy.
Article 39 of the Cape Town Convention permits Contracting States to identify categories of non-consensual rights or interests capable of taking priority over registered international interests.
Türkiye has made declarations concerning certain non-consensual rights and interests, including specified public-service and State-related rights.
International Registry registration should therefore not be confused with absolute priority against every conceivable claim in every jurisdiction.
The declarations of the relevant Contracting State must also be reviewed.
Insurance and Loss Allocation
Insurance clauses are central to engine leasing and finance.
The agreement will ordinarily need to address matters such as physical damage coverage, aviation liability, war risks, agreed values, deductibles, loss-payee rights, additional-insured status and the application of insurance proceeds.
The parties should also determine in advance how a total-loss event affects the lease.
A properly drafted agreement may require payment of a stipulated loss value, replacement of the damaged engine with an acceptable substitute or application of insurance proceeds in accordance with an agreed waterfall.
Redelivery Condition
Engine redelivery is a frequent source of disputes.
A provision merely requiring an engine to be returned in “good condition” may be commercially inadequate.
The agreement may instead contain precise requirements regarding:
LLP remaining life;
remaining cycles;
performance condition;
EGT margin;
shop-visit history;
AD compliance;
mandatory modifications;
borescope results;
technical records; and
absence of unacceptable damage.
An engine can be physically capable of operation while being substantially less valuable than the engine that the lessor was contractually entitled to receive.
Technical Records
Aircraft engine records have direct economic and legal value.
Incomplete traceability can make a component difficult or impossible to return to service under applicable aviation requirements.
The lease should therefore allocate responsibilities concerning custody, preservation, electronic records, original documentation, inspection rights, backups and reconstruction of missing records.
The Aircraft Protocol itself includes relevant data, manuals and records within the definition of an aircraft engine.
Sanctions and Export Controls
Aircraft engines can cross borders repeatedly during their operational life.
For this reason, sanctions and export-control compliance may materially affect both ordinary operation and enforcement.
Modern agreements frequently need to address prohibited jurisdictions, restricted counterparties, export restrictions, sanctions representations and termination rights.
An engine may be physically capable of being repossessed but legally incapable of immediate export to the lessor’s preferred jurisdiction.
Repossession and lawful cross-border transfer should therefore be treated as separate issues.
Governing Law and Dispute Resolution
Cross-border engine leases frequently provide for a selected commercial governing law and international arbitration or court jurisdiction.
Türkiye’s declaration applying Article VIII of the Aircraft Protocol reinforces party autonomy in qualifying Cape Town transactions.
Depending upon the transaction, disputes may be referred to London arbitration, ICC arbitration, SIAC, ISTAC or a selected national court.
However, the dispute-resolution clause should not be analysed in isolation.
Counsel should also determine in advance which courts or authorities can provide urgent assistance where the engine is physically located.
A tribunal may declare that a lease has terminated and possession must be returned, while practical repossession may still require local enforcement measures.
Legal Due Diligence Before an Engine Transaction
Before purchasing, leasing or financing an aircraft engine, a transaction team should examine at least the following questions.
Who owns the engine?
Is the manufacturer serial number correctly identified?
What International Registry registrations exist?
Are there existing financiers or lessors?
Will prior registrations be discharged at closing?
Where is the engine physically located?
On which airframe is it currently installed?
Does any maintenance provider hold possession or assert unpaid charges?
Are technical and LLP records complete?
Are there sanctions or export-control issues?
Is insurance structured to protect the lessor or financier?
The Cape Town system permits electronic searches of the International Registry, with registry search certificates identifying registered information and the relevant date and time of registration.
Conclusion
Aircraft engine leasing and aviation asset finance differ fundamentally from conventional equipment finance.
An aircraft engine is a high-value, internationally mobile asset capable of being installed on and removed from different aircraft while remaining the subject of separate ownership and financing rights.
An effective Engine Lease Agreement must therefore integrate far more than rent and lease duration.
It should address:
title, International Registry registrations, Cape Town Convention protection, maintenance reserves, LLP exposure, technical records, insurance, sanctions, governing law, insolvency, repossession and redelivery.
Two Cape Town principles are particularly important.
First, ownership or another right or interest in an aircraft engine is not affected merely because the engine is installed on or removed from an aircraft.
Second, a registered interest generally takes priority over subsequently registered and unregistered competing interests.
For transactions involving Türkiye, additional considerations arise. Türkiye has been within the Cape Town system since 2011, applies the Article VIII choice-of-law provisions, has adopted specified speedy-relief mechanisms and has selected Alternative A for insolvency proceedings with a 60-day waiting period.
The central legal question in modern engine finance is therefore not merely:
“Who is named as owner in the lease?”
The more important inquiry is:
Who owns the engine, where and against whom can that ownership or security interest be enforced, what priority does the creditor hold in the International Registry, does installation on another aircraft affect the interest, and how quickly can the engine be recovered if the airline defaults or enters insolvency?
The answers to those questions form the foundation of effective international aviation asset finance.
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