Aircraft Mortgages, Cape Town International Interests, Engine Security, IDERA and Enforcement
Introduction
Airlines and business-jet investors do not necessarily purchase aircraft worth USD 30, 50 or 100 million entirely with their own capital. Modern aircraft acquisitions are commonly structured through secured bank loans, finance leases, operating leases, sale-and-leaseback transactions, export-credit structures and special-purpose aircraft-owning companies.
Aircraft finance, however, differs fundamentally from ordinary corporate lending.
The aircraft itself is frequently the lender’s most valuable security asset.
The lender therefore examines not only the borrower’s balance sheet but also legal title to the aircraft, its registration, the engines, insurance proceeds and the creditor’s ability to recover, de-register, export and remarket the aircraft following a default.
In Türkiye, the domestic security regime is based primarily on the aircraft-mortgage provisions of Turkish Civil Aviation Law No. 2920, while cross-border transactions must also consider the Cape Town Convention and Aircraft Protocol. Both instruments entered into force for Türkiye on 1 December 2011.
A sophisticated Turkish aircraft-finance transaction must therefore analyse national registration, aircraft mortgages, international interests, engine security, leasing structures, insurance assignments, IDERA and insolvency remedies together.
Why Is Aircraft Finance Different?
An aircraft does not remain permanently within one jurisdiction.
An Airbus, Boeing, Gulfstream or Bombardier aircraft may be in Istanbul today, London tomorrow and Dubai the following day.
This mobility creates an obvious legal question for lenders:
Which legal system protects the lender’s security?
ICAO explains that the Cape Town Convention and Aircraft Protocol were specifically designed to improve certainty and enforceability of rights over highly mobile, high-value aviation assets including airframes, aircraft engines and helicopters.
Security law is therefore not peripheral to aircraft finance. It directly affects whether financing is commercially viable and how much risk a lender is willing to accept.
Principal Aircraft Financing Structures
Aircraft acquisitions may be financed through several structures.
Secured Aircraft Loan
The airline or investor owns the aircraft while the bank finances part of the purchase price and receives security over the aircraft and related assets.
Finance Lease
The finance lessor retains legal ownership while the airline or operator receives economic use of the aircraft. SHGM’s registration procedures expressly recognise finance leasing as a separate aircraft acquisition structure.
Operating Lease
The airline operates the aircraft for a defined period without acquiring legal ownership.
Sale and Leaseback
The airline sells the aircraft to a leasing company and immediately leases it back, converting capital tied up in the aircraft into liquidity.
SPV Financing
A dedicated Special Purpose Vehicle may acquire the aircraft and lease it to the operating airline.
Large transactions may combine several of these techniques.
Aircraft Mortgages under Turkish Law
Article 69 of Turkish Civil Aviation Law permits an aircraft to be mortgaged as security for an obligation.
Significantly, the secured obligation does not have to be an existing fixed debt. Turkish law permits aircraft mortgages to secure future and conditional claims as well.
This makes the mortgage suitable for sophisticated revolving and structured financing arrangements.
Article 70 provides that a contractual aircraft mortgage is created through agreement between the owner and creditor together with registration in the Turkish Civil Aircraft Registry. The mortgage agreement must be in writing and the signatures must be notarised.
SHGM currently requires, among other documents, a notarised mortgage agreement and an application for registration. Where the owner and operator are different entities, written operator consent is also required in the circumstances identified by SHGM.
Accordingly, a clause in a finance agreement promising to grant a mortgage does not by itself complete the proprietary security.
The registry step remains essential.
Fleet Mortgages
Turkish law also contemplates situations in which several aircraft secure the same obligation.
Under Article 72, where several aircraft are mortgaged for one debt and the registry does not reflect a different agreed allocation, each aircraft may be responsible for the entire secured obligation.
This can be particularly useful in fleet financing.
A lender financing an airline may therefore obtain security across several aircraft rather than relying on a single asset.
Insurance as Part of the Security Package
A lender faces an obvious risk if its USD 50 million collateral is destroyed in an accident.
Turkish Civil Aviation Law addresses this issue by extending the aircraft-mortgage regime to relevant insurance proceeds. Articles 77 and following protect the position of registered mortgage creditors in relation to insurance compensation in the circumstances prescribed by law.
International aircraft-finance documentation therefore commonly supplements the aircraft mortgage with arrangements such as:
Assignment of Insurances,
Loss Payee provisions, and
Additional Insured protections.
The objective is to ensure that destruction of the aircraft does not simultaneously destroy the lender’s practical economic security.
Repairers and Other Competing Rights
A lender is not necessarily the only person capable of asserting rights against an aircraft.
Article 71 of Turkish Civil Aviation Law provides that a manufacturer or repairer may request registration of a statutory mortgage for claims arising from construction or repair of an aircraft.
This becomes important where an aircraft undergoes expensive engine overhaul, structural repair or heavy maintenance.
Türkiye has also made declarations under the Cape Town Convention preserving priority for categories of non-consensual rights that enjoy priority under Turkish law and identifying certain judgment-attachment and public tax-related rights within the Convention’s declaration framework.
A lender’s due diligence must therefore go beyond asking whether another bank has already registered a mortgage.
Can the Bank Automatically Take Ownership After Default?
Not under the ordinary Turkish aircraft-mortgage regime simply by relying on a contractual automatic-transfer clause.
Article 83 provides that the mortgage creditor recovers from the assets covered by the mortgage through compulsory enforcement and restricts arrangements under which ownership of the aircraft would simply pass to the creditor because the debtor has failed to pay.
This means that an ordinary clause stating:
“Upon default, title to the aircraft automatically transfers to the lender”
cannot simply replace the statutory mortgage-enforcement framework.
Cross-border transactions, however, must also consider the remedies available under the Cape Town Convention and Aircraft Protocol.
The Cape Town Convention
The Cape Town Convention creates an international legal regime for security and related interests in highly mobile equipment.
For aircraft finance, the Aircraft Protocol extends that framework specifically to qualifying airframes, aircraft engines and helicopters.
Türkiye signed the Convention and Aircraft Protocol on 16 November 2001, deposited its ratification instruments on 23 August 2011 and became bound by them on 1 December 2011.
Where the Convention’s requirements are satisfied, interests arising under qualifying security agreements, title-reservation agreements and leasing arrangements may constitute an international interest.
The International Registry provides the electronic registration architecture for those interests. One of the principal purposes of the system is to increase predictability concerning enforceability and priority of creditor interests.
Why Aircraft Engines Matter Separately
Aircraft engines create a particular problem for traditional security law.
Engines are regularly removed from aircraft, sent to maintenance facilities and replaced with other engines. The engine installed on an aircraft today may later be installed on a completely different aircraft.
The Cape Town aircraft regime therefore expressly addresses qualifying aircraft engines as aircraft objects separate from the airframe.
For lenders, this means due diligence and security documentation may need to identify separately:
the engine manufacturer;
engine model;
engine serial number; and
existing international interests over the engine.
A sophisticated aircraft financing therefore cannot necessarily assume that security over the airframe automatically resolves every issue concerning high-value engines.
IDERA: The Creditor’s Exit Mechanism
One of the most important instruments in international aircraft finance is the Irrevocable De-registration and Export Request Authorisation — IDERA.
In practical terms, IDERA is intended to enable an authorised party, subject to the applicable legal framework, to request de-registration and export of an aircraft following the relevant triggering circumstances.
Türkiye has expressly declared that Article XIII of the Aircraft Protocol, which provides the IDERA framework, will apply.
Its importance is commercial as much as legal.
A lender or lessor must ask:
If the debtor defaults, can the aircraft be removed from the existing registry and transferred to another jurisdiction for sale or lease?
An aircraft that can rapidly be recovered and remarketed is considerably more valuable as collateral than an aircraft trapped indefinitely in a local enforcement process.
Insolvency: Türkiye and Alternative A
The borrower’s insolvency is one of the most important stress scenarios in aircraft finance.
Türkiye has declared that Article XI, Alternative A of the Aircraft Protocol applies in its entirety to all types of insolvency proceedings and has selected a waiting period of 60 calendar days.
Türkiye has also declared that Articles XII and XIII of the Aircraft Protocol apply.
In addition, under its declaration pursuant to Article 54(2) of the Cape Town Convention, Türkiye has stated that remedies available to the creditor which are not expressly required by the Convention to be exercised through a court may be exercised without court action or leave of the court.
This does not mean that every aircraft can automatically be repossessed after sixty days in every factual scenario. Applicability of the Convention, the debtor’s insolvency status, Turkish procedural law, aviation-safety requirements and the relevant declarations must still be examined in the individual case.
Does Cape Town Apply to Every Turkish Aircraft Financing?
No.
Türkiye has made a declaration under Article 50 concerning transactions that are wholly internal to Türkiye, subject to the preservation contained in Article 50(2).
Accordingly, it would be incorrect to assume that every financing involving a Turkish-registered aircraft automatically receives the full Cape Town treatment.
The structure of the transaction, location and status of the debtor, registration and the Convention’s jurisdictional connecting factors must be analysed in each transaction.
The Wider Security Package
Major aircraft lenders generally do not rely on a single form of collateral.
A sophisticated security package may include:
Aircraft Mortgage — proprietary security over the aircraft;
Cape Town International Interest — where the Convention applies;
Engine Security — separate treatment of qualifying engines;
IDERA — de-registration and export protection;
Assignment of Insurances — security over insurance proceeds;
Assignment of Lease Receivables — security over aircraft rental income;
Share Pledge — pledge over the shares of the aircraft-owning SPV;
Bank Account Security — security over rental or operating accounts; and
Assignment of Requisition Proceeds — protection in relation to certain governmental taking or requisition proceeds.
The economic objective is to give the lender security not merely over an aluminium airframe but over the entire economic ecosystem surrounding the aircraft.
Aircraft Finance Due Diligence
Before financing an aircraft, a lender or lessor should ordinarily investigate at least the following issues:
- Who is the legal owner?
- What does the national aircraft registry show?
- Are any aircraft mortgages already registered?
- Are there attachments or other encumbrances?
- Does the International Registry contain prior interests?
- Who owns the engines?
- Are there separate engine interests?
- Has an IDERA been recorded?
- Is the aircraft subject to a finance or operating lease?
- Are lender rights properly protected under the insurance policies?
- Are there repairer or maintenance claims?
- Are there potentially overriding tax or public-law interests?
- Has the aircraft been validly de-registered from any previous registry?
- Is the borrower’s ownership structure legally effective?
- Is there a pending insolvency or restructuring risk?
SHGM’s current registry procedures expressly distinguish between acquisitions by purchase, ordinary lease and finance lease and require ownership changes to be reflected in the Turkish Civil Aircraft Registry.
Default: The Real Question Is Control of the Aircraft
In ordinary finance, the creditor’s primary concern is usually whether the debt will be paid.
Aircraft finance adds another question:
Who controls the aircraft when something goes wrong?
During a prolonged default:
engine hours continue to increase;
maintenance status may deteriorate;
insurance may lapse;
the aircraft may move to another jurisdiction; and
its market value may decline.
Aircraft finance documentation therefore treats not only payment default but also events such as:
maintenance default;
insurance default;
registration default;
cross-default;
insolvency;
unauthorised leasing;
unauthorised engine removal; and
unapproved changes in aircraft location
as potentially significant contractual events.
The lender ultimately requires more than a legal right to receive money. It requires a practical route to a maintained, insured, transferable and remarketable aircraft.
Conclusion: Aircraft Finance Is Really the Financing of an International Security Architecture
Aircraft financing in Türkiye is not simply a loan agreement between a bank and an airline.
A major transaction may require the integration of:
Aircraft Mortgage + Turkish Aircraft Registry + Cape Town International Interest + Engine Security + Insurance Assignment + IDERA + Corporate Security
into a single coordinated financing structure.
Turkish Civil Aviation Law permits aircraft mortgages to secure existing, future and conditional obligations, with contractual mortgages established through the formal agreement and registry mechanism prescribed by law.
Türkiye’s participation in the Cape Town Convention and Aircraft Protocol adds an international layer to cross-border aircraft and engine financing. The regime has applied to Türkiye since 1 December 2011, while Türkiye has also adopted the 60-day Alternative A framework and declared Article XIII on IDERA applicable.
The critical question in a multimillion-dollar aircraft financing is therefore not merely:
“Which bank will provide the loan?”
The real legal questions are:
Who owns the aircraft and engines? Which security interests will be registered, and where? Who receives insurance proceeds? What happens upon insolvency? Which competing rights may rank ahead of the lender? And, above all, how quickly can the creditor recover, de-register, export and remarket the aircraft following default?
Those questions form the core of modern aircraft finance law.
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