The Covid pandemic placed immense strain on lessors and airlines alike. The recent case in the High Court of Peregrine Aviation Bravo v Laudamotion  EWHC 48 (Comm) sheds some light on the impact the pandemic had on relationships between lessors and airlines, especially amidst the dystopian atmosphere of the early lockdowns, and highlights important issues to take into consideration when looking to terminate the leasing of (or the commitment to lease) an aircraft.
By way of brief overview:
- The claimant lessor, acting through various entities (including Peregrine Aviation Bravo) (hereinafter, the “Lessor”), had several existing leases with Laudamotion, a subsidiary of Ryanair (and hereinafter, the “Airline”), under which the aircraft had been delivered (the “Delivered Leases”), and had entered into four new leases for mid-life aircraft scheduled for delivery during Q2 2020 (the “New Leases”).
- Whilst the Delivered Leases were guaranteed by Ryanair, only one of the four New Leases was guaranteed by Ryanair (with the apparent intention that the other three New Leases would be guaranteed closer to delivery).
- As a consequence of the Covid pandemic which had spread widely across Europe by March 2020, there were extensive discussions and communications between the Lessor and the Airline in March and April 2020 concerning the status of the aircraft already operational under the Delivered Leases and the aircraft scheduled to be delivered under the New Leases.
- The Airline sent at times bold communications, two of which were later cited as grounds for an event of default. The first, sent on 18 March 2020, stated amongst things that delivery under the New Leases would be unilaterally deferred until at least the end of June 2020. The second, sent on 20 April 2020, indicated that it would apply a unilateral rent reduction to the Delivered Leases and that it could not accept delivery of the aircraft under the New Leases. It is important to note that the Airline did continue to pay rent (when due) in full under the Delivered Leases.
- The Lessor eventually decided to force delivery of the first aircraft, MSN 3361, as a “shot across the bow”, tendering it for delivery on 7 May 2020 having only given notice (in a best-case scenario) on 1 May 2020.
- The Airline claimed that, amongst other things, the aircraft was not in the requisite delivery condition and that inadequate notice had been provided. The Lessor terminated the first New Lease and the remaining three New Leases on 15 May 2020.
- The Lessor subsequently re-leased the aircraft to SmartLynx, an ACMI operator, on a power-by-the-hour arrangement.
Disputes arose between the parties which fell to be resolved in the High Court of England and Wales. Henshaw J, the case judge, found against the Lessor, deciding that the Airline did not wrongfully fail to take delivery as alleged by the Lessor and that no events of default had occurred. Ancillary claims against the guarantor also failed as a consequence.
Events of Default
The Lessor claimed before the court that three events of default had arisen in respect of the New Leases only:
- An event of default under all four New Leases insofar as the Airline had threatened to suspend some of its debts or other payment obligations (the “Suspension of Payments EoD”).
- An event of default under the MSN 3361 Lease insofar as the Airline had failed to take delivery of that aircraft within 5 Business Days (the “Delivery Failure EoD”).
- As a consequence of the Delivery Failure EoD, a corresponding cross-default under the remaining three New Leases.
Did an event of default occur under the Suspension of Payments EoD?
The Suspension of Payments EoD would have been a primary event of default under all four New Leases without having to rely upon a claim for cross-default. The court came to the conclusion that, on its construction, the Suspension of Payments EoD was intended to cover:
- a clear and unequivocal suspension of payments or threat to suspend payments which relates to the Airline’s debts in general (or at least a category of them), indicative of financial difficulties carrying a risk of insolvency or other curtailment of creditors’ rights,
- existing (and not contingent) debts which are not disputed in good faith and
- circumstances where the suspension or threat is still continuing at the time of termination.
On the basis of that construction, the correspondence between the Airline and the Lessor – specific as they were to the leases between them – did not trigger an event of default under the Suspension of Payments EoD.
First, the correspondence had been, whilst at times bold, not unequivocal; where the Airline’s language had at times indicated that they would make unilateral reductions, they also expressed a wish to “work [together] to agree this reduced rental”. Secondly, there were no debts to suspend in respect of the New Leases as the obligations to pay rent thereunder were contingent future obligations. Thirdly, the correspondence had not been in reference to the Airline’s lessors or other creditors generally; it concerned only the aircraft leased (or to be leased) to the Airline. Fourthly, the court found that the Lessor had also affirmed the leases insofar as they did not purport to terminate the leases for almost two months and had, at times, indicated a willingness to enter into negotiations concerning a deferral.
Could the Lessor have relied upon the Suspension of Payments EoD if it had not cited it at the time of termination?
Interestingly, the Suspension of Payments EoD had not been referenced in the initial termination notice served on 15 May 2020 and was instead being pleaded later. Henshaw J affirmed that parties are entitled to rely upon events of default which were not relied on at the time of termination, although came to the conclusion (on the construction of the lease) that such reliance should be defensive only (i.e. to allow a defence against any counter-claim for wrongful termination) rather than operate as a means to claim damages.
The construction of the relevant lease provision was critical in this instance as this considered a codified regime for damages as opposed to common law damages for repudiatory breach. The relevant clause stated as follows (including our emphasis):
“If an Event of Default occurs, in addition to all other remedies available under applicable Law, [Lessor] . . . has the right to recover from [Lessee], and [Lessee] will indemnify [Lessor] . . . on [Lessor’s] first written demand against, any Expenses which [Lessor] . . . may sustain or incur directly as a result . . .”
In this case, any damages claim had to flow “directly as a result” of the event of default. Whilst Henshaw J acknowledged that an event of default can cause recoverable loss without termination, the loss being claimed here (being, amongst other things, accelerated rent) could only have crystallised as a result of the termination of the leasing of the aircraft. On that basis, no damages could be considered to have arisen directly as a result of the alleged Suspension of Payments EoD, unless the leasing itself had been brought to an end by reason of that event of default.
Was the Airline obliged to take delivery?
In determining whether a Delivery Failure EoD had arisen, Henshaw J considered whether MSN 3361 had been validly tendered for delivery. The lease required consultation with the lessee prior to determination of a delivery date and for reasonable notice to be given. In this respect, a scheduled delivery date of 7 May 2020 was set on the basis of notification given (in a best-case scenario) on 1 May 2020.
The court came to the conclusion that insufficient notice had been provided. The contract could only be workable if the lessee was given sufficient time to conduct the necessary checks ahead of delivery as otherwise it would be left in an invidious situation of either (i) accepting an aircraft without proper checks or (ii) refusing to accept it with the result that the lease is terminated when the Airline would have otherwise accepted delivery.
Notwithstanding the fact that the aircraft had been invalidly tendered for delivery, Henshaw J considered whether it had met the requisite delivery condition in which it needed to be for the Airline to accept delivery. In that respect, there were certain key documents which had not been provided (including, amongst other things, the export certificate of airworthiness) and thus were entitled to claim that there were “Material Deviations” which would have otherwise needed to have been rectified ahead of delivery.
What is an airworthy aircraft?
Interestingly, as part of their defence, the Airline had raised an argument that – as the aircraft was being prepared for storage by the Lessor in anticipation that the Airline would not take delivery – the aircraft was not in an airworthy condition.
The test for airworthiness had previously been considered, by way of analogy with shipping cases, as to whether a prudent operator, had he known of a defect of an aircraft, would have required that a defect be made good before permitting the aircraft to fly. If so, the aircraft would not be considered airworthy.
Henshaw J rejected such a test on the basis that, in the context of stringent aviation regulations, such a question cannot be considered without regard to regulatory requirements. In his view, and whilst an obiter statement, a more appropriate test for airworthiness should be whether the aircraft and its records have been maintained in accordance with applicable regulatory requirements and that no maintenance or repair required pursuant to those regulations remained outstanding.
Whilst Henshaw J found against the claimants, he did go on to consider what amounts would have been recoverable against the Airline had the leases been validly terminated, a valuable insight into how a lease termination claim might be considered before the English courts.
The court’s consideration of what amounts might have been payable goes on for a number of pages, and considers particular esoteric points, but there are certain interesting points which can be discerned from the court’s analysis.
First, the court affirmed the duty of mitigation. Any damages claim needs to discount amounts received in mitigation (in this case, rent received under the replacement lease(s) with SmartLynx post-termination) against amounts that would have been receivable under the leases had they been performed. In recognition of the time value of money, i.e. a dollar today is worth more than a dollar tomorrow, any such claim is expressed to be discounted for its present value. In this case, the court would have honoured the contractually agreed discount rate (being 3.25% at the point of termination) for the terminated leases. In addition, in order to deduct amounts received in mitigation, the court determined what discount rate should apply to amounts received under the SmartLynx lease in order to compare like-for-like. Henshaw J took the view that an appropriate rate in those circumstances would be the contractual discount rate increased by the percentage difference between lease income streams from the Airline (a BB+ entity) and SmartLynx (a B+ entity).
Secondly, the lease included a two way “upsy downsy” adjustment whereby the Lessor would be obliged to pay the Airline if the aircraft was returned in a better condition at redelivery (and vice versa if returned in a worse condition). It was expected that – on the basis of the expected utilisation of the aircraft – a payment from the Lessor would have been likely (which would have reduced the Lessor’s damages claim). However, the lease contained the contractual right to swap out an engine in favour of another (which, had it been exercised, would have reduced or obviated the “upsy downsy” adjustment payment). As such right was clear and precise, the court assessed that it would have been exercised by the Lessor and thus any adjustment payment should be attributed a nil value.
Thirdly, the lease included a cost sharing regime for airworthiness directives above a certain threshold (which, if invoked, would have again reduced the Lessor’s damages claim). However, it was assessed that, on the basis of prior history, the prospect of any airworthiness directive costs exceeding the agreed threshold were minimal and therefore no amount could be discounted thereunder.
Any decision to terminate the leasing of an aircraft will invariably need to take into account the specific fact pattern at the time. However, to the extent that any practical takeaways can be taken from this case, we would note as follows:
- It is not uncommon for reasonable notice to be given of a delivery date, especially for mid-life aircraft coming off-lease from another operator. Reasonableness will always be a matter for debate in the circumstances, but it is clear that giving regular updates on the status of the aircraft and providing as much notice as possible will be key to ward off any counter-claim for failure to properly tender owing to unreasonable notice being given by the lessor.
- If a decision to terminate is taken, it is worth considering broadly any and all events of default that it might be possible to rely upon at the time of termination. Whilst it is a matter of construction of the lease, the court’s judgment suggests that failure to cite a specific event of default (which is subsequently relied upon) could mean that the particular event of default might only be employed defensively and that damages may not flow from it.
- As a corollary to the above, when drafting new leases some consideration should be given to phraseology used in the losses/damages clause. The lease in Peregrine stated that the damages needed to flow “directly as a result” of an event of default (and so accordingly the court determined in this case that the damages could not arise as a result of an event of default unless the leasing was brought to an end by reason of that event of default). Lessors may wish to be clearer that, upon termination for breach, a claim for accelerated rent and other damages applies irrespective of whether an event of default is cited or within contemplation at that time.
- Only the first lease had been guaranteed with the remaining three leases to be guaranteed at a later point (presumably as a delivery condition precedent). Whilst the claim would have failed in any event, the Lessor had to claim in a rather tenuous manner that losses incurred under the three other leases were caught by the (guaranteed) first lease. As a practical matter, it is always worth entering into a guarantee at the time a lease is signed, not at delivery, given that claims can arise in respect of pre-delivery disputes.