Global air freight's future

Avoiding unnecessary disruption

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Under a dry aircraft lease (namely a long-term lease where the aircraft is handed over to the lessee, without crew, for its own purpose), the lessee undertakes all risks and responsibilities in relation to operation and maintenance of the aircraft, while the lessor’s obligations are limited to warranting the lessee’s quiet enjoyment. Such leases typically contain “hell or high water” rent payment clauses, effectively meaning the lessee must pay rent on an unconditional basis.

Three recent High Court cases have tested the robustness of these clauses, with the lessees arguing that the COVID-19 pandemic, the arrest of an aircraft by national authorities, or the grounding of the Boeing MAX-8s frustrated the leases, bringing their rent payment obligations to an end.

To establish frustration, a party must demonstrate that, without default, its obligations are incapable of being performed, since performance of the contract has been rendered radically different from the initial obligations undertaken (The Sea Angel [2007] 2 Lloyd's Rep 517). Clearly, the doctrine of frustration would not apply where the issue causing performance to be radically different was captured by, say, a force majeure clause. The cases serve to illustrate that hell-or-high water clauses continue to be seemingly enforceable, with the court concluding in each case that frustration was not available and that the lessee remained responsible for payment of the rent.

A summary of each case is below.

Salam Air v. Latam Airlines

In this case, the lessee (Salam Air, an Oman-based company) failed to meet its rent obligations under three aircraft leases with Latam Airlines in light of the COVID-19 pandemic and the Omani authorities’ decision to prohibit all air passenger flights to and from Oman in March 2020.

The lessor sought to call upon standby letters of credit (an alternative to the deposit of three months’ rent). The lessee sought an injunction preventing the lessor from doing so, arguing the decision of the Omani authorities frustrated the purpose of the aircraft leases, namely, to allow the lessee to operate short-haul flights from Muscat.

In refusing to grant the injunction, the judge reasoned:

1. A six-year dry aircraft lease is a challenging environment in which to establish frustration as from the lessor's perspective, it does not matter how frequently the lessee uses the aircraft, if at all, or with what level of occupancy. The lessor was still able to perform its obligation to provide the lessee with quiet possession of the aircraft, and the lessee to perform its obligation to pay the rent.

2. Under the doctrine of “frustration of purpose,” it must be demonstrated that both parties had a common purpose at the foundation of the contract which is now impossible to perform. There was nothing in the lease to suggest that the lessee’s use of the aircraft for short-haul flights from Muscat was a shared purpose of both parties, as opposed to a matter with which the lessee alone was concerned. The corollary of this was that the obligation to pay rent in almost any conceivable circumstance lent support to the proposition that the lessee would not be free of its obligation to pay rent merely in light of aircraft restrictions in Oman and the COVID-19 pandemic ([2020] EWHC 2414 (Comm)).

Key takeaways
  • Recent case law upholds unconditional rent payment clauses in dry aircraft leases
  • Courts have confirmed that a lease will not be frustrated as a result of the COVID-19 pandemic, an aircraft arrest, or the Boeing MAX-8 grounding
  • However, judges may be willing to grant a stay of execution on a summary judgment against a lessee if there are exceptional circumstances
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