Aviation Finance

Typically, aviation finance transactions may be governed by:

• the laws of England; or
• the laws of a US state – most commonly, New York.

The creation of a security interest and execution, filing and performance requirements are subject to Turkish law. Decree 32 on the Protection of the Value of Turkish Currency sets forth the regulatory and restrictive principles regarding the determination of the value of Turkish currency against foreign currencies (ie, all payments must be made through local banks). Also, while mortgages and pledges must comply with Turkish laws, in case of the sale of an aircraft in Türkiye, Turkish law will have mandatory application. A choice of foreign law as the governing law will be upheld as valid, provided that:

• the dispute is a commercial matter;
• the dispute does not fall within the exclusive jurisdiction of the Turkish courts under applicable Turkish law; and
• the dispute is not mandatorily subject to the jurisdiction of the Turkish courts under the applicable Turkish laws.

In all such cases, the Turkish court must determine that the provisions of the chosen foreign law do not contradict:

• Turkish public policy; and/or
• the mandatory provisions of Turkish law.

Debt in the form of loans or bonds and equity in the form of pure equity or capital shares are frequently used. The sale and leaseback structure is one of the most common methods of financing in the market.

Since equity need not be repaid but comes at the cost of ownership, a leaseback arrangement is preferred where an airline needs to use the cash invested in a particular aircraft for other investments, while still requiring the asset for operational purposes.

Financial structuring and strategy are key tools of private investors. Therefore, other than setting maximum leverage or requiring that competition among lenders is maintained to foster better financing conditions (where appropriate), the government should not impose restrictions on:

• the ways in which private investors may raise finance (eg, by requiring the use of local banks); or
• the instruments or structures to be negotiated.

Commercial banks and investment banks are the most common debt providers. Multinational development banks, export credit agencies and national development banks are also potential sources of financing.

If an aircraft is registered in the Turkish Aircraft Register, maintained by the Civil Aviation Authority, this serves as prima facie evidence of ownership. Any transfer of title must be reflected in the Aircraft Register. A duly executed bill of sale and its delivery will be regarded by the Turkish courts as evidence of the parties’ intention to transfer title to the aircraft.

Depending on the statutory procedural requirements, which may vary depending on the nature of the aircraft lease, the following must be submitted to the Civil Aviation Authority:

• a duly executed transfer agreement, together with its Turkish translation;
• corporate authorities of the parties; and
• approvals from primary filing authorities, to the extent applicable.

The transfer of title of a leased aircraft is possible:

• only by way of sale; and
• only if such transfer is permitted under the initial lease agreement.

This transfer requires the execution of a lease transfer and assumption agreement reflecting the change in parties.

Minor statutory registration fees apply, pursuant to the Flight Standards Tariff of the Civil Aviation Authority, which is subject to annual updates.

An aircraft may be detained by a Turkish court:

• upon the application of third parties seeking an attachment order based on alleged private law claims; or
• by tax departments for unpaid tax obligations.

For instance, airport authorities may seek an attachment order or assert a possessory lien and a right of retention for unpaid airport charges. Under the Customs Law, any vehicle used in smuggling activities in violation of customs regulations may be confiscated.

In Türkiye, aircraft registration falls under the responsibility of the Ministry of Transport and Infrastructure, whose activities include, among other things:

• the certification and regulation of:
• • aircraft;
  • air crews; and
  • airports; and
• the control of air traffic.

These activities are carried out through the Civil Aviation Authority. The Civil Aviation Authority must also maintain the Aircraft Register.

The records are accessible, provided that the applicant demonstrates a legitimate interest.

According to the Civil Aviation Law 2920, which came into effect on 19 October 1983, the Aircraft Register includes the following information:

• the name and address of the aircraft’s manufacturer;
• the date of manufacture and serial number of the aircraft;
• the type, model and make of the aircraft;
• if the owner is an individual, their name;
• if the owner is a company:
• • the company name;
  • the register of commerce in which it is registered; and
  • its registration number;
• if the owner is a commercial partnership:
• • the partnership type;
  • its commercial name;
  • the register of commerce in which it is registered; and
  • its registration number;
• if the owner is another kind of legal entity, its name and legal residence;
• the manner in which the owner acquired title to the aircraft (eg, via a sale agreement or forced sale); and
• the call sign of the aircraft.

The requirements for aircraft registration are set forth in the Civil Aviation Law. Article 3 defines an ‘aircraft’ as any type of vehicle deriving lift and operating in the air.

The Civil Aviation Law provides that acquisition of ownership, a mortgage or any other real right over an aircraft by a person acting in good faith based on the information recorded in the Aircraft Register will be upheld as valid. This also applies to any legal steps taken:

• in reliance on the rights of the recorded owner; or
• where the owner enters into agreements to dispose of such rights.

Since a power of attorney may be revoked by the grantor under Turkish law, it may not serve as reliable protection on its own.

The Ministry of Transport and Infrastructure will automatically deregister an aircraft if:

• the prerequisites for the aircraft to qualify as a Turkish civil aircraft cease to exist or the aircraft is transferred to a person that does not meet such prerequisites;
• the aircraft:
• • is registered in a foreign register; or
  • despite being registered in the Turkish Aircraft Register, has not been deregistered from the foreign register; or
• the permitted period for registration has expired.

The Civil Aviation Law also provides that if the aircraft is declared a total or constructive loss, its owner may apply for deregistration.

Mortgages and other rights over aircraft are registered in the Aircraft Register. No separate mortgage register is maintained. The Civil Aviation Law requires that the mortgage agreement be:

• in written form; and
• executed before a notary public.

The following particulars are recorded in the Aircraft Register:

• the mortgagee’s name and address;
• the principal of the debt and the interest rate; and
• if the debt is not conclusively fixed, the highest sum (including interest) secured by the mortgage.

Special provisions apply where the mortgage secures the issuance of nominal or bearer bonds.

Preliminary consent must be obtained from the Ministry of Treasury and Finance for the registration of a foreign currency mortgage in Türkiye.

If the debt is repaid, the mortgagee waives its rights or the mortgagee and owner become the same entity, the mortgage becomes ineffective and will be deregistered accordingly.

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An operating lease may be entered into for a period of no less than six months. On the other hand, cross-border aircraft leases to be entered into for the operation of aircraft in Türkiye may also be structured as cross-border financial leases.

In particular, under the Financial Leasing, Factoring, Financing and Savings Finance Companies Law 6361, cross-border lease transactions based on financial lease agreements which are for a term of a minimum two years, in relation to aircraft (as well as their engines, parts and accessories) or airlines active in the carriage of passengers and cargo by companies, corporations and financial leasing companies authorised to lease such items according to the regulations of their home jurisdiction will be considered to comprise a financial lease. The Financial Leasing Law requires:

• a minimum lease term of two years; and
• a mandatory cure period of 30 days (which extends to 60 days if the lease includes a purchase option).

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In accordance with Article 26 of the Financial Leasing Law:

• the title to an aircraft that is subject to a financial lease remains the with lessor during the lease term; and
• the lessee cannot transfer its possession to third parties.

The lessor may sell the aircraft if such a title transfer is agreed upon by the parties in a lease, without creating a new agreement.

According to Article 23 of the Financial Leasing Law, the lessor and the owner must be the same entity if the parties have chosen to benefit from the Financial Leasing Law. Furthermore, the lessee must have possession of the aircraft, including airframe and engines, during the term of the financial lease.

According to the Civil Aviation Law, an aircraft can only be registered in the Aircraft Register for the term of a lease, upon the expiry of which the aircraft is to be deregistered. In case of an event of default, the lessor is expected to comply with the mandatory cure period before terminating the lease agreement. If termination is contested by the lessee in bad faith, the Civil Aviation Authority will expect evidence of such termination from either:

• the relevant filing authority; or
• a Turkish court.

Repossession and deregistration of the aircraft will not occur unless a final and enforceable court order in this regard is obtained.

Upon lease termination, the lessor is entitled to repossess the aircraft and export it from Türkiye by completing the required procedures with the Civil Aviation Authority and through Customs, by settling the necessary charges.

Neither the filing authority where the lease is registered, if applicable, nor the Civil Aviation Authority will confirm whether an aircraft has been redelivered with all conditions met. Therefore, in order to determine whether an aircraft is ready to be deregistered, the Civil Aviation Authority will seek a letter of confirmation from the relevant filing authority or from the competent court that:

• the lease has been terminated; and
• the aircraft can be deregistered.

The Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Cape Town Convention on International Interests in Mobile Equipment on Matters specific to Aircraft Equipment are in force in Türkiye, which provides a stable legal framework. Therefore, the prevailing laws should apply unless, in the worst-case scenario, consequences arise that create a temporary change in the laws in force.

Turkish law distinguishes between liens on movable and immovable property. Liens on movable property, save for the exceptions provided by law, can be established only by retaining possession of the movable property pending discharge of the outstanding obligation incurred in respect of services rendered to the movable property. Liens on immovable property, on the other hand, can be established only by way of:

• a mortgage;
• a mortgage with certificate; or
• a certificate of annuity charge.

It is customary, as also provided in the Civil Aviation Law, for any charge or encumbrance such as a lien or mortgage on the aircraft to be established by registration in the Aircraft Register.

To perfect a security interest in an aircraft, it must be registered in the Aircraft Register. Once registered, security interests in aircraft will be subject to the provisions applicable to immovable property.

There is no provision under Turkish law for the registration or recordation of a mortgage against movable property, such as an aircraft engine or an aircraft part.

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To enforce a lien under Turkish law, the lienholder must:

• start enforcement proceedings in accordance with the Enforcement and Bankruptcy Code 2004; and
• issue a writ before the bailiff.

The bailiff then:

• informs any parties to which a lien has been granted subsequently of the existence of the writ; and
• sends a payment order to the debtor and the third-party owner of the movable property to pay the debt, stating that unless they lodge an opposition to the above payment order or pay the debt, the movable property will be sold.

If an opposition is lodged against the payment order, the creditor may either:

• apply to a specialised bailiff court for the examination of the opposition; or
• lodge a claim before the court requesting cancellation of the opposition by proving the merits of the claim.

Once the claim has been determined by the appropriate court, the bailiff, upon application by the creditor, will commence the forced sale proceedings.

In the case of an aircraft leased under a financial lease, subject to the Financial Leasing Law, third-party creditors are not allowed to exercise a lien on the aircraft, as the aircraft remains the property of the lessor. However, the creditor or lessee may try to prove an equity interest in the leased asset before a court.

For a foreign court judgement to be enforced by the Turkish courts, the requirements of Articles 50 to 59 of the Law on International Private Law and Procedure 5718 must be satisfied.

Under the Law on International Private Law and Procedure, a foreign court judgment cannot be directly enforced in Türkiye and an application should be made to a Turkish court, which will enforce a foreign judgment only if:

• there is a treaty of reciprocity or, in the absence of such treaty, effective reciprocity for the enforcement of judgments between the two countries;
• the foreign judgment is a final judgment and all possibilities of appeal have been exhausted;
• the judgment is not given on a subject which is among the exclusive jurisdiction of the Turkish courts;
• the judgment is not clearly against Turkish public policy; and
• the party against which enforcement is sought does not raise an objection in the Turkish court, to the effect that:
• • such person was not duly summoned to or represented at the foreign court; or
  • the judgment was rendered in such person’s absence in violation of the laws of the foreign country and the Turkish court considers such objection as justified.

Taxes, social security premiums and wages and other statutory liens take priority over any mortgages and other rights in rem. For liens, the general rule is that priority depends on the date of establishment. Possessor’s liens based on the Civil Code take priority over previously established rights in rem, provided that the lienholder acts in good faith. If the Cape Town Agreements apply, the priority rules that are set out in Article 29 of the convention will apply, to the extent that the Cape Town Agreements are enforced.

Pursuant to Law 6192/2011, and a decision of the Cabinet of Ministers issued on 24 May 2011, in accordance with Article 3 of Law 244/ 1963, Türkiye has duly ratified the Cape Town Agreements. According to UNIDROIT’s official website, Türkiye deposited the instrument of ratification on 23 August 2011 and, in accordance with Article XXVIII of the p1rotocol, the Cape Town Agreements came into full force and effect on 1 December 2011. There is little jurisprudence and a lack of definitive administrative guidance that would indicate and create precedent on how the Cape Town Agreements will be implemented, interpreted, applied or enforced in Türkiye by the courts and bailiff offices.

Under Turkish law, the transfer of title by way of delivery of a bill of sale will be recognised as evidence of valid agreement among the parties to transfer the title. Nevertheless, the transfer of title will not be considered to have been legally concluded until it is registered in the relevant aircraft registry, where it will constitute public notice to bona fide third parties. On the other hand, title to equipment which is not subject to registration (eg, an engine) may be evidenced by way of possession. Until the contrary is proven, the possessor of such will be considered as the owner.

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The manufacturer/seller is typically bound by industry-standard representations and warranties.

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The seller must agree that it:

• is the sole and absolute legal and beneficial owner of the aircraft; and
• upon delivery, will transfer the aircraft to the buyer with full title guarantee.

The possible mortgage, charge, pledge, lien or other encumbrance created by seller, as well as damage history and payment terms, will be handled commercially and the buyer will be obliged to settle the agreed commercial requirements.

Unless the parties benefit from government incentives or exemptions, agreements which are signed in Türkiye are subject to stamp duty imposed on the highest aggregate amount specified in the agreement, at the rate of 0.948% of such amount. For agreements that are signed outside of Türkiye, such stamp duty will become payable if and when the document is presented to any authority in Türkiye.

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The Civil Aviation Authority oversees liability insurance requirements for aircraft.

Except for certain third-party liabilities that must be purchased locally, there is no requirement under Turkish law for a leased aircraft to be fully insured in Türkiye by Turkish insurance companies.

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The global aviation market is expected to see continued growth in the years ahead, driven by rising passenger traffic, both domestically and internationally. Türkiye is rapidly advancing in aviation and is investing in major projects to fuel further growth. Strategically located at a global crossroads, Türkiye is well positioned to continue its expansion in the coming years.

The aircraft financing landscape in Türkiye is evolving accordingly, with traditional methods such as operating leases and secured lending remaining dominant, alongside a growing interest in Islamic finance and export credit financing. Key trends include:

• a shift towards sustainable aircraft financing; and
• the increasing role of lessors.

There is growing interest in digitalisation and green financing mechanisms.

The keys to the smooth conclusion of an aircraft financing transaction include:

• early coordination between the parties;
• clear documentation;
• timely action on the notarisation and apostille of foreign documents such as powers of attorney; and
• proactive regulatory planning. are key to a smooth closing.