Nigeria: Aviation Finance Comparative Guide

1 Legal framework

1.1 Which laws typically govern aviation finance transactions in your jurisdiction?

In Nigeria, there are no specific laws that govern aviation finance transactions. However, the general aviation laws, regulations and ratified treaties – such as the Civil Aviation Act 2006, the Nigeria Civil Aviation Regulations 2015 and the Cape Town Convention 2011, to which Nigeria is a party – are all applicable in this regard.

Other laws that govern general financial transactions – such as the Central Bank of Nigeria Act 2007 and the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 1995 –may also apply to certain aspects of aviation finance transactions, such as rental payments, which may be made in currencies other than the Nigerian naira.

1.2 If aviation finance documents are governed by laws other than your local law, what local law requirements (documentary and procedural) are required to ensure that foreign law documents are recognised and enforceable locally?

Aviation finance documents governed by foreign laws are recognised by the Nigerian courts. The following Latin maxims are upheld by the Nigerian courts:

• Pacta sunt servanda – that is, "contracts must be kept"; and
• Pacta convent quae neque contro leges neque dolo malo inita sunt omni modo observando sunt– that is, "agreements which are neither contrary to the law nor fraudulently entered into, should be adhered to in every manner and in every detail".

Documents issued in a foreign language other than English must be translated into English and submitted to the Nigerian embassy for legalisation and authentication.

2 Finance structures

2.1 What aviation finance structures are most commonly used in your jurisdiction?

In Nigeria, as in other common law jurisdictions, the choice of aviation finance structures will depend on factors such as:

• the type of aircraft;
• the intended use;
• the owner/operator;
• the financier or lessor; and
• the tax benefits that may be derived from the chosen structure.

The most common structures are secured direct lending, operating leases and finance leases. For larger orders of commercial aircraft, export credit agencies are often used to guarantee loans.

2.2 What are the advantages and disadvantages of these different types of structures?

Secured lending: This is most commonly used for the purchase of business jets and smaller numbers of large commercial aircraft by operators or owners. It may be obtained through local banks, which may lend through a syndicate of banks for larger transactions. The financier may specify the equity required from the borrower/lessee/operator and fund the remaining amount for a secured interest in the aircraft. The benefit for the lender is that in the event of non-payment, the financier may repossess the aircraft.

One benefit of this structure for owners is that they may deduct depreciation costs on their financial accounts yearly. However, other structures may afford better interest rates and greater flexibility.

Operating leases: These provide more flexible financing structures for owners/operators. One example is the inclusion of Nigeria as a voluntary participant in the pilot phase of the International Civil Aviation Organization Carbon Offsetting and Reduction Scheme for International Aviation, which will commence in 2021. Operators under operating leases may have the flexibility to change their fleet to introduce aircraft that comply with the new environmental requirements. Therefore, operating leases – structured as either dry leases or wet leases – are very common in Nigeria.

Dry leases are longer-term structures of three years or more. The advantage for the lessee is the flexibility to test out the aircraft for the specified period without committing to purchase it. However, the advantages and disadvantages will depend on the classification and recognition of the lease from a legal and tax point of view. With the introduction of International Financial Reporting Standard (IFRS) 16 on leases, which took effect on 1 January 2019, the global requirements on the reporting of leases for tax purposes have changed for most airlines/owners/operators. In Nigeria, Federal Inland Revenue Service (FIRS) Information Circular 2010/01, which served as a guideline on the tax implications of leases, classified leases as either operating leases or finance leases. Under an operating lease, the lessee cannot recognise the aircraft as its own asset. No new laws or circulars have been issued by the federal government or the FIRS with regard to the implementation of IFRS 16, which has changed this position for lessees. Lease rentals may still be recognised as expenses for lessees until guidelines are issued on the reporting of the ‘right of use', rather than expenses.

The advantage for the lessor is that the lessor retains ownership of the aircraft and receives rental income from the lessee over the contract period. The disadvantages for lessors depend largely on:

• the type of aircraft;
• the age of the aircraft;
• the aircraft's residual value; and
• the condition of the aircraft on redelivery.

These factors will largely depend on the lessee selected by the lessor after conducting due diligence. They will affect the redelivery condition of the aircraft and/or repossession in the event of default.

Wet leases, on the other hand, are for shorter periods that may be as brief as three months. This structure is common where the lessee does not possess an air operating certificate (AOC) or requires the aircraft only for a short period, and in some cases for contract operations such as Hajj. A wet lease offers the lessee the benefits of the aircraft, crew, maintenance and insurance. While this gives the lessor peace of mind that the aircraft will remains under the control of its crew, the costs of operating within the region might be more expensive for the lessee.

Finance lease: Finance leases in Nigeria are similar to those in other common law jurisdictions. They are longer-term structures whereby the lessee bears the obligations of ownership of the aircraft. They may be executed through a combination of operating leases with an option of purchase at the end of the period; or through a hire purchase, whereby the buyer pays some equity and the seller amortises the rest of the payments and interest over a period of time. Either way, the structure is geared towards the transfer of ownership of the aircraft from the financier/lessor to the borrower/lessee upon completion of the loan amount. In some finance lease structures, a special purpose vehicle may be used in a tax-beneficial jurisdiction with which Nigeria has entered into a double tax treaty, to benefit both the lessor and the lessee. Finance leases have not been affected by IFRS 16. Finance leases are also highly advantageous to the lessee, because it is allowed by law to claim capital allowances on the leased aircraft, while at the same time deducting interest payments as expenses.

2.3 What other factors should operators bear in mind when deciding on a financing structure?

Operators should consider both their financial capabilities and the political, economic, social, technological, environmental and legal factors that may affect operations in the region in the coming years. These include, most importantly, potential regulatory changes in the aviation sector, as well as economic and monetary policies. These considerations should inform the choice of financial structure, which should be tailored to:

• the aircraft type;
• the age of the aircraft;
• the chosen tax structure; and
• the operator's capacity to keep up with contractual and financial obligations.

2.4 Who are the most common providers of aircraft finance in your jurisdiction? Do any restrictions apply in this regard?

The most common providers are commercial banks and leasing companies. Although no direct restrictions are applicable, exchange controls – regulated by the Central Bank of Nigeria – apply with regard to the repatriation of payments made in currencies other than Nigerian naira.

3 Title transfer

3.1 How is title to an aircraft legally transferred in your jurisdiction?

The title to an aircraft may be transferred by any written agreement or contract between the parties. The Nigerian Civil Aviation Authority (NCAA) also recognises a bill of sale as a legal method for transferring title.

3.2 What are the formal and documentary requirements for transferring title?

Transfer of title should be effected through a written document. Where title is transferred, the document transferring title may then be filed with the NCAA. If the transfer is to an individual or company that resides outside Nigeria and the aircraft is to be exported, a deregistration request may also be filed with the document effecting the transfer of title.

Where the transfer is made to an individual or company that resides in Nigeria, the NCAA will issue a new certificate of registration to the new owner. In order for the transfer document to be accepted by the NCAA, it must be duly stamped, with payment of stamp duty. The transfer document need not be notarised; however, if the transfer document is in a foreign language other than English, it must be professionally translated into English and submitted to the Nigerian embassy for legalisation and authentication.

3.3 What is the process for transferring title?

Where title is transferred to a lessee in Nigeria, the aircraft may be registered by a lessee that meets the requirements under Part 4.2.1.2 of the Nigeria Civil Aviation Regulations and a certificate of registration shall be issued by the NCAA.

Where title to an aircraft registered in Nigeria is transferred by any written document, bill of sale or contract, the certificate of registration of the aircraft becomes void and the appropriate section of the certificate of registration must be endorsed and returned to the NCAA together with all transfer documents. The process of transferring title in an aircraft depends on whether the transferee intends to keep the aircraft registered in Nigeria or wishes to export it to a different country. If the transfer of title is made to a citizen of Nigeria or a company registered in Nigeria with the intention of keeping the aircraft registered in Nigeria, the holder of the certificate of registration must endorse the relevant sections on the reverse side of the certificate of registration, notifying the NCAA that there has been a change in ownership or operator. A new certificate of registration will be issued upon completion of the registration process by the new owner.

Where title is transferred to a foreign individual or company that chooses to keep the aircraft registered in Nigeria, the transferee must comply with Part 4.2.1.2 of the Nigeria Civil Aviation Regulations. This provides that where the foreign person or entity has leased the aircraft to a Nigerian citizen:

• the aircraft may remain on the Nigerian registry only for as long as the lease remains in effect; and
• the certificate of registration must include:
• • the names and addresses of the lessee and, if different, the operator of the aircraft;
  • confirmation that the aircraft is not registered under the laws of any other state; and
  • confirmation that the aircraft is not more than 22 years old, unless the aircraft is used exclusively for general aviation purposes.

Where the transferor chooses to export the aircraft to another country, the holder of a certificate of registration or owner or lessor, or its duly authorised attorney, may apply in writing for deregistration of the aircraft from the Nigerian register for export to the state of registration.

3.4 Are any charges, fees or taxes levied on the transfer of title?

Where there is a transfer of title to an aircraft which is registered in Nigeria, fees are payable to the NCAA for registration of the aircraft with the NCAA, upon submission of the application for registration. Registration includes registration of ownership.

Under the NCAA fee schedule, the prescribed fee for the issuance of a certificate of registration is based on the maximum certified take-off mass of the aircraft to be registered. The charges are as follows:

• Under 3,000 kilograms (kg): NGN 10,000.
• Between 3,000kg and 6,000kg: NGN 20,000.
• Between 6,000kg and 15,000kg: NGN 30,000.
• Between 15,000kg and 50,000kg: NGN 50,000.
• 50,000kg and above: NGN 100,000.

An additional charge of NGN 500,000 is payable on request for a special registration mark which is out of sequence.

With regard to taxes levied on the transfer of title, this depends on whether any of the parties are resident in Nigeria and the structure of the transaction. Where the transferor is a foreign entity, it may be taxed on income which is derived from its Nigerian operation under the Companies Income Tax Act (CITA). Section 13(2) of CITA specifies the circumstances in which income is deemed to have been derived from the Nigerian operation of a non-resident company. These include where:

• the company has a fixed base in Nigeria and derives income through that fixed base;
• the company has a dependable agent in Nigeria;
• the trade or business involves a single contract (turnkey projects); or
• the trade or business is between the foreign company and a related person in Nigeria.

No income taxes may be levied on non-resident companies such as a transferor without a fixed base in Nigeria.

3.5 Other than in case of insolvency, are there any laws under which the registered title holder may be forced to relinquish ownership of the aircraft (eg, expropriation, confiscation)?

Apart from insolvency laws, there are no specific laws under which the registered holder may be forced to relinquish ownership of an aircraft. Section 44 of the Constitution of the Federal Republic of Nigeria 1999 (as amended) provides that:

However, this provision does not affect payments:

• due under any general laws on the imposition or enforcement of taxes, rates and duties;
• relating to leases, tenancies, mortgages, charges, bills of sale or any other rights or obligations arising out of contracts; or
• due under bankruptcy laws.

If the owner of the aircraft is a company that has enjoyed bailouts or funding from the federal government which may have become non-performing loans, the federal government – through the Asset Management Corporation of Nigeria (AMCON), under the AMCON Act – may convert the non-performing loans in the company into shares in the company. If the owner of the company has benefited from government loans or bailouts, the aircraft may be confiscated.

4 Registration

4.1 What body administers the aircraft register in your jurisdiction?

As required under the Civil Aviation Act 2006, the Nigerian Civil Aviation Authority (NCAA) administers and maintains the aircraft register in Nigeria.

4.2 What information is included in the aircraft register? Is this publicly accessible?

Under Part 4.2.1.5(a) of the Nigeria Civil Aviation Regulations, the information contained in the aircraft register on each aircraft registered in Nigeria is recorded on the certificate of registration, together with any other information required by the NCAA. The certificate of registration lists the names and addresses of the registered operator and owner of the aircraft. Under Part 4.2.1.6(a), the NCAA also establishes and maintains in the aircraft register a record of all legal interests, which shows proprietary rights, interests, liens and other dealings for each aircraft registered in Nigeria.

As regards access to the aircraft register, Parts 4.2.1.5(b) and (c) of the Nigeria Civil Aviation Regulations provide that, upon request, the NCAA will provide information to another International Civil Aviation Organization (ICAO) Contracting State or to the ICAO regarding the registration and/or ownership of any particular aircraft registered in Nigeria. Persons seeking to access the register for the purpose of obtaining information must apply in writing to the NCAA and pay the appropriate search fees as prescribed by the NCAA.

4.3 What are the formal and documentary requirements for registration of an aircraft? What is the process for registration? What is the effect of registration? What is the effect of deregistration?

Requirements for registration: In order to be registered, the aircraft must be eligible for registration and meet all technical and legal requirements provided under NCAA Advisory Circular NCAA-AC-AWS001A. Thereafter, a certificate of registration will be issued.

An aircraft is eligible for registration if it meets the eligibility requirements under Part 4.2.1.2 of the Nigeria Civil Aviation Regulations. The aircraft must not be registered under the laws of any other state and must not be more than 22 years old, unless the aircraft is used exclusively for general aviation purposes. Most importantly, the aircraft must be owned by one of the following categories of persons only:

• a citizen of Nigeria;
• an individual citizen of another state who is lawfully admitted for permanent residence in Nigeria;
• a corporation lawfully organised and doing business under the laws of Nigeria, where the aircraft is based and primarily used in Nigeria,
• a government entity of Nigeria or political subdivision thereof; or
• a foreign person that has leased the aircraft to a person described in one of the first to fourth bullets above, provided that:
• • the aircraft remains on the Nigerian register for only as long as the lease remains in effect; and
  • the certificate of registration includes the names and addresses of the lessee and, if different, the operator of the aircraft.

The aircraft must demonstrate compliance with the technical requirements for registration by providing the following documents:

• the aircraft's technical specification;
• a certificate or notice of deregistration from the previous state of registration, or a letter from the state of manufacture if the aircraft is new and has never been registered in another state, confirming non-registration. The deregistration certificate must be received by the NCAA directly from the state of registration and must not be presented by the applicant (ie, it should be state to state);
• a certified copy of a current insurance certificate for the aircraft;
• a copy of the air transport licence, air operating permit, permit for non-commercial flight or permit for aerial aviation services;
• proof of payment of the prescribed fees, as set out in the NCAA Fee Schedule;
• a certified copy of the certificate of incorporation, if the aircraft is owned by a company;
• a copy of a government-issued identity card or passport, or any other identification card approved by the NCAA, if the aircraft is owned by an individual; and
• a copy of the permit to import and operate the aircraft issued by the minister of aviation.

In order to meet the legal requirements, the following documents must also be submitted:

• document(s) to prove the aircraft ownership, as set out in Part 4.2.1.4(a)(2) of the Nigeria Civil Aviation Regulations (eg, the purchase agreement), with stamp duty paid;
• the names of the directors of the company that owns or leases the aircraft and their specimen signatures giving authority to register and/or operate the aircraft in Nigeria, and indicating who among them has the mandate to transact on their behalf on matters relating to the aircraft registration and/or operation (see Nigerian Regulations NCAA-AC-AWS001A July, 2014);
• a certified copy of the lease agreement, if the aircraft is on lease, with stamp duty paid;
• a certified copy of power of attorney from both the owner/lessor and the lessee;
• an indemnity in accordance with Parts 4.2.1.7(a) and (b) of the Nigeria Civil Aviation Regulations; and
• an irrevocable deregistration and export request authorisation (IDERA), where applicable.

Registration process: A person that wishes to register an aircraft in Nigeria must:

• submit a duly completed Form AC-AWS 001A to the NCAA;
• pay the prescribed fees in accordance with the NCAA Fee Schedule; and
• meet the above aircraft eligibility requirements, as well as the technical and legal requirements.

This is in line with Part 4.2.1.4(a) of the Nigeria Civil Aviation Regulations. Each application must:

• comply with Part 4.2.1.2 on the eligibility of aircraft;
• include evidence of ownership; and
• be signed in ink.

If an applicant meets all requirements for registration, a certificate of registration will be issued by the NCAA.

Effect of registration: The effect of registration is that the aircraft may be operated in Nigeria under the laws of Nigeria. Part 4.2.1.1(a) of the Nigeria Civil Aviation Regulations stipulates that no one may operate a civil aircraft that is eligible for registration under the laws of Nigeria unless:

• the aircraft has been registered by its owner or operator under the laws of Nigeria; and
• the NCAA has issued a certificate of registration for that aircraft, which must be carried onboard the aircraft for all operations.

In order to operate the aircraft within Nigeria, a certificate of airworthiness must be issued in line with Part 5 of the Nigeria Civil Aviation Regulations

Effect of deregistration: Where the NCAA deregisters an aircraft, the certificate of registration will be cancelled and the entry in the aircraft register will be deleted. This is stipulated in Part 4.2.1.3(a) of the Nigeria Civil Aviation Regulations, which also provides that the NCAA shall deregister an aircraft in any of the following circumstances:

• The owner of the aircraft does not meet the eligibility standards set out in Part 4.2.1.2 of the Nigeria Civil Aviation Regulations;
• The holder of a valid deregistration power of attorney applies to the NCAA for deregistration;
• The holder of a certificate of registration, the owner or lessor or its duly authorised attorney applies in writing for deregistration of the aircraft from the Nigerian Register;
• The NCAA is satisfied that:
• • the aircraft has been destroyed, lost or stolen and cannot be found;
  • the aircraft has been permanently withdrawn from use;
  • the aircraft is registered in a country other than Nigeria or;
  • the aircraft's certificate of airworthiness has lapsed for five years or more; or
• The lease agreement upon which the aircraft was registered has expired or has been terminated, and a duly executed IDERA has been presented, except where the owner indicates in writing its desire for the aircraft to remain registered in Nigeria.

4.4 If your jurisdiction has ratified the Cape Town Convention, can a local law deregistration power of attorney be acquired by a lessor/financier, and if so, does it provide any additional protection for such parties?

Nigeria has ratified the Cape Town Convention. The NCAA has made it mandatory for an IDERA and a deregistration power of attorney to be filed simultaneously during the registration of the aircraft where the lessor or owner of the aircraft is a foreign entity. This provides the lessor/financier with additional protection, as the NCAA will honour the enforcement of a deregistration power of attorney under Part 4.2.1.2(a) of the Nigeria Civil Aviation Regulations. This provides that the NCAA shall remove an aircraft from the Nigerian registry if the holder of a valid deregistration power of attorney applies to it for deregistration.

4.5 What are the formal and documentary requirements for registration of an aircraft lease? What is the process for registration? What is the effect of registration? What is the effect of deregistration?

The requirements for registration of an aircraft lease are similar to those for the registration of an aircraft. This is because the owner and operator must be identified when applying for the certificate of registration of the aircraft and must meet the requirements under the Nigeria Civil Aviation Regulations. Where the aircraft to be registered is under lease, the aircraft must:

• be eligible for registration through the issuance of a certificate of registration; and
• meet all technical and legal requirements set out under NCAA Advisory Circular NCAA-AC-AWS001A (see question 4.3).

To register aircraft documents such as lease agreements in the aircraft register, stamp duty must be paid on the documents for acceptance by the registry. Under Section 4 of the Stamp Duties Act 1939, the federal government – through the Federal Inland Revenue Service is mandated to collect duties on instruments relating to matters executed between a company (including a bank or other financial institution) and any individual, group or body of individuals. This also applies to aircraft lease agreements.

4.6 What are the formal and documentary requirements for registration of an aircraft mortgage? What is the process for registration? What is the effect of registration? What is the effect of deregistration?

In order to register a mortgage on an aircraft, the mortgage must be executed by deed, duly stamped and registered with the NCAA, after payment of the prescribed fees. From the date of registration, the registered mortgage will take priority over all other mortgages on the aircraft as filed with the NCAA.

The Companies and Allied Matters Act 2020 also provides that where a security interest is established by a company creating a mortgage or a charge, it must be registered within 90 days of creation of the mortgage. Failure to register the mortgage or charge will render it void against any creditor. The registration must be done at the Corporate Affairs Commission.

4.7 Can aircraft be registered in your jurisdiction even if the operator is not from your jurisdiction?

An aircraft cannot be registered if the operator is not from Nigeria. The technical requirements for registration of an aircraft under NCAA Advisory Circular NCAA-AC-AWS001A require the submission of a copy of the applicant's air transport licence or air operating permit. These are licences issued by the NCAA to Nigerian entities after meeting the requirements under the Civil Aviation Act 2006 and the Nigeria Civil Aviation Regulations. Under Section 33 of the Civil Aviation Act 2006, these licences may be granted only to:

• a citizen of Nigeria; or
• a company or a body corporate that is registered in Nigeria and has its principal place of business within Nigeria, and is controlled by Nigeria nationals.

The only exception to this is where an Article 83Bis is in place between the foreign jurisdiction and Nigeria. At present, however, none are in place.

However, an aircraft may be registered in Nigeria if:

• it is owned by:
• • a foreign person that has leased the aircraft to a citizen of Nigeria;
  • an individual citizen of another state who is lawfully admitted for permanent residence in Nigeria; or
  • a corporation that is lawfully organised and doing business under the laws of Nigeria; and
• it is based and primarily used in Nigeria, and a government entity of Nigeria.

5 Operating leases

5.1 Are there any mandatory or advisable terms that should be included in an operating lease from a local law perspective?

There are no mandatory terms, and the parties may agree upon specific terms based on their negotiations. However, the following clauses are commonly found in the standards terms of operating leases and should be included with the relevant appendices containing the relevant forms:

• Interpretation;
• Representations and warranties;
• Conditions precedent;
• Commencement of lease;
• Payments;
• Taxation;
• Quiet enjoyment and other lessor covenants;
• Lessee's covenants;
• Insurance and total loss;
• Manufacturer's warranties;
• Indemnity;
• Return of aircraft;
• Default;
• Assignment and transfer;
• Illegality;
• Notices;
• Disclaimers and waivers;
• Law and jurisdiction;
• Third parties; and
• Confidentiality.

5.2 What charges, fees or taxes arise from the execution of an operating lease?

After execution of an operating lease, the leased aircraft which is to be registered in Nigeria will attract fees payable to the Nigerian Civil Aviation Authority (NCAA), which are charged upon submission of an application to register the aircraft.

In order to register the operating lease with the aircraft registry, stamp duties must be paid on the operating lease document for acceptance at the registry.

With regard to taxes levied on operating leases, these will depend on whether the lessor is a resident company in Nigeria. Where the lessor is a foreign entity, it may be taxed on income derived from Nigeria where such income is derived from its Nigerian operations under the Companies Income Tax Act (see question 3.4).

The lessee is mandated by law to deduct withholding tax at a rate of 10% on rental payments on the operating lease. This rate is reduced to 7.5% where there is a double tax treaty between the lessor state and Nigeria.

5.3 Can either the lessor or the lessee assign or novate its rights in an operating lease in your jurisdiction?

Yes, as long as the terms of the operating lease permit such novation and it is subject to the necessary notification of the NCAA or other regulatory bodies.

5.4 What are the respective obligations and liabilities of the lessor and lessee under an aircraft lease?

Under an aircraft lease, the lessor and lessee obligations are as negotiated and agreed by the parties of the specific lease agreement. Under standard aircraft leases, the following obligations and liabilities are common.

Lessor's obligations:

• The lessor is obliged to deliver the aircraft in the delivery condition specified under the aircraft lease. The lessee may reject the aircraft where the lessor fails to meet the aircraft delivery condition.
• The lessor must not interfere with the quiet use, possession and enjoyment of the aircraft by the lessee during the lease period.

Lessee's obligations:

• The lessee, upon executing the acceptance certificate, takes full responsibility for the aircraft, its condition, maintenance, insurance and all obligations stipulated under the aircraft lease.
• The lessee is obliged to pay rents and supplementary rents on the aircraft as and when due throughout the lease period.
• The lessee is obliged to redeliver the aircraft at the end of the lease period in the manner set out in the aircraft lease.

5.5 In the event of default, what options are typically available to enforce the operating lease? Do all or some enforcement actions require court applications? If so what are the associated costs and timescales involved?

In the event of default, the lessor may notify the lessee of the event of default and give the lessee a period to remedy the default. Where that is unsuccessful, the lessor may terminate the lease and repossess the aircraft. Where the lease has been registered with the NCAA, the lessor may simply enforce the irrevocable deregistration and export request authorisation (IDERA) filed with the NCAA. Nigeria has ratified and implemented Article 54(2) of the Cape Town Convention and the associated protocol through the Civil Aviation Act 2006, which allows the lessor to deregister and export the aircraft without an order of court. However, if the lessor is a Nigerian entity and no IDERA was filed, the lessor may approach the court to obtain an order.

It is typical for recalcitrant lessees that have defaulted to approach the court to seek an injunction to restrain the lessors from repossessing the aircraft, even where an IDERA and a deregistration power of attorney have been signed and filed. All of these cases have ended up with the NCAA and the court upholding the IDERA filed in full compliance with the Cape Town Convention.

The enforcement process should not normally take more than a week where notice is sent to the NCAA and there are no hindrances from the lessee seeking court intervention. Where the lessee approaches the court, the obvious strategy is to delay repossession. The timescale of this is hard to predict – it could range from a couple of months to over a year. The cost of litigation will also depend on the law firm briefed to defend the lessor.

5.6 Upon termination of the operating lease, how is repossession of the aircraft effected? Can airports assert a lien over all of the lessee's aircraft until unpaid charges have been discharged?

As provided in Parts 4.2.1.3(a)(2) and (5) of the Nigeria Civil Aviation Regulations respectively, the lessor – as the holder of a valid deregistration power of attorney – may apply to the NCAA for deregistration of the aircraft. Alternatively, where the lease agreement upon which the aircraft was registered is terminated, the owner may present a duly executed IDERA to the NCAA for deregistration of the aircraft. The NCAA is mandated by law to deregister the aircraft when either the deregistration power of attorney or a duly executed IDERA is presented for execution.

It is possible for regulatory agencies such as the NCAA, the Federal Airports Authority of Nigeria and the Nigeria Airspace Management Agency to restrict an aircraft from movement in Nigeria where charges are due on the account of the aircraft, until those charges have been discharged.

5.7 What disputes typically arise over operating leases in your jurisdiction and how are these typically resolved?

The most common disputes that may occur post-delivery mainly concern:

• the operations and condition of the aircraft during the lease period; and
• the payment obligations of the parties, especially on liens and insurance.

The resolution of these disputes will depend on the nature of the relationship between the lessor and the lessee. If the lessee has generally been creditworthy, it is easier to reach a settlement. However, where the dispute escalates beyond amicable settlement, it will be referred to the method of dispute resolution set out in the lease agreement under the agreed governing law.

5.8 What other considerations should be borne in mind when concluding an aircraft lease in your jurisdiction?

Lessors should do their due diligence on prospective lessees, in order to ascertain their creditworthiness and reputation. Lessors may also take the pre-emptive measure of having a local representative investigate the condition of the aircraft, any debts owed to the regulatory authorities and other issues that might give an early indication of a tentative breach of the lease agreement.

6 Security

6.1 What types of security interests in aircraft are available in your jurisdiction? Which are most commonly used and which would you recommend (if different)?

Under the laws of the Federal Republic of Nigeria, the various types of security include mortgages (legal or equitable), charges, liens, pledge and hypothecation. The most common forms in Nigeria are mortgages, charges and liens. The recommended types of security interest are mortgages and charges, as these may be registered.

6.2 What are the formal, documentary and procedural requirements for perfecting a security interest in an aircraft?

The requirements to perfect a security interest in an aircraft are set out in question 4.6. It is common for the security interest to be registered at the initial stage when the aircraft is registered with the Nigerian Civil Aviation Authority (NCAA). If a security interest is created over the aircraft once the aircraft has already been registered, this must be filed with the NCAA; and where necessary, the holder of the certificate of registration must endorse the relevant sections on the reverse side of the certificate of registration, notifying the NCAA that there has been a change in ownership or change of operator. A new certificate of registration will be issued upon completion of the registration process. All technical and legal requirements set out under NCAA Advisory Circular NCAA-AC-AWS001A must also be met (see question 4.3).

All documents creating a security interest must be duly stamped. The security interest may subsequently be registered with the Corporate Affairs Commission.

6.3 Can security be taken over engines and/or any other aircraft parts in your jurisdiction? If so, how?

There is no specific register for engines and other aircraft parts in Nigeria. Security may be taken over engines and aircraft parts as part of the aircraft, but these cannot be registered separately with the NCAA. The security may be taken along with the aircraft and may be registered as provided in questions 4.3 and 4.6.

6.4 What charges, fees or taxes arise from the perfection of a security interest in an aircraft?

The following charges and fees may arise from the perfection of a security with the respective regulatory agencies.

Stamp duty must be paid on the documents creating a security interest in an aircraft; otherwise, it will not be accepted for filing with the various regulatory bodies. The stamp duty payable on legal mortgages is 0.375% of the secured amount.

Under the NCAA Fee Schedule, the following charges are payable upon the application for registration of a mortgage on an aircraft:

• On the first NGN 100,000 of the sum secured by mortgage and for each complete NGN 10,000: NGN 500.
• On the next NGN 900,000 for each NGN 100,000 or part thereof: NGN 500.
• Thereafter, for each NGN 1 million or part thereof: NGN 200.

The NCAA Fee Schedule provides for a minimum charge of NGN 10,000 and a maximum charge of NGN 150,000. Where the mortgage to be registered does not specify the amount, the fee to be paid is NGN 50,000; and where the application is made for the mortgage of more than one aircraft, the charge payable is as provided above for the first aircraft and NGN 5,000 for each additional aircraft.

Under the Companies and Allied Matters Act 2020, the registration of a security interest created by a company must be registered with the Corporate Affairs Commission within 90 days of creation of the mortgage. Failure to register the mortgage or charge will render it void against any creditor. The total fees payable to the Corporate Affairs Commission in connection with the filing, registration or release of a charge shall not exceed 0.35% of the value of the charge or such other amount as the Minister may specify in the Federal Government Gazette.

6.5 What are the respective obligations and liabilities of the owner and the secured party under the security interest?

The obligations and liabilities of the owner/secured party will be as provided in the contract between the parties. The owner/secured party must ensure that the security interests in the aircraft are filed in the various registers. Where the owner/secured party fails to do so, this may have a detrimental effect on the prioritisation or validation of the security interests, which may make enforcement in the event of breach more difficult.

6.6 In the event of default, what options are available to enforce the security interest? Is self-help available in your jurisdiction or does enforcement action have to go through the courts?

In the event of default, the secured party may notify the defaulter of the event of default and give it a period in which to remedy the default. Where that is unsuccessful, the secured party may terminate the agreement and repossess the aircraft.

Self-help is available in Nigeria. Where the security interest has been registered with the NCAA, the secured party may simply enforce the irrevocable deregistration and export request authorisation (IDERA) filed with the NCAA without going to court. Nigeria has ratified and implemented the Cape Town Convention and the associated Protocol, which allow the secured party to deregister and export the aircraft without an order of court. However, if the secured party is a Nigerian entity and no IDERA was filed, the secured party may approach the court to obtain an order.

6.7 Will local courts recognise a foreign court judgement in favour of a lessor/financier?

In order for the local courts to recognise a foreign court judgement, two federal laws are relevant:

• the Reciprocal Enforcement of Judgments Act, 1958; and
• the Foreign Judgments (Reciprocal Enforcement) Act, 1961 (Cap F35, Laws of the Federation 2004).

Section 3 of the 1961 act empowers the minister of justice of the Federation of Nigeria to extend the application of Part 1 of that act with regard to the recognition and enforcement of foreign judgments of superior courts in any foreign country if he is satisfied that the judgments of the Nigerian superior courts are accorded similar or substantial reciprocity in that foreign country. Under Section 10(a) of the 1961 act, a foreign judgment may be registered within 12 months of the date of the judgment or such longer period as may be allowed by a superior court in Nigeria, where an order is yet to be given under Section 3 of the 1961 act.

The 1958 act deals, among other things, with the recognition of judgments obtained in the United Kingdom and other UK dominions and territories. The 1961 act did not specifically repeal the 1958 act. This means that it still applies to the United Kingdom and to parts of the UK dominions to which it was extended under Section 5 of the 1958 before the entry into force of the 1961 act.

Nigeria is also a signatory to the New York Convention and has implemented the convention through the Arbitration and Conciliation Act 1988 (Cap A18, Laws of the Federation of Nigeria 2004). A party seeking to enforce an arbitral award may apply to the high court of the jurisdiction in which it seeks to enforce for recognition and enforcement of the award.

6.8 What other considerations should be borne in mind when perfecting a security interest in an aircraft in your jurisdiction?

When perfecting a security interest, stamp duty must be paid on the related documents before filing. This is determined by an assessment made by the stamp duties commissioner; in aircraft transactions, such assessments are often very high. In order to ameliorate this for the operator/lessee, the secured party/financier may allow the operator/lessee to pay stamp duty on part of the secured value/amount instead of the whole sum. This is common practice, with the operator/lessee undertaking that the full duty on the whole secured amount will be paid on a future date or upon the occurrence of a specific event or events. The secured party/financier is protected only up to the amount secured; and until the full stamp duty is paid, the secured party/financier may lose its ranking prior to completion of the payment of stamp duty. It is advised that negative pledge and pari passu covenants be included in the document containing the security interest.

6.9 Has your jurisdiction ratified the Cape Town Convention? If yes, are there any notable exceptions to the ratification? If yes, in your opinion, could any conflicts arise between the Cape Town Convention and local law in an enforcement scenario? If yes, have any enforcement issues arisen in relation with regard to conflicts between the Cape Town Convention and local law?

Nigeria has ratified the Cape Town Convention. There are no notable exceptions to ratification that may present any conflict between the Cape Town Convention and Nigerian law in an enforcement scenario. The declarations lodged by the Federal Republic of Nigeria under the Cape Town Convention are as follows:

Based on these declarations, the NCAA has made it mandatory for an IDERA and a deregistration power of attorney to be filed simultaneously during the registration of the aircraft where the lessor or owner is a foreign entity. This provides the lessor/financier with additional protection, as the NCAA will honour the enforcement of a deregistration power of attorney under Part 4.2.1.2(a) of the Nigeria Civil Aviation Regulations. This provides that the NCAA shall remove an aircraft from the Nigerian registry if the holder of a valid deregistration power of attorney applies to the NCAA for deregistration.

7 Aircraft sale and purchase

7.1 How are aircraft sale and purchases typically effected in your jurisdiction? Are there any differences in the sale of airframe versus engines?

An aircraft sale and purchase is commonly carried out through the execution of an aircraft sale and purchase agreement between the purchaser and the seller. Once the purchaser is satisfied with the aircraft, the seller issues a bill of sale which transfers title to the aircraft to the purchaser free and clear of any mortgage, charge, lien or other encumbrance whatsoever. Under the aircraft sale and purchase agreement, the ‘aircraft' will normally constitute the airframe together with the engine(s), including the manuals and technical records, unless otherwise provided in the agreement between the parties.

7.2 What players are typically involved in an aircraft sale and purchase?

Typically, and depending on the mode of financing the sale, the transaction will involve the purchaser, the seller and the escrow agent, where the sale is for cash. Where the aircraft is purchased through financing provided by banks or other financial institutions, the financiers (eg, commercial banks; export credit agencies) or their nominee, or a security trustee as appointed under the financing documents, may also be involved. The civil aviation authorities will also be involved in the registration of the aircraft. In order to ensure that there are no pending liens or bills outstanding on the aircraft, other players such as EUROCONTROL or maintenance, repair and overhaul facilities will also be involved, to provide the purchaser with written proof that no outstanding bills are due on the aircraft.

7.3 Is the manufacturer/seller bound by a duty to disclose? What representations and warranties will it typically make?

Most aircraft sale and purchase agreements are governed by foreign law. Under Nigerian law, the vendor of a property that knows its own title is obliged to disclose all that is necessary to protect itself, rather than requiring the purchaser to demand an inspection of the vendor's title deed before entering into a contract. However, this may differ in the case of an aircraft sale, where the purchaser contractually accepts the aircraft ‘as is where is' and the seller makes no representations and warranties in relation to the airworthiness, condition, design, merchantability or fitness for use or operation of the aircraft. This is why in such case the purchaser conducts an inspection of the aircraft before accepting the aircraft. The Nigerian courts uphold the Latin maxim of Pacta convent quae neque contro leges neque dolo malo inita sunt omni modo observando sunt, which means that "agreements which are neither contrary to the law nor fraudulently entered into should be adhered to in every manner and in every detail". The agreement between the parties will therefore be upheld by the courts.

It is therefore common for the seller to make the following representations and warranties:

• It is the sole and absolute legal and beneficial owner of the aircraft;
• The aircraft is not (or on the delivery date will not be) the subject of any mortgage, charge, pledge, lien or other encumbrance whatsoever;
• The aircraft is not (or on the delivery date will not be) the subject of any financing by any third-party finance provider;
• Upon delivery, the seller will transfer the aircraft to the purchaser with full title guarantee; and
• The seller is duly incorporated and has full power and authority to enter into and perform its obligations under the aircraft sale and purchase agreement, and that entry and performance has been duly authorised by all necessary corporate action of the seller.

7.4 What due diligence is typically conducted in an aircraft sale and purchase?

In an aircraft sale and purchase, due diligence is typically conducted on the aircraft and the seller, to ensure that the aircraft meets the delivery condition as stipulated between the parties and the seller has the clear legal and beneficial title at the time of delivery.

Aircraft due diligence:

• Manuals and technical records.
• Certificate of registration issued by the Nigerian Civil Aviation Authority (NCAA).
• The most recent certificate of airworthiness issued by the NCAA (notwithstanding that such certificate of airworthiness may have expired).
• A valid flight permit issued by the NCAA which is in full force and effect at the delivery date.
• Export certificate of airworthiness issued by the NCAA.
• Certificate of deregistration issued by the NCAA.
• Evidence that the aircraft is free of any mortgage, charge, pledge, lien or other encumbrance, being:
• • confirmation from the NCAA that no mortgage, charge, pledge, lien or other encumbrance is registered with the NCAA (for the avoidance of doubt, such confirmation may be in the form of a clear NCAA mortgage register search); and
  • clear priority searches from the International Registry of Mobile Assets with respect to the airframe and each engine.
• Evidence that no navigation fees or duties are outstanding to EUROCONTROL, the Federal Airports Authority of Nigeria and the Nigerian Airspace Management Agency with respect to the aircraft.
• Evidence from the base of aircraft confirming that all relevant airport charges are paid as of the delivery date.
• Evidence that there are no fees, invoices, expenses or taxes payable to the inspection facility or any other provider of maintenance, repair, overhaul or hangarage or parking services with respect to the aircraft.
• Where engines or auxiliary power units are on a programme, evidence that the contract is fully paid to date and confirmation from the original equipment manufacturer that the contract will be available for transfer to the purchaser following delivery.

Seller due diligence:

• A mortgage register search at the Corporate Affairs Commission showing that there are no mortgages, charges or other encumbrances registered against the seller with respect to the aircraft on the delivery date.
• A director's certificate of the seller:
• • confirming that the aircraft is not the subject of any mortgage, charge, pledge, lien or other encumbrance; and
  • attaching the constitutional documents of the seller.
• Certified copies of the aircraft sale and purchase agreement and bill of sale pursuant to which title to the aircraft was transferred to the seller.
  

7.5 What are the formal, documentary and procedural requirements for conclusion of an aircraft sale and purchase?

The purchaser may submit a duly completed Form AC-AWS 001A to the NCAA, pay the prescribed fees in accordance with the NCAA Fee Schedule and meet the aircraft eligibility requirements, and the technical and legal requirements. The following documents must also be submitted:

• a duly executed aircraft sale and purchase agreement;
• an executed bill of sale;
• an export certificate of airworthiness issued by the NCAA where the aircraft was registered; and
• a certificate of deregistration issued by the NCAA where the aircraft was registered.

7.6 What are the respective obligations and liabilities of buyer and seller during the transaction, and what are the consequences of any breach?

Under an aircraft sale and purchase agreement, the seller and purchaser's obligations are as negotiated and agreed by the parties of the specific aircraft sale and purchase agreement. However, under standard aircraft sale and purchase agreements, it is common for the seller to bear the obligation of delivering the aircraft in the delivery condition specified under the agreement. After inspecting the aircraft, the purchaser may reject it where it does not meet the delivery condition specified. The seller is also obliged to deliver the aircraft to the purchaser free from any mortgage, charge, pledge, lien or other encumbrance, in order to give the purchaser clear title.

The purchaser is obliged to accept the aircraft as long as it meets the delivery condition stipulated in the aircraft sale and purchase agreement. Where this is not done, the purchaser may forfeit any deposit paid into the escrow account.

7.7 What charges, fees or taxes arise from the conclusion of an aircraft sale and purchase? Are there sales tax exemptions – for example, if the aircraft is being sold to an operator that will continue to use the aircraft to generate revenue?

Where the seller/owner of the aircraft is a Nigerian company or individual, the seller is required by law to pay capital gains tax of 10% accruing to the company or individual. However, a rollover relief may be claimed where the proceeds of the disposal are used to purchase a new asset of the same class (ie, another aircraft).

The seller/owner must also remit value added tax (VAT) at the rate of 7.5% chargeable on the supply of goods and services. Where the seller is a Nigerian company, it may also be required to pay income tax depending on the revenues of the company. Medium-sized companies with revenues of between NGN 25 million and NGN 100 million pay a rate of 20%; and large companies with a turnover greater than NGN 100 million pay a rate of 30%.

Where the purchaser of the aircraft is a Nigerian company, by virtue of the Federal Government 2013 Fiscal Policy Measures, Ref BD.12237/S.1008/T/11 of 15 January 2013, which were extended in 2015, all commercial aircraft and spare parts imported for use in Nigeria shall attract import duty and VAT at a rate of 0% respectively. However, this right is not exercisable by purchasers of aircraft for private use.

Operators of aircraft for commercial use must also:

• charge VAT at a rate of 7.5% and remit it to the Federal Inland Revenue Service (FIRS); and
• charge a ticket sales charge on air ticket contracts, and a charter and cargo sales charge of 5%, to be remitted to the NCAA.

7.8 What other considerations should be borne in mind when conducting a sale and purchase of an aircraft in your jurisdiction?

Where the acquisition is from a Nigerian seller, it is critical to ensure that no outstanding charges are owed to any regulatory authorities either in Nigeria or outside Nigeria. These include the NCAA, the Federal Airports Authority of Nigeria, the Nigeria Airspace Management Agency and the FIRS in Nigeria; and EUROCONTROL in Europe. If the aircraft has flown though Europe in the preceding months or years and EUROCONTROL charges outstanding, the aircraft – even after the transfer to the new owner – may be grounded when it is within EUROCONTROL territory until the outstanding charges are paid.

7.9 Are the payments of deposits refundable under term sheets if a sale does not proceed and do the parties have a duty of good faith in the conduct of sale and purchase negotiations?

This will depend on the exact terms of the agreement. Where the purchaser has undertaken to forfeit the deposit if the aircraft is rejected for reasons other than issues touching on the airworthiness, it may be bound by this obligation. Under Nigerian law, the duty of good faith in negotiations is enforced by the courts where the parties have made this an obligation in the contract. Section 169 of the Evidence Act 2011 imposes the doctrine of estoppel by stating that: "When one person has either by virtue of an existing court judgment, deed or agreement, or by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representatives in interest shall be allowed in any proceeding between himself and such person or such person's representative in interest, to deny the truth of that thing." All conditions precedent stipulated in a contract are therefore expected to be fulfilled by the parties and will be upheld by the Nigerian courts, including the duty of good faith in the conduct of sale and purchase negotiations.

8 Insurance

8.1 What insurance requirements apply to aircraft in your jurisdiction?

Under Section 74 of the Civil Aviation Act, any carrier operating air transport services to, from or within Nigeria; aerodrome operator; aviation fuel supplier; provider of ground-handling services, meteorological services, air traffic control services or aircraft maintenance services; or provider of such other allied service as the Nigerian Civil Aviation Authority (NCAA) may from time to time determine in writing must maintain adequate insurance covering its liability under the act and its liability towards compensation for damages that may be sustained by third parties for an amount to be specified in regulations set by the NCAA.

8.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?

Yes, there is no prohibition under the Insurance Act against insurers reinsuring or spreading the risk with other insurers outside Nigeria. This is commonly done in the Nigerian aviation industry, with insurers reinsuring the risk with foreign insurance companies.

8.3 What other forms of insurance feature in the aircraft finance market in your jurisdiction?

See question 8.2.

9 Trends and predictions

9.1 How would you describe the current aircraft financing landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Despite the economic slowdown in Nigeria, the executive arm of the Nigerian government, through the minister of state (aviation), has made ambitious moves to develop the aviation industry by proposing:

• the privatisation of Nigeria's three largest airports – Abuja, Lagos and Port Harcourt; and
• the creation of a national carrier as well as a state leasing company.

The national carrier project has been suspended, but the federal government appears to be moving forward with plans for the privatisation of the three major international airports.

Towards the end of 2019, the executive arm of the federal government submitted six aviation sector bills to the National Assembly – the legislative arm – for passage into law. The six bills, which will repeal some existing laws and establish new regulatory bodies, are:

• the Civil Aviation Bill 2019;
• the Federal Airports Authority of Nigeria Bill 2019;
• the Nigerian College of Airspace Management Agency Establishment Bill 2019;
• the Nigerian College of Aviation Technology Establishment Bill 2019;
• the Nigerian Meteorological Agency Establishment Bill 2019; and
• the Nigerian Safety Investigation Bureau Establishment Bill 2019.

The passage of these bills into law will introduce changes to the aviation industry at large in Nigeria.

10 Tips and traps

10.1 What are your top tips for the smooth conclusion of an aircraft financing transaction and what potential sticking points would you highlight?

The most critical point in any aircraft financing transaction is to conduct proper due diligence on the party to which the aircraft is to be leased or from which the aircraft is to be bought. It is crucial to ascertain the creditworthiness and reputation of a lessee; and take pre-emptive measures of having a representative locally to monitor the condition of the aircraft, debt owed to the regulatory authorities and other issues that might give an early indication of a tentative breach of a lease agreement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.