1 Legal framework
1.1 Which laws typically govern aviation finance transactions in your jurisdiction?
Aviation finance transactions in Kenya are governed by:
- the Civil Aviation Authority Act, 2013 which establishes the Kenya Civil Aviation Authority (KCAA) with the mandate to administer the aircraft register and register rights and interests in aircraft, among other things;
- the International Interests in Aircraft Equipment Act, 2013, which gives effect to the Cape Town Convention (including the Cape Town Protocol);
- the Companies Act, 2015, which provides for the registration of charges created by company incorporated in Kenya, including charges over aircrafts; and
- the Moveable Property Security Rights Act, 2017, which provides for the registration of security rights in movable property, such as the assignment of receivables and insurance proceeds.
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?
In addition to local law, the Cape Town Convention – which has the force of law in Kenya pursuant to Section 4 of the Interests in Aircraft Act – also governs aviation finance documents.
Any foreign law financing document that may have to be produced in a Kenyan court as evidence must be stamped with stamp duty. If the document is executed outside Kenya, the document must be stamped with the requisite stamp duty within 30 days of its receipt in Kenya, failing which penalties for late stamping are payable. If the document is not stamped with the requisite stamp duty, it cannot be accepted as evidence before a Kenyan court.
2 Finance structures
2.1 What aviation finance structures are most commonly used in your jurisdiction?
Mortgages/charges, leases and assignments of rent receivables are the common aviation finance structures in Kenya.
Additionally, aircraft owners/lessors commonly require the lessee to obtain insurance over the aircraft. In such instances, the lessor will require the lessee to create a security by way of assignment of the insurance proceeds, in favour of the lessor.
In practice, a financier and/or lessor will also require the lessee to execute:
- an irrevocable de-registration and export request authorisation (IDERA) over the aircraft to be registered against an existing proprietary interest in the aircraft with the Kenya Civil Aviation Authority (KCAA) pursuant to the Cape Town Convention in order to protect the financier/lessor's interest. The IDERA must be presented to the KCAA's director general for endorsement; and
- a deregistration power of attorney.
Both of these will enable the financier and/or the lessor to have the aircraft deregistered and moved out of Kenya in the event of the lessee's default without further reference to the lessee.
2.2 What are the advantages and disadvantages of these different types of structures?
The creation of a charge/mortgage on an aircraft in Kenya is possible where the owner of the aircraft is a company incorporated in Kenya. It is not mandatory under law to register a charge at the Kenyan companies' registry in the event a person has registered that charge at the International Registry. However, in the event a person wishes to register the charge at the Kenyan companies' registry, in order to perfect such security in Kenya, the person creating the charge in favour of the financier must pay stamp duty at the rate of 0.1% of the amount secured by the charge/mortgage in addition to registration fees.
The stamp duty amount is likely to be high, considering that financing of this nature is usually for large sums of money. In the event of late stamping, penalties will apply. Moreover, if the charge is not registered within the deadlines set out in the law, the person creating the charge will have to seek a court order to allow for registration of the charge out of time, and will incur more costs (ie, legal and court filing fees) in the process.
An advantage of registering a charge at the Companies Registry is that it is relatively quick: it typically takes three to seven working days from the date of lodging the documents to complete registration. Moreover, a court order is not required to enforce the provisions of a charge over an aircraft, so this is a relatively simple process. If the company creating a charge over an aircraft goes into formal insolvency, the aircraft will not form part of the property of the company that will be available to its creditors for distribution. Only the holder of the charge will be entitled to exercise its rights with respect to the aircraft.
An aircraft lease arrangement will be appropriate where the operator wishes to operate aircraft owned by another entity in exchange for rent to the leasing entity. Rent payable in respect of an aircraft lease (except for leases on helicopters) is exempt from value added tax, thus making it relatively inexpensive.
The issuance of an IDERA and a deregistration power of attorney to the financier/lessor is of critical importance as the financier/lessor will be able to use these documents to cause the aircraft to be deregistered and exported out of Kenya without reference to the financed operator/lessee in the event of default by the lessee.
2.3 What other factors should operators bear in mind when deciding on a financing structure?
If the aircraft is being imported into Kenya, consideration must be made of the following:
- the requirement to have the aircraft registered at the KCAA before a lease or a security instrument can be perfected over the aircraft;
- the taxes and levies that are payable, or in the alternative, the need to apply for an exemption from payment of certain taxes from the National Treasury, such as the import declaration fees and the railway development levy, where applicable. The processing of exemption applications tends to take between three and six months; and
- the fact that the processing of documents at KCAA for registration or approval or endorsement tends to be bureaucratic and can delay completion of transactions.
2.4 Who are the most common providers of aircraft finance in your jurisdiction? Do any restrictions apply in this regard?
International aviation finance companies commonly provide aircraft finance in Kenya. No restrictions apply in this regard.
3 Title transfer
3.1 How is title to an aircraft legally transferred in your jurisdiction?
Transfer of aircraft in Kenya is effected by way of a bill of sale.
The transferee must notify the Kenya Civil Aviation Authority (KCAA) of the change of ownership of the aircraft, if the aircraft is registered in Kenya. Where the aircraft is imported into Kenya, the duly stamped bill of sale will be required for the purposes of registration of the aircraft in Kenya.
3.2 What are the formal and documentary requirements for transferring title?
There are no special requirements for the transfer of an aircraft to Kenya. The usual practice, however, is that the transfer is effected by way of a bill of sale. The bill of sale should be:
- in writing and duly executed by the parties; and
- stamped with stamp duty under the Stamp Duty Act (Chapter 480 of the Laws of Kenya). The stamp duty must be paid to the collector of stamp duties within 30 days of execution of the bill of sale if it is executed in Kenya. If the bill of sale is executed outside Kenya, stamp duty must be paid within 21 days of the bill of sale being brought into Kenya. Penalties are payable for late payment of stamp duty.
If the bill of sale is not stamped with the requisite stamp duty, it cannot be accepted as evidence before a Kenyan court.
3.3 What is the process for transferring title?
The parties enter into an agreement for sale on mutually agreed terms. Upon satisfaction of the agreed terms, the parties will execute a bill of sale.
The bill of sale must contain a statement that the transfer is absolute for the requisite consideration and upon execution by the transferor. The bill of sale must be stamped with stamp duty and lodged for registration as discussed in question 3.2.
Upon stamping of the bill of sale, the transferee should notify the KCAA of the change of ownership, after which the KCAA will update the change in the aircraft register and issue a new certificate of registration noting the transferee as the new owner of the aircraft as at the date of the bill of sale.
3.4 Are any charges, fees or taxes levied on the transfer of title?
The following fees are payable in respect of the transfer:
- stamp duty as assessed by the collector of stamp duties, depending on the value of the aircraft (as the transfer is effected by way of a bill of sale, it is considered as a conveyance under the Stamp Duty Act (Chapter 480 of the Laws of Kenya) and assessed at 2% of the value of the aircraft); and
- a certificate of registration issuance fees of KES 10,000 (approximately $100).
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)?
Yes, there are two laws under which the owner of the aircraft may be forced to relinquish its ownership:
- Under Section 36 of the Narcotic Drugs and Psychotropic Substances (Control) Act, 1994, the government may forfeit or confiscate an aircraft that has been used to commit an offence under the act. The court convicting an offender and issuing the forfeiture/confiscation order must report to the High Court, which will publish a notice of the forfeiture/confiscation in the Kenya Gazette.
- Under Section 231 of the Kenya Defence Forces Act, 2012, an officer not below the rank of major or corresponding rank commanding any part of the defence forces may issue a requisitioning order authorising the requisition of a specified aircraft, where this is considered necessary in the interests of defence or public safety.
4.1 What body administers the aircraft register in your jurisdiction?
The Kenya Civil Aviation Authority (KCAA).
4.2 What information is included in the aircraft register? Is this publicly accessible?
The aircraft register contains the following information -
- the nationality mark of the aircraft, and the registration mark assigned to it by the KCAA;
- the name of the manufacturer and the manufacturer's designation of the aircraft;
- the serial number of the aircraft;
- the name and address of the owner or everyone that is entitled as owner to a legal interest in the aircraft or a share therein (where it is a lease or a financial arrangement, the details of the lessee, lessor and the financier);
- the name or logo of the KCAA;
- the number of the certificate of registration; and
- the conditions under which the aircraft is registered.
The above information is made available upon a party making a formal request and paying the applicable fee of KES 3,000 (equivalent to $30) to the KCAA, which will then provide an extract of the register relating to the aircraft.
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 of an aircraft: The registration of aircrafts in Kenya is governed by the Civil Aviation (Aircraft Nationality and Registration Marks) Regulations, 2018. Under Regulation 4 of the regulations, an aircraft is eligible for registration if it is:
- either owned or leased by a citizen of Kenya, an individual citizen of a foreign State who is lawfully admitted for residency in Kenya, a corporation lawfully organised and doing business under the laws of Kenya, or a government entity of Kenya; and
- not registered under the laws of any foreign country.
A person that wishes to register an aircraft in Kenya must apply for aircraft acceptance by submitting a duly completed prescribed application form, Form AC-AWS001C, to KCAA.
The following information and documents are required to register an aircraft:
- documents of ownership of the aircraft (bill of sale);
- a written notice submitted to the KCAA by the owner of the aircraft authorising and identifying the person making the application on behalf of the owner;
- in case of a body corporate, a written notice stating the name and address of an officer of the body corporate who may be served with documents, including the registration certificate issued by the KCAA; and
- for imported aircraft that were previously registered in a foreign country:
- a cancellation certificate or statement issued by the authority responsible for registration of aircraft in that country stating when the registration was cancelled;
- a description of the aircraft that identifies it by reference to its manufacturer;
- if the aircraft has previously been registered in Kenya or anywhere else particulars of the registration mark, if it has been reserved for the aircraft;
- the name and address of each person who holds a proprietary interest in the aircraft and a description of the person's property interest;
- airworthiness report;
- customs clearance (or exemption) certificate;
- a certified copy of the aircraft's current insurance certificate
- the name and address of the registered owner if different from paragraph (d); and
- physical station where the aircraft will be usually stationed.
Registration process: The process of registration of an aircraft under the Civil Aviation (Aircraft Nationality and Registration Marks) Regulations is as follows:
- An application for registration in the prescribed form is submitted to the KCAA. The application should be accompanied by the prescribed application fees and the relevant documents set out above.
- Upon receipt of the application, the KCAA will review it and register the aircraft if the requirements for the application are met.
- The KCAA will issue the owner of the aircraft with a certificate of registration.
Effect of registration: Regulation 3 of the regulations provides that an aircraft cannot operate in Kenya unless it is registered with the KCAA, or in any contracting state to the International Civil Aviation Organization (ICAO) Convention or any other state that has an agreement with Kenya allowing its aircraft to fly in Kenyan airspace.
In addition, an aircraft registered in Kenya can fly in the airspace of any contracting state to the ICAO Convention or any other state that has an agreement with Kenya allowing its aircraft to fly in Kenyan airspace.
Effect of deregistration: Once an aircraft is deregistered, it loses its Kenyan nationality, is struck off the aircraft register and cannot operate in Kenya. The aircraft may then be exported from Kenya.
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?
Kenya is a party to the Cape Town Convention. The provisions of the Cape Town Convention apply in Kenya vide Section 3 of the Interests in Aircraft Act.
In addition to an irrevocable de-registration and export request authorisation as discussed in question 2 above, a lessor/financier may require a deregistration power of attorney to be executed by an operator as a deed.
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?
There is no system for the registration of aircraft leases in Kenya. However, aircraft leases should be submitted to the KCAA for approval. Once executed and stamped, the lease should be submitted to the KCAA for approval together with the following documents and/or information:
- the name and address of the lessor;
- the name and address of the lessee;
- the aircraft registration, type and serial number;
- the duration of lease;
- a certificate of registration with respect to the aircraft;
- a certificate of airworthiness with respect to the aircraft;
- details of insurance with respect to the aircraft; and
- a letter authorising sub-lease/power of attorney or lease termination as applicable.
Once the KCAA has reviewed the lease, if satisfied, it will issue a letter confirming its approval of the lease. The lessor's and the financier's interests are noted on the certificate of registration of the aircraft.
The approval is usually granted for one year and upon expiry, the operator must renew the approval in order to continue operations in Kenya.
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?
Kenya does not maintain an aircraft mortgage register.
However, where an aircraft is owned by a Kenyan company, while this is not mandatory under law, it is advisable for the financier to require the owner to register a charge over the aircraft with the registrar of companies. This offers additional protection to the financier even where the mortgage is registered as an international interest. Registration of the charge serves as notice to third parties of the existence of the charge. Additionally, if the security interest has not been registered at the International Registry, registration determines the priority of interests at the time of enforcement.
In order to perfect the charge under the Companies Act, the charge must be assessed for stamp duty at the rate of 0.1% of the secured amount. The stamped charge should be presented to the registrar of companies together with the duly completed statutory form for registration. For charges created in Kenya, the stamped charge should be presented for registration within 30 days of the date of the charge. Where the charge is created outside Kenya, it should be presented for registration within 21 days of the date of its receipt in Kenya.
After registration, the registrar of companies will issue a certificate of registration of mortgage.
A registered charge will take priority over all unregistered and subsequent charges.
Failure to register the charge within the statutory deadline of 30 days after the charge is created, or 21 days from the day on which the charge arrives in Kenya where the charge is created outside Kenya, will result in it being void as against a creditor, liquidator or administrator in case of the owner's insolvency.
If the charge is not registered within the specified deadline, an application for an order for registration of the charge out of time may be made to the High Court.
A charge is deregistered when the sums secured under the charge have been paid off in full.
4.7 Can aircraft be registered in your jurisdiction even if the operator is not from your jurisdiction?
No. According to Regulation 4 of the Civil Aviation (Aircraft Nationality and Registration Marks) Regulations, an aircraft is eligible for registration if:
- it is owned or leased by a citizen of Kenya, an individual citizen of a foreign state who is lawfully admitted for residency in Kenya, a corporation lawfully organised and doing business under the laws of Kenya, or a government entity of Kenya; and
- it is not registered under the laws of any foreign country.
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?
According to the Kenya Civil Aviation Authority's (KCAA) Advisory Circular CAA-AC-GEN010, dated June 2018, an aircraft lease agreement must include the following details at a minimum:
- details of the lessor and lessee;
- the aircraft make/model, nationality, registration number and manufacturer's serial number;
- the effective date of the lease;
- the identity of the persons with operational control and maintenance control;
- the state of registration and the airworthiness regulations under which the aircraft will be maintained;
- responsibility for t maintenance;
- responsibility and authority for signing maintenance release and for keeping the maintenance records of the aircraft;
- the maintenance/inspection programme, including the system of maintenance that will be utilised;
- responsibility and authority for arranging maintenance for the aircraft, and ensuring airworthiness directive compliance and completion of aircraft maintenance programmes tasks; and
- the name, location and approval of the contracted aircraft maintenance organisation.
The parties are at liberty to agree on other terms of the lease.
5.2 What charges, fees or taxes arise from the execution of an operating lease?
Stamp duty and aircraft registration fees are payable for perfection of the lease.
5.3 Can either the lessor or the lessee assign or novate its rights in an operating lease in your jurisdiction?
Aircraft leases are regarded as normal contracts and can therefore be assigned or novated if the aircraft lease allows either party to assign its rights thereunder.
5.4 What are the respective obligations and liabilities of the lessor and lessee under an aircraft lease?
Parties' obligations and liabilities will flow from the specific aircraft lease agreement. Aircraft leases must be submitted to the KCAA for approval after execution and stamping. It is the obligation of the lessor, under the Civil Aviation (Aircraft Nationality and Registration Marks) Regulations, to notify the KCAA of the change of registration or ownership details due to the lease.
Generally, lessees must pay rent, ensure that they operate the aircraft safely, pay maintenance contributions and insure the aircrafts. Separately, lessors must allow the lessee to enjoy quiet possession of the aircraft.
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?
Options available to enforce the operating lease
The lessor may:
- exercise any of the following options as provided under the Protocol to the Cape Town Convention:
- terminate the lease and take possession or control of the aircraft;
- sell or grant a lease of such aircraft;
- collect or receive any income or profits arising from the management or use of the aircraft; or
- apply for a court order directing any of these acts;
- opt for any other options provided under the specific aircraft lease to enforce it;
- require the KCAA to de-register and export the aircraft without any further reference to the lessee where the lessor/financier has an irrevocable de-registration and export request authorisation (IDERA) lodged and endorsed by KCAA in respect of the aircraft; and
- make an application to court for an order requiring the lessee to surrender the aircraft to the lessee where a lessee is in default and has refused to surrender the aircraft back to the lessor.
KCAA and the Kenya Airports Authority (KAA) may issue letters of undertakings to release aircrafts to a lessor or financier upon payment of any unpaid fees owed to them.
Associated costs and timelines (court application): The costs of an application for a court order will depend on the amount claimed, and the nature and number of orders sought. Given that a lessee will be expected to oppose any application to court, the timescale within which a court order may be obtained cannot be estimated. However, where there is imminent risk that the rights of the lessor will be prejudiced if the aircraft is not surrendered within a specific timeframe, the lessor should consider filing an interlocutory application under a certificate of urgency to preserve the aircraft pending hearing and determination of the application.
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?
The lessor may request the lessee to return or surrender the aircraft. The lessor may also repossess the aircraft where it has access to it. If the lessee fails to return or surrender the aircraft and the lessor cannot access it, the lessor may apply for a court order directing the lessee to surrender the aircraft as set out in question 5.5.
If there are unpaid charges, the KCAA may:
- assert a lien over an aircraft or other property of lessee until all unpaid charges have been discharged as set out under Section 35(5) of the Civil Aviation Act;
- deny or withdraw a service, licence or certificate, and seize the aircraft after giving reasonable notice of the intention to seize the aircraft; or
- detain the aircraft or property until payment is made.
Additionally, Regulation 6 of the Civil Aviation (Regulatory Fees and Charges for Air Navigation Services) Regulations entitles the KCAA to exercise a lien over the aircraft for any unpaid regulatory fees or air navigation charges. The KCAA will release the aircraft once the unpaid fees and charges have been paid.
This right of lien is also available to the KAA in the event of any unpaid airport fees.
5.7 What disputes typically arise over operating leases in your jurisdiction and how are these typically resolved?
Disputes typically revolve around non-payment of rent, maintenance charges and other payments under the operating leases. The parties usually agree on the dispute resolution procedures in case of any dispute arising from their specific lease agreement. Any dispute is therefore resolved as per the dispute resolution procedures set in the specific lease agreement.
Additionally, if the lessee has refused to surrender the aircraft to the lessor, the lessor may apply to court for an order preserving the aircraft (in the event it may be harmed) or requiring the lessee to surrender the aircraft to the lessor.
5.8 What other considerations should be borne in mind when concluding an aircraft lease in your jurisdiction?
The lease must be stamped with stamp duty and submitted to the KCAA for approval.
The lessor should ensure that the lessee provides it with an IDERA and deregistration power of attorney, which will enable the financier to have the aircraft deregistered and taken out of Kenya in the event of termination of the lease for whatever reason.
In case of an aircraft that has been imported into Kenya, the lessor should ensure that the aircraft has been duly registered in Kenya and that all import duties have been paid (or an exemption obtained where applicable). The lessee should be required to provide the lessor with a clearance certificate from the Kenya Revenue Authority confirming that all customs formalities have been completed in respect of the aircraft importation into Kenya.
The lessor should require the lessee to take out insurance over the aircraft. Section 20 of the Insurance Act requires insurance over assets in Kenya to be taken with an insurer registered in Kenya. Insurance may, however, be taken with a foreign insurer with the approval of the commissioner of insurance.
Upon termination of a lease, the lessor will be required to notify the KCAA of the termination for updating the aircraft register and re-registration or deregistration of the aircraft, as the lessor may wish.
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)?
Please see questions 2.1 and 2.2.
6.2 What are the formal, documentary and procedural requirements for perfecting a security interest in an aircraft?
Please see question 4.6 as this applies to mortgages and charges created over aircrafts.
Where a deed of assignment (of rent or insurance proceeds, as the case may be) is executed in favour of the financier by a Kenyan entity, such security must be registered at the Collateral Registry established under the Moveable Property Security Rights Act (MPSRA). A deed of assignment is exempt from stamp duty in Kenya.
Additionally, the deed of assignment should also be registered at the Companies Registry within the timeframes set out in question 4.6, as these will also apply.
6.3 Can security be taken over engines and/or any other aircraft parts in your jurisdiction? If so, how?
A mortgage or charge may be taken over an engine or specific aircraft part. Please see the requirements relating to a mortgage/aircraft in question 4.6.
6.4 What charges, fees or taxes arise from the perfection of a security interest in an aircraft?
Stamp duty will be payable on the charge or mortgage at the rate of 0.1% of the secured amount. However, no stamp duty is payable on a deed of assignment of rent or insurance proceeds, as all instruments under the MPSRA are exempt from stamp duty. However, an application for such exemption must be made to the collector of stamp duties.
Registration fees will also be payable for registration of the charge or mortgage at the Companies Registry. The amount of the registration fees is dependent on amount secured by the mortgage/charge.
6.5 What are the respective obligations and liabilities of the owner and the secured party under the security interest?
The respective obligations and liabilities of the owner and the secured party will be as set out in the specific charge or security instrument.
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?
Self-help measures such as repossession, selling or leasing/re-leasing an aircraft may be utilised in Kenya.
A party can also use any other options provided under the specific security instrument to enforce a security.
It may be necessary to obtain court orders where the operator is uncooperative, making it impossible for the secured party to use any of the self-help measures.
6.7 Will local courts recognise a foreign court judgement in favour of a lessor/financier?
Foreign court judgments will be recognised if the judgment is issued in a country that is a state party to the Cape Town Convention under the Interests in Aircraft Act.
Foreign court judgments will also be recognised if the judgment is issued in a country that accords reciprocal treatment to judgments issued in Kenya under the Foreign Judgments (Reciprocal Enforcement) Act. These countries are Australia, Malawi, the Seychelles, Tanzania, Uganda, Zambia, the United Kingdom and the Republic of Rwanda.
6.8 What other considerations should be borne in mind when perfecting a security interest in an aircraft in your jurisdiction?
Kenya does not maintain an aircraft mortgage register. However, the interests of a financier should be noted in the aircraft register upon registration of the aircraft. Where the aircraft is already registered, the owner/lessor must notify the Kenya Civil Aviation Authority of the creation of the security.
Interests in aircraft parts will not be noted in the aircraft register and thus financiers should undertake to have these registered as international interests at the International Registry.
In addition, for international financing (where the state of registration is not Kenya), it is advisable for the security interest to be registered at the International Registry and or notified to the relevant aviation authority in the state of registration.
Although the financier may exercise options that are available without having to resort to the court, such options may be impeded by the chargor applying for injunctive orders against exercise of such options.
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?
The Cape Town Convention has the force of law in Kenya. Section 5 of the Interests in Aircraft Act provides that the Interests in Aircraft Act shall prevail in case of any inconsistency with any other act in relation to aircraft objects.
However, at the time of its ratification of the Cape Town Convention, Kenya lodged a declaration to the effect that the following have priority in Kenya over registered interests in an aircraft:
- payments due to workers arising from employment relations;
- liens created by repairmen on objects in their possession;
- liens created by bailees on objects in their possession; and
- taxes, duties and levies due to the government.
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?
Sale and purchases of aircrafts, airframes and engines are effected by way of a sale and purchase agreement.
Separately, the title in an aircraft may be transferred by a bill of sale.
7.2 What players are typically involved in an aircraft sale and purchase?
An aircraft sale and purchase typically involves the seller and the purchaser as well as financiers.
7.3 Is the manufacturer/seller bound by a duty to disclose? What representations and warranties will it typically make?
A manufacturer will be bound only by the aircraft sale and purchase agreement and will be required to give representations in relation to the airworthiness of the aircraft if it is the seller. The seller will also be required to make representations and warranties in relation to the title to the aircraft.
An aircraft sale and purchase is a contract which binds the seller not to make misrepresentations as to the aircraft. Any misrepresentation made by the seller will be a vitiating factor to the aircraft sale and purchase transaction.
7.4 What due diligence is typically conducted in an aircraft sale and purchase?
Due diligence in an aircraft sale and purchase involves an investigation of the title, technical and legal documentation relating to both the aircraft and the seller. The buyer should investigate the validity of the title, the identity and registration of the seller and whether there are any encumbrances such as lien on the aircraft. This includes searches at the International Registry, the Companies Registry and the Collateral Registry.
The purchaser may also search the ownership of the aircraft at the aircraft registry by making an application to the Kenya Civil Aviation Authority as per our response to question 4.3. Upon receipt of the extract from the registry, the purchaser will confirm owner of an aircraft, and, if different from the owner, the operator.
In addition, the buyer should verify that the person executing the sale agreement is the owner or a person who has legal authority (where the seller is a corporation) to execute the sale on behalf of the seller.
As to the legal and technical documentation, the buyer should conduct due diligence on the maintenance and airworthiness logs of the aircraft. This avoids an instance where the buyer would conduct expensive repairs on the aircraft as this would be factored in the purchase price.
The buyer should also conduct a mechanical inspection of the aircraft to ensure that the sale agreement will cover every aspect of the aircraft that will arise in course of the due diligence.
7.5 What are the formal, documentary and procedural requirements for conclusion of an aircraft sale and purchase?
An aircraft sale and purchase transaction has the following phases:
- due diligence;
- negotiation of the terms of sale and purchase;
- execution of the sale and purchase agreement; and
The due diligence should be conducted as highlighted in question 7.4. The buyer should highlight issues arising from the due diligence and take them into consideration in the negotiation process. The buyer should require the seller to give representations and warranties on issues such as liens resulting from unpaid taxes, fees and charges that could not be conclusively verified through the due diligence. Where the terms of sale are agreed, the parties will conclude a sale and purchase agreement agreeing on the timeline and the conditions to be satisfied before payment of the purchase price and delivery of the aircraft.
The following information will be necessary for conclusion of the sale and purchase agreement:
- the parties' names, addresses, identity documents and passport pictures (where the seller/purchaser is a corporation, this should include names and details of the officers of the corporation who have legal authority to execute the sale and purchase agreement on behalf of the corporation);
- documents of ownership of the aircraft;
- the name of the manufacturer and the manufacturer's designation of the aircraft;
- the serial number of the aircraft;
- a description of the aircraft that identifies it by reference to its manufacturer;
- the state in which the aircraft is registered;
- the maintenance logs of the aircraft; and
- the certificate of airworthiness (if any) issued to the aircraft.
7.6 What are the respective obligations and liabilities of buyer and seller during the transaction, and what are the consequences of any breach?
The respective obligations and liabilities of the buyer and the seller will be as agreed and set out in the sale and purchase agreement. Aircraft sale and purchase agreements are unique and should be customised to suit the specific aircraft in question, with the parties' obligations and liabilities tailored to the different types of aircraft sale and purchase agreements.
Breach of a party's obligations will entitle the other party to exercise any of the remedies under the sale and purchase agreement. The general remedies for breach include rescission or repudiation of the sale and purchase agreement or a claim for damages.
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?
Aircraft transfer (which is by way of a bill of sale) is subject to stamp duty at the rate of 2% of the aircraft transfer value.
Aircraft are exempt from payment of an import declaration fee when imported or purchased before clearance under Part A, paragraph (xxii) of the First Schedule to the Miscellaneous Fees and Levies Act, 2016.
Additionally, aircraft are exempt from payment of the railway development levy when imported or purchased before clearance under Part B, paragraph (vi) of the First Schedule to the act.
Certificate of registration issuance fees of KES 10,000 (approximately $100) are payable for the purposes of registration of the aircraft (where the aircraft is imported) or the issuance of a new certificate of registration (where the aircraft is already registered in Kenya).
7.8 What other considerations should be borne in mind when conducting a sale and purchase of an aircraft in your jurisdiction?
Revenue generated from aircraft hiring, leasing and chartering services (except for helicopters) is exempt from value added tax.
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?
Term sheets are generally non-binding. However, when a term sheet is heavily negotiated to the extent that it reads like a formal agreement, it may be held to be binding. In such case, any deposit paid under the term sheet will be applied as agreed in the term sheet. It is therefore advisable that the term sheet should remain non-binding, save for exclusivity and confidentiality clauses, to the extent that there should be no requirement for payment of deposits.
The parties to an aircraft sale and purchase transaction are bound by the binding terms of any agreement entered into in the course of the transaction and therefore have no duty to act in good faith.
8.1 What insurance requirements apply to aircraft in your jurisdiction?
An aircraft registered in Kenya must hold a certificate of aviation assurance issued by a company registered in Kenya under the Insurance Act to carry on aviation insurance business. In addition, Regulation 51 of the Civil Aviation (Licensing of Air Services) Regulations, 2018 requires an aircraft to have third-party liability insurance in respect of its passengers and their baggage.
Section 20 of the Insurance Act requires insurance over assets in Kenya to be taken out with an insurer registered in Kenya. However, insurance may be taken out with a foreign insurer with the approval of the commissioner of insurance.
8.2 If local insurance is required, can local insurers assign reinsurance contracts in your jurisdiction?
Yes. Local insurers can assign reinsurance contracts.
8.3 What other forms of insurance feature in the aircraft finance market in your jurisdiction?
Aviation insurance covers all risks in connection with aircraft hull, aircraft liability, hull and liability war, general liability and crew personal accident.
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?
COVID-19 has had a significant impact on the aviation sector globally, as well as in Kenya. Airlines have lost significant amounts of income due to travel restrictions.
As a result, airlines have continued to accrue costs without corresponding revenues or with less revenues than anticipated, resulting in radical strategic choices by key stakeholders to stop the financial bleeding.
The latest trends in the aviation sector in Kenya include the following:
- the renegotiation of the terms of leases, including renegotiation of lease payment terms and rent deferrals with lessors;
- the restructuring of existing loans with financiers;
- the launch of the Magical Kenya Tourism and Travel Health and Safety Protocols (by the Ministry of Tourism and Wildlife), with a view to ensuring the safe revival of the tourism industry after Kenya reopened its borders on 1 August 2020; and
- recent amendments to tax laws which mean that certain parts of aircraft that were previously exempt from value added tax are now taxable at the standard rate (eg, aircraft launching gear).
More recently, the National Aviation Management Bill, 2020, which would pave the way for the nationalisation of the national airline, Kenya Airways PLC in a bid to revive it, is proceeding through the legislative process in parliament. The bill proposes to establish:
- the Kenya Aviation Corporation, which will be the holding company for all aviation assets in Kenya;
- the transfer and consolidation of Kenya Airways and the Kenya Airports Authority (KAA);
- the establishment of operations in Kenya Airways, the KAA and the Aviation Investment Corporation (collectively referred to as ‘operating entities'); and
- the efficient management, financing and operation of the corporation and the operating entities.
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?
A financier should conduct both financial and legal due diligence on an operator before committing itself to the financing transaction. Once this is done, the financier should ensure perfection of the financing transaction documents by filing the requisite notice with the Kenya Civil Aviation Authority.
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.