IATA Aircraft Lease Guidance

Guidance Material and Best Practices for Aircraft Leases
4.2 Events of Default
Events of Default (EoD), also known as Termination Events, are defined as events or contractual breaches
which would allow the Lessor certain remedies depending on the type of default, but ranging as far as
repudiation or termination of the lease agreement, and ultimately repossession of the aircraft.
The EoD provisions are typically negotiated as part of the definitive lease agreement.
There is a sub classification within EoD that distinguishes between actual or immediate default, and an event
of default arising. Where an actual default occurs, there has been a breach of the lease, and the remedies
(including repudiation or termination of the lease, and subsequent repossession) are often immediately
available to the Lessor. In contrast to these immediate remedies, certain EoDs allow for a grace period. If the
Lessee remedies its default within the grace period, then the Lessor shall not have access to its remedies
triggered by a full EoD.
It is particularly important for the Lessee to consider the aforementioned sub classification of EoDs, as it is
key to have grace periods for situations which may be beyond the control of the Lessee, such as a nonpayment
EoD which is subject to the usual international administrative payment procedures. It is also crucial
that the Lessee understands and establishes the subsequent internal monitoring measures to prevent an
actual default which would have immediate consequences. Examples of both an actual default and an event
of default are discussed further on in this section.
EoDs, especially when linked to default on payments, often put a Lessor on high alert, as such an EoD can
quickly lead to bankruptcy. Besides being a time-consuming and costly process for all involved, bankruptcy
can delay a repossession exercise for the Lessor. However, it is important to note that a default is not always
the end of the world, and does not necessarily mean that the Lessee is physically unable to make the
payment. Best practices include that the Lessee should have adequate admin payment procedures. Both
parties should be aware of potential impact and risk associated with EoD and its commercial implications.
Lessors will of course try to forecast EoD risks, using various financial tools such as credit scoring and
structural and reduced-form models, but the best way to predict a default is to maintain frequent and
transparent communications with the Lessee, supported by adequate monitoring methods.
Some of the most common or sensitive EoDs found in an operating lease are examined in greater detail
below.
4.2.1 Non-payment
Failure to make scheduled payments is the most common default seen in the operating lease industry. This
relates to all scheduled payments including rent and maintenance reserves, and always has a grace period
attached of approximately two to three business days, in which to remedy non-payment. A Lessee should not
accept non-payment as an EoD with no grace period attached, as there is always potential for a slight delay
due to internal and external administrative procedures.
46 4 th Edition 2017