Buyer Beware: A Costly Trend in Aircraft Purchase Agreements
July 23, 2018
So you found the perfect aircraft, examined the logbooks and photos carefully, and you’re ready to purchase? What an exciting time!
Be careful not to let your enthusiasm propel you through the next few steps too quickly. What looks like the right deal up front could end up haunting you down the road if you hastily sign an agreement without reading the fine print.
Believe it or not, some aircraft dealers add a contingency to your agreement contractually requiring you to provide them with a First Right of Refusal if you decide to sell the aircraft down the road.
Since this language is tucked into your purchase agreement (at a time when most buyers aren’t thinking about selling), it’s easy to overlook. In fact, we have recently talked with a handful of frustrated aircraft owners who signed a First Right of Refusal agreement without noticing it or evaluating its long-term implications.
The First Right of Refusal Contract
The First Right of Refusal contract we see most often states that if you decide to sell, assign, pledge, or otherwise transfer the aircraft, you are required you to give the Seller (the aircraft dealer) a 10 day option to purchase the Aircraft before proceeding to sell the aircraft on your own.
After the 10 day window has expired, you can proceed to sell the aircraft to an interested buyer, but only on the same terms you offered to the aircraft dealer.
Most contracts also state that if any pricing or terms change during your transaction, you must provide the dealer with another written offer to purchase your aircraft (and another 10 days to consider your new offer) under the new pricing and/or terms before proceeding with your other buyer.
Because these contracts are usually indefinite, with no end date to the First Right of Refusal obligation, you can’t just “wait them out” if you do happen to sign one.
The additional hurdles and delays that come with the First Right
of Refusal will greatly affect everyone involved.
What really happens if you decide to sell your aircraft?
Let’s fast-forward a few years. You are ready to sell the aircraft and decide to contact the dealer you bought it from since you recall signing a First Right of Refusal agreement. Wouldn’t it be nice if they made you a strong offer to purchase your plane right off the bat?
The dealer makes you an offer. Unfortunately, it’s a wholesale offer that’s below the market, and there’s no way you can take it. So you put your plane on the general market and hope for the best.
After a few weeks, you receive an offer with pricing and terms you would like to accept. However, according to the First Right of Refusal agreement you signed, the dealer has a set period of time (most likely 10 days) to consider any offers. During that time, your buyer may decide to revise their offer or walk away altogether. Either way, the additional hurdles and delays that come with the First Right of Refusal will greatly affect everyone involved. Remember, even after you have an agreement in place, any changes at all to the pricing or terms will require you to provide the dealer with another First Right of Refusal period.
Logistically, a First Right of Refusal agreement not only eliminates your ability to provide a good deal to a specific family member or friend, it also makes a sale at full market value nearly impossible. With a very narrow field of buyers willing to pay a competitive price for your plane while tolerating the extra hoops and uncertainty, you’re stuck in a wearisome relationship with the dealer—whether you like it or not—until your plane is finally sold (most likely back to them at a below-market price).
Including a First Right of Refusal in a dealer-to-consumer transaction
is not a standard industry practice.
Does a First Right of Refusal belong in Aircraft Sales?
Typically, a First Right of Refusal is granted when an individual or business has a connection to the property that will be significantly affected by a potential sale. For example, a charter operation may request a First Right of Refusal before selling aircraft that will continue to be used actively on their flight line. Because the aircraft owner will also be receiving an ongoing benefit (monthly revenue) from the charter company, the First Right of Refusal may make sense and provide value for both parties.
Including a First Right of Refusal in a dealer-to-consumer transaction, however, is not a standard industry practice, and it should be avoided. It adds no value to your aircraft acquisition, and the additional strings attached will severely limit your options if you decide to sell your plane down the road.
Why would a dealer that is truly providing you with competitive prices and good service require you to sign a legally binding contract—at your expense—to gain your future business? If you would like to pursue selling your aircraft back to the dealer because of an outstanding customer experience, you can always offer to sell the aircraft back to them without signing a First Right of Refusal.
About the Author: Bill Heckathorn is the President of Performance Aircraft. He founded the company in 2004 with the vision of leveraging the power of internet and technology to improve the customer experience. Given his background in the industry, Bill understands the ins and outs of aircraft ownership, positioning and marketing aircraft, and working with overseas buyers. He offers special insight into the late model Cessna and Cirrus markets, and he really enjoys helping first time aircraft owners understand and enjoy aircraft ownership.
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