“Cape Town Convention” – a long time coming but about to arrive in the UK

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“Cape Town Convention” – a long time coming but about to arrive in the UK

The Convention on International Interests in Mobile Equipment and a Protocol to the Convention on Matters Specific to Aircraft Equipment were adopted on 16 November 2001 at an international conference held in Cape Town, thus is known as “the Cape Town Convention”.

The Cape Town Convention and the Protocol (the “Cape Town Treaty”) established a commercially-orientated, comprehensive international legal framework relating to the creation, registration, priority, search and enforcement of security and leasing interests in aircraft (aircraft able to carry at least 8 people or in excess of 2,750 kg or helicopters able to carry at least 5 people) and aircraft engines (with thrust in excess of 1,750).

Its primary aim is to reduce risk and consequently the cost of raising finance by:

  1. the creation and registration of an “international interest” (such as a mortgage or lease)
  2. first to file rule based on an electronic  notice on the International Register
  3. providing default remedies including the ability to take possession and facilitating the deregistration and export of the aircraft following a default. Countries ratifying the Cape Town Treaty have a number of options which they can choose.

It took five years until 1 March 2006 before the Protocol entered into force and an International Registry was established by Aviareto in Ireland. The United Kingdom signed the Protocol on 16 November 2001 but, now some 14 years later, the UK implementing regulations were laid before Parliament on 26 March 2015 with the aim of the Cape Town Treaty  coming  into effect in the UK on 1 August 2015.

Why so long?

Cynics said from the outset that it would make little difference in those countries with well-established legal systems recognising the effect of mortgages and leases and that it still probably would not have a lot of benefit to Mortgagees and Lessors in default situations.

It was not until 2009 that the European Union acceded to the Cape Town Convention but it then still needed to be incorporated within the legal systems of individual member states. It is thought that many countries (perhaps those with poor credit records) hastened to be bound by it so that their eligible airlines could benefit from a discount of up to 10% of the premium of their export credits support.

What will it do?

  • Airlines will more easily be able to access international finance as “Alternative A” (one of two alternatives dealing with insolvency related events) which is being adopted by the UK Government – changing protection to a 60-day waiting period will be welcomed by financiers. Alternative A is well known amongst aviation finance investors and has been adopted by the majority of countries that have ratified the Cape Town Treaty. It will address delays caused by insolvency laws and enforcement problems and reduce legal and transactional risk 
  • The UK will introduce an irrevocable deregistration and export request authorisation (IDERA) to allow the deregistration and export of aircraft.
  • Buyers will benefit from the registration system and the priority rules. Although not a title registry the inclusion of sale contracts will eventually provide a searchable listing of title transfers of aviation assets over the course of their lives.
  • It will enable a lender to create security over an aircraft irrespective of the physical location of the aircraft. It will make financiers, lessors and pilots happy by removing the need for some aircraft on delivery flights to make long diversions to enter British airspace so that a valid British legal charge may be created in accordance with the Blue Sky decision.
  • The treatment of engines as separate property is extremely useful as they make excellent collateral.

On a wider international front, the Cape Town Convention can be helpful in relation to, for instance:

  • choice of law options in respect of contractual rights and obligations
  • speed of interim relief upon a default
  • de-registration 
  • export.

It will not affect possessory liens of maintenance organisations in respect of work done or statutory rights of detention such as those for Airport and Navigation charges.

In conclusion, the ratification by the British Government will bring benefits to UK aviation businesses.

Many UK companies already comply with the Cape Town Treaty when buying assets from a country that has ratified the Treaty or lease an asset from a lessor in a contracting state. Aspects of compliance are already in place and now the benefits will hopefully flow.

Alina Nosek, Partner, AviationFor more information on aviation law or related enquiries, contact Alina Nosek, Head of Aviation.

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Published: 9 Apr 2015

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