Purchasing An Aircraft Hangar: Buyer Beware
By Gregory J. Reigel
It always surprises me when a potential aircraft hangar buyer is unsure whether he or she should use a purchase agreement when buying the hangar. Most of these individuals operate businesses, have purchased homes and no doubt used a purchase agreement in such transactions. Yet, many of these same individuals would spend a comparable amount of money to purchase an aircraft hangar without the protection of a written purchase agreement.
A purchase agreement should be used in hangar purchase transactions. First, the law in most states requires that a contract for an amount greater than $500 be in writing in order for it to be enforceable. This is called the statute of frauds. Although exceptions to this legal doctrine exist, complying with the law is usually safer than hoping you will be able to take advantage of an exception.
Further, using a purchase agreement can also help avoid confusion and misunderstandings. If the agreement clearly explains how the transaction will happen, when it will happen and what is included in the deal, the likelihood is greater that the buyer and seller will each know the other party’s expectations, and the likelihood of surprises or misunderstandings is reduced greatly.
What Terms Should Be Included?
The number and complexity of the terms that should be included in an aircraft hangar purchase agreement will often be dictated by the size, location and value of the aircraft hangar being purchased. Although by no means inclusive, the following terms provide a good place to start.
Identify the parties. The purchase agreement should identify who is selling the hangar and who is buying the hangar. Although this sounds simple to do, it isn’t always clear who each party is. Aircraft hangars are commonly registered in the name of a corporation or limited liability company. In that case, the individual with whom the buyer is negotiating is not the owner of the aircraft hangar and should not be listed as the seller. The actual owner of the aircraft hangar should be identified as the seller.
The buyer on the other hand, can be an individual or a corporation or limited liability company. If an individual is the buyer, that person will be listed as such in the purchase agreement. Upon execution and filing of the bill of sale, that person will be the record owner of the aircraft hangar.
If a corporation or limited liability company will be purchasing the aircraft, the purchase agreement should identify that entity as the buyer. Alternatively, an individual can sign a purchase agreement as the buyer and, as long as the purchase agreement allows the buyer to assign his or her rights under the agreement, that individual could still assign the purchase agreement to a corporation or limited liability company prior to closing. The corporation or limited liability company then becomes the buyer and can close on the transaction without the individual even entering the chain of title. From a liability perspective, this can be important.
Identify the hangar. The purchase agreement should identify the aircraft hangar with as much detail as possible. At a minimum, it should include the size and location of the hangar. This is typically done using the lot number of the property on which the hangar is located. Ideally, a list of any additional items of personal property being sold with the hangar should be included in the purchase agreement. Also, if the seller intends to retain certain items, those items should be specifically identified and excluded from the transaction. Taking the time to detail exactly what is and is not being sold should prevent misunderstandings when the hangar is delivered to the buyer at closing.
Specify the purchase price. The purchase agreement should specify how much is being paid for the aircraft hangar. If the buyer will be giving the seller a deposit or earnest money, that fact should be included. Also, what happens to the deposit when it is given to the seller? Will the money be placed in escrow or simply held by the seller? If an escrow agent is not involved, the buyer will need to obtain some assurance that the deposit will not simply disappear into the seller’s pocket, making the buyer’s recovery from the seller difficult or impossible if the transaction does not close. The purchase agreement should also state under what conditions the seller must refund the deposit to the buyer.
The buyer’s method of payment should also be stated. Is it a cash transaction or will financing be involved? If financing is involved, the buyer may want to include language that makes the transaction contingent upon the buyer obtaining financing on terms acceptable to the buyer. That way, if the buyer isn’t able to obtain satisfactory financing, the buyer will not be forced to complete the purchase on financially-unacceptable terms.
Closing documents. Aircraft hangars are typically considered personal property, as opposed to real property or real estate. That is, the aircraft hangar is a tangible asset that is located on real property which is usually leased from the owner or operator of the airport, but the hangar is not considered part of the real property. The aircraft hangar can be moved from one piece of real property to another — although physically relocating an aircraft hangar once constructed on a piece of real property is extremely rare.
When a buyer purchases an aircraft hangar, the buyer receives a bill of sale as evidence of the transfer/sale of the aircraft hangar from the seller to the buyer. Unlike an aircraft bill of sale, the bill of sale for an aircraft hangar does not need to be filed with the FAA and, in fact, the FAA would not accept the bill of sale for filing if it was sent to them. The FAA does not maintain a registry or any other record of ownership of aircraft hangars as it does with aircraft.
In most states, the aircraft hangar bill of sale will need to be recorded with the county in which the hangar is located. States require this filing in order to keep track of the owner for the purposes of imposing personal property taxes on the owner of the aircraft hangar. Similar to real estate taxes, once a year the county in which the aircraft hangar is located will estimate the fair market value of the aircraft hangar and then assess a personal property tax on that value.
Pre-closing inspection. In many transactions, the buyer will want to have an inspection performed on the aircraft hangar before the closing. The purchase agreement can specify who will perform the inspection and what qualifications that individual must possess. Also, the buyer should make the purchase agreement contingent upon the buyer’s satisfaction with results of the inspection. The buyer is usually responsible for the expenses associated with a pre-closing inspection.
Due diligence. The buyer will want to perform due diligence to confirm the status of the title of the aircraft hangar. Since an aircraft hangar is considered personal property, it typically does not have a title as an aircraft or real estate would. However, certain things can affect the seller’s ability to convey clear title to the buyer (e.g. judgments, mortgages, liens, etc.). As a result, the buyer will want to perform searches with the appropriate courts and state/county offices to confirm that the seller actually owns the aircraft hangar and to verify the absence of any encumbrances that could prevent the seller from conveying clear title to the buyer.
Warranties. It is possible to include a variety of warranties in the purchase agreement under which the seller represents certain conditions of the aircraft hangar (e.g. warranties of airworthiness, merchantability, fitness for a particular purpose, etc.). From a buyer’s perspective, the warranty of title is probably most important. This warranty ensures that the buyer receives title to the hangar free and clear of any liens or mortgages. Although the buyer will still want to confirm this by performing thorough due diligence before closing, having the warranty of title included in the purchase agreement will help to minimize the risk of any unrecorded liens or interests in the aircraft hangar.
What Remedy Does An Aircraft Hangar Purchase Agreement Give The Buyer?
An aircraft hangar purchase agreement is not a 100-percent guarantee that a seller will perform as required. Such a guarantee is impossible. Further, the purchase agreement alone does not make anyone do anything. If a seller does not want to comply with his or her obligations, the purchase agreement will not change that. However, the purchase agreement will give the buyer the ability to go to court and have a judge make the seller comply with his or her obligations.
Alternatively, the court may award money damages for losses the buyer incurs. An example of this is when a seller refuses to return a deposit even though the buyer has complied with all of the terms of the purchase agreement and has a right to return of the money. In this situation, a court could enter a judgment against the seller in the amount of the unreturned security deposit.
Conclusion
An aircraft hangar purchase agreement is a valuable tool to ensure that a buyer purchasing an aircraft hangar receives what he or she is expecting. It prevents confusion and misunderstanding and provides security that the buyer will have recourse if the seller fails to perform as required. With minimal time and expense incurred up front, buyers can protect their interests and maximize the likelihood of an uneventful closing and purchase.
© May, 2011. All rights reserved.
Greg Reigel is an aviation attorney, author and pilot. He holds a commercial pilot certificate (single-engine land and sea and multi-engine land) with instrument rating. His practice concentrates on aviation litigation, including aviation insurance matters and FAA certificate actions, and also aviation transactional matters. He is admitted to practice law in Minnesota and Wisconsin and advises clients throughout the country on aviation law matters. A cum laude graduate of William Mitchell College of Law, Reigel is the founder and president of the law firm Reigel & Associates, Ltd./Aero Legal Services based in Hopkins, Minn. He is an Adjunct Professor for the Business Law Clinic and an Instructor for the “Lawyering Skills” courses at William Mitchell. His articles have appeared in Private Pilot, the Midwest Flyer and on www.globalair.com. He frequently speaks to groups on aviation and business law issues. Reigel is a member of the AOPA Legal Services Panel, secretary of the Minnesota Aviation Trade Association, and a member of the NTSB Bar Association, National Business Aviation Association, Minnesota Business Aviation Association, ABA-Forum on Air & Space Law, Lawyer-Pilot Bar Association and Experimental Aircraft Association.