Understanding Aircraft Fractional Ownership: A Sample Contract Overview

Aircraft Fractional Ownership Sample Contract and Key Considerations

Fractional ownership agreements offer a practical way to share the costs and responsibilities of owning an aircraft.

A fractional ownership agreement outlines how multiple parties share ownership interests, expenses, and operational responsibilities. These agreements are legally binding, ensuring all co-owners understand their roles and obligations.

Below, you’ll find a detailed example of a fractional ownership agreement and answers to common questions about a joint ownership agreement, including how they handle repairs, usage, and the number of participants.

What Is a Fractional Ownership Agreement?

A fractional ownership agreement is a legally binding contract that specifies the rights and responsibilities of each party sharing an asset, such as an aircraft. It includes details like:

• Ownership Interest: Each party's share in the aircraft, often expressed as a percentage or fraction.
• Usage Rights: How much and when each fractional owner can use the aircraft.
• Costs and Maintenance: Allocation of actual expenses incurred for aircraft operations, maintenance, and insurance.
• Liability: Rules about who is held liable for damages, accidents, or missed payments.

The agreement ensures the co-owners operate the aircraft smoothly while adhering to the Federal Aviation Administration (FAA) and Federal Aviation Regulations (FARs).

Aircraft Fractional Ownership Sample Contract

Here’s a detailed example of what a fractional ownership agreement might look like. While this is simplified, actual agreements will vary depending on specific needs and applicable law.

Aircraft Fractional Ownership Agreement

Effective Date: [Insert Date]

Parties: This agreement is entered into by [Owner A], [Owner B], and [Owner C] (collectively referred to as the co-owners).

Registration Number: [Aircraft Registration Number]

Aircraft Description: [Make, Model, and Serial Number]

1. Ownership Interest

Each party holds an undivided interest in the aircraft as follows:

• Owner A: 50%
• Owner B: 25%
• Owner C: 25%

2. Use of the Aircraft

The co-owners agree to allocate flight hours based on ownership percentages.

• Owner A: 50% of total annual flight hours.
• Owner B: 25% of total annual flight hours.
• Owner C: 25% of total annual flight hours.

Scheduling shall be done on a mutual agreement basis, with priority given during emergencies.

3. Maintenance and Repairs

• Routine Maintenance: Costs will be shared based on each owner’s pro rata share.
• Unscheduled Repairs: Costs arising from wear and tear will be allocated pro rata. If repairs result from negligence by a specific owner, that party will cover the full cost.
• Maintenance shall comply with Federal Aviation Regulations and be coordinated by a qualified maintenance provider.

4. Costs and Expenses

Each party will contribute their pro rata portion of expenses, including:

• Fixed Costs: Insurance premiums, hangar fees, and inspections.
• Variable Costs: Fuel, landing fees, and other costs related to individual use.

Payments must be made monthly in accordance with billing from the management company.

5. Insurance

• The aircraft will be insured under a liability insurance policy.
• All co-owners will be listed as additional insured parties.
• The policy will cover property damage, injuries, and other liabilities.

6. Sale or Transfer of Interest

If an owner wishes to sell their ownership interest, they must provide such notice to the other co-owners. The selling owner must offer their share to the remaining owners at fair market value, determined by qualified appraisers.

7. Dispute Resolution

Disputes will first be mediated. If unresolved, the matter will proceed to binding arbitration in accordance with applicable law.

Witness Whereof: The parties agree to the terms and have signed below.

Owner A: ________________________ Date: __________

Owner B: ________________________ Date: __________

Owner C: ________________________ Date: __________

How Many People Can Enter into a Fractional Ownership Agreement?

Typically, two to six fractional owners share an aircraft. The number of participants depends on the:

• Size of the Aircraft: Larger jets can accommodate more ownership shares.
• Usage Requirements: Fewer owners mean more availability for each party.
• Fair Market Value: High-value aircraft may require more participants to distribute costs effectively.

Key Points to Remember in Aircraft Fractional Ownership Agreements

When entering into an aircraft fractional ownership agreement, it's essential to consider several critical factors to ensure a smooth and legally compliant partnership. Here's what you need to know:

1. Legal Framework

Your agreement must comply with both Federal Aviation Regulations (FARs) and applicable state laws. This compliance ensures that all operations are legal and that the rights and responsibilities of each party are clearly defined. Key considerations include:

• Registration and Certification: Ensure the aircraft is properly registered with the Federal Aviation Administration (FAA) and that all owners are listed accordingly.
• Operational Compliance: Adhere to all FARs concerning maintenance, pilot qualifications, and operational procedures to maintain safety and legality.
• State Laws: Be aware of state-specific regulations that may affect ownership structures, tax obligations, and liability issues.

2. Cost Allocation

Expenses associated with the aircraft are typically divided among owners based on their ownership percentage, known as a pro-rata share. However, the agreement should specify how various costs are handled:

• Fixed Costs: These include hangar fees, insurance premiums, and scheduled maintenance. They are usually shared proportionally among owners.
• Variable Costs: Expenses such as fuel, landing fees, and unscheduled repairs may be allocated based on actual usage or as agreed upon by the parties.
• Capital Improvements: If significant upgrades or modifications are planned, the agreement should outline how these costs will be shared and whether they affect ownership percentages.

3. Liability Coverage

A comprehensive liability insurance policy is crucial to protect all owners from potential claims arising from accidents or incidents involving the aircraft. Important aspects include:

• Policy Coverage: Ensure the policy covers bodily injury, property damage, and personal injury liabilities.
• Named Insureds: All fractional owners should be listed as named insureds to guarantee coverage.
• Additional Insureds: Consider including pilots, crew members, and other parties who may operate or be involved with the aircraft.
• Security Interests: If there are any liens or security interests on the aircraft, such as those held by a financing entity, ensure the insurance policy acknowledges these interests and provides appropriate protection.

4. Transfer of Ownership Interests

The agreement should clearly define the process for selling or transferring an ownership interest to another party. Key points to address include:

• Right of First Refusal: Existing owners may have the right to purchase the selling owner's share before it is offered to external parties.
• Approval of New Owners: Any new owner should meet specific qualifications and be approved by the remaining owners to maintain the integrity of the ownership group.
• Valuation of Shares: Establish a method for determining the fair market value of the ownership interest at the time of sale to ensure a fair transaction.
• Security Interests: If the selling owner's share is subject to a security interest, such as a loan or lien, the agreement should outline how such interests will be addressed during the sale.

Conclusion

An aircraft co-ownership agreement is a powerful tool for sharing the costs and responsibilities of aircraft ownership. With clear terms for the use of the aircraft, expenses, maintenance, and resale, co-ownership agreements ensure smooth operations and strong relationships between owners.

Before entering into an agreement, consult a legal professional to draft a contract tailored to your needs. A well-prepared ownership agreement offers peace of mind and allows you to enjoy the benefits of fractional ownership with confidence.

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