Acceleration or penalty clause: aircraft leases

The High Court has provided helpful clarification about whether acceleration clauses in aircraft leases are enforceable or whether they are unenforceable penalty clauses. In VS MSN 36118 CAV Designated Activity Company v SpiceJet Limited [2023] EWHC 1146 (Comm), the court ruled in favour of a lessor in its efforts to enforce an acceleration clause following breach of an aircraft lease.

The case concerned payment defaults by the lessee, SpiceJet, in respect of the 96-month lease of a Boeing 737-700 aircraft. The claimant lessor, VS MSN, sought the accrued rental sums due and all future rentals due until the end of the eight-year lease, pursuant to a contractual acceleration clause following non-payment by the lessee (and further default having failed to keep to the terms of a rent deferral agreement). The judgment addressed whether: (i) the lease entitled the lessor to all future rent that would be due until the end of lease immediately; and (ii) did this provision amount to a penalty clause or an acceleration clause?

Key takeaways

• Lessors who seek to rely upon acceleration provisions in their leases following an event of default can take comfort in the finding that acceleration clauses in aircraft leases, even without a provision for accelerated receipt, can be relied upon, even for minor defaults.
• In this case, the aircraft lease was found to have been unsatisfactorily drafted: the acceleration clause did not clearly establish the future point up to which rent would be due or how the acceleration clause would be triggered.
• The provision for the repayment of rent to the lessee, for the period after redelivery of the aircraft before the expiry date, was key to VS MSN’s success. Not only was the clause important in the construction of the acceleration clause itself, helping to establish the date “redelivery” referred to, but it was also important in defeating the argument that the provision was a penalty clause.

Background

• VS MSN (“the Lessor”) agreed upon a lease with SpiceJet (“the Lessee”) on 26 April 2018 to lease a Boeing 737-700 to SpiceJet for 96 months after the aircraft’s delivery.
• The aircraft was delivered on 4 May 2018 and the lease was anticipated to end on 3 May 2026.
• The Lessee had defaulted on payments and a subsequent rent deferral agreement.
• The Lessor brought a claim for summary judgment for the accrued rent due (US$ 4,127,155) and all future rent (US$ 5,890,000 plus interest) that would have been ordinarily due until the end of the lease on the basis of a provision in the lease.
• The Lessee was still in possession of the aircraft when judgment was handed down.

What did the court decide?

The drafting of the lease

The dispute centred around the wording of Clause 23.2.1 of the lease which dealt with the remedies available to the Lessor in the event of a default. In this case the default was the non-payment of rent. VS MSN’s claim, as Lessor, relied specifically on Clause 23.2.2 (y), which stated “all remaining Rent due until the redelivery of the serviceable Aircraft shall become due and payable to Lessor”.

VS MSN claimed that after the default, it was automatically and immediately entitled to payment of all sums due to it up to 3 May 2026 (the expiry date). SpiceJet argued that “the redelivery” was not defined as a fixed date. Instead, the lease specified a number of circumstances whereby the lease might end early. A separate clause in the lease also outlined how the lease might automatically be extended if the aircraft was not returned in “serviceable” condition, leading to SpiceJet submitting that the use of the word “serviceable” in 23.2.2 (y) added a further element of uncertainty and ambiguity as regards the interpretation of the clause.

The judge accepted that the wording of clause (y) was unsatisfactory, noting that the provision VS MSN relied upon was “badly drafted” and “the grammar did not make sense.” The judge also noted that the clause did “not explain when it operated.” However, the court upheld VS MSN’s interpretation that it was entitled to payment of all sums up to the expiry date and found SpiceJet’s position on the construction of the clause unlikely. VS MSN’s reading was supported by clause 10.2.1 of the lease, which stated that the lessor would repay the lessee the difference of rent between the redelivery date and the expiry date.

The acceleration clause

SpiceJet also tried to argue that clause 23.2.2 was “draconian” and made no provision for accelerated receipt of payment. Alternatively, it said this clause amounted to an unenforceable penalty clause.

The judge ruled that the clause was an acceleration clause and was not unusual in a list of remedies in an aircraft lease. He held that it was not unreasonable for the lessor to protect itself in this way citing ZCCM Investments Holdings plc v Konkola Copper Mines 2017 EWHC 3288 (Comm) at [33]-[34].” Moreover, considering the provision in clause 10.2.1 (the repayment of rent to the lessee for the additional rent after redelivery) there was nothing objectionable about the acceleration clause.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2023