Whether you are leasing several acres to start up as a Fixed-Based Operator (FBO), a Maintenance Repair and Overhaul shop (MRO), or a single aircraft hangar for commercial use, you should be mindful that leasing property on an airport is different than leasing other commercial property. Therefore, potential airport tenants should be mindful of some of the most common pitfalls that are often overlooked when entering into a lease. Those looking to acquire an interest in an airport-based business should also be weary of the potential pitfalls. If a tenant is aware of potential pitfalls when entering into a lease, they are better able to avoid or correct them early on. By avoiding or correcting problems, potential tenants minimize risk of a breach, default and/or protracted litigation. In this article, I will discuss some of the potential pitfalls tenants may face when entering into an airport lease.
All Tenants Must Comply with all Airport Minimum Standards
In addition to complying with their respective leases, tenants on airports are required to comply with the Minimum Standards. The Federal Aviation Association (FAA) encourages federally obligated airports to establish Minimum Standards for commercial service providers and rules and regulations for all other airport activities. Minimum Standards for an airport are usually set forth in a document referred to as either the Airport Minimum Standards or the Rules and Regulations for that particular airport. Generally, airport leases include provisions incorporating the Minimum Standards by reference or indicate that the lease is subordinate to the Minimum Standards. If a lease contains a provision that exempts a tenant from compliance with the Minimum Standards, the tenant should proceed cautiously. The FAA encourages Minimum Standards in order to level the playing field and prevent discrimination. If a tenant is given an exemption from the Minimum Standards, it can create a situation where another may argue that the landlord/Airport Sponsor is engaged in discrimination or has provided one tenant with an impermissible Exclusive Right. Such arguments can lead to a complaint to the FAA and jeopardize the public funding of the airport. As the tenant who has and relies upon the exemption, you can easily find yourself in the middle of a costly dispute.
Before executing a lease with an exemption allowing the tenant to deviate from certain Minimum Standards, the tenant should ask the landlord/Airport Sponsor whether other tenants have similar exemptions and/or whether the airport is working to update the Minimum Standards to eliminate the need for exemptions. If the only option is to execute the lease including the exemption, the tenant should be mindful of same, gather all relevant facts and carefully evaluate the risks before proceeding. It is wise to consult with trusted counsel in this scenario.
Avoid Lease Terms in Excess of 50 years
Federally obligated airports are required to hold “good title” and must avoid actions that would deprive the airport of the rights and powers to control development and comply with the federal obligations. “Leases that exceed 50 years may be considered a disposal of the property in that the term of the lease will likely exceed the useful life of the structures erected on the property.” (FAA Order 5190.6B at 12.3(b)(3)). According to the FAA, “tenant ground leases of 30-35 years are sufficient to retire a tenant’s initial financing and provide a reasonable return for the tenant’s development of major facilities.” (FAA Order 5190.6B at 12.3.(b)(3)). Thus, if you are entering into a lease that exceeds 35 years you should be mindful of the risk that the FAA may object to the length of the lease and there is further risk that the FAA may require the airport to shorten the term. If the airport wants to shorten the term, it will require a renegotiation of your lease and the tenant should attempt to leverage your position for more favorable terms.
Avoid Exclusive Rights
Any airport that has previously received federal funds is precluded from granting a “special privilege or a monopoly to anyone providing aeronautical services to the airport or engaging in aeronautical use” for as long as the airport continues to operate (FAA Order 5190.6B at 8.1). The FAA defines an Exclusive Right as:
"a power, privilege or other right excluding or debarring another from enjoying or exercising a like power, privilege or right. An exclusive right may be conferred either by express agreement, by imposition of reasonable standards or requirements or by other means. Such a right conferred on one or more parties, but excluding others from enjoying or exercising a similar right or rights would be an exclusive right."
(FAA Order 5190.6B at 8.2). “The intent of this restriction is to promote aeronautical activity and protect fair competition at federally obligated airports.” (FAA Order 5190.6B at 8.1). According to FAA policy:
"The existence of an exclusive right to conduct any aeronautical activity at an airport limits the usefulness of the airport and deprives the public of the benefits that flow from a competitive enterprise. The purpose of the exclusive rights provision as applied to civil aeronautics is to prevent monopolies and combinations in restraint of trade and to promote competition at federally obligated airports."
Examples of Exclusive Rights that may violate the airport’s federal obligations include the following:
- Lease terms that include language stating that the tenant shall be the sole operator of its type
- Options to lease additional areas of the airport or rights of first refusal
- Exemptions to Minimum Standards
If your lease has an Exclusive Right, it may expose you to an attack by a competitor or prospective competitor. A competitor may attack your lease by any combination of the following:
- Bringing the matter to the airport’s attention and seek to have the Exclusive Right removed from your lease
- Filing an informal Part 13 complaint or a formal Part 16 complaint with the FAA seeking to have the airport remove the Exclusive Rights; and/or
- A declaratory judgment action seeking to have the provision declared unenforceable as a matter of law
Does the Tenant have a Remedy if the Airport Closes or Operations are Limited?
An airport can be closed and/or operations limited for any number of reasons including:
- Construction and/or improvements to the airport
- An airport sponsor’s decision to close the airport after its federal obligations cease
- Construction adjacent to the airport assuming that the Airport Sponsor does not have the ability to control development in the surrounding areas; and
- Flights cease or decrease substantially, as we saw following the Sept. 11 attacks and the current Coronavirus Pandemic
In order to prepare and protect themselves, airport tenants and prospective tenants should consider how their business would be impacted in each of the above cited scenarios and further consider whether there is anything in their lease that protects them or provides a remedy. If they are not already included in the lease, consider adding the following lease terms:
- A covenant by the landlord/Airport Sponsor obligating them to maintain and continue to operate the airport for the length of the lease
- A provision providing for a rent abatement if the airport is closed due to construction or improvements on the airport or the surrounding areas for a lengthy period of time; and
- A force majeure clause that specifically includes references to terror attacks, pandemics, and labor shortages
Does the Tenant Understand and are They Prepared to Comply with the Insurance and Indemnification Obligations?
Most leases include insurance obligations and indemnification obligations. The insurance obligations often require the tenant to maintain certain specified coverages at required limits and likely require the tenant to name the landlord as an additional insured. Indemnification provisions often require a tenant to defend, indemnify and hold the landlord/Airport Sponsor harmless for claims from third parties.
Read these provisions carefully and make sure you understand them and discuss with your insurance broker. Before entering into a lease, it is recommended that the tenant share the lease with your insurance broker and advise them that you are required to maintain the specified insurance coverages. Specifically ask your insurance broker the following:
- Are the insurance requirements commercially reasonable and obtainable by you
- What is the cost for obtaining same
- Will your insurance cover you in case the indemnification provision is triggered
- Are there claims for which the insurer would not insure you?
If your insurance broker advises that the insurance obligations are not commercially reasonable or you simply cannot afford the premiums, raise that concern with the landlord/Airport Sponsor. If it is truly commercially unreasonable and/or you cannot reasonably afford the premium, the landlord/airport sponsor may be willing to adjust same. If you are in that position, it is likely that they have already adjusted for other tenants and if they don’t offer you the same accommodation they may actually be inadvertently giving the other tenant(s) an Exclusive Right.
Whether you are a first time lessee just starting out or a seasoned aviation business seeking to expand, being mindful of the common pitfalls will allow you to complete additional due diligence, ask tough questions, request specific terms and minimize the risk before you find yourself involved in the middle of a protracted dispute with your landlord, neighboring tenants or competitors.
Alison L. Squiccimarro is an attorney with the Law Offices of Paul A. Lange, LLC with offices in New York and Connecticut. Alison’s nationwide practice focuses on aviation related commercial litigation with an emphasis on FAA and DOT Regulatory Issues, Airports, Insurance Coverage and Employment matters.
