Acceleration clause upheld in aircraft lease

A recent judgment of Charles Hollander KC gives comfort to lessors who seek to rely upon acceleration provisions in their leases following an event of default. The case of VS MSN 36118 CAV Designated Activity Company v SpiceJet Limited [2023] EWHC 1146 (Comm) examined whether a clause providing for the payment of future rent following an event of default was sufficiently clear so as to be binding upon the lessee, or whether it was a penalty clause. While noting that the wording of the clause in this particular case was unsatisfactory, the Judge was able to interpret the relevant provision such that the lessor was automatically entitled to future rent up until the redelivery date of the aircraft. Following actual redelivery and payment of all sums due, the lessor was then obliged to repay the amount of rent it had received in respect of any period following redelivery.

Background

SpiceJet (the “Lessee”) entered a lease with VS MSN (the “Lessor”) on 26 April 2018 whereby it would lease a Boeing 737-700 from the Lessor for 96 months. The aircraft was delivered on 4 May 2018 and the lease was expected to end on 3 May 2026. As at the date of judgment the Lessee remained in possession of the aircraft.

The Lessee had defaulted on its payments and, on 20 November 2020, the parties entered into a rent deferral agreement. Despite this, there were then further payment defaults. Consequently, the Lessor brought a claim for summary judgment for: (i) accrued sums due; and (ii) claims for future rental said to have become due upon an event of default.

Accrued Sums Due

The first limb of the claim was for the total sum outstanding under the lease of US$ 4,127,155 for rent and maintenance reserves as at 6 September 2022. The Lessee did not suggest positively that the sums claimed were not due and the court held that they had no defence to this limb of the claim.

Future Rentals

The more significant part of the judgment related to future rental payments. The Lessor said that it was entitled to these, as it had declared an Event of Default under the lease. Under clause 23.2.1 of the lease:

“Upon the occurrence of any Event of Default…Lessor may, at its option and without notice to Lessee, declare this agreement to be in default and Lessor may exercise one or more of the following remedies...”

Those remedies included, in clause 23.2.2(y), “all remaining Rent due until the redelivery of the serviceable Aircraft shall become due and payable to Lessor”.

The Lessor therefore claimed that following the Event of Default, it was automatically entitled to payment of all sums which would become due up to 3 May 2026, as it interpreted “redelivery” for the purposes of this clause as being the date on which the lease was scheduled to expire.

Once the aircraft had been redelivered, and all monies paid by the Lessee, clause 10.2.1 of the lease provided that:

“…Lessor shall…pay to Lessee:

…(b) the amount of any Rent received in respect of any period falling after the Redelivery Date of the Aircraft…”.

Accordingly, the Lessor claimed US$ 5,890,000 plus interest under this head, comprising rent until 3 May 2026.

The Lessee disputed this and argued that clause 23.2.2 was a badly drafted and ambiguous provision. It argued that, on the Lessor’s construction, (y) provided for rent to be due “until the redelivery of the serviceable Aircraft” but that it was impossible to know in advance on what date this would take place.

“Redelivery Date” was defined as: “the Expiry Date or the earlier date of termination of the leasing of the Aircraft in accordance with the terms of this Agreement”. “Expiry Date” was defined as 96 months after the Delivery Date, subject to certain other scenarios set out in clause 4.2 (i) – (vi) (e.g., if the Lessor terminated the leasing of the aircraft, the date of termination would be the Expiry Date).

The Lessee submitted that the Redelivery Date was not a fixed date and depended upon whether one of the circumstances in 4.2 occurred. If (i) – (vi) applied, redelivery might occur on a different date to 3 May 2026.  The Lessee also asserted that, if the aircraft was not delivered in a serviceable condition on the last day of the lease, the lease term would be extended and this meant that rent continued to be payable even after the Expiry Date, until the condition of the aircraft satisfied the terms of the lease - adding a further layer of uncertainty.

The Lessee also argued that the Lessor was seeking to rely on a draconian clause which would allow it to receive all rentals in advance with no provision for accelerated receipt, particularly in circumstances where a breach might be minor. If this was what the lease intended, it would have used clear words. The Lessee said it could be interpreted as confirming that rent was payable until redelivery of the serviceable aircraft rather than on a specific date in 2026. Alternatively, the provision was arguably a penalty clause which could only be determined at trial.

Judgment

Charles Hollander KC held that the wording of 23.2.2(y) was unsatisfactory. However:

• It was clear from clauses 23.2.1 and 23.2.2 that the lease provides for several consequences which follow in an Event of Default, and that clause 23.2.2 provides for automatic consequences.
• 23.2.2(y) is an acceleration clause. The words “shall become due” deems sums which would not otherwise be due (yet) to be due and payable.
• The Lessee’s submission that 23.2.2(y) merely makes clear that rent is payable until redelivery of the serviceable aircraft was an unlikely interpretation in a provision intended to provide additional remedies for the Lessor.
• The deeming of monies due not otherwise due until a future date aligns with clause 10.2.1 which provides for monies to be potentially repayable after the Redelivery Date.
• The fact it is draconian is not unusual in a list of remedies in an aircraft lease. It is not unusual for a lessor to want to secure future payments in advance when there is a default, with monies being repayable after redelivery and full payment.

With respect to rent “due until redelivery of the serviceable Aircraft” it could not be known whether redelivery would take place earlier than 3 May 2026 or whether failure to return the aircraft in serviceable condition at the expiry of the lease would extend the rental beyond 2026. Nonetheless, the redelivery date was held to be 3 May 2026 and the acceleration provision could not have been intended to cover post 3 May 2026 sums. Nor would it cover a possible early redelivery which could not be contemplated. Clause 23.2.2(y) was an inelegant way of referring to 3 May 2026. This was supported by clause 10.2.1 which required the Lessor to repay rent received relating to the period after redelivery and payment of all sums due.

The Judge concluded that the Lessor was therefore entitled to receive rent payable for the period up to the date of redelivery under the lease, i.e. 3 May 2026, but that such rent should be repaid to the Lessee once the aircraft had in fact been redelivered in accordance with the terms of the lease and the Lessee had otherwise paid all sums due to the Lessor.

As for the contention that there was a penalty clause, there was nothing objectionable about an acceleration clause. Accordingly, there was no defence to this part of the claim either, and judgment was given for the sums claimed.

Comment

This judgment is an interesting analysis of how the court might interpret contractual provisions in an aircraft lease which might appear obscure and also what might constitute a penalty clause in this context. It is also a helpful reminder to ensure such provisions are drafted as clearly as possible to avoid any ambiguity.

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