Airport Premises - traps for the unwary

News /

Taking a tenancy of airport real estate may at first appear little different to leasing any other type of commercial property. However, the operational requirements of a company wishing to take space at an airport need to be thought through carefully; simply using “standard” documentation that would be suitable for warehouse or office premises in other locations may expose a tenant to unexpected factors unique to an airport environment.

Ince & Co real estate partner Trevor Garrood says: “In our experience there is often insufficient focus on legal rights and ancillary arrangements which airport occupiers may need but which would not be relevant elsewhere.”

“For those committing to a long term lease of a hangar or warehouse facilities where the user or its customers will need to move aircraft in and out, there needs to be legal certainty on a whole raft of ancillary issues” he adds.

Trevor goes on to explain: “The tenant should not only be sure that aircraft will be able to use the necessary runways and taxiways, but also that other practical and financial issues potentially critical to the operation and economic viability of the tenant's business are taken into account. These issues and the costs associated with them are largely in the control of the airport owner (subject to regulation if applicable to the airport in question). Examples would include the allocation of apron-level support accommodation, the level of landing fees and arrangements as to supply of fuel (and, at smaller airports where in the control of the airport owner, the allocation of take-off and landing slots).

Rights and Reservations

Recently one of our clients wished to take a long lease of airport premises. It was then intended that the client would build a new operational facility on the site at a cost of many millions of pounds. However, it soon became apparent that there had been insufficient consideration and no discussion concerning the tenant having rights to use runways and taxiways (or even to fly aircraft in and out of the airport) nor were there any provisions concerning the availability of fuel supplies, ground handling facilities or other requirements. The initial stance of the landlord was that none of these issues would be a problem in practice and “of course” the facilities would always be available. However, it soon became apparent that the landlord also expected to be able to raise prices and (as this was a relatively small airport and therefore not subject to IATA slot scheduling) control take-off and landing times and other key issues as it saw fit.

We therefore negotiated specific provisions in order to protect our client, including cost caps and the imposition of positive obligations on the landlord to provide specified services. One surprising aspect of the discussions was that the landlord was able to say, truthfully, that other tenants had not raised these points; they all seemed to have assumed that everything would simply fall into place, year after year, provided by a benevolent landlord who would not seek to gain any advantage. We see this as a commercially naïve and risky approach.

Break options

Apart from ensuring that all necessary rights are given in the lease or documents linked to it, another possible protection for tenants is the incorporation of an option to terminate where circumstances relating to the airport as a whole stand to render the tenant's business unviable. This may be due, for example, to increased costs, or such issues as the landlord being unable or unwilling to continue to provide particular services or facilities. Whilst tenant options to terminate are quite common for commercial premises generally, they are nearly always at fixed intervals (usually every five years) throughout the lease term. Having to wait up to five years to exercise such a break option would not be adequate protection for a tenant faced with significant increases in cost or curtailment of services, hence the potential need for an additional, “non-standard”, type of break option. Where a tenant has sunk significant capital cost into a project then termination rights of this nature will of course still only provide part of the answer, but so long as the financial modelling takes these types of factor into account the tenant can go into the transaction on an informed basis.

How far one is able to go in negotiating such protections depends of course on the size and sophistication of the airport in question, the level of demand for property there and therefore the parties' negotiating strength. The position will also vary depending on the extent to which support services are provided by the airport itself or by third party service providers.

At larger airports where take-off and landing slots are coordinated by Airport Coordination Limited in the UK or its equivalent under the IATA regime in the relevant jurisdiction, airport landlords may require evidence that you have obtained a slot or slots from the relevant coordinating authority before granting a lease or other property rights.

Users of airport properties will also have to consider their readiness to comply with security requirements (in the UK the Aviation Security Act 1982 (as amended by the Policing and Crime Act 2009)) and may have to provide the landlord/airport operator with evidence of this compliance. This is likely to include a requirement for security clearance for relevant personnel, particularly if the property is “airside”.

Having in place proper health and safety and emergency response procedures is of particular sensitivity at airport locations and these need to be coordinated with the airport operator (and security services where required). Again this is something that the landlord/airport operator may need to see evidence of.

Compliance with noise and emissions regulations (which are likely to need to be coordinated with and through the airport operator) may restrict the usage of the property and add to administrative and compliance burden.

In relation to any use of property or facilities within an airport terminal, the key issue for negotiation is location: in which terminal – where within the terminal – the ability of the airport to allocate alternative locations for security or other reasons and the impact of these matters on the pricing of facilities and any ability of the user to terminate or vary the terms of its occupation if changes are made.

In summary, leasing of or capital expenditure on airport premises will have many aspects which are no different from any other type of real estate, but there may well be a whole layer of specific additional issues which need to be thought through and allowed for. These will vary from case to case. In the example described above, if the specific provision had not been dealt with in the legal documentation the client could, in a few years, have found itself either with an unviable operation or at the mercy of the landlord/airport owner as to the imposition of increasing charges or operational constraints.

Ince & Co has a strong practice in the aviation, transport and logistics sectors and considerable experience in advising clients on real estate leases and projects for these types of business.

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