Although Lithuania no longer has a national airline, charter companies are popular in the market, especially during holiday periods. Although the Lithuanian aviation industry was heavily affected by the COVID-19 pandemic, no charter company has gone bankrupt. In fact, just recently in spring 2024, one charter company undergoing restructuring finished restructuring procedures earlier than planned and successfully continues its operations from Lithuania.
Lithuanian Airports, a company operating three airports in Lithuania, has just recently presented a long-term master plan for the development of the entire network until 2052, aiming to develop a competitive model for Lithuanian airports, improve efficiency and clearly map out the infrastructure development steps for Vilnius, Kaunas, and Palanga airports in order to be able to seamlessly handle 17 million passengers a year in the future. It is noteworthy that approx €180 million in investments is planned for Vilnius airport (Lithuania’s main capital airport), an additional €50
million for Kaunas airport (in Lithuania’s second largest city), and €50 million for Palanga airport (in a busy Baltic Sea coast summer resort).
From the legal perspective, there have not been any remarkable updates or developments in aviation finance and leasing in recent years, save that Lithuania has just recently ratified the Cape Town Convention on International Interests in Mobile Equipment (2001).
Lithuanian Legal Framework for Aviation Finance and Leasing – General Overview
General Legal Framework
In Lithuania, there is no single regulation covering all aspects of aviation finance and leasing. The primary regulation governing the aviation industry in general is the Aviation Law, establishing the main rules regarding administration of aviation, use of airspace, aircraft and other facilities in aviation, airport operations, carriage, search and rescue, and pecuniary liability and insurance of entities related to aviation. A number of secondary laws implementing the Aviation Law, such as orders, decrees, etc., have been adopted by the Lithuanian Government, the Lithuanian Ministry of Transport and Communications, the Lithuanian Transport Competence Agency, the Lithuanian Transport Safety Administration, State Enterprise Oro navigacija (Air Navigation), and others.
As to financing transactions, the general rules are established by the Civil Code (governing the creation and perfection of pledges/mortgages under local law) and the Code of Civil Procedure (governing enforcement of pledges/mortgages). If financing is provided by Lithuanian lenders, other local laws may also be relevant (e.g. the Law on Financial Institutions, the Law on Banks, and other laws and secondary legislation of the Republic of Lithuania and of the European Union).
Aviation Authorities
Pursuant to the Aviation Law, the Government, the Ministry of National Defence, the Ministry of Transport and Communications, the Chief of Defence of the Republic of Lithuania, the Lithuanian Transport Safety Administration, and the Lithuanian Transport Competence Agency implement national management of the aviation sector in the country within the scope of their competence. As regards civil aviation, the core functions are vested in the Lithuanian Transport Safety Administration and the Lithuanian Transport Competence Agency, which took over the functions of the Lithuanian Civil Aviation Administration after its restructuring in 2019.
Registration of Aircraft in Lithuania
Requirements for aircraft registration in Lithuania are established in the Aviation Law, the Regulations of the Register of Civil Aircraft, the Rules for Registration of the Objects of the Register of Civil Aircraft, and the Rules for Issuing of Registration Marks and Marking of Civil Aircraft.
An aircraft is eligible for registration with the Register of Civil Aircraft if: (a) it has a certificate of airworthiness; (b) it is not registered in a foreign aircraft register; (c) the aircraft owner is: (i) a citizen of the Republic of Lithuania or another member state of the European Union; or (ii) another natural person who makes use of the right of free movement in the member states of the European Union provided to him by the legislation of the European Union; or (iii) a legal entity registered in the Republic of Lithuania; or (iv) the State of Lithuania or a municipality; or (v) the owner of the aircraft is not a person specified in items (i), (ii) and (iii) above, but the aircraft performs more than half of the flights from an airport of the Republic of Lithuania; or (vi) the operator of the aircraft is a person specified in items (i), (ii) or (iii) above; (d) the aircraft is not registered in the Register of Military Aircraft of the Republic of Lithuania.
The requirement specified in item (a) above does not apply in the case of test flights to obtain a certificate of airworthiness.
The minimum set of documents required for aircraft registration with the Register of Civil Aircraft is the following: (a) application to the Transport Competence Agency; (b) documents evidencing the owner’s legal title to the aircraft; (c) document evidencing the transfer and acceptance of the aircraft (for example, a transfer and acceptance deed); (d) if the aircraft was registered in a foreign aircraft register – the original certificate issued by that register, evidencing deregistration of the aircraft; if the aircraft was not registered in a foreign aircraft register, then the original certificate issued by the aircraft register of the country from which the aircraft is imported, evidencing that the aircraft was not registered there (if the original certificate cannot be provided, an exemption may be requested, with reasons why the original certificate cannot be provided); (e) registration (if legal entity) or personal identity (if natural person) documents of the owner and/ or operator of the aircraft; (f) documents evidencing the right to manage and/or operate the aircraft (for example, lease agreement) if not the owner of the aircraft (if the document is in a foreign language, the Transport Competence Agency may request its translation into Lithuanian); (g) power of attorney issued by the aircraft owner to the person submitting the documents to the Transport Competence Agency; (h) documents evidencing payment of the registration fee (which depends on the aircraft specifications and whether registration is regular or expedited).
When copies of documents are provided, these have to be certified by a public notary and, where applicable, certified with an Apostille or legalised and translated into the Lithuanian language (unless otherwise agreed with the aviation authority).
Title Transfers
Lithuanian laws provide that title and other rights in rem to real estate are governed by the laws of the country in which the real estate is located (lex rei sitae). Under Lithuanian laws, aircraft registered in Lithuania are considered real estate; therefore, title and other rights in rem in registered aircraft are governed by the laws of the country of aircraft registration (lex registri).
The agreement for the sale and purchase of an aircraft registered with the Lithuanian Civil Aircraft Register is governed by Lithuanian law and requires certification by a notary in Lithuania. Aircraft sale and purchase agreements concluded in breach of the notarisation requirements are null and void. Therefore, if the agreement for the sale and purchase of a Lithuania-registered aircraft is governed by foreign law, the Transport Competence Agency may refuse to register the change of the owner with the Lithuanian Civil Aircraft Register, and in case of a dispute Lithuanian courts may refuse to apply foreign law in respect of the transaction.
Nonetheless, in respect of aircraft registered in a foreign Civil Aircraft Register, the rules of Lithuanian law would not apply. Thus, application of foreign law would be recognised in Lithuania, unless doing so conflicts with the public order and Lithuanian mandatory statutory provisions.
Registration of Lease Interests in Lithuania
There is a requirement when applying for aircraft registration with the Lithuanian Civil Aircraft Register to provide the aircraft lease agreement to the Transport Competence Agency to substantiate the nexus with Lithuania (i.e. that the requirements for aircraft registration listed above are met). The respective aircraft is indicated in the aircraft registration certificate issued by the Transport Competence Agency and usually also in the operations specifications of the aircraft operator.
Regulation (EC) No 1008/2008 of the European Parliament and of the Council of 24 September 2008 entitles an air carrier (lessee) to take on lease aircraft registered in both EU and non EU countries. A Lithuanian air carrier may be required to obtain prior approval of the Transport Competence Agency subject to the requirements contained in the Regulation.
Aircraft Mortgage
In Lithuania, security for obligations can be established over aircraft. This is usually done by creating a mortgage over the aircraft. Security can also be established over other types of collateral (e.g. over movable items or rights, such as funds in bank accounts). The security interest is effective upon creation, but may be invoked against third parties, with certain exceptions, only if registered in the Register of Contracts and Liens (for aircraft mortgages and pledges of movables and rights) or in the Real Estate Register (for real estate mortgages). Aircraft mortgage (even though legally treated as real estate) is subject to registration with the Register of Contracts and Liens.
The pledge/mortgage agreement can be signed in a free form and may be structured in a way acceptable to the parties (however, it must contain certain mandatory prerequisites (requirement as to substance), as established by the Lithuanian Civil Code).
The aircraft mortgage agreement must be certified by a notary in Lithuania. The notary certifying the transaction will require the mortgage agreement to be drafted in the Lithuanian language. A bilingual version of the mortgage agreement can be used, but the Lithuanian version would have to prevail. In certain cases, for instance, the English language can be chosen as the prevailing language, but notaries will then require that, along with the other parties, the agreement is signed by the translator confirming that the translation is correct. The notary notifies details of the notarised mortgage agreement to the Register of Contracts and Liens for registration. Registration normally takes 1 to 2 business days from the date of receipt of such notification from the notary.
To discharge or cancel a mortgage and/or pledge, a relevant request has to be submitted to the notary by the creditor, or by the collateral owner, in the latter case together with evidence showing the proper fulfilment of the secured obligation. Upon receipt of such request, the notary notifies the Real Estate Register and/or the Register of Contracts and Liens that the mortgage and/or pledge should be deregistered. The mortgage and/or pledge is removed from the respective register usually within one business day after receipt of such notification from the notary.
Status of Cape Town Convention: Ratification and Case Law
The Cape Town Convention on International Interests in Mobile Equipment (2001) has been ratified in Lithuania just recently (on 14 June 2024). The law on ratification of the Cape Town Convention will enter into force and the implementing acts should be adopted by mid next year.
It is noteworthy that there are already some case law developments concerning the Cape Town Convention (although it has been ratified by Lithuania recently). In particular, in 2022 the Lithuanian Supreme Court ruled that the provisions of the Cape Town Convention concerning enforcement actions (protecting the rights of the holder of the collateral or international interest) would not be applicable without Lithuania’s independent accession to this international treaty.
Repossession of Aircraft and Enforcement of Security
Repossession Following Lease Termination or Bankruptcy of the Lessee
Under Lithuanian law, the use of self-help remedies is essentially prohibited or very strictly limited to the cases clearly prescribed under applicable laws. This means that the aircraft should be repossessed in a normal business-like manner, under the terms of the lease agreement. In case of a dispute, the parties should bring the matter to court. Once the court issues a judgment, the same is submitted to the bailiff for enforcement.
If the lessee is undergoing bankruptcy, unless stated otherwise in the lease agreement, the lease is valid and enforceable until terminated by the decision of the bankruptcy administrator, i.e. the lessee undergoing bankruptcy is eligible to carry on its business activities. Upon termination of the lease, the aircraft may be repossessed in a normal business-like manner, i.e. the bankruptcy administrator cannot exercise and assume more rights than the entity undergoing bankruptcy had.
Enforcement of Security
Mortgage and pledge enforcement procedures are practically the same. Enforcement is carried out through a notary and a bailiff. If the enforcement grounds established under the secured obligation and/or the applicable law exist, a creditor may apply to a notary for an enforcement record, based on which a bailiff starts the forced enforcement procedure. When a creditor (pledgee) applies for an enforcement record, the notary, having received the pledgee’s request for an enforcement record, must firstly verify whether: (i) the person submitting the request is the pledgee; (ii) the data provided in the pledgee’s request (pledge/mortgage identification code, claim amount, details of the debtor, pledgor/mortgagor and their addresses) conforms to the data provided in the relevant public register; (iii) whether the maturity date of the secured obligation has expired or, if the pledgee wishes to enforce the pledge before the maturity date, whether other grounds for enforcement exist. Having verified such data, the notary sends a notice to the debtor, proposing that the debtor repay the debt within 20 days from the date of the notice or submit evidence that the creditor’s claim is invalid.
The notary will make or refuse to make an enforcement record based on the information provided by the creditor and the debtor. If the notary makes an enforcement record, the notary promptly notifies the relevant public register accordingly. From the date of registration of the enforcement record, the debtor has no right to dispose of the collateral without the creditor’s consent.
An enforcement record issued by a notary must be submitted to a bailiff for enforcement. Usually, a creditor may choose from the following enforcement options: (a) to sell the collateral in a forced auction; or (b) to request transferring the collateral to the creditor for administration (in such case the creditor is entitled to cover its claim from the proceeds received during the administration). If the proceeds of sale of the collateral do not entirely cover the creditor’s claim, the creditor is entitled to initiate general debt recovery proceedings.
By Eva Suduiko, Partner, and Aurelija Balciune, Specialist Counsel, Cobalt
