Aviation finance in Japan: overview

A Q&A guide to aviation finance in Japan.

This Q&A provides a high level overview of key practical issues including financing options for purchasing aircraft; registration and deregistration requirements; transfer of title; security, including aircraft mortgages; transfer of security; enforcement of security and repossession; and application of the Cape Town Convention.

To compare answers across multiple jurisdictions, visit the Aviation Finance Country Q&A tool.

The Q&A is part of the global guide to aviation finance. For a full list of jurisdictional Q&As visit www.practicallaw.com/aviationfinance-guide.

Contents

Financing options

1. What are the main options available for financing the purchase of an aircraft? How are aircraft purchases typically financed?

The major financing options for the purchase of an aircraft are:

  • Finance leases.

  • Operating leases.

In the case of finance leases, the leasing structure known as a Japanese operating lease with a purchase option (JOLCO) is popular. A JOLCO is an operating lease for the purpose of accounting and tax, which gives the lessee an option to purchase the aircraft at the end of the lease, or at some point during the lease period, at the purchase price determined at the commencement of the lease. Although it is an option, it is generally used in practice.

Synthetic leases are also used as a type of finance lease. A synthetic lease is an operating lease for the purpose of accounting, but which is intended as a finance lease. It is structured in a way so that the lessee does not recognise the aircraft as its own asset, and the rent is considered as a lessee's expense.

 
2. What are the issues arising in relation to the various financing options?

If the lessor is a non-Japanese entity, a Japanese title holder is required for the purpose of registration of the aircraft with the Japanese Civil Aviation Bureau. In this case, it is common for the aircraft to be sold by the lessor to a nominal title holder, with the title holder retaining title during the lease term and then selling the aircraft back to the lessor.

Another possible issue is withholding tax imposed on the lease rent. In particular, lease rent paid from a Japanese lessee to an Irish lessor is subject to Japanese withholding tax. In such cases, an intermediary lessor, such as an entity in Norway, is generally used.

 

Registration and deregistration requirements

Registration

3. What is the procedure for registration of an aircraft?

Aircraft are registered by the owner of the aircraft with the Japanese Civil Aviation Bureau, which is a department of the Ministry of Land, Infrastructure, Transportation and Tourism of Japan.

 
4. What is the procedure for registration of aircraft mortgages?

Mortgages (teito-ken) over aircraft are registered at the Japanese Civil Aviation Bureau (JCAB). The application is made by the owner/mortgagor and the mortgagee. There is no limitation on who can be eligible as a mortgagee.

The amount of debt to be secured by the mortgage and the rate of interest are registered. The amount of the secured obligation must be stated in yen, and interest must be stated at a fixed rate (even if the actual rate is floating). The JCAB aircraft registration identifies the airframe by manufacturer, type and serial number (such as "Boeing 737-800 msn xxxxxx"). Engines and parts are considered as part of the aircraft, and a mortgage over the aircraft covers engines and parts installed on the aircraft.

No separate registration is available for engines and spare parts, and no separate mortgage over engines or spare parts can be registered.

The registration fee payable to the government is 0.3% of the secured obligation. As this is rather expensive, a provisional mortgage registration is quite common in order to secure priority. A full mortgage registration is required for enforcement of the mortgage.

 
5. Can aircraft leases be registered? If so what is the procedure for registration of aircraft leases?

There is no registration of aircraft leases in Japan.

 
6. What is the effect of registration of:
  • An aircraft?

  • An aircraft mortgage?

  • An aircraft lease?

Aircraft

An aircraft that is registered with the Japanese Civil Aviation Bureau (JCAB) is considered to have Japanese nationality. Aircraft without a nationality cannot be operated in Japan. The registration of an aircraft constitutes prima facie evidence of ownership.

Aircraft mortgage

To perfect an aircraft mortgage, the mortgage must be registered with the JCAB. The registration of the mortgage is sufficient to perfect the mortgage. The JCAB aircraft registry is open to the public, but the registration of the mortgage is not notified to any third party.

Aircraft lease

Aircraft leases cannot be registered in Japan.

 
7. What is the procedure for obtaining a certificate of airworthiness?

The Japanese Civil Aviation Bureau (JCAB) provides certificates of airworthiness to aircraft registered with the JCAB. If a type certificate has been granted for the aircraft type (such as B737-800, A320-200, and so on), the certificate of airworthiness is typically given almost automatically without delay.

It is not usual practice to apply for a certificate of airworthiness without first obtaining a type certificate. The period required to obtain a type certificate depends on the specific case. In the case of aircraft approved by the US Federal Aviation Authority and/or the European Aviation Safety Agency, the JCAB will grant a type certificate with only minor modifications.

Deregistration

8. What is the effect of deregistration of:
  • An aircraft?

  • An aircraft mortgage?

  • An aircraft lease?

Aircraft

An aircraft that is deregistered from the Japanese Civil Aviation Bureau's (JCAB's) registry loses its Japanese nationality, and the airworthiness certificate issued by the JCAB ceases to be effective. It can take a week or two to obtain a certified copy of the aircraft registry showing the deregistration of the aircraft.

Deregistration is usually performed in order to register an aircraft in another jurisdiction. At the request of the registered owner immediately prior to deregistration, the JCAB will give formal notice to the aviation authority of the new jurisdiction.

Aircraft mortgage

A mortgage can be deregistered following discharge of the secured obligation, to show that the aircraft is not subject to a mortgage anymore. In other cases, deregistration will cause the mortgage to lose its perfection. It can take one or two weeks to obtain a certified copy of the aircraft registry showing deregistration of the mortgage.

Aircraft lease

Aircraft leases cannot be registered in Japan.

 

Transfer of title

9. How is legal title to an aircraft transferred?

Airframe

Under Japanese law, title to airframes can be transferred by agreement between the existing and new owners. A transfer is not effective against third parties unless and until the transfer is registered with the Japanese Civil Aviation Bureau (JCAB).

It is common for title to be transferred by way of delivery of a bill of sale. A notarised bill of sale from the previous owner (or if the previous owner is a Japanese entity or individual, the bill of sale executed by a registered seal) is required for:

  • Registration of the transfer of title with the JCAB.

  • Fresh registration of the aircraft.

The bill of sale must be:

  • In a particular form.

  • In the Japanese language.

  • Executed by affixing the registered seal of the owner together with a seal certificate issued by the regional Legal Affairs Bureau (for a company) or local government (for an individual).

  • Notarised, in the case of fresh registration with the JCAB and the previous owner (including the manufacturer) is not a Japanese entity or individual.

Engine

Under Japanese law, title to aircraft engines can be transferred by agreement between the existing and new owners. A transfer is not effective against third parties unless and until possession of the engine is transferred. Engines cannot be registered with the JCAB.

 

Security

Mortgages

10. What are the types of aircraft mortgages available? What are the validity requirements for aircraft mortgages?

A mortgage can be created over an aircraft/airframe. For a mortgage to be valid, a valid mortgage agreement setting out the secured obligations is required. A mortgage over an aircraft registered with the Japanese Civil Aviation Bureau (JCAB) must be registered with the JCAB. For the purpose of registration, the amount of the secured obligation under the mortgage denominated in Japanese yen and the rate of interest must be specified.

See Question 4 on the registration procedure for aircraft mortgages.

 
11. Will a registered mortgage take priority over other mortgages and charges over the aircraft?

Aircraft mortgages can only be perfected through registration with the Japanese Civil Aviation Bureau. Mortgages that are not registered are not effective against third parties. The priority of security interests over aircraft is determined in accordance with the order of registration of such interests, including provisional registration.

 
12. Can spare parts be subject to an aircraft mortgage? If not, are there any other forms of security that can be taken over spare parts?

Spare parts are not registrable and cannot be subject to an aircraft mortgage. Security over spare parts can take the form of a:

  • Security by way of assignment of title (joto tanpo).

  • Pledge (shichi-ken).

For perfection, the possession must be transferred from the debtor to the secured party. Transfer of possession does not always require transferring physical possession. However, for pledges, an agreement that the pledgor has possession on behalf of the pledgee is not sufficient.

No registration is available. Even if a security interest is perfected, there may be cases where bona fide third parties that acquire the property are protected.

A name plate or placard is often affixed to the parts in order to protect any security interests, although these measures are not necessarily sufficient in themselves to protect the relevant security interests.

Leases

13. What forms of security can be granted over an aircraft lease?

It is possible to assign an aircraft lease. The law governing the assignment must be the same as the law governing the lease agreement. The assignment will be perfected if it complies with the requirements of that governing law. Under Japanese law, an assignment is only effective against the lessee and other third parties if either:

  • The lessee consents to the assignment in writing and an official date is affixed to this document of consent by a Japanese notary.

  • The lessee receives a notice of the assignment by way of a letter, the content and date of which are certified by a post office.

Other forms of security

14. What other forms of security can be taken over an aircraft?

Airframe

Mortgages (teito-ken) are the usual recommended form of security. In some cases, security can be obtained through the use of a special purpose company as registered owner, which shares are pledged in favour of the secured parties.

Engine

As for spare parts, security over an engine can be taken in the form of a:

  • Security by way of assignment of title (joto tanpo).

  • Pledge (shichi-ken).

In each case, certain formalities are required for the purpose of perfection, but no registration is available. A name plate or placard is often affixed to the parts in order to protect any security interests, although these measures are not necessarily sufficient in themselves to protect the relevant security interests.

 
15. What other forms of security over an aircraft can be registered?

No other forms of security over an aircraft can be registered.

 

Transfer of security

16. Is it possible to transfer security interests over an aircraft? Are there specific issues of local law when transferring security interests?

It is possible to transfer security interests over an aircraft. A registered mortgage can be transferred by the current mortgagee to a new mortgagee in conjunction with a transfer of security interest.

 
17. Is a transfer of security subject to registration requirements?

Transfers of aircraft mortgages must be perfected by registration with the Japanese Civil Aviation Bureau.

 

Enforcement of security and repossession

Mortgages

18. What are the circumstances in which a mortgagee can take possession of the aircraft and/or sell the aircraft? What requirements must the mortgagee comply with?

Subject to certain provisions of insolvency law and insolvency proceedings, the mortgagee can enforce its mortgage in the case of default under the secured obligations.

With respect to the repossession of aircraft, it should generally be noted that a lender financing the lessor may have a mortgage to secure the lessor's debt, and unless both the lessee and the lessor default, the lender cannot enforce the mortgage due to quiet enjoyment covenants in favour of the lessee. Even in cases where the mortgage can be enforced, a considerable amount of deposit is required if the aircraft is being operated as a commercial passenger or freight aircraft. Historically, there have been no cases of repossession of aircraft operated by a Japanese scheduled air carrier.

 
19. What is the procedure for repossession of the aircraft?

For the enforcement of a mortgage, the mortgagee must apply to a court for an order of enforcement. At the request of the mortgagee, a court bailiff will take the nationality certificate relating to the aircraft and retain it until the aircraft is owned by a new owner. An auction will be held for the sale of aircraft.

A court order is required to obtain an injunction, and the specific procedure depends on the type of injunction. If the injunction is to prevent the owner from transferring title to the aircraft, the injunction can take effect by registering the relevant order with the Japanese Civil Aviation Bureau.

 
20. Will local courts recognise a choice of foreign law in an aircraft mortgage? Are there any mandatory local rules that apply, despite a choice of foreign law?

Mortgages registered with the Japanese Civil Aviation Bureau must be governed by Japanese law.

 
21. Will local courts recognise and enforce a foreign court judgment in favour of a mortgagee?

A final and conclusive judgment of a foreign court can be enforced in a court of Japan without further consideration of the merits of the case if both:

  • Service of process has been duly effected in respect of the foreign judgment.

  • Japanese courts receive reciprocal treatment in the courts of the foreign jurisdiction in question.

Other forms of security

22. What is the applicable procedure for repossession of an aircraft under other forms of security interests?

If an obligation is secured by way of assignment (joto tanpo) and the debtor is in default, the creditor can repossess the aircraft. If the debtor refuses to transfer possession of the aircraft, the creditor can obtain and enforce a judgment. A court bailiff can take possession of the aircraft and transfer possession to the creditor.

Leases

23. In the event of a default event under an aircraft lease, can the lessor take possession of the aircraft without judicial intervention?

In the event of a default under an aircraft lease, the lessor can repossess the aircraft. If the lessee refuses to return the aircraft to the lessor, the lessor can obtain and enforce a judgment. A court bailiff can then take possession of the aircraft and transfer possession to the lessor.

 
24. What is the procedure for taking possession of an aircraft before the expiration of a lease?

If the lessee does not perform its obligation to return the aircraft to the lessor, the lessor can obtain and enforce a judgement. A court bailiff can then take possession of the aircraft and transfer possession to the lessor.

The lessor can also obtain a court injunction to secure its interests. As it can take a relatively long period to obtain a final judgment ordering the return of the aircraft to the lessor, in order to secure the lessor's right, the lessor can apply for an injunction order to prevent any transfer of possession of the aircraft to a third party.

 
25. If recovery of the aircraft is contested by the lessee and a court judgment is obtained in favour of the lessor, how long is it likely to take to gain possession of the aircraft?

If the court judgment is final, it can be enforced immediately, although it can take some time to arrange for a court bailiff with jurisdiction over the current location of the aircraft to take possession of the aircraft.

 
26. Will local courts recognise a foreign court judgment in favour of a lessor?
 

Cape Town Convention

27. Has your country signed and ratified the Convention on International Interests in Mobile Equipment (Cape Town Convention)?

Japan has not signed the Cape Town Convention. There is no official discussion as to whether Japan should become a signatory.

 
28. Has ratification of the Cape Town Convention caused any conflicts or issues with local laws?

Japan has not signed the Cape Town Convention.

 
29. What is the legal position regarding non-consensual rights and interests under Article 39 of the Cape Town Convention?

Japan has not signed the Cape Town Convention.

 
30. Has your country adopted the remedies on insolvency provided under Article XI of the Protocol to the Cape Town Convention?

Japan has not signed the Cape Town Convention.

 
31. What is the procedure to file an irrevocable deregistration and export request authorisation (IDERA)?

IDERAs under the Cape Town Convention are not available for aircraft registered with the Japanese Civil Aviation Bureau.

 

Reform

32. Are there any proposals for reform in the area of aviation finance?

There have been discussions on reforming tax regulations. This reform would abolish the availability of accelerated depreciation. This change could have a considerable impact on transactions relating to Japanese operating leases with purchase option.

 

Online resources

Law Database System of the Ministry of Justice

W http://law.e-gov.go.jp/htmldata/S27/S27HO231.html ( www.practicallaw.com/6-624-3693)

Description. This link provides access to the Japanese text of the Civil Aeronautics Act No. 231 of 15 July 1952, as amended. This database is provided by the Ministry of Justice of Japan.

Japanese Law Translation Database System of the Ministry of Justice

W www.japaneselawtranslation.go.jp/law/detail/?id=37&vm=&re=02&new=1

Description. This link provides access to the English translation of the Civil Aeronautics Act No. 231 of 15 July 1952, as amended. This database is provided by the Ministry of Justice of Japan.



Contributor profile

Hisao Hirose, Partner

Squire Patton Boggs

T +813 5774 1800
F +813 5774 1818
E hisao.hirose@squirepb.com
W www.squirepattonboggs.com

Professional qualifications. Japan, Attorney-at-law (bengoshi), 1979

Areas of practice. Aviation finance; asset finance; aviation regulation.

Recent transactions

  • Acting for Japanese leasing companies in relation to Japanese operating leases for airlines in Europe and Asia.

  • Acting for Japanese leasing companies and Japanese investors in relation to the purchase of aircraft on lease to airlines in Europe, Asia and the US.

  • Acting for Japanese airlines in relation to aircraft leases.

  • Acting for Japanese and other banks and Japanese leasing companies in relation to financing for aircraft lease transactions.

Languages. English, Japanese

Professional associations/memberships.

  • Japan Federation of Bar Associations.

  • Dai-ni Tokyo Bar Association.


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