In aircraft transactions, deposits demonstrate a buyer’s commitment to the purchase. While there is no one-size-fits-all, it needs to be at a level reflecting the value of the aircraft and at an amount mutually agreed upon through negotiation between the buyer and the seller.
Generally, a soft deposit is refundable until the buyer issues a Letter Of Acceptance or Technical Acceptance to the seller.
Soft deposits are used for quick deals with minimal contracting. This typically occurs when there is a strong foundation of mutual trust between the buyer and seller and/or when the aircraft’s quality is undeniable. The initial Letter of Intent will include terms that are effectively a soft deposit.
Understandably, buyers prefer their deposit to remain refundable for as long as possible.
A soft deposit allows for quick contracting and/or allows the buyer to reject an aircraft without the back-and-forth of navigating legal red tape if something unexpected is discovered during the PPE (Pre-purchase evaluation) that might affect their buying decision.
Naturally, a soft deposit favors the buyer. If the PPE reveals undesirable conditions, or if the buyer changes their mind entirely, they can reject the aircraft. In these cases, the APA (aircraft purchase agreement) often has a clause that allows the buyer to be reimbursed for the cost of the PPE.
The greatest risk of a soft deposit is transferred to the seller. Until the APA is signed, the buyer may walk away from the transaction with little consequence.
There are a few risks to the buyer with a soft deposit. In some cases, where the aircraft is an in-demand aircraft model with a good pedigree, other buyers may be willing to commit a hard deposit. The buyer who offered the soft deposit will generally be disadvantaged, assuming there are other comparable offers. Sellers view a buyer who is willing to commit a hard deposit more favorably.
A hard deposit is when the buyer commits non-refundable funds at the signing of the Aircraft Purchase Agreement. It is only refundable if the aircraft cannot be made to meet delivery conditions. For example, the discovery of unknown damage history.
Except in very limited circumstances, the hard deposit becomes non-refundable once the APA is signed before the PPE. With the hard deposit, the buyer bears the risk because they have limited knowledge of the aircraft’s condition until the panels are removed during the PPE.
When you want certainty of the transaction to go through if there is no fault with the aircraft. A seller will always prefer a hard deposit, but it’s not always practical.
A hard deposit is a display of a commitment from the buyer. And brings a higher level of comfort for the seller.
If some conditions arise during the PPE that might affect a decision to buy the aircraft and it was not properly addressed during contracting, a buyer may need to forfeit the deposit to get out of the deal.
It’s important that the major risks are clearly stated as exceptions within the APA. However, the seller may push back if the exceptions are too broad.
The strategy behind whether to implement a Hard vs. Soft Deposit in an aircraft transaction depends on numerous factors.
Other important factors also play a role.
Navigating aircraft transaction deposits can be complex, involving hard versus soft deposits and varying risk tolerances. The Duncan Aviation Aircraft Sales & Acquisitions team simplifies this process. We:
Let Duncan Aviation guide you through deposit negotiations, ensuring a smooth and efficient transaction.
