Your Obligations Under an Aircraft Security Agreement: Covenants, Default and Repossession
For borrowers about to sign, or already living with, an aircraft security agreement. This page covers what you promise the lender, what counts as default, and how repossession and deficiencies work, so a covenant breach never catches you by surprise.
How the security agreement fits with your other loan documents
Most piston loans close on three core documents. The promissory note is your promise to pay: amount, rate, term and late charges. The security agreement pledges the aircraft and contains the covenants. Some lenders add a separate loan agreement with financial reporting or guaranty terms. The lender records the security agreement with the FAA to perfect its lien, a process explained in FAA lien recording. For a walk-through of every document in the stack, see aircraft loan documents explained.
The collateral clause usually covers more than the airframe: engines, propellers, avionics, parts and accessories installed now or later, the logbooks and records, and insurance proceeds. An avionics upgrade you pay for in cash becomes the lender's collateral the day it is installed.
The covenants: what you promise to do (and not do)
| Covenant | What it typically requires | How owners trip it |
|---|---|---|
| Maintenance and airworthiness | Keep the aircraft airworthy; complete the annual within the preceding 12 calendar months (14 CFR 91.409); comply with ADs; keep complete records; use qualified maintenance | An annual that lapses while the aircraft sits; a deferred recurring AD; missing logbook entries |
| Insurance | Hull coverage at least equal to the loan balance or an agreed value; lender named loss payee with a breach-of-warranty endorsement; liability limits set by the lender; advance notice to the lender of cancellation | Letting a policy lapse at renewal; flying outside the pilot warranty; switching carriers without sending the lender a certificate |
| Registration | Keep the FAA registration current (7-year cycle) and the address up to date (30 days) | An expired certificate after a move, because the renewal notice went to an old address |
| Basing and location | Base the aircraft at the stated airport; notify, or get consent, before moving it; limits on time outside the U.S. | Relocating for a new job, or spending a winter in the Bahamas, without telling the lender |
| Use | No leasing, rental, flight instruction for hire, charter or other commercial use without written consent; no illegal use | A leaseback to a flight school, or "sharing" with a club that pays by the hour |
| Liens and taxes | No other liens; pay shop bills, hangar rent and property or use taxes when due | A disputed shop invoice that turns into a claim of lien |
| Transfers | No sale, transfer to an LLC or trust, or sale of partnership shares without consent | Moving the aircraft into a new LLC for liability reasons without telling the lender |
| Parts and equipment | No removal of engines, props or avionics unless replaced with equal or better parts, which then become collateral | Pulling a GPS navigator to sell before upgrading the panel |
| Inspection and reporting | Let the lender inspect the aircraft and records; provide financial statements if required | Ignoring a request for the last annual sign-off |
Insurance terms differ by lender. The details of loss payee, agreed value and pilot warranties are covered in insurance for financed aircraft.
What counts as an event of default?
Aircraft security agreements commonly list these defaults. Some come with notice and a cure period; others take effect immediately.
- Non-payment beyond any grace period. A late charge may apply first, but repeated lateness can still be a default.
- Insurance lapse, even for a day. This is often an immediate default because the collateral is suddenly unprotected.
- Breach of a covenant: unauthorized use, relocation, removal of parts, an expired annual or registration.
- Sale, transfer or new lien without consent.
- False statements in the application or later reports.
- Insolvency or bankruptcy of the borrower or a guarantor.
- Seizure, confiscation or total loss of the aircraft.
- Death of an individual borrower or guarantor, in some agreements.
- Cross-default: a default on another loan with the same lender, or sometimes on any debt above a threshold.
Cross-default and cross-collateralization
A cross-default clause links your aircraft loan to other debts. If you miss a payment on a business line with the same bank, the aircraft loan can be called too. A cross-collateralization clause goes further: it makes the aircraft security for your other debts with that lender, so paying off the aircraft loan may not release the lien. Look for phrases like "all obligations of Borrower to Lender, now existing or hereafter arising". If your banking relationship is broad, ask for the clause to be limited to this loan.
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What happens after a default: remedies and repossession basics
Remedies come from the agreement and from Article 9 of the Uniform Commercial Code as adopted in your state. The general sequence:
- Notice and acceleration. The lender declares a default and may make the whole balance due immediately. Default interest and collection costs often start at this point.
- Repossession. Under UCC 9-609, a lender may take possession without a court order if it can do so without breaching the peace. Aircraft recovery specialists and ferry pilots handle this. If the aircraft is locked away or you object, the lender usually has to go to court.
- Notice of sale. UCC 9-611 generally requires reasonable notice to you and to guarantors before the aircraft is sold.
- Commercially reasonable sale. UCC 9-610 requires every aspect of the sale to be commercially reasonable. That is not the same as getting top dollar.
- Application of proceeds and deficiency. Under UCC 9-615, proceeds go first to the lender's costs, then to the debt. You owe any shortfall, and you get any surplus.
- Right to redeem. Until the sale, UCC 9-623 generally lets you redeem the aircraft by paying the full obligation plus the lender's expenses.
Worked example: why a repossession costs far more than a sale
Take a $212,500 loan at 8.00% over 20 years. The payment is $1,777 a month, and after 36 payments the balance is $197,876. Then the borrower defaults. The costs below are illustrative assumptions; your agreement and the market will differ.
| Repossession path | Amount |
|---|---|
| Balance at default | $197,876 |
| Interest during 4 months to recover and sell (contract rate) | $5,277 |
| Recovery and ferry | $4,000 |
| Storage and insurance while held | $3,000 |
| Annual and squawks to make it saleable | $4,500 |
| Broker commission (5% of sale) | $8,750 |
| Legal fees | $3,500 |
| Less: forced-sale price | ($175,000) |
| Deficiency you still owe | $51,903 |
Compare a voluntary sale at the same point. If the owner lists early and sells for $205,000 less a 5% commission, the gap to the payoff is $3,126. That is a problem you can solve with a check, not a judgment. The decision rule: if you can see a default coming, call the lender and talk about a sale or a modification before the first missed payment.
What to negotiate before you sign
- Notice and cure periods for non-payment defaults, such as a written notice and a period to fix a paperwork lapse.
- Relocation by notice rather than consent, and a stated allowance for trips outside the U.S.
- Pre-approved uses you already plan: a named co-owner, a leaseback, or instruction you give in your own aircraft.
- Consent "not unreasonably withheld" for transfers to your own LLC.
- Cross-default limited to this loan, and no cross-collateralization.
- Parts replacement language that plainly allows exchange overhauls and avionics swaps of equal or better value.
Not every lender will agree to every change, but it costs nothing to ask before signing. A financing specialist can compare how lenders in the network handle these clauses.
A compliance calendar for financed owners
| Item | When | Send to lender? |
|---|---|---|
| Annual inspection | Within 12 calendar months of the last one | If requested; keep the sign-off handy |
| Insurance renewal | Yearly, before expiration | Yes: the new certificate naming the lender |
| Recurring ADs | Per each AD's interval | No, but log compliance |
| FAA registration renewal | In the 6 months before the 7-year expiration | No, but a lapse is a breach |
| Address change with the FAA | Within 30 days of moving | Tell the lender too |
| Relocation, new use, new co-owner, LLC transfer | Before it happens | Yes, in writing |
How this guide differs from related guides
This page covers your obligations as a borrower. How the lender records and ranks its lien is in FAA lien recording. Insurance specifics are in aircraft insurance requirements. For the note, the loan agreement and the rest of the paperwork, see aircraft loan documents explained. For every FAA touchpoint a financed owner deals with, see the FAA's role in aircraft ownership.
Frequently asked questions
What is an aircraft security agreement?
It is the contract in which you grant the lender a security interest in the aircraft, including its engines, propellers, avionics and records, to secure your promissory note. It also contains your ongoing promises (covenants), the events that count as default, and the lender's remedies. The lender records it with the FAA Registry to perfect its lien. The covenants, though, are what shape your day-to-day ownership.
Can I move my financed airplane to a different airport or state?
Usually yes, with notice or consent. Many security agreements name a home airport and require you to tell the lender before basing the aircraft somewhere else. Some also require consent before it leaves the U.S. for more than a short trip. A move can change your insurance and, in some states, trigger use tax or state registration. Read the basing clause and send the notice in writing before you move.
Can I lease my financed aircraft to a flight school or rent it to other pilots?
Not without the lender's written consent under most agreements. Leasing, rental, flight instruction for hire and charter change the risk, the insurance and sometimes the tax treatment. Lenders that allow it typically require commercial-use insurance, a written lease that is subordinate to the lender's lien, and sometimes different loan terms. Operating that way without consent is a covenant default even if every payment is on time.
Can a lender repossess an aircraft without going to court?
Often, yes. Under UCC 9-609, a secured party may take possession after default without a court order if it can do so without a breach of the peace. Agreements and state law vary, and consumer loans can carry extra notice rules. In practice, recovery firms and ferry pilots retrieve aircraft from open ramps. Taking an aircraft out of a locked hangar over the owner's objection usually requires a court.
What is a deficiency after aircraft repossession?
It is what you still owe when the sale proceeds do not cover the loan balance, accrued interest and the lender's reasonable costs of repossessing, storing, repairing and selling the aircraft. Under UCC Article 9 the sale must be commercially reasonable, and you must get notice of it. Forced sales usually bring less than a normal listing, so deficiencies can be large.
What happens to a financed aircraft if the owner dies?
The loan becomes a debt of the estate, and the security agreement may treat death as an event of default. Separately, the FAA registration becomes ineffective 30 days after the registered owner's death (14 CFR 47.41). The aircraft cannot fly until the estate or heirs deal with the registration. Life insurance sized to the loan balance and a named person who can act for the estate make this manageable.
General information, not legal advice. Security agreements and state versions of UCC Article 9 differ. Have an aviation attorney review your documents, and confirm consumer-law protections that may apply in your state.