When analyzing the right that a Lessee may have to conduct an engine swap under an aircraft lease agreement and the mechanisms to protect the rights and interests of each party that holds title in respect to the corresponding assets that involves the aircraft after such engine swap, we need to consider what happens with an engine installed in an aircraft subject to a mortgage, pledge or a lien. A common concern is that the engine could be considered as part of the mortgaged property and furthermore, a major concern is that the owner of the engine could lose the property rights thereon and that the engine could be considered owned by the owner of the aircraft.
Pursuant to Article 2, of the Civil Aviation Law1, "aircraft is any vehicle capable to flight autonomously in the aerospace to transport passengers, cargo or mail". Pursuant to the Civil Aviation Organization, "an aircraft is any machine that can derive support in the atmosphere from the reactions of the air other than the reactions of the air against the earth's surface".2
Therefore, we note that the Civil Aviation Law by definition, does not include specifically the engines as part of the aircraft, so it is an insufficient definition since no reference is made to the property rights of the parties concerning to each of the assets comprising the unit; however, if evidence of ownership rights by the owner of the engine is provided, it would not be considered as part of the mortgaged property nor as owned by the owner of the aircraft, but it is important to take into account certain elements and practical problems when dealing with the discharge of a mortgage over an aircraft where an engine different from the one originally installed has been discharged and released. A discharge will normally occur when (i) the aircraft has been sold, or (ii) the mortgage has been paid out and the mortgage is legally terminated.
In either case, there are different parties with property rights to be recognized: the new owner of the aircraft in case (i) above, the party being released from the obligations under the mortgage in case (ii), and in both cases, the owner of the engine(s) that had been swapped.
The Civil Aviation Law, has no specific regulation related to mortgages, pledges or liens over an aircraft or its parts, and unfortunately when the Civil Aviation Law entered into effect it repealed and omitted many provisions that the Law of General Communications ("Ley de Vías Generales de...