English High Court upholds JOLCO Termination Sum payments

The Background

In 2018 and 2019, VietJet entered into JOLCO structures for four aircraft (two NEOs and two CEOs). These structures involved a mix of Japanese equity (approximately 25%) and international bank debt (approximately 75%). Each aircraft was leased through a special purpose vehicle (Lessor) and sub-leased to VietJet as operator, with a purchase option exercisable (at a specified date towards the later part of the lease term) for a combined amount of US$96 million across the four aircraft. Although not an obligation, it was the expectation of the parties that VietJet would exercise these purchase options. However, if any of the aircraft was not purchased by the end of the lease, it was to be returned in accordance with the return conditions in the relevant lease. The documents were governed by English law.

Payment defaults by VietJet led to the termination of the leasing of the four aircraft in October 2021.

FWA, having acquired the rights and claims against VietJet following an enforcement and sale of the lease rights by the Security Trustee, initiated proceedings including claims for the Termination Sums (liquidated damages payable upon termination).

Separately, following a mortgage enforcement sale, FWA also became the beneficial owner of the Aircraft and by March 2025 (before judgment was given), FWA obtained legal title to all four aircraft, and the ownership trust arrangements were terminated. FWA had also exported all four aircraft from Vietnam by the time of judgment.

Key Issues Before the Court

We have set out below three of the key issues the Court addressed:

1. Whether VietJet was liable to pay the Termination Sums under the leases.
2. Whether FWA was entitled to a declaration of possession and whether FWA was also entitled as a creditor under the Cape Town Convention to immediate possession, custody and control of the Aircraft.
3. Whether VietJet owed further “Rental” payments for failing to return the NEOs in the agreed condition, and if so, what amount.

These issues were of relevance to the wider JOLCO market, as well as to the broader aircraft leasing market.  The structure of Termination Sums is a key feature in all JOLCO transactions, and debt and equity providers enter into JOLCO transactions on the basis that the airline’s payment obligations will be enforceable and will cover the respective debt and equity interests.  In all leasing transactions, lessors and financiers also have an interest in the enforceability of rights of possession, and many leases contain an agreed right for a lessor to charge an uplifted rental if a lessee fails to redeliver an aircraft on time.

Termination Payments Not Penal

VietJet contended that the termination sums constituted unenforceable penalties. The Court firmly disagreed, applying the Makdessi v Cavendish Square Holdings test and concluding the payments served a legitimate commercial purpose—namely, protecting the interests of equity investors and debt providers and preserving the efficiencies of the JOLCO structure.

The Court noted that a key element of the JOLCO structure is to provide tax benefits to the investors for the duration of the lease, in exchange for which VietJet would have a lower cost of financing than it otherwise would have been able to secure had there not been protections in place in the event of default.

It considered how early termination of the structure would be damaging to the investors who would lose the expected tax treatment and potentially accelerate their liability to tax, as well as risking not being made whole on their expected return on investment if a sale of the aircraft did not yield a sufficiently high amount.

Importantly, the Court acknowledged VietJet’s sophistication and familiarity with aircraft finance structures, highlighting the commercially negotiated nature of the clauses.  The judgment notes that VietJet, was a “sophisticated commercial actor” with “significant experience of aircraft financing” and as borne out of the evidence at trial was very familiar with JOLCO structures and their tax treatment.

The JOLCO lease terms included a negotiated protection for VietJet where – even following a default termination – VietJet could be entitled to purchase the aircraft if it paid all amounts due (plus an adjustment for any higher market value) within 30 days following the termination.  However, VietJet did not pay any amounts at all, and so lost this right to take title to the aircraft.

The Court considered that the protections afforded by the termination sum payment clause balanced the interests of the financing parties in the JOLCO structure who risked their capital and VietJet (which had not) in light of a wide range of uncertain and unpredicted downside scenarios in the event of default.

Notably, the Court considered that this was a wider interest than just pecuniary compensation – it was to secure a particular tax result and preserve the JOLCO structure, which depended on payments flowing up from VietJet to service the loans and provide a return for investors.

Consequently, the Court found that the protections in the clause were legitimate and were neither “extravagant, exorbitant or unconscionable” nor “wholly disproportionate” to the interests sought to be protected, especially where it was the investors risking their capital. Therefore, the detriment to VietJet in making the termination payments was not out of all proportion to the legitimate interest.

Key Takeaways

The judgment validates the enforceability of structured termination payments, reinforcing JOLCO arrangements as robust investment vehicles. Termination payments can be substantial—even if the aircraft is retained by the lessor—due to the broader interests protected by such clauses.

If VietJet had been successful in its arguments, this could have caused huge issues for the JOLCO market generally, as a large number of aircraft around the world have been financed with JOLCO transactions. A ruling that Termination Sum payments were unenforceable could have triggered “illegality” termination clauses under existing JOLCO transactions, presenting difficulties for a great many airlines, banks and investors.

FWA entitled to possession

Despite already having exported the aircraft, the Court granted FWA declaratory relief in respect of its entitlement to possession.  The Court considered this would eliminate ambiguity and prevent further challenges by VietJet including in Vietnam, where shareholders of VietJet had commenced action against the Vietnamese aviation registry. This decision underlined the English Court’s exclusive jurisdiction and its critical role in ensuring legal certainty for international aircraft financing arrangements.

Cape Town Convention - Possession

Though not essential to the outcome, the Court agreed with FWA’s argument that in accordance with the Cape Town Convention and The International Interests in Aircraft Equipment (Cape Town Convention) Regulations 2015 (the Regulations, which implemented the Cape Town Convention and the Aircraft Protocol in the United Kingdom) there does not need to be a contractual right of possession; it is a freestanding matter under the Cape Town Convention.

Regulation 27 (equivalent to Article 31 of the Convention) provides that an assignment of “associated rights” made in compliance with Regulation 28 (equivalent to Article 32 of the Convention) transfers the “related international interest” and “all the interests and priorities” under the Cape Town Convention and the Regulations.

FWA obtained all rights under the Regulations and Cape Town Convention, including the right to exercise the remedies that would have been available to the Lessor, such as taking possession or control in the event of a default under Regulation 21(2)(a) (equivalent to Article 10).

FWA submitted that, as the liability judgment had already found that there were subsisting defaults at the time of the assignments, the Court should find that FWA had an entitlement to possession from at least that date to the sale of each of the aircraft.

The Court agreed with FWA’s position, rejecting VietJet’s argument that a creditor cannot be entitled to possession if it (or its assignee) lacks title to the aircraft. The Court held that:

• It makes sense that there is an entitlement to possession in circumstances where a lessee refuses to redeliver the aircraft, and this entitlement is unaffected by the fact that a lessor may have sold the aircraft in the meantime.
• A creditor need never have held title to the aircraft – what is important for the purposes of an international interest is that there is a “power to dispose”, which is a broader concept that does not require holding title. This may be applicable in the case of a headlease – sublease structure.
• An international interest does not terminate upon the title to the aircraft being divested. The Official Commentary in respect of the Cape Town Convention provides that termination is only when the agreement giving rise to the international interest comes to an end and the creditor has been paid in full or has recovered possession or control of the aircraft and has exhausted all other default remedies conferred on it by the Cape Town Convention.

Post Termination Rental Payments were payable despite sale

VietJet argued that post-termination “Rental” obligations at a rate of 150% should cease once legal title of the Aircraft had passed as FWA had no possessory interest in the aircraft. 
The Court disagreed, affirming that “Rental” functioned as liquidated damages, not rent in the normal sense of the word. The Court considered the clause was a liquidated damages clause on the basis that:

• It is triggered by a default on VietJet’s part.
• The extension of the lease under the clause arises automatically and runs until redelivery – it requires no action of either party.
• It applies even after the lease has been terminated, and so at the point where rent has stopped being paid.
• By paying the “Rental”, VietJet does not obtain possession of the aircraft in the typical sense – it only has possession for the purpose of rectifying the default.
• “Rental” is simply a shorthand term describing what is payable as liquidated damages to achieve an appropriate level of compensation for the fact that the aircraft is not in the redelivery condition on termination.

Lessors, Lessees and financiers should be alive to the drafting of post-termination rental payments and consider whether they are likely to constitute liquidated damages, liability for which subsists post-termination and may even continue after a sale of the aircraft.

Outcome

VietJet is required to pay FWA approximately US$181.8 million, comprising the Termination Sums and the post-termination “Rental”.

Practical Implications

• For Financiers and Lessors: This case bolsters confidence under English law in the enforceability of structured remedies within JOLCO leases, particularly where default leads to early termination.
• For Lessees: Contractual notices should not be ignored, and advice should be sought particularly when there are time limited options or else there could be significant financial consequences. Contractual obligations—especially those framed as liquidated damages or termination sums—carry significant post-default liabilities, regardless of aircraft value or ownership changes.

Please do not hesitate to contact us for further information about this judgment.

The authors would like to thank Serene Allen and Rheagen McAvoy for their assistance in preparation of this article.