Airport Operator Options for Delivery of FBO Services (2018)

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33 CHAPTER FOUR THE FIXED BASE OPERATOR LEASE A lease is a complex legal document that creates rights and obligations that will affect the airport sponsor and the fixed base operator tenant for many years. Consequently, the lease must anticipate and address significant changes that, although not expected, could occur during the lease term. FBO leases have the added complexity of complying with grant assurances, FAA regulations, policies, and guidelines. Appendix A provides a brief discussion about airport sponsor responsibilities and obligations to comply with FAA and other federal agency regulations when providing aeronautical services. Sometimes FBOs (and other airport users) do not agree that an airport sponsor is complying with federal obligations, often on issues about competition and exclusive rights. The FAA has an informal (Part 13 Action) and formal process (Part 16 Action) to address complaints against an airport sponsor. Appendix B summarizes the Part 13 and 16 Actions. Because a sample FBO lease is usually attached as an exhibit to an RFP, its preparation must precede the completion of the RFP. The following sections discuss contemporary practices about important FBO lease provisions, prepared by the research team and reviewed by the panel. This discussion applies primarily to the solicitation of third-party FBOs, although, with the exception of investment requirements, many of the elements also would apply to contracts an airport sponsor would create to manage FBO facilities owned by the sponsor. FBO LEASED PREMISES The site survey will define the leased premises. Explicit and detailed drawings and exhibits that show the leased premises will make FBO lease administration easier over the lease term. The leased premises must be clearly identified, either by reference to a recorded plat or by a metes and bounds description based on a current survey. Airport sponsors often prepare a new site survey as a part of the FBO procurement process. The survey would show the boundaries of the leased premises and also all existing buildings, aprons, ramps, taxiways, and other improvements. In some cases, the survey may also locate underground improvements, such as storm water facilities, that may affect the use of leased premises or construction of new facilities. The survey will state and describe the total square footage or acreage of the leased premises, which may be required to calculate the ground rent. Often the leased premises will include areas exclusively for FBO use and other areas, such as ramps, aprons, and taxiways, that the FBO will be entitled to share with others, either on a preferential use basis or a common use basis. The lease should define the “exclusive use,” “preferential use,” and “common use” areas, and the survey should clearly identify these areas. Occasionally, the FBO may ask for an option to lease additional land at the airport. Typically, the FAA recommends against giving land lease options because, from the airport sponsor’s perspective, an option to lease additional land effectively pre- vents the airport sponsor from using or leasing the optioned land for any other purpose until the option expires. The option also could have a chilling effect on competition by preventing the entry of another business operator. If the FBO insists on some assurance that it will be able to lease additional land in the future, a better solution from the airport sponsor’s perspective is to grant the FBO a “right of first refusal.” This approach would give the operator the right to lease the additional land only if the airport is ready, willing, and able to enter into a lease with a third party, and then only on the same terms and conditions as those offered by the third party. If the airport agrees to grant an option to lease additional land, the option provision in the lease should provide for payment by the FBO of an annual nonrefundable option fee, which is often calculated as a percentage of the rental rate for the currently leased premises. The option provision must also specify the rent (or methodology for calculating rent) on the optioned land, the lease term, and all other terms and conditions that would govern a lease of the optioned land if the option were exercised. Usu- ally, most of the lease terms for the optioned land are incorporated by reference from the lease of the currently leased premises.

34 FBO LEASE TERM The lease’s term should relate to the level of capital investment by the FBO as required by the airport sponsor. Major invest- ments can require up to 30 years or more to be amortized. Minor investments can be amortized over 5, 10, or 15 years. As a rule, the lease term should not be longer than the duration of the facility financing. If the term of the lease is shorter than a mutually agreed to amortization schedule, the lease can include a buyout of the unamortized capital investment made by the lessee at the end of the specified term (ACI-NA n.d.). For FBO leases in which the operator is obligated to construct improvements, the lease term should be based on the time frame reasonably required to amortize the FBO’s capital investment in the new improvements. Because the lease term is tied to a reasonable capital investment amortization period, lease term extensions at the unilateral option of the FBO generally are not justifiable. If a reversion clause is included in the contract, the airport sponsor will take possession of the improvements at the end of the initial lease term. This combination of land and facilities may have greater value on the market than vacant land would have. Therefore, allowing the FBO to extend the lease term unilaterally would delay, without compensation, the time when the airport sponsor would become owner of the facilities that it could offer in a new RFP. If the leased premises consist of existing improvements, without additional FBO investment, then the lease term is usually shorter (3 to 5 years), but renewal options that favor the FBO may be more common. Nevertheless, the airport sponsor could seek to limit renewal options as much as possible to maintain flexibility to address changed conditions and future events. For long-term FBO leases, airport sponsors often do not include a provision to extend the lease term beyond 20 or 30 years from the time of lease signing because circumstances may change significantly. Because some state laws limit the permissible duration of air- port land leases, legal counsel should be consulted to determine whether any such restrictions exist in the airport sponsor’s jurisdiction. USE OF LEASED PREMISES Generally, the agreement limits the use of leased premises to the conduct of the agreed on scope of business in the RFP (on a nonexclusive basis), subject to rules and regulations, as well as to minimum standards implemented by the airport sponsor. The airport sponsor can reserve the right to periodically update, amend, and change the airport’s minimum standards, and these updated standards will apply to the existing lease if the airport included an enforcing clause in the lease. Typically, the FBO lease requires written consent by the airport sponsor if the FBO wishes to use the leased premises for something other than the agreed on scope of business. Thus, airport sponsors should clearly define the FBO scope of busi- ness in the lease, specifying which aeronautical services and activities are and are not included. The lease should also require the FBO to continuously operate the FBO business on the leased premises. The lease should specify the areas of the airport to which the FBO’s employees, contractors, and customers will have access, including any restrictions on access and any badging or security clearance requirements. However, the lease must expressly state that the rights granted to the FBO under the lease are nonexclusive and that the airport sponsor reserves the right to grant similar rights and privileges to other opera- tors on the airport in accordance with 49 USC 47107–Section 308 (a) of the Federal Aviation Act of 1982. The use provision should address the storage and sale of aircraft fuel and any into-plane fueling services the FBO may provide. Specifically, the lease should address where on the leased premises the FBO is allowed to dispense fuel to non-airline aircraft opera- tors (whether it is on the leased premises, on common use apron areas, or on preferential use apron areas of other lessees). To avoid misunderstanding, the airport sponsor may want to include a specific provision stating that airlines operating at the airport have the right to purchase their fuel requirements and fueling services from any person or company that has an appropri- ate fuel service permit with the airport sponsor. The FBO is not permitted to provide fueling services to airlines except pursuant to such a fuel service permit. Tenants have the right to self-fuel as long as their fueling facilities are not available for commercial transactions and the fueling facilities conform to the airport’s minimum standards and rules and regulations. Last, the lease should specifically prohibit the FBO from engaging in or permitting certain activities on the leased premises or other airport property, such as— • Interfering with any of the utility systems or fire protection systems located on airport premises • Keeping or storing flammable or combustible liquids except as approved by the airport sponsor and then only in accor- dance with applicable federal, state, and local laws and ordinances, and applicable fire, building and safety codes

35 • Doing anything that may conflict with 14 CFR Part 139 Airport Certification, as amended periodically, or jeopardizing the airport’s operating certificate • Doing anything to create electrical or electronic interference of communications between the airport and aircraft or between aircraft and any navigational aids • Doing anything that may conflict with 49 CFR Part 1542 Airport Security or the TSA-approved security plan for the airport • Engaging in any business activities not specifically permitted by the lease COMPETITIVE FUEL PRICING STANDARD Use of the leased premises should include the right to sell aviation fuel at competitive prices. When developing the lease, some airport sponsors include a competitive pricing standard to prevent price gouging; for example, “Fuel prices will not exceed the average aviation fuel price for airports within 50 or 100 miles based on the AirNav website.” This provision will work best with Avgas pricing. Jet-A fuel is already subject to widespread discounting based on volume sales, contract rates, negotiated rates, or discount buyer associations (such as Corporate Aviation Association). REMOVAL OF DISABLED AIRCRAFT Many airport sponsors contractually require the FBO to have equipment and personnel capable of removing disabled aircraft from runways and taxiways. Additionally, the lease or minimum standards may require the FBO to promptly remove any disabled aircraft that is in the FBO’s or its customer’s care, custody, or control from any part of the airport. In addition, the airport sponsor should have the right to remove disabled aircraft that the FBO fails to remove promptly and to charge the FBO for the cost of removal and storage. NONEXCLUSIVE RIGHTS AND PRIVILEGES When developing the lease, the airport sponsor should include a nonexclusivity statement (FAA 2009). The lease should say that the rights granted are nonexclusive and that the airport sponsor reserves the right to grant similar privileges to another operator or other operators on the airport. FBO MAINTENANCE AND COST RESPONSIBILITIES The lease should clearly delineate the respective maintenance and repair responsibilities of the airport sponsor and the FBO. Triple Net Agreement An FBO lease will ideally be a triple net lease that places all responsibility for maintenance and repairs on the FBO. To clearly delineate these requirements, the lease would specify that the FBO’s maintenance responsibilities include ordinary, extraor- dinary, and structural repairs to and replacement of buildings, pavement, fencing, landscaping, irrigation, utility lines, roofs, aircraft ramps, aircraft and vehicular parking areas, drainage installations, obstruction lights and similar devices, and fire protection and safety equipment. Maintenance and repair of the apron, ramp, and taxi-lane areas on the leased premises would include the cleaning of and repairs to paving and other surfaces resulting from oil, gasoline, grease, lubricants, and other substances that have a corrosive or detrimental effect on the paving. The lease would also place responsibility on the FBO to maintain all portions of the leased premises in a safe and clean condition and provide for the proper and sanitary handling and disposal of all trash, garbage, and waste. If the airport sponsor is to have any maintenance, repair, or replacement responsibili- ties, those obligations would be limited to items specifically listed in the lease, with the lease stating that the FBO is responsible for the maintenance, repair, and replacement of all other portions and components of the leased premises and improvements. Reasonable Routine Maintenance and Preventive Maintenance A comprehensive maintenance and repair provision will also require the FBO to perform commercially reasonable routine maintenance and preventive maintenance on all buildings, building components, and improvements on the leased premises, including aprons, ramps, and taxi-lanes. Such a provision will ensure that the building and improvements will be in the best possible condition when they are turned over to the airport sponsor at the expiration or earlier termination of the lease.

36 Periodic Leased Premises Inspection Many leases provide for an airport sponsor to inspect periodically the leased premises to determine the FBO’s compliance with the maintenance and repair obligations of the lease. Annual Maintenance and Repair Report Leases often require the tenant to provide annual reports detailing the prior year’s maintenance and repairs and providing a maintenance and repair plan for the upcoming year. The airport sponsor would have the opportunity to comment on such annual reports and to notify the FBO of potential deficiencies, all without relieving the FBO of any of its repair and mainte- nance responsibilities under the lease. Utilities Utilities and utilities interruptions should be addressed, either as part of the maintenance provision or as a separate provision of the lease. The FBO should be responsible for arranging for all utilities necessary to serve its operations and to pay promptly when due all costs and fees for utility services. Any required utility line installation, maintenance, or repair would be coordinated with the appropriate utility company and the airport sponsor. The airport sponsor should reserve the right, at its own expense, to install, maintain, repair, and replace water and sewer pipes, electrical lines, gas pipes, and other utilities on, under, and across the leased premises in order to serve other portions of the airport or other airport tenants. If the airport sponsor is also a utility provider (such as a city or county), the lease should disclaim any liability of the airport sponsor to the FBO for any failure or defect in the supply or character of the utility services furnished by the airport sponsor in its capacity as a utility provider. The lease should also state that the airport sponsor, as such utility provider, shall have the right to shut down electrical or other utility services to the leased premises when necessitated by safety concerns or by repairs or modifications to the utility system. FACILITIES REFRESHMENT The flying public’s perception of the FBO facility is of critical importance to the airport’s sponsor, as it directly affects the airport’s image and reputation. Many contemporary leases include a facilities refreshment element that requires the FBO to renovate and refresh the public view areas of its facilities (usually at 5-year intervals, but sometimes as early as 3 years or as late as 15 years, depending of the facility specified). This type of provision defines the minimum investment level for such renova- tions, renewals, and refreshment as a percentage of the then current fair market value of facilities and provides that if the mini- mum investment is not achieved, the difference between the required minimum investment and the amount actually expended becomes additional rent that is payable to the airport sponsor. This information should be included in the RFP package and in the airport sponsor’s management plan. Some local governments have aesthetic ordinances for their newer facilities. GROUND RENT Initial ground rent should equal fair market rental value as determined by a current appraisal of the leased premises. Because a lease typically is written for a lengthy term, often 20 to 30 years, the lease should provide for periodic adjustments to the ground rent. Typically, rent adjustments can be made by appraisal, based on an index such as the consumer price index (CPI), or parties may negotiate a periodic adjustment in good faith. Regardless of the rent adjustment mechanism, the lease should provide for the ground rent to be periodically recalibrated to the then current fair market rent. Adjustment by Appraisal For example, the lease may provide that every 5 years the ground rent will be adjusted, up or down, to the current fair mar- ket rent based on an up-to-date appraisal of the leased premises. The parties would first attempt to agree on the new market ground rent. If they were unable to agree, the airport sponsor at the FBO’s expense would obtain a current appraisal. If the FBO disagrees with such appraisal, the FBO would be entitled to obtain its own appraisal, and the lease should provide a mechanism for determining the adjusted ground rent based on the two appraisals. For example, the lease may provide that if the two appraisals differ by 10% or less, then the ground rent would be equal to the average of the two determinations. If the appraisals differ by more than 10%, then a third appraiser would be selected to review each party’s appraisals. The third appraiser would then determine the new fair market rent based on the appraisal that he or she determines to be most reasonable.

37 Adjustment by appraisal reflects the actual condition at the airport and the actual value of airport land and is, therefore, many airport sponsors’ preferred means for ground rent adjustments. Adjustment by Consumer Price Index or Other Indices Second, the lease may allow periodic adjustments based on increases in the CPI. The Bureau of Labor Statistics publishes several different consumer price indices, so be sure to identify the CPI that will be the benchmark for calculating annual increases in ground rent. A common CPI benchmark is the “Consumer Price Index for All Urban Consumers (CPI-U), U.S. City Average, All Items, Not Seasonally Adjusted, 1982-1984 = 100” as published by the Bureau of Labor Statistics of the U.S. Department of Labor. Similar CPIs are available for more narrowly defined geographic areas (e.g., “Consumer Price Index for All Urban Consumers for the Los Angeles-Riverside-Orange County, California Area, 1982-1984 = 100”). Alternatively, to create more certainty about future increases in the ground rent, the parties may agree to a set percentage increase each year. Adjustment by Negotiation Some airport sponsors are willing to negotiate with tenants on fair market value adjustments. For example, the Los Angeles World Airports (LAWA) allows periodic adjustment to fair market rents through negotiation: At least eighteen (18) months prior to the Periodic Adjustment Date … the parties may, in good faith, negotiate the rental rate(s) applicable to the subject adjustment period. … The City shall provide Lessee with a list of the City’s estimated airport wide rental rates then in effect. Such good faith negotiations may include the involvement of a third-party reviewer to review and make nonbinding recommendations regarding each party’s rate proposal. … If the parties are able to reach agreement on the adjustment to rental rate(s), then said rate(s) shall be presented as a recommendation to the Board. (LAWA n.d.). If the parties cannot reach an agreement, then the rate adjustment will be accomplished by the appraisal methodology. BUILDING RENTS If the leased premises consist of existing buildings and improvements owned by the airport sponsor, then building rent will be paid in addition to ground rent. The building rent may be adjusted over time using any of the previously discussed mecha- nisms. The length of the lease term largely determines which adjustment mechanisms will be used. Ground rent adjustments may use all three mechanisms because ground leases are usually long-term leases. Building leases, on the other hand, typi- cally have shorter terms. If the building lease term is very short, the parties may agree that no periodic adjustment in build- ing rent is appropriate. As the term of the building lease increases, it becomes more appropriate to provide for building rent increases. For example, a building lease of 5 years may provide only for annual CPI adjustments, whereas a building lease of 10 years may also include an adjustment to market rate after the first 5 years. FEES Fuel Flowage Fees The FBO lease would also provide for the payment of fuel flowage fees to the airport sponsor based on the volume of aviation fuels delivered to the fuel farm by a wholesale fuel distributer. The fuel flowage fee is an airport user fee established to pay the costs of the airfield and services provided by the airport to its general aviation users. The fuel flowage fees are collected by the FBO, as the agent for the airport sponsor, and are payable by the FBO to the airport sponsor monthly. The lease should specifically provide that the FBO’s collection and payment of the fuel flowage fee on behalf of the airport sponsor is not an additional consideration by the FBO for the use of the leased premises and does not constitute “additional rent.” Rather, the fuel flowage fees are the airport sponsor’s property, which the FBO agrees to collect and hold in trust for the airport sponsor. The fuel flowage fee should be applied to all fuel delivered to the fuel farm including fuel for GA aircraft (including the FBO’s own aircraft), the aircraft of air carriers that do not have an operating agreement or into-plane fueling agreement with the airport sponsor, and military aircraft. Fuel placed in aircraft operated by air carriers that do have an operating agreement or into-plane fueling agreement with the airport sponsor may be excluded from the fuel flowage fee.

38 The airport sponsor sets the fuel flowage fee rate for each type of aviation fuel sold by the FBO. After giving notice to the FBO, the airport sponsor should periodically adjust flowage fees. Guaranteed Fuel Flowage Fees Some airport sponsors are including a guaranteed fuel volumes provision in their leases. The airport sponsor will require the FBO to guarantee minimum fuel volumes such that the annual fuel flowage fee shall not be less than the rate per gallon multiplied by the guaranteed minimum amounts. With this type of provision, if shortfalls in guaranteed fuel volume result in a shortfall in fuel flowage fee proceeds, the shortfall becomes additional rent payable by the FBO to the airport sponsor. GA Landing Fees Many airport sponsors think it is beneficial to include a lease provision that enables the levying and collecting of GA landing fees if that becomes appropriate airport policy. The airport sponsor would charge this fee to aircraft that land at the airport. As with the fuel flowage fee, the landing fee is the property of the airport sponsor, not additional rent paid by the FBO for the use of the leased premises. The FBO collects the landing fee from GA users on behalf of the airport sponsor. However, unlike the fuel flowage fee, collection of the landing fee may prove problematic, so the lease may require only that the FBO use reasonable efforts to collect the landing fees. Recognizing that greater effort is required to collect landing fees, the airport sponsor typically allows the FBO to retain a certain percentage of those collected fees. The FBO reports monthly to the airport sponsor the total landing fees it was unable to collect and the efforts made to collect those fees. Additional Fees Because some FBOs have chosen to charge separately for fuel, offices, hangers, and ramps, airport sponsors can recover a greater portion of the costs they incurred providing facilities to GA by levying a percentage fee on the FBOs’ additional rents and fees. Additional fees incurred in the FBO lease under appropriate circumstances may include the following: • An apron or ramp fee, which is a percentage of the fee, if any, charged by the FBO to aircraft using the FBO’s apron or ramp areas. Some airports waive this fee if a certain amount of fuel is purchased. • A facilities fee, which is a percentage of the fee, if any, charged by the FBO to third parties for using FBO-leased facilities • If not covered by other agreements, a percentage of the rent or other revenue from rental car companies or other third- party services providers • If the airport sponsor reserves the right to charge fees for miscellaneous items and services that are assessed by the airport sponsor against all similarly situated parties, then charges may include fees for employee badges, other airfield uses by the FBO’s customers that do not have an airfield use permit or agreement with the airport sponsor, parking in areas other than the leased premises, airfield driver’s licenses, and security passes. LIQUIDATED DAMAGES FOR DELINQUENT PAYMENT To encourage timely payment of rents, fees, and charges, the lease should require the FBO to pay a late fee or liquidated dam- ages (depending on local practice and laws) on past due amounts. The late fee or liquidated damages is typically a percentage of the past due amounts. PERFORMANCE GUARANTEE Many airport sponsors require the FBO to provide a third-party performance guarantee, in the form of an irrevocable standby letter of credit or a quick pay bond issued by a reputable financial institution or surety. The amount of the performance guar- antee will be equal to some percentage of the expected annual rent, fees, and charges under the lease, and should be subject to periodic adjustment by the airport sponsor. That percentage should correlate to the estimated time that would be required for the airport sponsor to regain control of the leased premises in the event of a lease default or FBO bankruptcy. If an FBO experiences financial trouble, it could easily take 60 days or longer for the airport sponsor to become aware of the problem and/or to satisfy the notice and cure provisions of the lease. Additional time may then be spent trying to reach

39 a mutually agreeable solution, which may or may not be successful. Ultimately, the FBO might file for bankruptcy. A letter of credit or quick pay bond will ensure that the airport sponsor continues to receive payment for the lease while it works to regain possession of the leased premises. MINIMUM OPERATING STANDARDS Many airport sponsors make the lease subject and subordinate to the minimum standards as they are as of the date of the contract and as they may be modified periodically during the term of the lease. AIRPORT DEVELOPMENT RIGHTS; SUBSTITUTION OF LEASED PREMISES; BUYOUT OF IMPROVEMENTS The airport sponsor must reserve the right to further develop, modify, and improve all areas of the airport, including landing areas, as the airport sponsor determines in its sole discretion to be in the best interest of the airport, regardless of the desires or views of, and without interference or hindrance from, the FBO. From a practical standpoint, the airport sponsor must retain the right to retake all or part of the leased premises if it deter- mines those premises to be required for other airport purposes and not for fixed based operations. If such action is taken, the airport sponsor may terminate the portion of the lease that applies to the needed premises or, if it intends to maintain a fixed base operation at the airport, the airport sponsor may provide substitute leased premises brought to the same level and improvement as the area taken. In that event, the airport sponsor would bear all expenses of bringing the substituted area to the same level of improvement as the area taken and moving the FBO’s equipment, furniture, and fixtures to the substituted area. The airport sponsor would not, however, be obligated to reimburse the FBO for lost profits or revenues due to such substitution. If the airport sponsor terminates some or all of the leased premises portion of the lease and does not provide substitute premises, the airport sponsor would be obligated to compensate the FBO in the amount equal to the undepreciated book value of the facilities and improvements actually retaken by the airport sponsor, based on straight line depreciation. AUDIT The lease will require the FBO to keep true and accurate books and records on its operations at the airport, and airport spon- sor representatives to have the right to inspect and audit such books and records to ensure lease compliance. If the audit finds that the FBO has underpaid the airport sponsor by a specified percentage (e.g., 2%) or more, the FBO would pay the cost of the audit as well as the amount underpaid, plus interest. If the audit shows that the airport sponsor has been overpaid, the overpayment amount would be applied to the next payments due from the FBO. SECURITY REQUIREMENTS Owing to the obvious importance of airport security, the lease will require the FBO at all times to comply with federal, state, and local laws and airport security rules and regulations, as they may change periodically. The FBO should pay specific attention to the airport’s security plan and acknowledge that it has reviewed the plan, is aware of the plan’s requirements as they relate to the FBO, and will take all steps necessary or required by the airport sponsor to ensure that the FBO and its employees, agents, contractors, and customers comply at all times with the plan. In addition, the lease should require background checks for FBO personnel, with the FBO responsible for the costs for such checks as well as the costs for tracking and administering the airport security badges provided to its employees. In addition, the lease should require that the FBO pay the airport sponsor as additional rent any FBO violation of a Depart- ment of Homeland Security or other regulation that results in a fine to the airport sponsor. Any fine levied directly on the FBO may be paid directly to the regulatory agency. Personnel Background Checks Badging The lease should require the FBO to pay the costs and expenses for background checks and badging. In addition, the FBO should be responsible for tracking and administering the badges provided to its employees.

40 TAXES AND ASSESSMENTS A lease should hold the FBO responsible for paying all taxes (both real property and personal property taxes) and assessments and for keeping leased premises free of liens. The lease, rent payments, and leased premises may be subject to a variety of federal, state, and local taxes. These taxes may include real property ad valorem taxes, personal property ad valorem taxes and sales, or use tax on rent. These taxes may not apply to the airport sponsor as a governmental entity, but they may apply to the FBO because it uses the leased premises for private commercial purposes. In addition to having a catch-all provision that requires the FBO to pay all applicable taxes and assessments, the lease should identify known taxes that the FBO is responsible for paying and which, if unpaid, could adversely affect the FBO’s business operations or become a lien on the FBO’s property or leasehold. The FBO should be required to pay all such taxes prior to delinquency and to keep the leased premises and the FBO’s property free of all liens. INDEMNIFICATION The lease should clearly state that the FBO must defend and hold harmless the airport sponsor for any loss or cause of action arising from the FBO’s use or occupancy of the airport. The indemnification provision’s language is critically important. The FBO should indemnify the airport sponsor against all claims, lawsuits, and liabilities that may be suffered or incurred by the airport sponsor because of any breach of the lease by the FBO, the activities of the FBO and persons for whom it is responsible anywhere at the airport, and any activities occur- ring on the leased premises. The FBO’s indemnity obligation may exclude liability arising solely from the negligence of the airport sponsor or its employees acting within the scope of their employment. If the airport sponsor is a governmental entity that enjoys sovereign immunity, the indemnity provision should also provide that it might not be construed as a waiver, in whole or in part, of the airport sponsor’s sovereign immunity or as a modification of any statutory procedures or conditions for asserting and enforcing claims against the airport sponsor. INSURANCE Contemporary leases require the FBO to provide insurance certificates as evidence of the required insurance coverage. Many airport sponsors require the FBO to provide the actual insurance policy on demand, but the FBO has the right to redact sensi- tive proprietary information. The airport sponsor must obtain the advice of its in-house risk management department or an outside consultant to determine the types of insurance policies, endorsements, and coverage levels prudent to that airport. Policy and endorsement forms may vary among states. Because insurance requirements may change or become inadequate over time, the lease should require that the FBO peri- odically modify its coverage and increase its insurance policy limits as necessary. Current certificates of insurance shall be proof of the insurance policies the airport sponsor requires the FBO to carry, and the airport sponsor shall be named as an additional insured and/or loss payee as appropriate. The FBO’s insurance should be primary and noncontributing with any other insurance provided by the airport sponsor, and a waiver of subrogation should be required. The lease should also require the insurance underwriters to meet certain minimum standards, such as to have a current A.M. Best rating of A- or better. Typical coverages that an FBO may be required to carry may include the following: 1. Worker’s compensation and employer’s liability 2. Aviation/airport or broad-form commercial general liability, including coverage for a. Premises and operations b. Independent contractors c. Products and completed operations

41 d. Personal injury e. Contractual liability f. Damage to leased premises g. Hangar keepers’ legal liability 3. Property insurance for physical damage to the FBO’s property, including improvements and betterments made to the leased premises because of fire, theft, vandalism, flood, windstorm, or other commonly insured risks 4. Automobile liability 5. Aboveground or underground storage tank liability (if applicable) 6. Pollution legal liability for transporting or handling hazardous materials or regulated substances 7. Environmental impairment liability 8. Aircraft liability, including passenger liability ENVIRONMENTAL COMPLIANCE Because the FBO’s business will involve the storage, use, handling, or creation of hazardous materials, the lease should address the FBO’s environmental responsibilities. At the beginning of the lease, the FBO should provide the airport sponsor with a list of all hazardous substances that the FBO expects to use, generate, or store on the leased premises, together with the estimated amounts of each substance. The lease should address any objections by the airport sponsor or restrictions on quantities. The lease should include a general requirement that the FBO comply with all applicable environmental laws, rules, and regulations and a general prohibition on the disposal or discharge of hazardous substances onto the leased premises or other airport property. The FBO should be provided copies of the airport’s spill prevention, control, and countermeasure plan and its storm water pollution prevention plan, and the lease should obligate the FBO to comply with such plans, regardless of whether the FBO has its own plans or procedures. Determining the cause of environmental contamination that occurs during the lease term may be problematic. One com- mon solution is to require a baseline environmental condition study to be completed at the outset of the lease and be incorpo- rated into the lease. Then, whenever a change in possession or control of the leased premises occurs, such as on termination of the lease, assignment of the lease, sublease of any portion of the leased premises, or abandonment or surrender of the leased premises, an additional closeout environmental condition study will be performed at the FBO’s expense. If the closeout environmental condition study identifies any environmental condition that was not identified during the initial baseline environmental condition study, then any required assessment or remediation would be performed at the FBO’s expense. Because environmental contamination may not be discovered until after the lease has terminated, the lease must pro- vide that the FBO’s environmental obligations will survive the expiration, termination, sublease, or assignment of the lease. SAFETY STANDARDS The FBO should be required to promote safe operations in its facilities, on its leasehold, and on the airport. Further, the FBO should be required to observe all applicable laws, rules, regulations, and general prohibitions pertaining to safety. LAWS, RULES, AND REGULATIONS The lease must require the FBO to comply with all applicable federal, state, and local laws, rules, and regulations. Such rules and regulations should be defined to specifically include the airport’s minimum standards; its rules, regulations, and policies in place and as amended periodically; and its grant assurances to the FAA.

42 The FBO also should be obligated to pay all civil and criminal penalties that it assesses for any violation of these rules and regulations. The airport sponsor may wish to specifically require compliance with the following: • The Illegal Immigration Reform and Immigration Responsibility Act of 1996, as amended, including use of U.S. Citizenship and Immigration Services E-Verify • The Americans with Disabilities Act of 1990, as amended • Title 49 CFR Part 21, Nondiscrimination in Federally Assisted Programs of the Department of Transportation • Title 49 CFR Part 1542, Airport Security • Title 14 CFR Part 152, Subpart E, Nondiscrimination in Airport Aid Program • Title 14, CFR Part 77, Safe, Efficient Use and Preservation of the Navigable Airspace Rights of the Federal Government; Subordination of Lease The lease should recognize that the FBO’s use of the leased premises and airport services and facilities are subject to all rights of the U.S. government affecting the control, operation, regulation, and seizure of the airport by the United States during a time of war or national emergency. Further, the lease must expressly provide that it is subordinated to the airport sponsor’s existing and future obligations and agreements with or to the federal government (i.e., grant assurances), but the airport spon- sor may agree to attempt in good faith to minimize, to the extent reasonable, any adverse consequences to the FBO. Attorney’s Fees and Enforcement Expenses State law will vary on the circumstances under which a party to a lease or other contract may recover its attorney’s fees and enforcement costs in the event of a default by the other party. Generally, the lease will provide that a party that fails to comply with its lease obligations will be obligated to pay the enforcement expense, including reasonable attorney’s fees, incurred by the other party, regardless of whether a lawsuit or other formal enforcement proceeding is instituted. LEASEHOLD IMPROVEMENTS AND ALTERATIONS The lease should include detailed provisions that address the capital improvements the FBO will be required to construct on the leased premises. This provision should address such matters as the description of the improvements to be constructed, the level of investment required of the FBO and the types of expenditures that count toward that investment, the sources of the FBO’s construction funds, the airport sponsor’s approval of plans and specifications and the general contractor to be used, the construction schedule, and the like. Usually the airport sponsor would also require the FBO to provide payment and performance bonds; if the airport spon- sor is a governmental entity, state law may require payment and performance bonds. Regardless, the lease should require the FBO to promptly satisfy or bond off any construction liens filed against the FBO’s leasehold estate or the improvements under construction. The lease should expressly prohibit the filing of any construction liens against the airport sponsor’s fee simple estate in the leased premises. State law will vary on the procedure for protecting the airport sponsor’s fee simple estate from construction liens, with some type of recorded notice or actual notice to the general contractor often being required. DEFAULT AND REMEDIES Events that qualify as an FBO default, as well as the airport sponsor’s remedies, should be spelled out in the lease. The default provision should also specify whether notice and an opportunity to cure each type of default will be afforded to the FBO. Typically, the airport sponsor is not required to give the FBO notices of default for failure to make monetary payments when due, although short grace periods after the due date are not uncommon. Nonmonetary defaults may justify notice and an opportunity to cure before the airport sponsor is entitled to terminate the lease or pursue other remedies. Nevertheless, the airport sponsor and its counsel should consider whether certain nonmon- etary defaults, such as failure to maintain insurance, should not be afforded notice and an opportunity to cure because of the potential immediate adverse consequences that could result from such a default.

43 The lease should also provide that the FBO’s abandonment of the leased premises or failure to conduct the agreed to FBO business on the leased premises for a specified period will constitute a default event, entitling the airport sponsor to terminate the lease and retake possession of the leased premises. Other common default events include a bankruptcy filing by or against the FBO or the appointment of a receiver or trustee for the FBO’s property, but such provisions may or may not be enforceable under federal bankruptcy law. When an FBO defaults, the airport sponsor must have the right to pursue all available remedies, which may include ter- minating the lease, recovering monetary damages, and such equitable relief as enjoining the FBO from engaging in certain conduct that violates the lease or requiring the FBO to perform specific obligations under the lease. State law will vary on when and under what circumstances the various remedies available to the airport sponsor may be pursued. If the airport sponsor elects to terminate the lease because of an FBO default, the lease should expressly state that the airport sponsor will be entitled to recover not only rents, fees, and unpaid charges as of the date of termination, but also the present worth of future rents, fees, and charges that would have become payable under the lease had the default not occurred. In crafting such an acceleration provision, care must be taken to provide a basis for calculating the present worth of future rents, fees, and charges that will vary depending on future circumstances. For example, the lease may provide that the present worth of future fuel flowage fees will be based on the minimum fuel flowage guarantee or on an average of prior years’ fuel flowage fees. ASSIGNMENT AND SUBLEASING In most states, assignment of the lease, improvements, and subleasing of the leased premises are permitted unless the lease expressly states otherwise. Therefore, to allow the airport sponsor to maintain control over the users of airport property, the lease should prohibit assignment and subleasing without the airport sponsor’s written consent. The lease also should specify that a transfer of ownership or control of the FBO itself would be deemed an assignment of the lease. The lease may provide that the airport sponsor may give or withhold its consent in its absolute discretion, or the lease may provide that the sponsor’s consent will not be unreasonably withheld. In either case, it is preferable to list the fac- tors the airport sponsor may consider when making its decision to give or withhold consent, such as the financial capabilities, creditworthiness, and experience of the proposed assignee. It also has become common for the airport sponsor to require payment of an assignment fee (see Figure 9) as a condition of granting its consent. For example, the lease may require an assignment fee equal to a specified percentage or to-be-negotiated percentage of the transaction value as determined by the airport sponsor. Similarly, a sublease fee may be calculated as a specific percentage or a to-be-negotiated percentage of the difference between the sublease rent and the rent payable by the FBO under the prime lease. By requiring an assignment fee or sublease fee, the airport sponsor ensures that the FBO will not receive an unwarranted windfall from a lease assumption or sublease transaction involving airport property. FIGURE 9 Example of an assignment fee—Van Nuys Airport.