In the midst of an aircraft transaction, a structure called a holdback may be proposed when, for example, a large maintenance event is taking place.
A holdback structure is when at the time of closing a certain amount of money is held in escrow and left there as a guarantee or to cover a certain event taking place post-closing.
Most commonly, this is used when a maintenance issue has arisen that could not be rectified in the time needed. For example, we recently completed a transaction that involved an aircraft being sold by an EU owner and going to the USA. A part, that did not affect the aircraft’s airworthiness, was needed to put the aircraft into the delivery condition agreed in the contract. No EU-certified parts were available, and it would cause a long time delay before one became available. However, USA-certified parts were readily available in America. Therefore, the parties agreed that an overage would be left in escrow after closing. The aircraft closed, flew to the USA, re-registered there, and then the part was ordered and installed using the funds from the holdback in escrow.
The holdback serves as a goodwill gesture to guarantee that an obligation you had before closing will be remedied after closing.
The benefit of the holdback structure is that a transaction can go through that otherwise would be delayed or terminated due to whatever logistical or operational issue that is preventing the aircraft from being in delivery condition at closing. The delivery condition can be met through the holdback post-closing and enables both parties to complete the deal.
However, some issues can arise from the holdback. It could occur that the money held back is not enough to cover the issue that needs to be rectified. This is usually handled maturely and respectfully by both parties, but it is something that could arise. Secondly, the issue you are remedying could take longer than proposed or thought. This can be problematic for the buyer who wanted a fast resolution.
A holdback structure will be very specific and personal to your transaction and is not applicable to every transaction, but it can be a very useful tool to assist both parties with closing a transaction in a timely manner.
