Published: July 25, 2022 | Updated: July 26, 2022
Commercial property solicitor Hannah Martin answers your questions on sale and leaseback
What is sale and leaseback?
Essentially, sale and leaseback is when a company sells a commercial property which they own and occupy, and then leases it back from the new owner.
The purchaser takes property ownership and becomes the landlord, with the company becoming the tenant.
The main features of a sale and leaseback transaction are as follows:
- The occupying company enters into a sale and leaseback agreement with the third party
- The occupying company sells the ownership of their building to the third party
- The third party, as the new owner, grants a lease of the property back to the company
Why would a business enter into a sale and leaseback agreement?
The main reason companies enter into such an agreement is to gain a cash injection.
This could be the case if a company is struggling, or if they want to fund something (such as the lease of an additional property).
Sale and leaseback can effectively be an alternative to financing.
Is my company eligible for sale and leaseback?
If a company owns and occupies a commercial property, then they are likely to be able to take advantage of this transaction. Often the most suitable companies are those who:
- Own and occupy the whole of a property
- Use the property for commercial use i.e. office or warehouse
- Have a suitable trading history and healthy balance sheet – this will make them more appealing to investors
- Are willing to enter into a lease at market value
What are the advantages of sale and leaseback?
Below, I’ve outlined the main advantages of sale and leaseback to allow you to assess your options.
- Cash injection – companies can free up capital and remain in their property
- Extra cash can pay for outstanding debts
- Increased liquidity
- Freehold property is risky, no longer owning such property reduces the direct risk on the company
- Eliminate the risk of property price fluctuation
- Costs less than financing, as additional fees such as valuation and bank fees aren’t included
What are the disadvantages of sale and leaseback?
In this section, I’ve set out the key disadvantages involved with sale and leaseback:
- Property could appreciate in value following sale
- Any future sale of the business will generate less cash without inclusion of property
- An agreement may not be reached for continued occupancy at the end of the lease period
- Any forfeiture clauses may result in the new owner taking possession prior the lease end
- A break clause could end the tenancy before the term expires
- New owner could change the property’s use
Specialist Sale & Leaseback Solicitors
At Frettens, our bright and experienced team would be happy to assist you with a sale & leaseback transaction.
We can help draft the lease, making sure that the terms are fair and that any risky clauses are earmarked, discuss renewal options and ensure validity of any documentation.