What is a sale and leaseback Commercial Property?


Sale and leaseback arrangements provide an opportunity for buyers to purchase a commercial property from the seller while also allowing the seller to retain use of the asset as a lessee. Under this arrangement, the buyer will own the property and receive rental payments from the seller in exchange for allowing them to continue using it.

What is a sale and leaseback?

Also sometimes referred to as a ‘Sell and Leaseback’ is where a buyer to buys an asset from the seller through the sale of commercial property and the buyer then creating a a lease which the seller leases back. At times the buyer will give the Seller of the property – the option of buying it back again at some future date, at a fixed purchase price. This allowing the vendor to create release monies for cashflow and the buyer getting a better ROI on an operating lease agreement, as opposed to leaving in it an bank at low interest rates. An obvious consideration of selling the property and leasing it back is – You must be the freeholder of the property or have a Virtual Freehold. At times a lease holder may be wanting to just lease a lease on. Occassionally a specialist leaseback solicitor will raise this when entering into a sale and before the property is transferred

The most common reasons for using a sale and leaseback are:

  • Selling your existing property to make land/property improvements
  • Expansion of the business
  • A seller who can’t afford to keep his or her property up to date but needs cash fast and still run the business from the premises.
  • Business or personal debts
  • A business owneer who can’t afford to buy an existing property outright but is looking for business premises on a long-term basis – and their present landlord is selling the property

What are the benefits of a sale and leaseback agreement for the Lessor?

There are immense tradeoff for a sale and leasebacks for a buyer

  • Provides a steady stream of income: The lessor can receive rental income from the lessee over the term of the lease agreement, providing a source of lease payments.
  • Generates cash: A sale and leaseback agreement allows the lessor to sell an asset and receive cash, which can be used for other investments or to pay off debts. This due to the asset having an income.
  • Reduces ownership responsibilities: The lessee usually takes on an all repairing lease agement, where the tennant is responsible for repairs and maintenance of the fabric of the property.
  • Improves financial statements: With an the asset on the balance sheet, the lessor can improve its financial ratios, such as its debt-to-equity ratio, and present a stronger financial position.
  • Increases flexibility: The lessor can use the proceeds from the sale to acquire new assets or pursue other opportunities, increasing its flexibility and ability to respond to changes in the market.

Who is the typical buyer in a sale and leaseback transaction?

Many people have an idea of what a commercial property is, but very few people have a clear idea of who is the typical buyer. A December 2022 study by the National Association of Property Buyers (NAPB) found that the typical buyer in a sale and leaseback transaction was male and over the age of 55 years old, and used pension funds to buy.

The study also found that: — The average purchase for a sale and leaseback investment was £450,000. An interesting fact was 13% of owners received cash from the seller before they bought the property as a loan, this usually at a below market value of the property, as the seller ws about to default on the loan.

Buyers are investors who look for business owners wanting to releasing capital from their commercial properties, from business operations.

Who is the typical seller in a sale and leaseback transaction?

The seller typically buys the business premises at an attractive price (often substantially lower than what it would cost to buy it as an outright transaction) but then leases it back to the seller. This can avoid excessive capital costs and/or having to carry a long-term lease moving to new premises if the property is sold to raise capital to run the business.

There are three main reasons why sellers sell their commercial property to lease back:

  • Cashflow: A cash injection is needed into the business to run the day-to-day operations.
  • Investment: A loan from the bank may just too expensive, or the terms my be onerous, a leaseback arrangement allows the business owner to investment into the property and the seller agrees to buy the property back at a higher price in the future when the business has met expectations.
  • Retirement: Many business owners sell and lease back their commercial premises a decade earlier to wind the business down and have ‘cash in the bank’ as part of their pension fund.

The steps involved in a sale and leaseback transaction:

There’s no way I’d ever recommend doing this yourself! When you’re dealing with commercial properties it’s important that you seek independent advice first. Contact an experienced commercial property lawyer.

What companies and properties are suitable for sale and leaseback deals?

Sale and leaseback deals are suitable for companies that own commercial properties, looking to raise capital for cashflow, on properties such as office buildings, retail spaces, industrial properties, and other types of commercial. The property must be in good condition, but not essential as it will be reflected in the buy price. The property tyhave a good occupancy rate, and be located in a desirable area in order to be attractive to potential buyers and investors. Companies with a strong financial position, stable business operations, and a healthy trading history are the ideal for sale and leaseback deals.

How does a sale and leaseback work?

An owner sells the property to a buyer, who then immediately leases it back to the original owner. The seller and buyer must take legal advice to ensure that the lease is fit-for-purpose. It’s also advisable that both parties take financial advice.

A healthy balance sheet is an important factor for a seller considering a sale and leaseback deal, afterall the when the owner sells the property, the buyer needs to know they can pay rent. This allows the company to secure the financing they need while still retaining the use of the property, that they then rent back.

In the sale and leaseback process, the buyer and seller negotiate the terms of the deal, including the purchase price,  the lease payments, and the lease period. The buyer acquires the property and becomes the new landlord, while the original owner becomes the tenant, paying rent to the new landlord.

This form of financing can be beneficial for both the buyer and seller, as it allows the seller to release capital that can be used for business operations or to raise capital. The buyer can generate income from the lease payments, used to pay any borrowing secure against the property.

A sale and leaseback deal also has tax implications for both parties, and it is important for them to seek professional financial advice before entering into the transaction. This will help ensure that the deal is structured in a way that is beneficial for both parties and that all legal and regulatory requirements are met.

In summary, a sale and leaseback is a way for companies to free up capital and a property to a property investor that immediately leases for an income. It is important to ensure that the lease is beneficial for both the buyer and the seller. That are well-negotiated and that all legal and regulatory requirements are met, to ensure that the deal is beneficial for both parties involved.

Disadvantages of Sale and Leaseback

These can include increased rent payments and the loss of control over the asset. Increased rent payments can affect a company’s finances and reduce the amount of funds available to improve the company’s operations, but these can be mitigated in early negotiations. Additionally, the sale and leaseback may have a negative impact on the company’s valuation, as it can be seen as a financial pitfall, as it no longer appears on the balance sheet.

Another disadvantage are the potential VAT implications, before completion check with your accountants the VAT status on completion. Usually VAT is charged and claimed back from HMRC.

Finally, Covid-19 has added challenges to the sale and leaseback process, investors are weary of companies in this ecomonic climate. With many companies facing financial uncertainty, it may be more difficult to find a buyer for the premises, or the terms of the leaseback may be less favorable. When the leaseback comes to an end, the company may have to repurchase the premises at a higher cost, which can negatively impact the company’s finances.