At a glance
- Sale and leaseback releases equity that can be invested in the core business.
- The rent and term of the leaseback agreement largely determine the return for both parties.
- Assess the tax implications in advance, including those relating to property transfer tax and the gain on disposal.
How the arrangement works
In a sale and leaseback, an owner-occupier sells the commercial property to an investor and immediately leases it back under a long-term lease, often for ten to twenty years. The business remains in the premises, but the invested capital is released for other purposes.
When it is attractive
- Growing businesses that need capital for expansion or an acquisition.
- Businesses seeking to reduce their exposure to changes in property values.
- Situations where the balance sheet is being optimised ahead of financing or a sale of the business.
What the investor assesses
An investor in a sale and leaseback takes into account the creditworthiness of the tenant-seller, the lease term and the rent relative to market rent. An initial rent that is too high compared with the market increases the risk when re-letting in future.
Points to consider in the lease
- Set the rent in line with the market to ensure a healthy long-term relationship.
- Explicitly specify indexation and any rent review dates.
- Allocation of maintenance responsibilities: under long leases, major maintenance is often the tenant's responsibility.
- Any repurchase options or right of first refusal if the investor sells at a later date.
Tax and accounting implications
The sale may generate a gain on disposal that has tax implications, and the buyer is generally liable for property transfer tax on the purchase price. Have a tax adviser calculate the implications for the annual accounts and corporation tax in advance.
Frequently asked questions
Is sale and leaseback only suitable for large businesses?
No, smaller businesses that own their commercial premises also use this arrangement, provided the property is sufficiently marketable to investors and the rent is in line with the market.
What happens when the lease expires?
That depends on the agreed terms: renewal at an updated rent, the tenant leaving, or a repurchase option agreed in advance.