Sale and leaseback: a win-win?

The recent announcement of the sale and leaseback by BP of their London headquarters is the latest example of the renewed popularity of this model of equity release for asset-rich businesses. It follows similar deals by Next, Brewdog, Sainsbury's, British Land and Waitrose who all, for different reasons, have looked to improve their balance sheets by selling their real estate but by leasing back their properties have retained occupation.

The impact of the COVID-19 pandemic has undoubtedly increased interest in sale-and-leaseback deals. As other sources of financing become less available and more expensive, a sale and leaseback offers an immediate cash injection. Choosing a sale and leaseback transaction also allows future flexibility to reduce space occupied or to change location. BP reached the conclusion that owning and running a large central London office space was “expensive, unnecessary and out of step with modern corporate practice”. Businesses may choose to sell either a single asset or a portfolio of assets.

In taking a leaseback, the seller is likely to be in a strong bargaining position to negotiate favourable lease terms. A well-advised seller should be able to ensure that their repairing obligations reflect the age and condition of the building, limiting these obligations by reference to a schedule of condition for an older building or carving out responsibility for inherent defects in new properties as well as limiting reinstatement and dilapidations liability. The seller is also well placed to build in future operational flexibility by incorporating break options, renewal rights and provisions to avoid costs which would otherwise be incurred in seeking consent from the purchaser for matters such as alterations. Potential sellers may also be tempted by the tax benefits they can receive in offsetting rental costs as an operating expense.

Although the seller will primarily be concerned with the sums they will receive for the asset, it is of course important that they properly consider the future affordability of rental payments to avoid prejudicing their business in years to come.

Sale and leasebacks are attractive to investors, particularly where the lease is for a longer term and the seller has a strong covenant. The guaranteed income stream provided by the rental income (with upwards-only rent reviews) provides a robust investment particularly appreciated by pension companies. Investors prefer fixed or indexed-linked structures compared to open-market rent reviews to ensure income growth. When negotiating the lease, purchasers should ensure that the lease remains marketable and acceptable to any financial institution should they wish to obtain finance either for the purchase itself or at some future point. They should also ensure the lease can be terminated easily if the tenant gets into financial difficulty.

Liquidity is paramount for all businesses and in the current volatile climate a sale-and-leaseback transaction is clearly worth consideration by owner-occupiers looking to improve their cashflow.

For further information please speak to Laurence Douglas or your usual Brodies contact.