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ASK THE EXPERT: Sale and leasebacks: sacrifice or a saviour?

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The UK Government recently announced that they will be offering financial packages to businesses in need of support, as the coronavirus crisis becomes a serious threat to the economy.

With the severity of the situation increasing, the financial support could not come soon enough for some companies, with many pleading with the government for money to be sent out faster.

The need for funds has become so desperate that business have started to look for other ways to free up the cash, with the sale and leaseback re-emerging as an effective method from the property world and one that could help jewellers and other retailers, according to James Polo-Richards, a real estate lawyer and partner in the commercial real estate team at law firm Wright Hassall.

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What is sale and leaseback?

Through a sale and leaseback deal, owners of a property sell to another party, agreeing to take a lease of the property back immediately. One high profile example of this has been Next Plc, who have announced plans to market some of their assets.

This process gives businesses an alternative way of raising finances, instead of having to turn to the banks for support. In addition, many property investors including large funds, private equity houses and smaller individual investors are looking at a range of opportunities.

Many funds, unless they can negotiate or revise terms, may be bound by covenants to spend cash they have raised by a certain date; and individual investors may see little value in the interest rates offered by banks or not be prepared to risk the current volatility of the stock market. Accordingly, there are people in the market who have cash to spend.

As with every transaction there are advantages and disadvantages which we outline below:

Release of cash and existing debt

For many businesses a sale and leaseback allows them to convert an asset into cash without losing control of the business. In the same way, where bank debt is secured against the asset, the sale of that asset should enable a company to repay that debt and remove the ongoing need for interest repayments.

Lower costs compared to traditional refinancing

While engaging with a bank to secure debt against an existing asset may be an option, there are usually higher transactional costs associated with such deals including being responsible for valuation, arrangement, legal and bank commitment fees. Theoretically a sale and leaseback deal should see each party bearing their own costs.

Stamp Duty Land Tax relief

Providing certain conditions are properly met, the leaseback aspects of a sale and leaseback deal may be exempt from SDLT meaning that the business will not need to pay any SDLT on the grant of the lease. The sale element is still likely to attract SDLT for the buyer.

Loss of value to the business and director’s duties

The sale of an asset is obviously a key consideration for directors as it could reduce the value of the business in any future business sale.

It is important to remember that while directors owe a duty to the company, where a company falls into financial difficulties and the risk of insolvency is real, those duties can then extend to creditors.  In exercising these duties, they need to ensure they are minimising losses.

Before any decision to enter a sale and leaseback arrangement is made, it is best practice for companies to seek professional advice and ensure the approach they’re taking is beneficial considering their current position.

Financial covenant and security

Before an investor purchases an asset, they want a level of certainty that the rent due under the lease they grant will be paid. In uncertain times, some investors will be apprehensive that companies looking for a sale and leaseback deal could be facing financial difficulties, impacting their ability to pay.

In such circumstances, parties will need to consider whether any rent should be held back in escrow or in a rent deposit deed. This would give the investor certainty that an element of the rent is already held securely if the new tenant does not perform.

Depending on how much rent is held in this way the seller/tenant may be quite relaxed: from a cashflow perspective they will know that they won’t actually have to pay any rent for a prescribed period if it has already been escrowed. If they have been able to negotiate a rent-free period as part of the deal this could leave the seller/tenant with a couple of years to focus on other parts of their business.

As with any transaction it is important to consider a number of factors, but sale and leaseback might represent a sensible option for many.

About the author: James Polo-Richards is a real estate lawyer and Partner in the Commercial Real Estate team at law firm Wright Hassall. He regularly advises property developers and property investors to help find practical solutions to their challenges, so that they can achieve their goals and realise the value of their assets in a timely and cost-efficient manner.

 About the firm: Wright Hassall is a top-ranked firm of solicitors based in Warwickshire, providing legal services including: commercial property, corporate law; commercial law; litigation and dispute resolution and employment law. The firm also advises on contentious probate, business immigration, debt recovery, employee incentives, information governance, professional negligence and private client matters.

 

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Rob Corder

The author Rob Corder