Could a sale and leaseback deal be the key for businesses looking to survive the coronavirus crisis? James Polo-Richards, a real estate lawyer and partner in the commercial real estate team at law firm Wright Hassall, explains more to RCI readers.
Following the UK government’s announcement that it will be providing financial packages to businesses who need them most, in a bid to keep the economy afloat, whilst it is positive news for those companies struggling in the current climate, there is a risk that the help will come too late for some, with the Business Secretary recently acknowledging that ‘more money needs to go out faster’.
To help raise the much-needed funds quickly, the property world has revisited an old favourite – the sale and leaseback. Could this be the key for businesses looking to survive the coronavirus crisis?
The sale and leaseback
With a sale and leaseback deal, an owner sells a property to another party, agreeing to take a lease of the property back as part of the transaction.
For those businesses that are not comfortable approaching a bank for support, this alternative will allow them to free up cash within the business. Next Plc is one high-profile example of businesses using this approach to raise finance, after the company announced plans to market some of its assets.
In addition, many property investors including large funds, private equity houses and smaller individual investors, are looking at a range of opportunities and property owners should recognise there are people in the market who have cash to spend.
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.
Of course, before entering a sale and leaseback deal, businesses should consider all the key factors to help them make an informed choice.
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.
Providing certain conditions are properly met, the leaseback aspects of a sale and leaseback deal may be exempt from Stamp Duty Land Tax (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 no trivial matter, as it could reduce the value of the business in any future sale, so directors must consider potential deals carefully. Directors owe a duty to the company, but 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 must minimise losses, so any decision to agree a sale and leaseback, where the company is perceived to be struggling, should involve professional advice and a clearly documented decision-making process.
Financial covenant and security
From an investor’s perspective, before agreeing a deal, they will want a degree of certainty that they will receive payment, as those businesses seeking a sale and leaseback deal could be struggling financially.
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 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, particularly those involving business assets, it is important to consider a number of factors, but sale and leaseback might represent a sensible option for many.