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A good time to sell property and lease it back?

30th April 2020

The current economic crisis of 2020 is hitting all businesses hard.  The financial support being offered by the government is welcomed, but has equally faced criticism for the time it is taking to receive the much needed funds.  Businesses up and down the country are therefore exploring a variety of cash-raising exercises in a bid to remain solvent.

Retail giant Next for example is looking to sell its 334,000 sq ft HQ in Leicestershire and three warehouses as part of a sale and leaseback arrangement to generate more cash to strengthen its balance sheet.

The concept of selling the property and agreeing a lease back to you with the buyer is not new; such agreements were popular in the 1970’s and unsurprisingly made a strong comeback during the global recession of 2008/9.  Sale and leaseback deals in Europe grew from 6% of the property market in 2004 to 17% in the first half of 2009.

A simple process

In summary, the owner of a property will agree to sell to a third party, who in turn agrees to lease the premises back to the occupying business.  The lease back completes the same day as the sale, so as to prevent any disruption to their activities.

Typically the buyer will be a property investor, who has funds to invest and recognises the opportunity presented by the need for many property owners to free up cash from within their business, rather than extend their bank debt.

Although the process itself is simple, there will likely be extensive negotiations required to arrive at a price that suits all parties.  Negotiating power does not rest entirely with the buyer as one might expect; there are benefits and drawbacks on both sides of the deal.

The most obvious advantage for the seller is the relatively quick injection of cash without impacting control of the business itself.  If bank debt is secured against the property, selling it could allow the business to pay-off the debt and pay no further interest.

This method of raising cash is also more economical in terms of fees when compared to bank funding.  With a sale and lease back each party will bear their own costs, whereas bank finance will usually entail bank fees, valuation fees, bank’s legal costs etc.

Considerations to be made

Selling a property will likely reduce the sale valuation of the business in the future and should not be considered lightly.  However, if the sale is likely to save a business from insolvency it could be the right option, at the right time.

Equally, a sale and leaseback should not be regarded as a last ditch measure.  Any investor purchasing the property will need confidence that the seller/tenant is capable of paying the rent, and so a seller/tenant that is struggling to stay solvent will not be an attractive prospect.  There are a number of measures which can be taken to provide an investor purchaser with some degree of comfort however; for example, part of the sale proceeds to be held back as a rent deposit.

More financially stable businesses may be able to negotiate terms in favour of the tenant. For obvious reasons, investors are actively seeking stable tenants with well-performing businesses and will want to avoid the issue of finding new tenants and agreeing new leases.  Certain businesses will therefore be able to leverage their long-term stability and performance for more attractive lease terms, such as reduced rent or the inclusion of a rent-free period.

We are here to make it happen

As is usually the case in times such as these, business people are exploring the opportunities created.  A number of investors/landlords recognise this as an opportunity to increase their portfolio, which is being met by businesses recognising an opportunity to overcome the financial impact of such an unprecedented event.

Ansons Solicitors remain open for business throughout these uncertain times to meet the needs of all clients, existing or new.

If you are considering any arrangement to sell or purchase a commercial property, please get in touch with the Commercial Property team here at Ansons. Laura Pyatt can be contacted at lpyatt@ansonssolicitors.com or call her direct on 01543 431181.

 

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