For many businesses, the financial packages offered by the UK Government, trying to keep the economy afloat during the coronavirus pandemic, will provide much needed support.
But for many, there is no support or the money will come too late to save them, with the Business Secretary acknowledging over the Easter weekend that ‘more money needs to go out faster’.
Exploring alternative ideas for raising cash quickly, the property world has revisited an old favourite – the sale and leaseback. But what is it and how does it work?
The sale and leaseback
A sale and leaseback deal does very much what it says on the tin – the owner of a property sells it to another party and, as part of the transaction, agrees to take a lease of the property back immediately.
A sale and leaseback can provide an alternative means of raising finance for a business which may prefer to free up cash in the business rather than approaching a bank for the money.
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.
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 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 a key consideration for directors as it could reduce the value of the business in any future sale. 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, detailing why the company took this approach.
Financial covenant and security
An investor buying any asset will want a degree of certainty that they will receive the rent due, but some investors may worry that companies wanting a sale and leaseback deal are struggling financially and will not manage to pay the rent over a long term.
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 in the event that 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, 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 in what is likely to be a challenging economic environment for years to come.
By James Polo-Richards, Wright Hassall