As each day of lock-down passes, it seems more and more companies are joining the sale and leaseback “bandwagon”. Yesterday, React News reported that Waitrose are looking for £150m in a renewed sale-and-leaseback drive. This follows a similar move, reported last June, where my local branch was one of seven stores set to be offloaded (a quick look on the Land Registry and it is apparent that this did happen, although disappointingly the lease is not yet registered to satisfy my intrigue on what the terms might have been). The latest Waitrose push follows reports of Next plc and IWG raising much needed cash in the same way. Surely we are set to see more of these deals where occupiers have the opportunity (owner-occupied buildings, attractive covenant to investors)?
There are a myriad of tax considerations (more on that from my astonishingly bright tax colleagues later), but for those ploughing forward into heads of terms, from the perspective of a real estate practitioner, are there any key points to keep on the radar (from either side of the negotiation)? There are many, but here are 4 immediate thoughts that are easily overlooked.
Who owns what? If you want to avoid a potential bunfight at the end of the term on dilapidation, it is always sensible to set this out clearly at the outset. What are the landlord’s fixtures, what are the tenant’s fixtures and what are the tenant's fittings? Naturally, this is all the more important with extensive and expensive kit on site (e.g. high spec “sheds”).
Who insures? If the tenant wants to maximise its operational flexibility, it may well want to retain the right to insure the asset. It is achievable, but with an investor wanting tight controls on how the tenant does this, it is arguably simpler for all to stick with the institutional norm. It is worth remembering than a lender would also need to get comfortable on the terms on which a tenant self-insures.
Energy performance. By the nature of the deal, an investor is after a long lease, and looking to avoid the need to dip into its pocket. However, it is worth remembering that responsibility for compliance with the MEES regulations rests with the landlord, where the minimum EPC rating may well increase to an EPC rating B by 2030 (see my previous blog here). At the same time, a tenant will be after flexibility on alterations (i.e the landlord may concede the opportunity to “police” this). In short, if an investor wants to future-proof its position on environmental compliance, the lease needs to deal at the outset.
Environmental Liability. A tenant will usually look to exclude all liability for existing environmental risk in a lease. Is that right on a sale and leaseback? Probably not. But then again, like everything, it will be up for negotiation.