As many companies, particularly retailers, seek to monetize assets or at least leverage valuable real estate assets, we are witnessing increased popularity of sale leaseback transactions.
The challenge for the buyer in these transactions generally revolves around ensuring that the lease secures the anticipated return for the price reflected in the sale, as the sale part of the transaction will likely be a fairly vanilla “as is, where is” sale.
Buyer concerns typically relate to securing the covenant of the seller for the term of the lease, which often manifests itself in assignment and change of control restrictions and, to a lesser degree, subletting. The new landlord often seeks to limit assignments that do not require consent to situations in which substantially all of the assets of the tenant are being purchased and the new tenant has a similar covenant (which in the case of a public company can be reflected with a ratings test, or for a private company, a net asset value test). Except where the seller-tenant is a public company, the landlord will also wish to restrict changes of control, which could be used as a means of circumventing the assignment restrictions. Other considerations for landlords include evaluating whether the tenant is released in situations in which transfer consent is not required.
With respect to subletting, a tenant may be able to carve out a wide ambit of freedom to sublet given that it’s covenant remains subject to excluded uses restrictions (government offices, call centres etc.).
Other areas that are often heavily negotiated or are increasingly under scrutiny in these circumstances are: (i) operating cost recoveries for capital repairs and code compliance depending in part on whether the buyer obtained and price reductions further to its due diligence and the reliability of off title searches and code compliance reports in various jurisdictions; (ii) the often innocuous obligation to maintain the building to a certain standard and the landlord’s ability to recover costs related to such obligation, particularly as operating exclusions may attempt to exclude any work orders or building non compliances whether occurring before or after the sale; and, as retail disruption accelerates, continuous occupancy or “go dark” provisions. We also anticipate that landlords will increasingly seek credit enhancements under the lease terms such as guarantees and letters of credit.
With capital markets exuberant and liquid these types of transactions should continue to propagate.