Keeping the keys: Structuring a lease when the seller retains the property

Not every business sale involves the transfer of real estate ownership. Many owners, particularly single-property SMEs, want to carve out the real estate, agree a lease with the operating business and retain as an investment post-sale. The result is an unusual dynamic, the party who has just sold the business becomes its landlord. The buyer's operating business needs continuity and the flexibility to run its operations whilst the new landlord wants to protect and grow the value of their investment. These competing priorities can create friction when agreeing key lease provisions.

Lease length and break options

For the real estate owner, a longer guaranteed lease term without break options typically drives a stronger investment value as it provides greater certainty of income. A shorter lease or the inclusion of break options can reduce both liquidity and value when the asset is sold or (re)financed. This differs for properties with strong redevelopment or alternative use potential whereby a shorter lease term could be preferred by the real estate owner.

The operating business wants occupational security balanced against the flexibility to relocate if operational needs change. Where the tenant is PE-backed, the Sponsor may also prefer a break right timed to align with its intended exit window, so a future buyer isn't locked into a site it doesn't want. The lease term needs to work for both parties and is likely to be driven by underlying property fundamentals.

Cost burden: who carries the FRI obligations

Investment value is strongest where the tenant is responsible for all property costs — maintenance, repairs, insurance and tax. These leases are called a full repairing and insuring (FRI) or Triple Net Leases and are the structure that real estate owners prefer (and the wider market norm). This structure can also be beneficial for tenants as landlords tend to be more hands-off in their management of the property under an FRI lease so operations can continue without repeated consent or consultation.

The operating business might reasonably push back on this structure where it feels this shifts costs unfairly. For example, if the owner which controlled the site before the sale underinvested in its condition or maintenance, the incoming tenant shouldn't inherit that liability. A schedule of condition agreed at completion, alongside a clear position on dilapidations can provide a solution that works for both parties.

Rent: proceeds today vs affordability tomorrow

It can be tempting for the real estate owner to push rent as high as possible on the assumption that more rent means more value. In practice, both over-renting and under-renting can damage investment value. A rent pitched above open market level creates an overrented position meaning a reduction in rent payable at the next major lease event (typically lease expiry etc.) as the current tenant (or any future tenant) will not continue paying above market levels. A rent below market level fails to capture the full potential income flow until the next lease event reducing the investment value.

For the operating business, the rent must be affordable, particularly in the early years when the business might be undergoing operational changes under new ownership. Benchmarking rent independently against open market evidence, rather than working back from a target sale price, tends to produce a figure that holds up for both sides over the life of the lease.

Security of tenure

Views on security of tenure typically follow the alternative use potential of the asset. Where a site has strong redevelopment or repurposing potential, the real estate owner may prefer to maximise investment value by securing the right to vacant possession as soon as possible. In England and Wales, this often means contracting out of the security of tenure provisions in the Landlord and Tenant Act 1954. Statutory tenure protections differ significantly dependent on jurisdiction.

Where the site is more specialised and operationally critical, the tenant will want the opposite: statutory protection and/or contractual extension rights, particularly if relocation would be costly or disruptive.

Physical alterations

For the real estate owner, the property is their security behind the investment and its condition and specification underpin both the rent and the exit value. They will seek greater control over alterations, particularly structural ones, to protect their underlying security.

The operating business needs the flexibility to adapt the site as its operations evolve, and an overly restrictive alterations clause can constrain a business moving forwards. A tiered consent regime, allowing minor and non-structural alterations without landlord approval while requiring consent for structural change, alongside a fair reinstatement position, usually provides the basis for an agreeable position. Whilst this might provide a useful starting point for negotiations, these clauses often need to be negotiated and drafted to cover specific considerations for the property involved.

The final word

Retaining the real estate on a business sale creates another aspect which needs to be negotiated as part of the process. The friction between the competing priorities can introduce further complications and delays for the sales process if managed incorrectly. A sustainable and timely solution can be found by seeking commercial advice alongside legal support. This protects the value of the real estate and gives the operating business the certainty it needs moving forward.