Structuring your lease to support a future exit

The decision to release capital via a sale and leaseback should not risk the future exit from a portfolio company. To mitigate this risk, it is important to ensure the rent is sustainable and the lease terms are market-standard but three lease provisions should be a top priority for Sponsors as they pose the largest potential risk for an exit: lease length, change of control and assignment/subletting.

Lease length and break options: pricing today vs flexibility tomorrow

Investors underwriting a sale and leaseback are typically pricing certainty of income — the longer the lease term, the lower the perceived risk, and the stronger the pricing. Most institutional sale and leaseback investors look for a minimum term of 15 years, with longer lease lengths required for bespoke or specialised assets.

Sponsors undertaking sale and leasebacks on highly critical facilities which are very difficult and costly to replace need to ensure long-term operational control and are often willing to commit to longer lease lengths. The long-term, guaranteed continuation of operations after an exit is essential for a successful sale.

Security of tenure beyond the initial lease is also a key consideration – some countries offer statutory protection for tenants but contractual protections such as tenant-only extension options should also be considered where required.

For other facilities and businesses, leases with greater flexibility to exit during the term are preferred. For example, Sponsors implementing a buy-and-build strategy might prefer flexibility to consolidate operations in the future as more sites are acquired.

In these scenarios, a tenant-only break option, exercisable shortly after the planned exit provides flexibility for an incoming buyer to decide the occupational strategy and exit the site if required.

This flexibility comes at a trade-off as break options reduce the certainty of income investors are pricing and typically reduce the liquidity and proceeds raised via sale and leaseback. Break options are also only available for properties where there are more readily available alternative uses/occupiers.

Change of control: the clause that can block an exit

Most institutional leases contain provisions that require landlord consent for a change of control of the tenant entity. In some leases, the landlord has complete discretion over the consent process and this introduces a third party with leverage into your exit process. At best, this slows your process but in the worst-case scenario, you might have to renegotiate lease terms with the landlord to obtain their consent.

From the landlord’s perspective, they have underwritten the credit strength of the business at the time of the sale and leaseback and want to prevent a degradation in the financials of the business via a change of control. This could materially impact their investment value which is often heavily reliant on the ability of the tenant to meet their lease obligations in the long-term.

This motivation often provides the appropriate solution: permitted change of control. For example, no consent required for a sale to a purchaser meeting a covenant test or credit-rating with an agreement upfront on the replacement of the Parent Company Guarantee on sale, if required. Alternative options include additional deposits or guarantees. If this topic is left unaddressed during the sale and leaseback negotiations it can create significant risk and uncertainty during an exit.

Assignment: important for exits which aren’t share sales

Change of control provisions protect one exit route but a trade sale of the underlying business, or a buyer for part of the portfolio both require the lease to be transferred. This scenario is governed by a different provision in the lease: assignment.

Standard institutional leases require landlord consent to assign, usually conditional on the assignee's financial standing and replacement of the Parent Company Guarantee. A landlord with unqualified discretion, an undefined consent process, or other conditions attached can all delay or reprice a sale.

Subletting provides optionality in certain scenarios and typically requires a lower bar for consent as the original entity which entered the lease retains contractual responsibility for its obligations.

Both provisions should have an objective consent standard agreed at the time of entering the sale and leaseback to ensure partial exits or trade sales remain viable.

The final word

The best-structured sale and leasebacks treat the transaction as one step in a longer capital plan, not an isolated event. That means structuring a lease that works for the business in the long-term whilst supporting your exit when the time comes. The key terms above are critical to derisking the exit process and require careful consideration and negotiation with any potential landlord.