Sale and leaseback arrangements have become increasingly popular in Finland. Sale and leaseback can be considered as a largely similar process to other real estate transactions. However, as the seller becomes the tenant of the property, the lease agreement must be given special considerations.
The benefits of sale and leaseback arrangements
Sale and leaseback arrangements generally improve the solvency of the seller of the property by freeing up capital to grow the business and reduce the need for external financing. The key to the success of a business is how to access essential assets to its operations and production with the most optimal capital structure.
Other advantages of sale and leaseback for the seller include, reduced administrative work involved in maintaining the property, predictability and budgeting of costs, and the ability to use capital for more profitable investments. Sale and leaseback may also offer significant tax advantages due to the right to deduct premises expenses.
For the buyer, sale and leaseback allows the amortisation of long-term returns and the benefit of low long-term interest rates – at least in the past. In addition, the increase in property values has attracted investors, particularly in growth centres. For real estate investors, a diversified property portfolio, the comprehensive development of rental activities and the creation of real estate funds, for example, provide a hedge against cyclical fluctuations. As in other real estate transactions and development projects, sale and leaseback is fundamentally a win-win arrangement and renders strategic growth possible.
In simple terms: the seller releases the capital tied up or to be tied up in the property, and the buyer obtains a long-term investment for the asset.
Consider these in sale and leaseback arrangements
In sale and leaseback arrangements the parties should consider the maintenance and repair liabilities of the property in more detail than in a normal commercial lease or tenancy of a property. When entering an arrangement, it is important for the parties to be aware of the risks, liabilities and constraints involved.
The provisions on the tenant’s right to alteration and maintenance responsibilities are often ambiguous, as the former owner becomes the tenant in the arrangement. As the rights and obligations of the tenant and the owner are inherently different, these can lead to disagreements between the parties unless they are clearly and explicitly agreed.
The single biggest risk is the ambiguity surrounding the binding nature of the buy-back right. There may be no legal remedy available if the buyer refuses to sell the property back to the original seller. The second major risk relates to the collateral aspect of the arrangements. As Finnish legislation prohibits the transfer of security over immovable property, the arrangement may in some respects be unencumbered by the parties or third parties. Finnish legislation imposes restrictions on how sale and leaseback arrangements can be implemented, so an expert advice is often necessary to avoid problems.
As a stable euro area country, Finland is increasingly part of the international real estate market with its co-working, space as a service and joint venture arrangements.
It is therefore recommended to include the legal advisor in the arrangement negotiations at an early stage. In this way, the objectives and expectations of the parties can be ascertained and considered from the very beginning of the arrangement.