Sale and leaseback. Releasing the capital locked in your freehold.
A sale and leaseback sells the freehold your business trades from to a property investor and leases it straight back on a long lease, so the building keeps working for you while the capital tied up in it comes out as cash. The search results treat this as a real-estate transaction, and the legal machinery is a property sale. For a trading company it is a financing decision: how to release liquidity from an asset you own, at what ongoing cost, and with what effect on the room you have left to borrow. The sale monetises close to the full appraised value of the building, where a mortgage on the same property reaches only 60 to 70 per cent. What you give up is ownership, and a rent that becomes a permanent fixed charge on the business. This guide sets out the mechanics, the capital arithmetic, the trade-offs and the accounting, from the borrower’s side, at August 2026 rates.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific property or facility. It deepens the shorter answers in our working guide.
You sell the freehold and lease it straight back on a long lease.
A sale and leaseback is two agreements executed together: an outright sale of the freehold, or a long leasehold, to an investor buyer, and a lease back to your business on completion, so trading never pauses. The day after completion the business occupies the same premises and runs the same operation; what has changed is that the building is owned by a landlord and the capital that sat inside it is now cash on your balance sheet. The buyers are property investors rather than lenders, commonly property investment funds, institutional landlords and specialist sale-and-leaseback funds that want a long, secure income stream from a trading tenant.
The lease is where the terms live. These are usually long leases, commonly fifteen to twenty-five years, most often on full repairing and insuring terms, which means the tenant carries the cost of maintaining and insuring the building. Rent is reviewed periodically, either to open-market levels or by reference to an index such as RPI or CPI, and reviews are often upward-only. Read against those terms, the leaseback is a long-dated fixed obligation, not a flexible one, and its cost and conditions matter as much as the price you receive.
Price and rent are set together, and they pull against each other. The capital value follows an independent valuation of the property, and the rent is set as a yield the buyer requires on the price paid. Agree a lower rent and the same building supports a higher capital value; agree a higher rent and the buyer will pay more up front. That lever is the heart of the negotiation, because a higher headline price bought with a heavier rent can cost the business more over the life of the lease than the extra cash is worth.
It monetises close to the full value, where a mortgage reaches 60 to 70%.
A sale and leaseback releases close to the full appraised value of the property, because you sell the whole asset rather than borrow against part of it. A commercial mortgage secured on the same building advances 60 to 70 per cent of value and leaves the rest locked in the equity of the property. Take a freehold appraised at £5m, as an illustration at August 2026: a mortgage at 65 per cent releases about £3.25m and keeps you the owner; a sale and leaseback releases close to the full £5m before sale costs and tax. The sale can crystallise a chargeable gain, so the net cash is lower than the headline price, but the gross release is materially larger than a mortgage reaches. That difference, roughly £1.75m in the illustration, is the reason borrowers reach for it.
The cash usually funds one of three things: capital spending the business cannot finance out of cash flow, part of an acquisition, or deleveraging, meaning repaying more expensive debt. There is a structural point behind the headline number. Cash-flow lenders size senior debt against earnings, commonly capping it at 2.5 to 3.5 times EBITDA, and a mortgage or a term loan draws on that same capacity. A sale and leaseback converts a fixed asset into cash without adding to the leverage multiple, because the proceeds are a sale rather than a borrowing. It does not come free of consequence, since the rent is a fixed charge the next lender will count, but it releases capital that earnings-based debt cannot reach.
So the instrument suits a business that is asset-rich and liquidity-short: real value sitting in a freehold, a genuine use for a large slug of capital, and no wish to dilute ownership to raise it. Whether releasing the capital beats keeping the asset is the harder question, and it turns on the trade-offs below and on the choice between debt and equity our guide to debt versus equity sets out.
You give up ownership, and rent eats debt-service headroom.
A sale and leaseback carries three costs against the cash it releases. You no longer own the asset, so future capital appreciation and the option to borrow against it again pass to the landlord. The rent becomes a permanent operating cost that ranks ahead of discretionary spending and lasts the life of the lease. And the lease binds the business to the building on repairing and insuring terms, with rent reviews that on many leases only move up. The trade is real capital today for a real obligation tomorrow, and the honest comparison is between the two, not the cash alone.
The headroom point is the one borrowers most often underweight. Rent is a fixed charge, and lenders test fixed-charge cover, so a new rent line reduces the cushion under your existing covenants and the capacity to raise further debt. Continue the illustration: rent set at a 7 per cent yield on the £5m sale is about £350,000 a year, against interest of about £219,000 before amortisation on the £3.25m a mortgage would advance at an all-in near 6.75 per cent. The leaseback releases more capital and carries no amortisation, but it costs more in annual cash and the whole of that cost is a fixed charge that never falls away. Cash released today can narrow the room to borrow next year.
The lease itself is the third cost. Repairing obligations, upward-only reviews and the reversion of the building to the landlord at the end of the term all sit with the tenant, and a business that might outgrow or exit the premises inside the lease term carries relocation and renewal risk it did not have as owner. Some buyers also ask for a guarantee from a parent or the shareholders to stand behind the rent, which reaches beyond the property in the same way our guide to personal guarantees describes.
It fits a business that needs liquidity more than it needs the freehold.
A sale and leaseback fits when the business owns freehold it intends to keep occupying, needs a slug of capital larger than a mortgage LTV can reach, and values the building for its use rather than as an investment to hold. The strongest cases put the released cash to work at a return above the rent: funding growth capital expenditure, part-funding an acquisition, deleveraging expensive debt, or funding a shareholder buyout where the alternative would be to give away equity. In each the asset was doing nothing but sitting still, and the capital does more elsewhere than the rent costs.
It does not fit as well where the property is strategic or appreciating and you would rather borrow against it than sell it; where the rent would push fixed-charge cover too tight to leave a working margin; or where the business may outgrow or leave the building within the lease term. Specialised or hard-to-relet property weakens the economics too, because a buyer prices that risk into a higher yield, which means a higher rent for the same cash. A cheaper commercial mortgage that covers the whole need makes the leaseback the wrong tool by default.
The test that cuts through it is simple to state and hard to pass: does releasing this capital earn more than the rent costs, after tax, across the life of the lease? Where the cash funds a return above the rental yield, the trade works. Where it plugs a hole in the business, a sale and leaseback swaps an owned asset for a permanent liability and leaves the underlying problem in place, which is rarely the right answer.
Under IFRS 16 the leaseback sits on the balance sheet, not off it.
Under IFRS 16 a sale and leaseback is no longer the off-balance-sheet arrangement it once was. The leaseback creates a right-of-use asset and a lease liability on the balance sheet, and only the part of the gain on sale that relates to the rights transferred to the buyer is recognised up front; the rest is deferred against the right-of-use asset. So the lease liability sits alongside your borrowings and reads like debt to anyone analysing gearing. The cash comes in, but a liability comes with it.
Private UK companies reporting under FRS 102 are moving the same way. For accounting periods beginning on or after 1 January 2026, the standard brings most leases on balance sheet under a model close to IFRS 16, so the presentational advantage that once favoured an operating lease over owned property is largely gone. Treat a sale and leaseback as an on-balance-sheet decision whichever framework you report under, and take your auditor through it before you commit.
The practical consequence is covenant arithmetic. Facility agreements test leverage and fixed-charge cover, and whether the lease liability counts as debt in those tests depends on the covenant definitions, which are sometimes fixed to the accounting standard in force at signing and sometimes carry a lease add-back. Check the definitions before assuming the leaseback is covenant-neutral, because a transaction that reads as clean in the accounts can still trip a ratio that was written a different way. What each covenant measures is in our guide to loan covenants.
A mortgage keeps the asset and costs less; the leaseback releases more.
The direct alternative to a sale and leaseback is a commercial mortgage on the same property, and the two decide different things. Both price against the same reference: SONIA sat at 3.73% on 2 July 2026 against a Bank Rate of 3.75%, held at the Bank of England’s June meeting. Bank of England, Bank Rate. A mortgage priced near 6.75 per cent, a low single-digit margin over that reference, on 60 to 70 per cent of value keeps you the owner and the upside and costs interest plus amortisation. The sale and leaseback releases close to the full value but turns the building into a rent line you no longer control. Cheaper and smaller against dearer and larger; the right answer follows the size of the need and the use of the cash.
The wider menu matters too. Where value sits in receivables and inventory rather than property, an asset-based facility can release liquidity against those without selling anything, advancing 80 to 90 per cent of eligible receivables, as our guide to asset-based lending sets out. Where the real need is permanent capital and the balance sheet cannot carry more fixed charges, the question is debt against equity, not which asset to monetise. And a sale and leaseback frequently appears inside a larger refinancing as one lever among several rather than a standalone deal, which is the frame our guide to refinancing business debt takes.
We will price the release against keeping the asset.
If you are weighing a sale and leaseback, a first conversation is confidential and costs nothing. We model the cash it releases, the rent it commits you to, and the effect on your covenants and remaining debt capacity, then set it against a mortgage, an asset-based facility and doing nothing, so the decision rests on the whole trade rather than the headline cheque. See how a mandate runs in how we work, or the full range of what we advise on in our services.