Structure
Sale and leaseback
A sale and leaseback sells the freehold to an investor and leases it straight back on a long term. It releases close to the full value of the property and converts an owned asset into a permanent fixed rent.
Also called sale-leaseback · leaseback · property sale and leaseback · SLB
You sell the whole asset rather than borrow against part of it. That is the entire reason the number is larger.
| Route | Released |
|---|---|
| Mortgage at 65% | £3.25m |
| Sale and leaseback | £5m |
The published illustration: a freehold appraised at £5m at August 2026. A mortgage at 65% releases about £3.25m and keeps you the owner; a leaseback releases close to the full £5m before sale costs and tax. The sale can crystallise a chargeable gain, so net cash is lower than the headline.
What it is
The sale of a freehold to an investor buyer, with the property leased straight back to the seller on a long term.
The business stops owning the building it occupies and starts renting it, usually from a party whose interest is the income stream rather than the premises. Nothing about the operation changes on the day: the same people work in the same place. What changes is the balance sheet on one side and the profit and loss account on the other.
The short version of what it does is release the capital, keep the use, and price the rent. Whether that is a good trade depends almost entirely on the third of those.
How much it releases
Close to the full appraised value, 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.
That difference, roughly £1.75m in the illustration, is the reason borrowers reach for it.
The qualifier matters, though, and it is frequently skipped. The sale can crystallise a chargeable gain, so the net cash is lower than the headline price. The gross release is still materially larger than a mortgage reaches, but the number to plan against is the one after sale costs and tax rather than the appraised value.
The lease is the long half of the transaction. The cash arrives once; the rent obligation runs for decades.
| Term | Years from completion |
|---|---|
| Typical lease term | Fifteen to twenty-five years |
Typical lease term on a UK sale and leaseback, published as fifteen to twenty-five years, plotted on a 0 to 30 year axis. Individual transactions vary and the term is negotiated.
Why it does not use debt capacity
Because the proceeds are a sale rather than a borrowing, and that is the 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. 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 nothing has been borrowed.
For a business that is already at or near its senior ceiling and needs capital, that is the whole argument. It is the one route to a large sum that does not compete with the facility the business already has or the one it wants next.
It is worth being precise about the limits of that claim, however. The rent is a fixed cost, so it reduces EBITDA, and a lower EBITDA supports a smaller multiple. The leaseback does not consume leverage capacity directly and it does reduce the earnings the multiple applies to. The effect is real but second-order, and it belongs in the model.
What the cash is for
Three uses recur, and the discipline is that the money should be going somewhere identified before the transaction starts.
Capital spending the business cannot finance out of cash flow, where the investment has a return and the constraint is simply the availability of the money. Part of an acquisition, where the leaseback funds equity the buyers would otherwise have to find. And deleveraging, meaning repaying more expensive debt, where the arbitrage between the implied cost of the leaseback and the coupon on the debt being repaid is the whole of the case.
The use that should give pause is funding losses. Converting the freehold into cash to bridge a trading problem removes the asset that would have supported a solution later, and it adds a rent to a business that was already struggling to cover its costs.
The test
Return above the rent, after tax, and it is a harder test than it sounds.
The transaction is worth doing if the capital released earns more, over the life of the lease, than the rent costs. That comparison has to be made after tax and on a like-for-like basis, which means including the sale costs and any chargeable gain in what the capital amounts to, and including rent reviews in what the rent costs.
The frequent error is comparing the headline release against the first year's rent. The release is a one-off and net of costs; the rent is permanent and rises. Comparing the gross number against the initial rent flatters the transaction substantially.
The other error is assuming the alternative is nothing. If the business could raise a mortgage at 65 per cent, the honest comparison is the leaseback against that, on the extra capital only. The question becomes whether the incremental £1.75m in the illustration earns more than the incremental cost of renting rather than owning.
Ownership goes, with the upside. What replaces it is a set of obligations that outlast most business plans.
| What goes | How long it lasts |
|---|---|
| Sale costs and any chargeable gain | One-off |
| Full repairing and insuring terms | 28–50 on the scale |
| Upward rent reviews | 48–72 on the scale |
| The rent, as a fixed charge | 66–90 on the scale |
| Ownership and future upside | Permanent |
What a leaseback surrenders, ranked by how long the consequence lasts. Illustrative of the published trade-offs; lease terms are negotiated and vary.
What the lease commits you to
Fifteen to twenty-five years, typically, on full repairing and insuring terms with periodic reviews and a reversion at the end.
Full repairing and insuring means the tenant carries the cost of maintaining and insuring the building, which is broadly what an owner bears anyway, so it is less of a change than it first appears. The provisions worth reading closely are the review mechanism and the end.
Rent reviews are commonly upward-only, which means the rent can rise at each review and cannot fall. Over a twenty-year term that ratchet compounds, and the rent in the final years can be a long way from the rent agreed at completion. Whether reviews are indexed or to open market value changes the risk profile materially and is worth negotiating rather than accepting.
The reversion is the point at which the lease ends and the business has no right to the building beyond whatever statutory protection may apply. A business whose operations are tied to a specific site should understand what happens at that date before agreeing the term.
What you give up
Ownership, with the upside, and the flexibility that comes with owning.
The appreciation in the property from the day of sale onwards belongs to somebody else. On a long-held freehold in a rising market that can be a substantial transfer, and it is invisible in any first-year comparison of release against rent.
The rent becomes a permanent fixed charge, payable in every year whatever trading looks like. That is a genuine increase in the operational gearing of the business: a company with a large fixed rent has less room to absorb a downturn than the same company owning its premises outright.
And the optionality goes. An owned freehold can be mortgaged later, sold later, developed, or used to support a facility when the business needs one. Once it is sold, none of those is available, and the asset that would have been the answer to a future problem has already been spent.
When it fits and when it does not
It fits an asset-rich, liquidity-short business with a use for the money that earns more than the rent.
The clearest case is a company whose balance sheet carries a valuable freehold and whose plan is constrained by capital rather than by demand, where the senior lender is already at its ceiling and the alternative to a leaseback is not doing the plan.
It does not fit where the property is strategic and irreplaceable, where the business is cyclical enough that a permanent fixed rent is dangerous, or where the money is funding a trading shortfall rather than a return.
And it does not fit where cheaper capital is available. A business with headroom under its senior facility and an unencumbered freehold usually has better options, because a mortgage keeps the asset and its upside while releasing a large part of the value. Reaching for a leaseback first, on the basis that the number is bigger, is how a business sells an asset it did not need to sell.
Common questions
What is a sale and leaseback?
The sale of a freehold to an investor buyer with the property leased straight back to the seller on a long term, typically fifteen to twenty-five years. The business stops owning the building it occupies and starts renting it, with no change to day-to-day operations.
How much capital does a sale and leaseback release?
Close to the full appraised value, because the whole asset is sold rather than borrowed against. On a freehold appraised at £5m, a mortgage at 65% releases about £3.25m and keeps you the owner, while a leaseback releases close to the full £5m before sale costs and tax. The difference is roughly £1.75m.
Does a sale and leaseback use up my borrowing capacity?
Not directly. Cash-flow lenders cap senior debt at commonly 2.5 to 3.5 times EBITDA, and a mortgage draws on that capacity where a sale does not, because nothing has been borrowed. The second-order effect is real though: the rent reduces EBITDA, and a smaller EBITDA supports a smaller multiple.
How do I tell whether it is worth doing?
The capital released has to earn more, over the life of the lease, than the rent costs, measured after tax. Include sale costs and any chargeable gain in the capital, and include rent reviews in the rent. Comparing the gross release against the first year's rent flatters the transaction substantially.
What does the lease commit me to?
Typically fifteen to twenty-five years on full repairing and insuring terms, with periodic rent reviews and a reversion at the end. Reviews are commonly upward-only, so the rent can rise at each review and cannot fall, which compounds over a long term.
What are the tax consequences?
The sale can crystallise a chargeable gain, so the net cash is lower than the headline price, and that should be modelled before committing rather than discovered at completion. The specific position depends on the facts and needs professional advice; nothing here is tax advice.
What do I give up?
Ownership with the future upside, which is invisible in any first-year comparison. A permanent fixed rent, which raises the operational gearing of the business. And the optionality of an unencumbered asset that could otherwise have been mortgaged, sold or used to support a facility later.
When is a sale and leaseback the wrong answer?
Where the property is strategic and irreplaceable, where the business is cyclical enough that a permanent fixed rent is dangerous, where the cash is funding a trading shortfall rather than a return, or where cheaper capital is available. A business with senior headroom and an unencumbered freehold usually has better options.
The full treatment sits in the guide: sale and leaseback explained.
Related terms
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.