Caven blog

What is the law on sale and leaseback?

Sale and leaseback is a method of financing a company which involves selling an asset and then leasing the asset back, so that it can continue being used. The process can be done with just about any asset, from machinery and equipment, to property and land. Companies can benefit from such transactions as the sale generates cash for the company to help it through tough times, or to help it expand. There are additional tax benefits for the company as well, as the rent increases the operating costs of the business. The director of a company must be careful that they are doing the right thing for the company and must also beware of putting the company in debt and borrowing when the company may not be able to pay the money back. If a director is found to be acting wrongly, then they can be liable for personal penalties and even imprisonment. As a result of this, the reasons why a company wants to sell and leaseback should always be considered. If a director is just delaying the inevitable liquidation of the company and reducing the number of assets to be divided amongst creditors, then the directors could be liable under s423 Insolvency Act 1986. A person will be liable under s423 if the aim of the transaction was to put assets beyond the reach of creditors. In addition to this, a sale and leaseback could come within the definition of a transaction as an undervalue, as defined by s238 Insolvency Act 1986, and could result in an insolvency practitioner making an application to have the transaction reversed. In order to avoid such measures and personal prosecutions, directors of companies should ensure that transactions they enter into, such as sale and leaseback, are entered into in good faith and not with intention to defraud anyone.

Sale and leaseback does not only take place with commercial properties - it can also take place with residential properties. There are many companies which now specialise in buying properties from their owners and leasing them back. These schemes are sometimes known as equity release schemes.

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