§ 20A.03 Characteristics of Sale-Leaseback Net Leases

• Jurisdiction: United States
• Publication year: 2022

§ 20A.03 Characteristics of Sale-Leaseback Net Leases

There are numerous variations of sale-leaseback net leases, but generally they are leases where (1) the rental paid to the buyer-landlord is either completely or mostly "net" of costs and expenses related to the real property; (2) costs and expenses related to the real property are paid by the seller-tenant (usually directly to the applicable third parties), including taxes, insurance, utilities, and any charges under any covenants, conditions and restrictions, reciprocal easement agreements or similar agreements encumbering the real property;¹ and (3) the seller-tenant maintains relatively broad operational control over the real property.²

[1]—Different Kinds of Sale-Leaseback Net Leases

Sale-leaseback net leases differ in the extent to which the costs, expenses, risks and obligations of ownership are transferred to the seller-tenant. In short, the term "net" can mean something very different in different transactions.

A sale-leaseback lease where seller-tenant undertakes essentially all real property-related costs, expenses, risks and obligations is sometimes referred to as a bond lease or bondable lease.³ Under such a lease, the seller-tenant is required to pay rent to buyer-landlord in every circumstance (without exceptions even for condemnation or all or a portion of the real property), to pay any and all costs and expenses related to the real property however they arise, and to fully indemnify the buyer-landlord for any costs or liabilities related to the real property or the lease.⁴ The buyer-landlord (and its lender) can therefore view these leases much like bonds, where the only ongoing material risk should be the credit of the seller-tenant paying the rent and other financial obligations (including indemnity obligations) under the lease. Because the buyer-landlord owns the real property, there are still some potential risks beyond those presented by a bond, such as environmental and title risks where even a broad indemnity from a credit tenant might not fully compensate buyer-landlord for an impact on the value of the real property or legal liability. These risks, however, can in most cases be effectively discovered through diligence efforts prior to the consummation of the sale-leaseback transaction, with mitigation measures (including, for example, reduced purchase price and holdbacks of a portion of the purchase price to pay for mitigation measures) included in the sale-leaseback documentation.

Other sale-leaseback leases shift most, but not all, of the property-related costs, expenses, risks and obligations to the seller-tenant. For example, many sale-leaseback leases provide that rent to the buyer-landlord is proportionally reduced in the event of a condemnation, with a termination right in the event of a material condemnation, even if in other ways the terms of the lease are materially consistent with a bond lease. Some other more tenant-friendly sale-leaseback leases also (1) allow for terminations in the event of a material casualty (sometimes limited to a short period before the lease term is set to expire), (2) require buyer-landlord to pay some portion of property-related insurance (especially if such insurance is required by the buyer-landlord's lender and not deemed to be "market" for similar transactions), (3) require the buyer-landlord to pay for a...