Unlocking value

Sale and leaseback of assets can prove to be a valuable tool for operators, particularly in tough economic times, but striking the right deal is essential.

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Unlocking value Releasing value: Sale and leaseback of assets can prove to be a convenient financing strategy.
By  Lenka Glynn , Kelly Tymburski Published  July 12, 2010

Sale and leaseback of assets can prove to be a valuable tool for operators, particularly in tough economic times, but striking the right deal is essential.

The global financial crisis created a kind of climate that encourages organisations to start considering alternative financing options. It is this climate in which sale and leaseback has begun to emerge as an appealing creative financing strategy, particularly in the telecoms sector.

A classic sale and leaseback transaction involves the owner of an asset (“Seller”) selling or otherwise transferring this asset to a purchaser (“Purchaser”), who in turn then leases it back to the Seller. Of course, there can be variations on this classic approach. Sale and leaseback transactions are typically very complex and their structure is dependent on the type of assets being transferred and the limitations and restrictions that, more often than not, exist in relation to such transfer.

In this article we discuss various practical commercial considerations and strategies organisations should consider before, during and after the actual sale and leaseback transaction takes place, in order to maximise its benefits.

Know your property

Although it may seem obvious, accurately identifying the asset portfolio for the sale and leaseback is critical. Even more important, however, is determining whether or not the assets are legally capable of being disposed of in the manner contemplated.

Tangible Property: This may either be real immovable property (which typically includes land or buildings) or movable property such as infrastructure, equipment, office fittings, tools and other tangible items.

The nature of the Seller’s rights in tangible property is generally either (i) freehold / ownership; or (ii) leasehold / lease. Typically, a sale and leaseback asset portfolio will include tangible property from both of these legal categories. For example, in the telecoms space, mobile towers are typically owned by the operator. However, the land on which these towers are erected is often leased by such operator from the land owner.

Where the Seller owns the relevant asset, it is generally able to freely dispose of it.  However, the Seller will need to identify instances where it is not the sole owner of the property or where its right to freely dispose of the property is limited by operation of an encumbrance or other third parties’ rights.

In such circumstances, the Seller should establish what approvals need to be secured or what actions need to be taken in order for the Seller to be able to legally effect the transfer of its title in the asset.

Lease of the relevant asset is typically dealt with through the assignment or novation of the lease by the Seller to the Purchaser. It is essential for the Purchaser to be aware of limitations that may hamper such an arrangement. In almost all cases, the prior written approval of the lease assignment or novation by the actual owner of the relevant asset will be required. The parties should also ensure that the terms of the original lease allow for the subsequent sub-leasing back to the Seller.

Parties should also bear in mind that in certain jurisdictions, real property transactions will need to comply with certain formalities in order to become legally effective and binding.

Intellectual Property Rights: More often than not, intellectual property rights (“IPR”) such as designs, know-how, patents or copyright will be included in the asset portfolio.  Indeed, IPR is often required for the effective management and operation of the property the Purchaser is acquiring through the sale and leaseback. For example, the Purchaser is likely to request the IPR in the network design or operating manuals.

Importance of contracts: Assets being transferred under the sale and leaseback often need to be maintained, operated, managed and to receive utilities by or from third parties.

Personnel: In some sale and leaseback transactions, the Purchaser may be interested in taking over some or all of the Seller’s personnel involved in the part of the business that is being transferred to the Purchaser. No matter what the commercial issues are, the parties will need to take account of applicable labour law considerations.

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