Real estate sale and leaseback (cession-bail): structuring, distinction from finance leasing and risks

A company that owns its premises ties up a significant share of its capital in an asset that produces no liquidity until it is sold or mortgaged. Faced with a funding need, a deleveraging plan or a growth project, the manager meets a classic dilemma: selling the building deprives the business of its site, while keeping it ties up equity. Real estate sale and leaseback (cession-bail) answers this dilemma by separating ownership from use. This analysis covers the structuring of the transaction, its legal distinction from real estate finance leasing (crédit-bail immobilier), the risk of recharacterisation that bears on the transaction and the fate of the lease when the seller-tenant encounters difficulties.

Definition and economic rationale of sale and leaseback

Sale and leaseback, rendered in French law as cession-bail, designates a transaction by which a company that owns a building sells it to an investor (real estate fund, property company, financial institution, investment company) while simultaneously entering into a contract with the purchaser allowing it to continue to occupy the premises in return for rent. The company ceases to be the owner but remains the occupier and operator of its site.

The primary objective is to release the cash tied up in the building. The market value of the asset, until then fixed on the balance sheet, becomes immediately available liquidity, without the business being interrupted or relocated. The transaction meets several concrete needs: rebuilding working capital, financing an industrial investment, reducing debt owed to a bank syndicate, or preparing a transfer of the business by lightening its scope.

Sale and leaseback differs from a simple sale in that it provides for continued occupation. It differs from a simple mortgage financing in that ownership is actually transferred. This dual nature, a transfer of title and a long-term lease commitment, makes it a hybrid transaction whose legal characterisation must be mastered from the outset.

Two distinct contractual vehicles

In practice, sale and leaseback is carried out through two legal structures that must not be confused.

The first is based on an ordinary commercial lease. The company sells the building to an investor, then signs a lease governed by Articles L.145-1 et seq. of the French Commercial Code. The occupier becomes an ordinary tenant, with no entitlement to become the owner again at the end of the lease.

The second is based on a real estate finance lease (crédit-bail immobilier) governed by Article L.313-7 of the French Monetary and Financial Code. The company sells the building to a finance lessor (a credit institution or an approved finance company), which immediately lets it back to the company together with a unilateral promise to sell. At expiry, the lessee may exercise the purchase option and become the owner again for a residual value agreed at the outset. The structure of a real estate finance lease held through an SCI (French property holding company) or through the operating company, with its advantages and risks, is analysed in our dedicated article.

The choice between these two vehicles determines the applicable legal regime, the accounting and tax treatment, and the ability to take the asset back. It is the first structuring decision of the transaction.

Structuring the transaction to release cash

The sale phase

The sale itself follows the regime of real estate sales. It requires a notarial deed (acte authentique) executed before a notary, the clearing of any pre-emption rights, verification of the mortgage and planning status of the building, and the production of the mandatory technical surveys. The choice between selling the building itself and selling the shares of the company that holds it is compared in our article on asset deals and share deals.

Setting the price is the core of the negotiation. Overvaluing the building increases the cash released immediately, but mechanically feeds through to the amount of future rent, since the investor seeks to protect its rental yield. Conversely, undervaluation lowers the rent but reduces the sale proceeds. The balance between the sale price and the yield expected by the purchaser determines the rental burden the company will bear throughout the term of the lease.

The tax regime of the sale deserves particular attention. The sale may generate a taxable business capital gain, calculated on the difference between the sale price and the net book value of the building. Where the asset has been heavily depreciated, the gain may be substantial and absorb part of the cash benefit. Transfer duties and the question of whether real estate VAT or registration duties apply must be settled with the notary and the chartered accountant (expert-comptable) before signing.

The occupation phase

The occupation contract is concluded at the same time as the sale, neither being conceivable without the other. The two instruments are interdependent: the company would not sell without a guarantee of remaining on the premises, and the investor would not buy without the certainty of a tenant in place generating rental income from signing.

Several clauses structure the rental commitment and determine the security of the occupier:

• the firm term of the lease, often long in order to secure the operation, with possible waiver of the right to terminate at the end of each three-year period
• rent indexation, the index chosen (commercial rent index, tertiary activity rent index) determining the trajectory of the rental burden
• the allocation of service charges, works and major repairs between landlord and tenant, a central question since the framework introduced by the Pinel Act of 18 June 2014
• the conditions for renewal or exit at expiry
• the security and guarantees granted to the landlord (security deposit, autonomous guarantee, surety)

How these clauses fit together determines whether the transaction provides real financial relief or merely converts an ownership burden into a rigid and lasting rental burden. On the charges and works that may be passed to the tenant since the Pinel Act, see our table of the allocation of commercial lease charges.

The balance sheet and governance trade-off

Sale and leaseback profoundly alters the structure of the balance sheet. The building leaves the assets, the bank debt that financed it can be repaid out of the sale proceeds, and the company replaces a depreciation charge and loan interest with a deductible rental charge. This reprofiling improves certain financial ratios and may strengthen the company's presentation to its financial partners.

This trade-off is not neutral. The company gives up the future appreciation of the building and the building up of an asset that can be passed on. It commits to a long-term rental burden, potentially increasing through indexation, which will weigh on the business whatever the economic climate. The decision is as much a matter of asset strategy as of cash management, and must be assessed over the whole duration of the commitment, not solely by reference to the immediate gain.

Distinction from real estate finance leasing

Real estate finance leasing and sale and leaseback by commercial lease are frequently confused, although their regimes diverge on essential points. The confusion arises because a finance lease may itself serve as the vehicle for a sale and leaseback, the company selling its building to a finance lessor which lets it back with a purchase option.

The nature of the transaction and the status of the operator

The real estate finance lease is defined by Article L.313-7 of the French Monetary and Financial Code as a transaction for the letting of buildings for professional use, coupled with a unilateral promise to sell, carried out by undertakings that buy these properties with a view to letting them and of which the tenant remains the owner as security for the financing.

Finance lease transactions are those for the letting of real property for professional use, bought by the owner or built on the owner's behalf, where such transactions enable the tenants to become owners of all or part of the let property, at the latest on expiry of the lease. (Article L.313-7 of the French Monetary and Financial Code)

A finance lease is a credit transaction within the meaning of the French Monetary and Financial Code. It may be granted on a habitual basis only by a credit institution or an approved finance company supervised by the Prudential Supervision and Resolution Authority (ACPR). An ordinary investor therefore cannot offer a finance lease: it can only structure a sale accompanied by a commercial lease.

Sale and leaseback by commercial lease does not take the characterisation of a credit transaction. The purchaser is an ordinary real estate investor, not subject to approval, and the contract falls solely under the commercial lease statute.

The entitlement to become the owner again

This is the most operational difference. The real estate finance lease includes a unilateral promise to sell: at expiry, the lessee has a purchase option allowing it to buy back the building for a residual value, often nominal or fixed from the outset. Economically, the transaction is analysed as term financing at the end of which the company becomes the owner again.

The ordinary commercial lease offers no entitlement to acquire. The tenant benefits from the right to renewal and, where applicable, an eviction indemnity, but has no automatic purchase option. At the end of the transaction, the building remains permanently in the investor's assets.

The accounting and tax treatment

The finance lease follows a specific accounting and tax regime. The lease payments are deductible, but the reintegration of a portion on exercise of the option, as well as the treatment of depreciation, require rigorous handling. The initial sale to a finance lessor may give rise, subject to conditions, to a spreading of the tax on the sale and leaseback capital gain provided for by the French General Tax Code, a mechanism that reduces the immediate tax friction of the transaction.

The commercial lease follows the ordinary regime: rent constitutes deductible operating expenses, with no particularity relating to a future acquisition.

The choice between the two vehicles therefore depends on the objective pursued. A company that wishes to part with the building permanently and maximise available cash will favour the commercial lease. A company seeking term financing, with the intention of becoming the owner again, will turn to the real estate finance lease.

The risk of recharacterisation

Sale and leaseback has an ambivalent nature: it combines a disposal of ownership and a financing secured by the building. This ambivalence exposes the transaction to a risk of recharacterisation, in particular where it in fact conceals another agreement or where it is carried out when the seller is in financial difficulty.

Recharacterisation as a disguised credit transaction

Where an unapproved investor structures a sale and leaseback by including a promise of sale in favour of the seller-tenant, the transaction risks being analysed as a real estate finance lease granted without approval. The unlawful carrying out of a credit transaction exposes its author to sanctions and undermines the validity of the transaction. The dividing line must be clearly drawn: either the transaction is a genuine commercial lease without purchase option, or it falls under finance leasing and requires an approved operator.

Recharacterisation as a fraudulent arrangement or a disguised security

An arrangement may be recharacterised where it masks an intention distinct from its apparent form. A sale and leaseback concluded at a price manifestly out of line with market value, or accompanied by conditions reflecting a mere security rather than a genuine transfer of ownership, may be analysed as a disguised sale with a right of redemption (vente à réméré), governed by Articles 1659 et seq. of the French Civil Code, or even as a prohibited forfeiture clause (pacte commissoire) where it provides for the appropriation of an asset as security for a debt.

Under French law, the court recharacterises agreements according to their real nature and not according to the label the parties have given them. The characterisation adopted by the contract does not bind the court where the economics of the transaction reveal a different reality.

Recharacterisation in an insolvency context

The most sensitive risk relates to the seller's financial situation. Where the sale and leaseback takes place shortly before the opening of collective proceedings, it may be challenged under the nullities of the suspect period (période suspecte) provided for by the French Commercial Code. A transaction for consideration concluded during the suspect period, in which the debtor's obligations significantly exceed those of its counterparty, may be annulled. A sale at a reduced price, a manifestly excessive rent or unbalanced conditions may lead to the transaction being set aside.

This risk calls for particular vigilance where the company turns to sale and leaseback precisely because it is experiencing cash strain. Documenting the value of the building by an independent valuation and justifying the economic balance of the transaction are decisive precautions to prevent any later challenge.

The fate of the lease where the seller-tenant is in difficulty

Sale and leaseback commits the company to a lasting rental burden. Where the seller-tenant, now a tenant or finance lessee, encounters difficulties that may lead to collective proceedings, the fate of the occupation contract becomes a central question, both for the company and for the investor.

Continuation of the ongoing contract

The opening of safeguard, reorganisation or compulsory liquidation proceedings does not terminate the lease by operation of law. The contract is an ongoing contract whose continuation is governed by the French Commercial Code, in particular Article L.622-13 in safeguard and reorganisation proceedings. The court-appointed administrator may require performance of the contract or renounce it according to the interests of the proceedings. The lease of the business premises, an essential asset for continuing the activity, is frequently maintained.

The landlord cannot rely on payment defaults prior to the opening judgment to terminate the lease. It retains, however, the right to act for unpaid post-judgment rent, under the conditions and time limits provided by the French Commercial Code for commercial leases subject to collective proceedings.

Assignment of the lease and of the business

Under a sale plan, the lease of the business premises may be transferred to the acquirer, including where clauses restrict assignment. The court may order the assignment of the lease to the beneficiary of the plan, the objective of safeguarding the business and jobs prevailing over restrictive contractual provisions.

This faculty has an important consequence for the investor: it may find itself bound to an acquirer it has not chosen, on the basis of the terms of the original lease. The financial strength of the original tenant therefore does not guarantee that of its eventual successor, which justifies the attention paid to the guarantees granted from the outset.

The specific position of the finance lease in collective proceedings

Where the transaction has been structured as a real estate finance lease, the position of the finance lessor differs from that of an ordinary landlord. Publication of the finance lease determines whether it can be relied on against third parties and the organs of the proceedings. A finance lease duly published allows the finance lessor to reclaim the building on termination of the contract, the building never having entered the debtor's estate. A failure to publish weakens its position and may deprive it of this right as against the creditors in the proceedings.

The fate of the purchase option also deserves attention. The finance lessee in difficulty may, subject to conditions, see the contract maintained and keep the prospect of exercising the option, which clearly distinguishes its situation from that of an ordinary tenant with no entitlement to acquire.

Conclusion

Real estate sale and leaseback is a powerful instrument for releasing cash, but it is by no means a neutral transaction. It converts an asset into immediate liquidity at the price of a long-term rental commitment and the definitive loss of ownership, unless a real estate finance lease is used, which preserves the ability to take the asset back. The transaction delivers its full value only if the balance between sale price, rental burden and length of commitment has been rigorously calibrated over the whole term of the contract, and not by reference to the initial gain alone.

The main point of vigilance is the context in which the transaction is decided. A sale and leaseback concluded by a company under financial strain exposes it to the risk of recharacterisation, whether as a disguised credit transaction, a concealed security or a challengeable act of the suspect period. The security of the transaction rests on three pillars: a valuation of the building documented by an independent valuation, an unambiguous contractual characterisation as either a commercial lease or a finance lease, and anticipation of the fate of the lease in the event of later difficulty.

Before any commitment, a company considering a sale and leaseback should have the economic balance of the transaction audited by independent advisers and secure its legal characterisation before the notarial deed is signed, the irreversibility of the sale precluding any adjustment once the transaction is concluded.

Frequently asked questions

What is the difference between sale and leaseback and a real estate finance lease?

Sale and leaseback by commercial lease is a sale followed by a lease governed by Articles L.145-1 et seq. of the French Commercial Code, with no entitlement for the tenant to become the owner again. The real estate finance lease, defined in Article L.313-7 of the French Monetary and Financial Code, is a credit transaction coupled with a unilateral promise to sell allowing the lessee to buy back the building at expiry. Only a credit institution or a finance company approved by the ACPR may grant a finance lease, whereas an ordinary investor may structure a sale and leaseback by commercial lease.

Does a sale and leaseback really release cash?

Yes, this is its primary objective: the value of the building tied up on the balance sheet becomes available liquidity from the sale, without interruption of the business. The sale proceeds may repay a debt, finance an investment or rebuild working capital. This immediate gain is offset by a lasting rental burden and by any tax on the capital gain on the sale, which must be factored into the analysis.

Can a sale and leaseback be annulled if the company later files for insolvency?

Yes, if the transaction is concluded during the suspect period preceding the opening of collective proceedings. The French Commercial Code allows the annulment of transactions for consideration in which the debtor's obligations significantly exceed those of the counterparty. A sale at a reduced price or accompanied by an excessive rent is particularly exposed. An independent valuation of the building limits this risk.

What happens to the lease if the seller-tenant is placed in reorganisation proceedings?

The lease is an ongoing contract which is not terminated by operation of law by the opening of the proceedings. Under Article L.622-13 of the French Commercial Code, the administrator may require its continuation, which is common for business premises. The landlord cannot rely on arrears prior to the opening judgment to terminate, but retains its rights over post-judgment rent.

Can the commercial lease resulting from a sale and leaseback be assigned without the landlord's consent?

Under a sale plan in collective proceedings, the court may order the transfer of the lease to the acquirer, including where clauses restrict assignment. The purpose of safeguarding the business and jobs then prevails over restrictive contractual provisions. The investor may thus find itself bound to an acquirer it has not chosen, on the basis of the terms of the original lease.

What is the tax regime of the capital gain on a sale and leaseback?

The sale in principle generates a taxable business capital gain, calculated on the difference between the sale price and the net book value of the building, often high where the asset has been heavily depreciated. The French General Tax Code provides, subject to conditions, a mechanism for spreading the tax on the capital gain realised on a sale and leaseback transaction, which reduces the immediate tax friction. The precise treatment must be settled with the notary and the chartered accountant before signing.

Should a commercial lease or a finance lease be preferred for a sale and leaseback?

The choice depends on the objective. A company that wishes to part with the building permanently and maximise available cash will favour the commercial lease. A company seeking term financing, with the intention of becoming the owner again at expiry, will turn to the real estate finance lease with its purchase option. This trade-off engages long-term asset strategy, beyond the immediate cash gain alone.