A seller leaseback is a transaction involving real property. In a seller leaseback transaction, a person or business sells real property and then rents it from the new property owner. This is also called a “seller rent back,” “sale-leaseback,” or “lease back option.” It is an option in both commercial and residential real estate contexts.
Seller leaseback means that the seller no longer owns the property but continues to occupy it or otherwise make use of it for the length of time that is stated in the rental agreement. The seller reaps the benefit of the sale of the property by gaining access to their equity in the property. However, the seller is also able to continue to use it for a period of time. The buyer is assured of receiving rental income from the seller, who becomes the lessee.
In the residential context, a seller can benefit from a seller leaseback agreement if they wish to sell their home but have not yet found another place to live or are simply not in a position to vacate the property at the time of closing for whatever reason.
Additionally, even if the seller has found another residence, the seller may need to realize the proceeds from the sale of the home in order to purchase the new property and take occupancy. In this case, the seller needs a place to live during the period between the closing of the sale of the home and the time of the purchase of the seller’s new home.
Because of this, it is ideal if both transactions can take place almost at the same time, with only about a month between the closings of the two properties. Then, within this limited time period, the seller can continue to occupy the property they have just sold per a lease with the new owner.
In the commercial context, a business might want a seller leaseback in order to generate funds that it might use to invest in growth or expansion opportunities. By selling a property that it owns and in which it operates and leasing it back, a business gains access to liquidity that has been tied up in real estate. A transaction of this kind can give a business access to as much as 100% of its property equity.
What Are the Advantages of a Seller Leaseback?
In the commercial context, a business might do a seller leaseback in order to generate money, perhaps to fund the pursuit of growth or expansion opportunities. By selling a property that it owns and in which it operates and leasing it back, a business gains access to liquidity that has been tied up in real estate. Meanwhile, it limits the disruption to its operations.
Of course, when it comes to real estate, the goal is to purchase at a low price and then sell later at a higher one. A seller leaseback agreement can assist an owner in reaching this goal. A seller can benefit from selling in a market in which property prices are high and still retain possession of the property for their business purposes.
A buyer could even conceivably place the responsibility for paying property taxes, insurance, and/or structural maintenance and repair costs on the seller/tenant. Generally, when the buyer enters into a lease of this kind, they charge a lower rent because of the burden of other costs that the seller/tenant has to bear.
In some cases, a buyer/landlord includes the costs of taxes, insurance, and maintenance in the rent, which assures that the items get paid. Often, the owner of the property is liable for paying these costs in any event if the tenant does not. So, to ensure that taxes, insurance, and maintenance are paid, the buyer/landlord wants to continue to pay these costs themselves.
The same can be true in a residential seller leaseback situation. The buyer/landlord wants to be sure that the rent paid by the seller/tenant is enough to cover at least all of the costs of ownership.
How Do I Protect My Rights in a Seller Leaseback?
Whether a person is the buyer or the seller in a seller leaseback arrangement, it is recommended that they protect their own rights by specifying the terms and conditions in writing. The parties should do this in a real estate leasing contract.
It is important to note that the law of the state in which the property is located may affect how a person can protect their rights in a seller leaseback. An example of this would be in California.
In that state, there is a form, the California Association of Realtors (C.A.R.) form, known as the “Purchase Agreement Addendum” (P.A.A.), where the parties can specify the terms and conditions of the seller leaseback. If completed and added to the main contract, his form would modify the purchase contract.
Also, if the seller/tenant requests a lease term that would be longer than 1 month, they would need to check a specific box on the P.A.A. form. This would be next to the statement: “Seller to Remain in Possession After Close of Escrow.” If the seller plans to lease back the property for more than 1 month, they would also need to use the form “Residential Lease After Sale” (C.A.R. Form RLAS).
To continue with the example of California, on the P.A.A. form, the seller and the buyer can agree on the following:
- The amount of the rent;
- Security deposit;
- Whether a late fee would be charged if the rent is not paid when due;
- Utilities are to be paid by the seller;
- Utilities are to be paid by the buyer.
Additionally, this P.A.A. form stipulates that the seller:
- Is to maintain the property;
- Is to make the property accessible to the buyer for the purpose of making repairs;
- May not sublet or assign the property without the buyer’s prior written consent; and
- Should have their own personal property insurance in place at their own expense, as the buyer/landlord does not insure the seller/tenant’s personal property.
In the residential context, the parties may want to specify in their P.A.A., perhaps as an addendum, who is to pay property taxes, homeowner’s insurance, homeowners’ association and/or condominium association fees, and any other expenses associated with ownership of the property.
Clearly, before entering into a seller leaseback arrangement, both parties want to have a clear understanding of the costs of the arrangement to them and understand what the consequences are. Consulting an experienced real estate lawyer would probably be a good idea. Both parties want to make sure that their economic and legal interests in the situation are protected.
What Legal Issues Could Arise During Seller Leaseback?
There are a number of issues that can come up in a seller leaseback situation. The seller/tenant may find that they cannot vacate by the promised date and may wish to extend their tenancy. The buyer/landlord may not agree.
Issues as to who is responsible for maintenance and repairs, paying taxes, and other fees or insurance of various kinds may arise. If the seller/tenant or a guest of theirs is injured on the property, there could be questions as to who is liable for damages.
There are a number of possible complications. That is why it pays for the parties to consult a real estate attorney when planning a sale-leaseback deal.
Do I Need the Help of a Lawyer With My Seller Leaseback Deal?
If you are involved in a seller leaseback arrangement, you should consult with a local real estate attorney. Whether you are a seller or a buyer, a lawyer can help make sure that any agreement you sign represents the agreement you want and protects your rights.
LegalMatch.com can connect you to an experienced local real estate attorney who can help you understand your legal rights and options according to your state’s specific real estate laws. An attorney will also be able to represent you in court, as needed, should any issues arise.
