Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.

Not that long ago, one of the best ways to invest in a bank was through stocks and shares. As well as a slice of the action, you became a part-owner of a substantial portfolio of freehold buildings.

I think it was in 1995 that Lloyds TSB as it then was that was the first bank to embark upon a sell-off of buildings by sale-and-leaseback. Possibly concerned about becoming stuck with duds, a portfolio was sold at a discount to a property company which then did what the bank should’ve done in the first place, that is to put the buildings up for auction where lots were snapped up by investors at prices that for the trader turned a profit.

Sale-and-leaseback is a method of releasing capital from sale of the freehold or long-leasehold interest whilst simultaneously leasing the premises for the business. It is also a way by which the seller- to–be-tenant can fix the initial rent for as long as possible, despite reviews along the way.

All the banks, realising that auctioning branches one-by-one was the better way to capitalise, there followed a swathe of sale-and-leasebacks involving Bradford & Bingley, RBS, Lloyds, Alliance, National Westminster, HSBC, Bank of Scotland, C&G, Barclays, etc.

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Privately-owned properties let to banks are nothing new, but was new is that the vast majority of bank buildings used to be owned outright by the banks themselves, so too the choice within different price ranges, particularly in the auctions, as a consequence of the banks’ decision to off-load surplus premises by sale-and-leaseback. For private investors, to buy what in some places might be the most prominent building in the ‘high street’ and let to a blue-chip covenant is an opportunity rarely available.

In the early days, when ex-banks became available as banks closed branches, successive occupiers were mostly trendy bars and restaurants for whom imposing and sometimes quirky buildings were in demand. With the best sites cherry-picked, demand from other businesses dried up as the supply increased.

A consequence of bank building sale-and-leaseback on a grand scale is a shift in the balance of power. A new generation of investors have been introduced to and perhaps discovered to their cost the ‘small print’ in the lease. Normally, the terms and conditions of the lease are drafted by the seller, the blanks for the name of the buyer, (the new landlord) and commencement dates filled in on completion of the purchase. Having in most cases no say in the precise wording of the lease exposes the investor to considerable risk by preying upon inexperience.

Since a seller is likely to want the highest possible price, it might be thought that the proposed lease would be buyer/new landlord-favourable. To take that on trust involving a sale-and-leaseback by auction can be a mistake. The proposition is designed to look good; term of lease, initial rent, rent review intervals, repairing covenants, and date of tenant break-clause if any, designed to appeal to the security-minded cash purchaser or mortgage-dependent investor.

Amongst the properties that the banks have sold and leased-back are substantial often rambling Victorian structures that might’ve been purpose-built for the bank or predecessor(s). By modern standards, the configuration is likely to be outmoded; the lease too. Built-in safes taking up a lot of room but no reinstatement clause in the lease. Parts of the property excluded from the rent if unoccupied. A schedule of condition to limit the repairing covenant. Practicalities may not be relevant at rent review, but could prove a major issue, as might cost of adaptability for other uses, should the building become vacant and to let. No indication the bank is planning on leaving could be curtailed by the break-clause. As anyone with an ex-bank to let will surely confirm, not much fun to own a building whose holding costs including empty property rates are draining resources.

Amongst the signs that for the landlord all is not going to go according to trouble-free plan are querying insurance premium and any service charge, and at rent review when the bank’s surveyors insist upon nil increase. Likely the method of dispute resolution is designed to put the wind-up the new landlord. Valuation technicalities include claiming discount for ‘hard frontage’ and other allowances for this and that. And should some increase be considered justified by the surveyor and a figure arrived at in principle, the bank vetoes its surveyor’s recommendation and makes a lower offer. As the break-clause date comes and goes and the landlord breathes a sigh of relief, any hope for investment growth is dashed on renewal of the lease when the bank only wants a short lease and a lower rent.

Banks are big-stick wielders. The landlord is expected to jump to attention whenever the tenant wants something, but when the landlord wants something, all might go quiet for months at a time.

Do the banks care? No. Banks are not an extension of social services. Profit-making includes keeping property costs to a minimum. Should they care? Yes. In their hype to the public they like to come over as caring so why should a relationship with the landlord be less so? They should care too about how the relationship with the landlord could tarnish their external surveyors. Those surveyors are concerned about social responsibility yet the mission statement is put aside when acting for clients whose conduct behind-the-scenes, albeit beyond technical reproach, is contrary to the spirit of the intention.

There can be sense of achievement in owning a building let to a bank but a feeling more likely to glow in your heart when the investment pans out as envisaged.

Michael Lever
The Rent Review Specialist
Established 1975

Please Note: This Article is 6 years old. This increases the likelihood that some or all of it's content is now outdated.
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