Sale-Leaseback Arrangements for Ontario Businesses: How They Work

A business that owns valuable equipment or real property outright, but needs cash now, has an option beyond a conventional loan: sell the asset and immediately lease it back, so operations continue uninterrupted while the sale converts owned equity into working capital. This is a sale-leaseback (sometimes written "sale and leaseback"), and it's a legitimate, fairly common financing tool — but it involves two linked contracts, each with its own risks, that need to work together correctly.

This article explains what a sale-leaseback is, why businesses use one, and the legal points worth understanding before entering into one.

What a Sale-Leaseback Actually Is

A sale-leaseback has two parts, usually documented in two separate agreements signed at the same time:

1. A sale agreement — the business sells an asset it owns (commonly equipment, machinery, or commercial real property) to a buyer, often a specialized leasing or finance company.
2. A lease agreement — the same buyer immediately leases the asset back to the original owner, who continues using it exactly as before, now as a lessee rather than an owner.

The business receives a lump sum from the sale, while its day-to-day operations are unaffected — the equipment stays on the shop floor, or the business keeps operating from the same building, under the new lease.

Why a Business Might Use One

• Unlocking capital tied up in owned assets. A business with substantial value in owned equipment or property, but limited cash on hand, converts that equity into working capital without disrupting operations.
• An alternative to a conventional loan. Depending on the business's credit profile and the asset involved, a sale-leaseback can sometimes be arranged where traditional financing is harder to obtain, though this depends heavily on the specific asset and buyer.
• Balance-sheet and tax effects. A sale-leaseback can change how the asset and the related payments appear on financial statements and affect tax treatment — this is an accounting question, not a legal one, and should be reviewed with an accountant before proceeding.

What to Watch for in the Two Agreements

The Sale Agreement

• Purchase price and how it was determined — an independent valuation is common for real property and significant equipment, since the price directly determines how much capital the business raises.
• Representations about the asset — the buyer will typically want assurances about title, condition, and (for real property) any encumbrances.
• Closing conditions — anything that must happen before the sale completes, including registering the transfer where applicable.

The Leaseback Agreement

• Lease term and renewal options — since the business now depends on this lease to keep using an asset it used to own outright, the term length and renewal rights matter more here than in an ordinary lease.
• Rent and any escalation clauses — how payments are calculated and whether they increase over the term.
• Default and remedies — because losing the leased asset now means losing something the business used to own free and clear, understanding what triggers default and what happens next is especially important.
• Maintenance, insurance, and risk of loss — as with any lease, these responsibilities should be explicit, not assumed.
• Any purchase option to reacquire the asset later — not automatic, and only present if specifically negotiated.

Real Property Sale-Leasebacks: An Added Layer

When the asset is commercial real property rather than equipment, a sale-leaseback also involves the mechanics of a real property transaction — title searches, registration on closing, and often a longer, more heavily negotiated lease given the higher stakes and longer time horizon. See our Commercial Real Estate page for more on that side of a property transaction; the leaseback lease itself should still be reviewed with the same care as any long-term commercial lease.

Risks Worth Weighing Before You Commit

• You no longer own the asset. If the business later needs to sell, relocate, or simply stop paying for it, your options are governed by the lease, not by ownership — you can't simply decide to keep using it rent-free or sell it yourself.
• Long-term cost. Lease payments over a long term can, in total, exceed what the asset would have cost to keep or finance conventionally — model the full-term cost, not just the immediate capital raised.
• Dependency on the buyer-lessor. If the new owner sells the asset to someone else, or runs into its own financial trouble, your lease terms and any renewal rights become the relevant protections — review them accordingly.
• Loss of the asset as collateral. An asset you no longer own can't be pledged as security for future financing, which may narrow your options later.

Frequently asked questions