Sale-Leaseback — One Architecture, a Financing Function
A sale-leaseback is the transaction in which the owner sells the property and immediately leases it back: the sale releases the capital locked in the asset, while the lease preserves the ability to continue the business in place. Under Georgian law the structure is built from two classical contracts — sale and lease — and knowledge of their rules determines the legal quality of the deal.
The content of the sale is defined by Article 477 of the Civil Code: the seller must transfer to the buyer the right of ownership in the property, the documents connected with it, and deliver the goods; the buyer must pay the agreed price and take delivery of the property. The lease side is governed by Article 581: the lessor transfers the property for temporary use, and the lessee pays the agreed rent, which may be set in money or in kind. In a sale-leaseback the two contracts interlock: the sale price and the rent must be balanced together, otherwise the economic sense of the structure collapses.
The Lease Term — the Ten-Year Boundary
In a sale-leaseback the lease term is the decisive parameter: it determines how long the seller-lessee may use the property. Article 582 of the Civil Code sets an important rule here: where a lease is concluded for a term of more than ten years, then after ten years have passed each party may terminate the lease relationship within the period established by the Code, provided this condition is provided for in the lease contract.
In practice this means that a lease term beyond ten years is conditional: after ten years each party gains an exit right — even where the contract was concluded for a longer term. When planning a sale-leaseback, this boundary must be calculated in advance: if the economic model of the structure demands a longer horizon, the parties must learn to manage the ten-year control point rather than ignore it.
Sublease and Control Over the Use of the Property
After the sale-leaseback the former owner — now the lessee — often needs to transfer parts of the property to others, for example by subleasing separate units of the enterprise. Article 587 of the Civil Code states the rule: the lessee has no right to sublease without the consent of the lessor, and the lessor may refuse consent to the leasing of separate parts of the leased property where this would cause it significant damage.
Moreover, the lessee is answerable to the lessor for any use of the property by the sublessee or the hirer other than that permitted by the lessor, and the lessor may directly stop such use. Including an advance consent to subleasing in the sale-leaseback documentation removes this risk in advance and increases the flexibility of the structure.
Comparison with Leasing — the Alternative Financing Instrument
The functional analogue of the sale-leaseback in Georgian law is financial leasing: under Article 576 of the Civil Code, the lessor transfers the property to the lessee for use for the agreed term, with or without a purchase option, and the lessee pays remuneration periodically — on condition that the lessee itself determines the property and selects the supplier, while the lessor acquires the property precisely for leasing and this fact is known to the supplier. The subject of leasing may not be money, securities, a share or a participation interest in an entrepreneurial society.
The economics of leasing are also limited by statute: where the lessor is an entrepreneur, the annual effective interest rate of the leasing must not exceed 50 percent, and where the recipient’s aggregate obligations to the lessor as a result of the financing are less than 200 000 GEL, the remuneration may not be tied to or indexed to a foreign currency. The choice depends on the circumstances: for financing existing property leaseback is natural, for acquiring new assets — leasing.
Practical Steps and Managing the Two Contracts as One
The success of a sale-leaseback depends on the documents: the sale agreement must define the property, the price and the transfer precisely; the lease must fix the term, the rent and the sublease regime.
When planning a sale-leaseback, the chief practical instrument is managing the two contracts as one: the sale and lease terms are negotiated simultaneously and create a single economic balance. For the seller-lessee, keeping that balance means that the sale price, the rent and the lease duration are calculated together, since a change in one element is reflected in the others.
The interdependence of the parties should also be detailed at the level of the contracts: what happens to the lease if the sale is rescinded, how the sublease regime changes, and how the ten-year control point is governed. These details are precisely where the structure either works or grows into a dispute.
Frequently asked questions
Why must the sale price and the rent be balanced together?
Because the sale and the lease are two parts of one economic structure: the price, the rent and the term are calculated together, since a change in one is reflected in the others.
May the lease term exceed ten years?
Yes, but where the lease is concluded for more than ten years, after ten years each party may terminate the relationship within the period established by the Code, if the contract so provides.
What restrictions does leasing carry in comparison?
Where the lessor is an entrepreneur, the annual effective rate must not exceed 50 percent; below 200 000 lari of aggregate obligations the remuneration cannot be linked to foreign currency; and money, securities, a share or a unit cannot be its object.
How We Help on Legal.ge
The lawyers of Legal.ge assist in designing the structure, preparing both contracts and steering the negotiations. Contact us — a well-built sale-leaseback remains a financing instrument and does not become a dispute.