Dawson International has sold its Kinross headquarters to a property group in a £3.5m lease-back deal that casts doubt over the future of its Todd & Duncan spinning mill which employs 250.

Cashmere group Dawson has sold Lochleven Mills to London-based Montgomery Hanson Property, and will receive 50% of any future development profit on top of £3.5m for an asset with a book value of £900,000.

The mills house Dawson's administrative offices as well as the production facilities of Todd & Duncan, which were modernised only last year in a £2m investment. Management problems at the mill, however, which led to the subsequent departure of director Giovanni Ghione, helped drag Dawson into the red last year, before a recovery this year.

The group said yesterday: "Following a difficult year in 2006, which was impacted by production issues in the first half, Todd & Duncan has reported a strong start to 2007. In the first five months overall sales increased by 7%, with cashmere volumes up 15%. With last year's production issues resolved, customer service and stock service availability levels have been restored and enhanced. New product development and underlying cost reductions are contributing to improved results."

However, it went on to warn: "Whilst Todd & Duncan has made significant progress in its turnaround strategy and maintained its price premium at the top end of the luxury cashmere market, neither they nor the market generally have been able to pass on the raw material price increases of the last two years."

Dawson is taking a lease on its former flagship property for an initial period of five years, with a mutual break clause after two years. "This is sufficient time to enable the group to consider and implement options for future production," it said. The immediate impact will be to reduce group borrowings.

Executive chairman Mike Hartley said: "We continue to review how we optimise the strategic opportunities of this business, including relocation to modernised premises."

Asked whether options for the business might also include ceasing production or moving it overseas, Hartley said: "I have never made any secret at Dawson that I will always keep all options open."

On local uncertainty, he said: "It is also uncertainty not doing anything. I would hope local people will see this as a good deal, bringing a lot of cash into the group. It gives us more money to do better marketing and invest further in the business."

On Todd & Duncan's prospects, he added: "Ultimately, pricing is determined by the total competitive behaviour, and competitors are behaving very aggressively."

James McArdle, managing director of Todd & Duncan, said the deal presented "an opportunity for Todd & Duncan to build on recent improvements and enhance future performance".