There comes a time for every entrepreneur and business owner when it makes sense for them to purchase their first commercial property and expand their operations. You may be familiar with the terms freehold or leasehold, but what is the difference between freehold and leasehold? These terms refer to the two main varieties of property interest in the UK, but you might be unclear as to exactly how they differ.
This handy guide will explore the differences between freehold and leasehold, and should point you in the right direction when distinguishing between the two kinds of interest and deciding which is right for you.
What does leasehold mean?
As the name suggests, a leasehold is simply an agreement to lease a property for a specified period of time, creating a landlord-tenant relationship.
According to the terms of your agreement, you may be able to sublet the property to another party or move out of it before the leasehold is up, but this will need to be negotiated prior to signing the agreement.
What’s the difference between freehold and leasehold business?
If you purchase a freehold business you will essentially own the entire property as well as the business.
However, if you purchase a leasehold business you are renting the business space within the property for a length of time depending upon the lease agreement.
Freehold Vs Leasehold
Whilst freehold ownership does offer many long-term benefits, there are shorter-term drawbacks which may make a leasehold a more attractive business proposition.Whether you’re looking to buy a commercial property on a freehold or leasehold basis will depend on your individual circumstances and the outlook for your future.
Advantages of a freehold business
It may seem like a freehold business is preferable every time, due to the absolute ownership it affords the holder of the title. Here are some of the benefits of purchasing a property on a freehold basis:
- With the property belonging to you and no-one else for as long as you wish to occupy it, you have long-term, comprehensive security for your business.
- Although not guaranteed, it’s very likely that the property itself will appreciate in value over time, even if the business is not a success.
- Mortgage vs rent. Generally speaking, mortgage repayments are more affordable than rent, since the latter are liable to market fluctuation and the former are tax deductible.
- Depending on the specific terms and conditions of your mortgage agreement, it may be possible to generate additional revenue by subletting part of the property.
- If you are able to obtain the appropriate planning permission, you will be free to alter or expand the property, and business, as you see fit.
Advantages of a leasehold business
Many businesses choose to lease a space within a property to support flexibility and costs. Having a leasehold business has numerous advantages including;
- Since less capital is needed up front to secure a leasehold tenancy this option is particularly popular with smaller businesses; or those which wish to keep their options open with regards to investing in other aspects of the company.
- If you find you need to move location (either to expand operations or because you can no longer afford the property), a leasehold offers far greater flexibility to do so. With a freehold, you will be tied down until you can either sell the property (often a lengthy process) or, if circumstances allow it, find a tenant.
- Insurance and upkeep costs. Although not applicable in every case, it’s common practice for the landlord to pay some or all of the costs of insuring the property and undertaking maintenance and repair costs.
- There is a specific provision in the Landlord & Tenant Act of 1954 which may give you the right to extend your occupancy of the property once the lease is up. However, many commercial property leaseholds explicitly exclude this provision, so it’s best to check beforehand.
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