Purchasing a Freehold or Leasehold – What’s the Difference?

May 5, 2018

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, which refer to the two main varieties of property interest in the UK, but you might be unclear as to exactly how they differ.

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. This handy guide should point you in the right direction when distinguishing between the two kinds of interest and deciding which is right for you.

Freehold vs Leasehold

If you hold a freehold title on a commercial property, this means that you own the land and all buildings upon it outright and indefinitely. This gives you exclusive ownership of the property and allows you to decide whether or not you wish to sell or lease it at any given moment.

As the name suggests, a leasehold on the other hand 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. The exact length of the tenure can vary significantly, but 75 or 99 years are standard periods of a leasehold title.

Advantages of a freehold title

It may seem like freehold ownership 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 as you see fit.

Advantages of a leasehold title

While freehold ownership does offer many long-term benefits, there are shorter-term drawbacks which may make a leasehold a more attractive proposition. Its own advantages include:

  • 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.
  • Since less capital is needed up front to secure a leasehold tenancy, it may make sense for smaller businesses or those which wish to keep their options open with regards to investing in other aspects of the company.