Freehold, Lease or Long Leasehold?
When purchasing a property, the status of ownership is an important consideration that affects the purchase price, what you can do with the property and your rights on disposal. Commercial buyers need to think carefully about whether a freehold, lease or long leasehold best suits their current business requirements and their future plans.
What is Freehold Property?
Freehold property is one in which you own the title to the property and the land on which it.
What is Leasehold?
A leasehold means that you have exclusive possession only for the length of time specified by contract, after which time ownership returns to the freeholder.
Benefits of Freehold Property
The benefits of freehold are obvious:
- Control Over Outlay of Property
provided you don’t breach any laws such as planning restrictions or change of use, your ownership of the property gives you relative certainty of outlay and the ability to shape the premises around your business requirements.
- Benefit from Appreciation in Value of Property
You will benefit from any appreciation in value of the property, and can choose to let it or sell at any time that suits your business requirements. However, it does mean you are fully responsible for the upkeep of the land and property.
Under a leasehold, you have exclusive use of the property, but only for the period fixed by the lease terms – although you may be able to extend this under the Landlord and Tenant Act 1954. With a leasehold, you typically own a property within a larger development or building and do not own the land or the building in which your property sits. The freehold owner is responsible for the upkeep of the land and any common areas such as the walls and roof shared by several leasehold owners. You will typically pay a proportion of upkeep costs, divided between the other leaseholders.
Benefit of Leasehold
- No Upfront Payments
A benefit of leasehold for business owners is that you usually do not have to pay anything upfront (other than perhaps initial payments of rent and other sums due under the lease), freeing up capital to invest in your business. You should always be aware, however, that rent can fluctuate far more freely than mortgage payments on a freehold and you will not benefit from any increase in the value of the property when you leave.
Long leaseholds may be available, typically providing possession for anything from 100 up to 999 years. Long leases may come with only a peppercorn or nominal rent and a larger outlay at the beginning – similar to purchasing the freehold. You must take care to understand what kind of leasehold you are taking on. Each of these has benefits and disadvantages, and the type of purchase or lease suitable for you will depend on the nature of your business, your financial commitments and plans for investment, and whether or not you require flexibility in terms of size and location.
What to Consider Before Entering into a Long Leasehold Agreement
- Length of lease term
- How often the ground rent is reviewed
- What you can do with the property
- Which aspects of upkeep and repair fall within your responsibility
Aside from the amount of ground rent payable to the freeholder, key issues to consider before entering into a long leasehold agreement are the length of the lease term, how often the ground rent is reviewed, what you can do with the property (such as subletting the whole of the property or unused spaces to other tenants) and which aspects of upkeep and repair fall within your responsibility. As with any business decision, it is essential that you plan well in advance to avoid a rushed negotiation when your current lease is running out.
Documentation for Taking on a Lease
- Deed of Assignment / Deed of Transfer
- Licence to Assign
Just like buying a freehold, you need to ensure the necessary documentation is in place and you have left sufficient time to ensure the terms of the lease are suitable for you. This will be affected by whether you are buying an existing lease or entering into a brand new one.
When taking on an existing lease, you will likely need a deed of assignment or transfer plus a licence to assign – the first transfers the lease from the current tenant to you, while the second is the consent from the ultimate owner, the freeholder, to the transfer. You will need to agree what alterations can be carried out and, if the lease is being assigned rather than created anew, whether you need a deed of variation to allow you to change the use of the property.
What if you want to assign the lease to someone else during the term of your leasehold?
You will, of course, want to avoid the possibility of tying your business into a lease that cannot be assigned or sold with the business. Unlike shorter market rent commercial leases, there are usually no break clauses, so the ability to assign or sublet is the only way to get out of the lease, should you need to. Just like the other terms of the agreement, provisions for assignment should be included within the lease itself and negotiated to suit both the freeholder and leaseholder, as far as possible. It is essential that you take legal advice to guide you through this process, ensuring the best terms for your commercial interests now and for years to come.