Commercial Property – Freehold v leasehold?

This article will be of interest to business owners looking to buy a UK commercial property. Its aim is to give you a brief introduction to the key points to consider about whether to buy a property: outright (freehold); as a long leaseholder; or to rent a property as a short leaseholder.

Freehold vs Leasehold property – what’s the difference?

When you buy a property, you have three main options

  • Freehold (you own the property out right)
  • Long-leasehold (you have the right to use the property but don’t own it)
  • Short leasehold (you rent the property for a few years)

Lets look at these below.

Freehold means that you own the property

Freehold means you own the property. You are said to be the ‘freeholder’. It’s your property to do with as you want to. Owning the freehold usually gives you complete control over the property. For example, if you need to sublet some or all of the property or if you want to sell it, you have the flexibility to do so.

Usually, you buy the freehold with a single upfront payment and you have to pay Stamp Duty Land Tax (SDLT) on this payment. You can read about SDLT on freehold commercial buildings here.

When you buy the freehold you own the property for ever.

Long leasehold is like a freehold, but someone else owns the property

Long leasehold means that someone else (the freeholder) owns the property, but you have the rights to use it. Your rights are contained in the lease. Sometimes leases run for a very long-time, even 999 years. Long leases are often granted when you buy just part of the building. The idea of the lease is that it just places certain restrictions on you, such as an obligation to keep the building in good repair, or not to undertake noisy activities. So you can see that having a lease rather than a freehold can make a lot of sense, particularly when a building is split into separate units.

Very long leases are often referred to as virtual freeholds. You shouldn’t be too worried when you take out a virtual freehold, though you do need to read the lease very carefully so that you know of any restrictions or obligations placed upon you.

An important factor with a long leasehold is that usually you have the right to extend the lease. This gives you security that you will be able to remain in place. There is a cost, but usually the cost is defined by a formula.

Like with freehold, usually you pay for a long leasehold property with a single payment upfront. You may also need to pay ‘ground rent’ every year or six months. Ground rent is usually (but not always) small, from a few pounds to a few hundred pounds a year. Also, like with freehold, you have to pay SDLT on the up-front purchase payment. The SDLT rates are different to those for commercial freehold. You can see the rates here.

Short leasehold is property that you rent

Short leasehold is property that you rent. There’s no strict definition of how long a short-leasehold is – I would say it could be up to 15 years. Short leaseholds are much more restrictive and usually place much greater obligations on the leaseholder. For example, your activities are likely to be restricted and may specify the activity that your engaged in. Also, you may need the landlord’s consent to make even minor changes to the property.

The other big difference is that there is usually a large ongoing cost, usually a monthly or quarterly rent that you need to pay to use the property. Sometimes there’s also a premium that you need to pay at the start of the lease. Usually there won’t be SDLT to pay on a short leasehold, because the premium (amount you pay up front) is likely to be less than the threshold, currently £150k.

I am not an expert in property law, but my understanding is that if you use a property for business purposes for five or more years, then you have a statutory right to renew the lease. However, with short leaseholds often there is a contractual clause that forces you to waive that statutory right, meaning that you often won’t have the right to renew the lease. In this case, at the end of the term, you need to renegotiate things completely with your landlord, and the land-lord has the right to kick you out.

Helping overseas companies with UK property leaseholds

We can advise on the tax implications of buying properties. But we would not normally get involved in the legal aspects. Property and lease acquisitions are specialist areas that require specialist legal advice. That said, we work with some very good solicitors that specialise in these areas. Just in the last few months our clients have completed some very sizeable restaurant leases using our preferred partners!

Find out more. Get in touch, and remember  – we’re here to help.

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