Buying a commercial property outright can represent a significant capital investment for most entrepreneurs and business owners. For some, buying a freehold may prove the opportunity to purchase an asset that will increase in value over time.
For others however, it may be financially unobtainable, or simply not be flexible enough to their needs. In this situation it may be preferable to have a leasehold, which is an arrangement to rent a property for a specified period, creating a landlord-tenant relationship.
This requires little or no initial capital investment and is generally available in most areas.
Whether you choose to buy the freehold or leasehold on a commercial property will depend on your individual circumstances and direction you want your business to go in. Here we explain each type of property interest to help you decide which is right for you.
Advantages Of Leasehold
With their smaller upfront costs, short contracts and ability to get out early, a leasehold can give you greater flexibility if your needs and circumstances change. For example, if you needed to move location to expand operations or because you can no longer afford the property then you could do so with a leasehold.
However, with a freehold, you would be tied down until you sell the property or find a tenant if this is permitted. Serviced offices and small workshops are often offered with a flexible licence, which allows owners to occupy business premises without taking on a substantial longer-term commitment.
If you’re spending money to adapt the property premises to your specific needs or want to establish yourself in the area then you may prefer a longer lease. The length of the tenure can vary, but 75 or 99 years are standard periods of a leasehold title.
It’s worth noting that 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.
Under the Landlord And Tenant Act 1954 there is a specific provision which may give you the right to extend your occupancy of the property once the lease is up. However, many commercial property leaseholds exclude this provision, so it’s is worth checking in advance.
Disadvantages Of Leasehold
Unless you carefully review the lease provisions before you take the property on, you may find yourself trapped with a property that no longer suits your needs with no legal recourse. This is especially difficult if tenants are struggling to make rental payments and have no permission to sub-let, or if that want to alter the premises to accommodate their changing needs but have no permission to make changes.
Other disadvantages may include the fact you are responsible for maintenance and repairs and will be required to put the premises back to their original state when you leave, which could be costly. Leases also commonly contain rent review provisions which means your monthly rent may be subject to a periodic price hike.
If you assign the lease (with the landlord’s permission) you will be under an obligation to guarantee that the new incoming tenant will pay the rent. Lastly, it’s worth considering that at the end of your tenancy, you will have no physical asset to show for your investment.
Advantages Of Freehold Title
The key advantage of buying a freehold title on a commercial property is that you exclusively own the land and all buildings upon it indefinitely. This allows you to decide whether you wish to sell or lease it as suits your needs, giving more long-term security for your business.
There’s a good probability the property itself will appreciate in value over time, even if the business is not a success. Mortgage repayments are tax-deductible and are generally more affordable than rent, which is more susceptible to market fluctuation.
It may be possible to generate additional revenue by subletting part of the property, depending on the specific terms and conditions of your mortgage agreement. It’s worth noting that if you are able to obtain the appropriate planning permission, you will be free to alter or expand the property as you see fit.
What Is A Tenancy At Will And Licence To Occupy?
A Tenancy at Will is a personal arrangement which either the landlord or tenant may end at any time, without the requirement to give notice. Whilst a Tenancy at Will does confer exclusive possession to the tenant, it does not give the tenant any interest in the premises.
A Licence to Occupy may be offered to you if you’re just looking for a short-term tenancy of up to a year. This differs from a lease in several key ways, but most importantly it will only give you permission to occupy the premises (or a particular area within the premises) for a particular purpose – there is no exclusive possession of any part of the property for any period of time.
Under this arrangement either party may terminate the licence agreement by giving the other a short period of notice alongside other conditions such as that the licensor may, at any time, ask the licensee to move to a different area of the building than that originally used.
Such an arrangement could cause significant problems for a growing business, offering very little security to the area of a premises rented, let alone the length of the tenancy itself.
However, this arrangement could suit some business owners looking for the flexibility of a short-term premises solution for a particular phase or project. Any anomalies in the drafting of the Tenancy at Will or Licence to Occupy may have the effect of them being regarded, in law, as a lease.
Here To Help
It’s always best to seek professional support when evaluating a decision of this nature. This article only explains the key differences and pitfalls, but there is finer and more complex detail that it is important to get right.
We can help. With our experience and expertise, we can make the process of buying a freehold or leasehold in commercial property easy.