Leasehold or freehold? Commercial property ownership options explained

05-Feb-2016

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Davis Miller is a regular contributor at many sites and mainly focuses on business and investment related topics.







If you are a business owner thinking about buying your own premises, click here to learn the difference between freehold and leasehold property. One of the most important decisions to make when buying commercial property is whether to purchase premises that come with a leasehold or freehold, according to central London estate agent LDG.

Each ownership option presents its own unique benefits and limitations, which is why it’s important to consider each before making a final decision.

What does freehold mean?

The defining characteristic of a freehold interest is its freedom from time of limitation. If you invest in a freehold property, you become the sole owner and controller of the premises itself, the land it is built on, all structures the land/property features, the soil below the surface and the airspace above. There are, however, instances where access rights to the property/land may be owned by other third parties.

What does leasehold mean?

The best way of describing a leasehold property is a long-term rental agreement, says Wimbledon estate agent Robert Holmes & Co. Anybody who makes a leasehold property purchase becomes the owner of the business premises and land in question, but for a specified time only. As leasehold represents a temporary purchase, freedoms and conditions may be very different than in the case of freehold purchase.

Comparing the options

In the case of the overwhelming majority of businesses, investing as much available capital as possible back into the business itself represents the number one priority.

This is why most business owners tend to opt for leasehold ownership because they will not be required to fork out excessive lump sums and may also pay much lower total prices than had they looked to make a freehold purchase. “One of the biggest advantages of owning a leasehold property is that it usually comes down to the building’s outright owner to take care of its upkeep and maintenance,” says Tim Cork of London window broker You Choose Windows.

Although there will be administration and maintenance costs payable by the leaseholder, and they will certainly be required to take out the necessary insurance policies, the leaseholder will not be out of pocket should any large-scale repairs be required to the premises.

In many cases, the total monthly rent and maintenance payments payable by the occupants will be fixed for five years. However, they may be reviewed if market conditions change and altered as the property owner deems suitable. As for freehold property, the most immediate benefit from a business or commercial perspective is the way in which the owner can take full control over the building, its land and everything to do with it.

As the sole owner, you do not have to seek permission from any individual or organisation, with the exception of local planning officers, if you want to make modifications or alterations to your building. Not only that, paying to lease a property is to effectively pass money straight onto another person or agency, as opposed to using the money to invest in something that you yourself own. Full building ownership does, however, comes with a great many responsibilities and potential burdens – especially when it comes to maintenance, repairs and the possibility of extensive problems further down the line.

In addition, coming up with the required capital in the first place has the potential to prove problematic. The purchase of a freehold commercial property is invariably more expensive than buying leasehold premises, says central London estate agent Best Gapp. “But if you intend to base your business at the premises for an extended period of time it could be more cost-effective to choose a freehold property,” a spokesman says.

 

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