Advantages and disadvantages of freehold and leasehold property
When buying a business with freehold or leasehold property, you must consider the pros and cons, however, the nature of your trade and your financial position will ultimately determine the type of property that’s best for you. If the success of your business is highly contingent on the property and its unique characteristics, your priorities will differ.
What are the pros and cons of freehold property?
When buying a freehold property, you are the exclusive owner, and when buying a leasehold property, you lease the property for the duration of the lease term. To understand the key differences between freehold and leasehold property, read our dedicated guide.
Pros of freehold property
Flexibility – If the property is freehold, you are free to use it as you wish without any limitations or restrictions. You hold the deciding vote when choosing the type of business activity to engage in, the operating hours you set, the building work you initiate, and whether you wish to sublet the property, provided you have the necessary permissions.
Certainty - Your business can have a stable home as you are the permanent property owner. This is key to a successful business, as the property terms and not controlled by a third-party. You also have the flexibility to adjust how much space the business occupies as it grows.
Realisable value – If the commercial asset is freehold, the value of the property will contribute to the overall value of the business. If you choose to sell a business with freehold property, you can cash out on the property value. As marketing conditions improve, the property may appreciate and gain value.
Spread costs – A commercial mortgage can be tailored to meet your affordability criteria, including monthly payments and loan term. You can split the cost into bite-sized chunks.
Cons of freehold property
Expensive - Buying a freehold property can eat into company finances due to the high deposit and monthly mortgage payments.
Harder to dispose – A freehold property is harder to dispose of than a leasehold property, as you are the legal owner. If you no longer require a freehold property or if it is no longer fit for purpose, you may choose to sell or lease the asset, which can be time consuming and costly.
Additional responsibilities – As the commercial property owner, you will be responsible for maintaining the property, as there is no landlord.
- Previous sales and acquisitions experience
- Sector specialisms and average success rate
- Sales value expectations and growth potential
What are the pros and cons of leasehold property?
Pros of leasehold property
No strings attached – If you no longer wish to use the property for your business, there’s a clear exit protocol.
Short or long-term commitment – You can jump between long and short-term lease terms depending on what suits you. This is particularly useful for growing businesses that require more flexibility and less commitment.
Opportunity to extend, renew, or renegotiate lease – You have the right to extend your occupancy by notifying the landlord. Your contract will detail the circumstances under which you can extend, renew, or renegotiate a lease agreement.
Low maintenance – Most leasehold property is overseen by a landlord, so they will typically maintain the property, including repairs and renovations.
Cons of leasehold property
Limitations on use – Your lease contract may restrict how the property can and cannot be used for business purposes, which could impact business activity.
If you wish to buy a business with free rein over the property, you may consider a freehold business. If the business opportunity in your sights is leasehold, you may wish to review the lease provisions (terms and conditions) to ensure that the property suits your needs. If you wish to make major changes, you will require permission from the landlord.
No ownership – Your monthly payments do not equate to a stake in the property, unlike mortgage payments, which means there’s no equity to show at the end of the lease term.
When considering the advantages and disadvantages of buying a business with freehold or leasehold property, take note of the implications, including what this means for company finances and your long-term business vision.
How can Selling My Business help?
If you are searching for a freehold or leasehold business, check our online directory of businesses for sale, filtered by tenure type. For more information on what it means to buy a business with freehold or leasehold property, get in touch with our highly experienced team of business transfer agents.
