Freehold vs leasehold commercial property

We take a deep dive into the main benefits and drawbacks of freehold and leasehold commercial property.

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Is freehold or leasehold commercial property better?

As with residential property, there are a number of factors to consider when determining whether freehold or leasehold commercial property is best suited to your business.

What’s the difference between freehold and leasehold commercial property?

Freehold means you own the land and the buildings on it, whereas leasehold means you are renting the property from a landlord for an agreed length of time. Depending on the leasehold agreement it’s common for the tenant to have complete flexibility over the internal fit out of the building, though they will often be required to return the building to its original state at the end of the tenancy. 

What are the benefits of freehold commercial property?

Owning the freehold title of land and buildings gives you complete control and security. If you need to sublet some or all of the property to generate income, or sell, you have the flexibility to do so.

Plus having a commercial property asset means you’re investing into mortgage payments, as opposed to paying rent. If the value of the property appreciates you may make a profit. And if you wish to make changes to the property there are a lot less hurdles for you to content with, aside from planning permission.

Over the long-term mortgage payments are likely to be lower than commercial rental payments.

Image of modern orange buildings on a sunny day
There are many advantages to freehold commercial property, including that you own the asset

What are the benefits of leasehold commercial property?

A commercial property mortgage will typically require a deposit of 20-30%, which can represent a significant amount of capital. Renting means you won’t need to reserve a chunk of money for a mortgage deposit.

Leasing property gives you possession for a fixed term, which allows you to be flexible if you need to expand or downsize. Many leasehold contracts also come with break clauses built in, allowing you to adapt if your business operations change during the term of your lease.

Additionally, landlords are usually responsible for covering major maintenance costs and buildings insurance.

What are the disadvantages of freehold commercial property?

Aside from the significant capital required to buy commercial property, freehold property is at the mercy of mortgage interest rates, which could increase or decrease.

If the size of your business changes it can be costly to relocate, and time consuming to find a new tenant or buyer.

If you do need to sell, you could end up having to pay capital gains tax if you make a profit.

You will be responsible for all maintenance and upkeep costs.

If a change of use for the property is required this can be difficult to obtain. For more about use classes see here.

Image of an empty meeting room with chairs grouped around a desk
You will be ultimately responsible for all aspects of the building if you own the freehold

What are the disadvantages of leasehold commercial property?

You’ll likely be subject to periodic rental reviews, meaning that your monthly costs can go up.

Depending on the lease agreement you may be unable to sublet the building if your business needs change, meaning you could be trapped in a long tenancy for an unsuitable building.

To make changes to the property you’ll need the landlord’s consent, which may be difficult to obtain.

At the end of the tenancy you’ll be required to return the property to its original state, which could prove costly.

References

Disclaimer

The content in this post is for informational purposes only and is not intended to replace legal or specialist advice. Before making any decisions we recommend you seek professional advice.

Sarah Raeburn

Head of Marketing

Sarah is head of marketing at HARNESS. She’s been writing articles and content for marketing and communications for over a decade, and has a particular passion for property.