Written by: David Rowling on Wednesday 21/10/2015
When investing in commercial property in the UK, you will encounter two terms to describe the legal ownership of properties, freehold and leasehold.
Which you opt for will depend on your specific goals as an investor, but freehold properties are commonly the most sought after. When you buy a property that is freehold, you own both the property and the land outright. Leasehold commercial properties are however, exactly that – leased. You therefore own the leaseheld building for a fixed period of time, and you will be subject to a contract between yourself and the freehold owner.
There are many reasons why investors prefer to opt for freehold properties wherever possible, but there are some things they should keep in mind when weighing up a property that offers either form of ownership, such as:
With a leaseheld property, a person has the right to use a property for a set period of time that is agreed upon in exchange for rent. Once this period of time is over, the property returns to the freehold owner.
The length of the lease will vary and impact your ability to get a mortgage. It is usual for lenders to need the lease to run 25-30 years after the end of your mortgage. So, if you want to get a 25-year mortgage the lease needs to 50-55 years before its termination. This means that it can be difficult to sell a property if the lease is less than 80 years. You can apply to your landlord for a new lease on the flat if you need it to last longer to gain a mortgage.
Unlike with a leasehold property, you won’t have to pay annual ground rent if you are a freehold owner. In this scenario, you will have to be responsible for maintaining the fabric of the building, including the roof and the outside walls.
If you are a leaseholder, then you are not responsible for maintaining and running the building. Usually, the landlord will appoint a managing agent to do this for them. If there are any major works that the leaseholder would like completed to the property, then they will need to obtain permission from the freehold owner. In some cases, leaseholders share the costs of paying a service charge to the landlord. In some cases, you will be asked to pay a sinking fund to cover any unexpected maintenance work.
Both leaseholders and freeholder owners have rights that protect them from either party taking advantage. The main source of contention between the two parties is related to fees; leaseholders can often feel that the freeholder is over-charging and not doing enough to maintain the building, while freeholders frequently complain that leaseholders breach the terms of their lease.
When looking for a commercial property, it is crucial to decide in which capacity you want to assume ownership. Financially and legally, you should look at your options, and consult with a professional to see which type of ownership best suits your circumstances. Similarly, you should assess your lifestyle choices. For instance, if you have an animal-related business and are leaning towards leasehold, then ensure that animals are allowed in the building as per the lease.