The New Entrepreneur's Guide to Setting Up and Running a Successful Business by Paul Kendall

Author:Paul Kendall
Language: eng
Format: epub
ISBN: 9781351015851
Publisher: Taylor and Francis

Freehold or Leasehold: Should You Buy or Rent?

The distinction between freehold and leasehold property can be explained by the following definitions.

Freehold any interest in real property which is of uncertain or undetermined duration (having no stated end), as distinguished from a leasehold which may have declining value toward the end of a long-term lease.

Leasehold an estate, or interest, in real property held under a rental agreement by which an owner gives another the right to occupy or use land for a period of time.

Leasehold property can be further defined as

■ Short leasehold where the portion of the term remaining unexpired under the rental agreement is less than 5–10 years.

■ Long leasehold where the portion of the term remaining unexpired under the rental agreement is more than 10 years.

This distinction between short and long leasehold is not cast in stone, as different industries have their own classifications; for example, residential lets over 12 months can often be classed as long term!

It would be usual to pay a premium to buy a long leasehold as it effectively gives one the right to occupy a property for a substantial period; for example, there are long leasehold properties with leases of 999 years (effectively a freehold). Long leaseholds of such length are generally treated in the same way as freehold properties.

Famously, Arthur Guinness signed a lease for his brewery in Dublin in December 1759, for an annual rent of £45 a year for 9000 years. In retrospect, his landlord appears to have been badly advised at the time.

The company has since bought out the originally leased property, and during the 19th and early 20th centuries the brewery owned most of the buildings in the surrounding area, including many streets housing brewery employees and offices associated with the brewery.

It would be unusual to pay a premium for a short leasehold as it does not provide safety of tenure past the date of termination of the short-term rental agreement.

The exception to this rule is where a fee is paid for a short-term pitch at a sporting/music event for the purpose of providing refreshments. In these circumstances, the levels of profits over the short period are relatively high, hence the premium being charged.

The following issues need to be taken into account when deciding whether to buy a freehold or rent a leasehold property.

1.Risk: There is a school of thought that it is riskier to sign a mortgage deed and purchase a freehold (as the mortgage could be a ‘millstone around your neck’) than it is to sign a leasehold agreement.

2.My personal view is that it is a lot riskier to sign a long leasehold, say for 25 years, as the landlord can claim rent from you for the whole of the period of the lease, even if you have retired before the end of that period and assigned the lease to your successors! At least if you have purchased the property, you will have the option to sell it to pay off the mortgage.

3.Freehold property ownership problems:

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