What is leasehold? | Freehold vs Leasehold For Commercial Properties: What Is The Difference?

What is leasehold? Should I purchase leasehold or freehold property?’ is a question that many potential commercial property owners ask themselves when considering whether to make an investment towards any premises.

Freehold properties are sought after, but there are pros and cons to obtaining a freehold and leasehold property that you should consider carefully. It is well-worth taking professional commercial property advice before entering into a long-term agreement.

What Is The Difference Between Leasehold And Freehold Property?

All properties in the UK, including commercial property, are usually either freehold or leasehold, and it’s important to understand the difference.

What is leasehold ownership? Leasehold ownership grants individuals the right to live in a property for a fixed duration, while the land remains owned by the freeholder or landlord.

Commercial Freehold Properties Means :

A freeholder of a commercial property is the person who owns the land and any buildings on a plot outright. Traditionally, the term ‘freehold’ meant that the occupier possessed the land ‘freely’ from the Crown, and not through the intermediary of another feudal landlord, such as a Duke or Baron. The concept predates the idea of private ‘property ownership’ as we now understand it – historically all land was ultimately ‘owned’ by the monarch in the feudal system and granted out to his or her tenants.  

In 2022, owning the freehold in a property means that you permanently own the whole building and the land that accompanies it under law. It remains in your legal ownership until it is sold. When purchasing a property, it’s crucial to understand the fundamental differences between freehold vs leasehold ownership.

Any maintenance work that needs to be carried out on the building or the grounds will be your responsibility and you will need to cover all costs (unless you have allowed a third party to occupy it on the basis that they maintain it). However, you have free rein to make any changes to the fabric of the building as you see fit – subject to the appropriate Local Authority permissions.

Whereas around 81% of UK residential properties are occupied by their freehold owners, a much lower percentage of commercial property occupies actually own the property from which they trade.  Instead, they  occupy their premises under the terms of a lease. 

What is leasehold interest? Leasehold interest refers to the ownership rights that leaseholders have over a property for the duration of the lease agreement.

Commercial Leasehold Properties Means :

If you occupy a commercial property by virtue of a  lease, you are a tenant and you have a leasehold interest in that property.  If that lease is for a term that exceeds 7 years in length, it is compulsory to register it at Land Registry and a new legal leasehold title will be created, with its own Land Registry title number.  A leasehold interest means that you have a right to occupy the land and any property situated on it for an agreed period of time and subject to the landlord’s requirements.  Usually that will mean that you are leasing it from the freeholder, but your landlord may in fact be a tenant of the premises who has been given permission by the freeholder to sub-let all or part of their leasehold property to you.  If your landlord is a tenant themselves it is important that you verify that the head landlord has given permission for you to take up occupation.  

The length of the lease , known as the ‘term’, is agreed between the landlord and the tenant and there will usually be some additional rights granted to you in the lease as well as numerous covenants with which you must comply.  The lease may allow you to mortgage your leasehold interest or it may specifically prohibit this. The debate between freehold property vs leasehold properties often comes down to long-term investment versus flexibility.

When the lease expires, formal ownership of the land returns to the freeholder unless the existing term is extended, a new agreement is negotiated, or you remain in occupation with the Landlord’s consent.

What is leasehold tenure? Leasehold tenure refers to the length of time a leaseholder has the right to occupy and use a property, as outlined in the lease agreement. Investors often weigh the pros and cons of freehold property vs leasehold properties before deciding which type of real estate to invest in.

Contact Astle Paterson For No-Nonsense Property Advice

At Astle Paterson, our knowledgeable team has extensive experience of all types of commercial property transactions, including the purchase or rental of offices, retail shops, industrial units, leisure developments, and trading estates.

We can also assist with all aspects of commercial property law so, to find out more or to request a free, no-obligation quotation, please contact our commercial property department on 01283 531366.

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