Freehold v Leasehold (Advantages & Disadvantages)

Question 1

What are the advantages of acquiring a freehold interest in commercial property (4)?

Answer 1

• You own the property outright, so the business will always have an office going forward.
• It’s an investment: the value of the property may increase over time, adding to the business’s overall worth.
• You have the ability to alter or decorate the interior and exterior of the property freely to suit the needs of the business.
• Equity can be released from the property in future by mortgaging it.

Question 2

What are the disadvantages of owning the freehold of a commercial property (4)?

Answer 2

• As owners, the company is wholly responsible for the premises, which often includes repair and maintenance obligations.
• Property value could fall, making it a financial risk.
• More expensive upfront than leasing — may not be ideal for a new business with tight cashflow.
• You’re stuck with the property if business needs change — it would have to be sold or let out if no longer suitable.

Question 3

What are the advantages of leasing commercial premises instead of buying freehold (4)?

Answer 3

• Leases are far more flexible — they may include break clauses, assignment rights, or surrender provisions if business needs change (e.g., growth or downsizing).
• The landlord is likely to be responsible for some repair and maintenance obligations.
• The cost of the lease is less upfront and can be spread out over time — ideal when cashflow is tight.
• Likely to benefit from security of tenure, allowing the company to stay in the premises even after the lease expires.

Question 4

What are the disadvantages of leasing commercial property compared to freehold ownership(4)?

Answer 4

• Tenants must comply with lease obligations — e.g., keeping the premises in a certain condition and paying rent regardless of profitability.
• Leases often contain restrictions on what a tenant can do, especially in relation to internal changes or alterations.
• Rent payments are not recoverable — they’re not an investment and don’t count as a business asset.
• Less freedom overall to adapt the premises entirely to the business’s specific needs.