Buying a freehold investment property?

If you are looking to invest in commercial premises; either as a base to run your business from, or as the start of a property portfolio which you plan to manage and let out to tenants, your two main options are either taking on a lease or buying the freehold of the premises.

You may have been told that purchasing the freehold is the way forward, but what does it mean to own the freehold and how can this be beneficial to you?

Yildiz Betez, a commercial property partner at Thackray Williams Solicitors in Bromley, highlights the advantages and disadvantages of owning the freehold.

What is a ‘freehold interest’?

There are many terms to describe this; freehold, fee simple, reversionary interest, but essentially owning the freehold gives you absolute ownership of the land, unlike a lease which grants you rights over the land for a limited period, but not the ownership.

Title and use

Before you buy you should ensure that the title to the property is ‘clean’, so that it does not restrict you from using the property as you wish, now, or at any time in the future.

Some properties are subject to ‘restrictive covenants’ which can limit the use of the property, for example by not allowing you to use the property other than as offices. If your intended end use is as a restaurant or for retail, then you will not be able to use these premises without permission from the person who has the benefit of the covenants. This can be difficult to establish and they may ask you for a payment in return.

In addition to restrictive covenants you should also assess any planning restrictions. If you need to make an application for a change of use before you can use the premises, then grant of planning permission should be included as a condition of the sale.

Check that you have the necessary rights of access, sufficient parking spaces and loading space you need. If these are not included in the premises you are buying you may want to negotiate them from adjoining property owners.

Sale subject to tenants

If you are buying premises which are already tenanted, you should carry out ‘due diligence’ checks on your tenants. You should get copies of all the tenancy agreements, confirmation of when the tenancies expire and confirm that there are no existing breaches of the terms of the lease. In particular you will want confirmation that there are no current arrears of rent, and when the next rent reviews are due, if any.

You will also need to become familiar with your obligations as a landlord under the terms of the lease. These will most likely relate to the maintenance and insurance of the building and the provision of certain services such as lighting and maintenance of any common parts, refuse collection, security and lift maintenance.

Advantages of owning the freehold

Buying a freehold of a commercial property, as opposed to taking a leasehold interest, is generally considered to be a better long term investment. You will however ultimately be responsible for the upkeep, maintenance and repair of the building, only receiving a contribution towards your costs from any tenants who are subject to a service charge. Rental income can be used to offset finance repayments.

There is a high initial investment cost for the purchase of freehold premises, including professional fees, search fees and stamp duty land tax. You will be liable for stamp duty land tax at 1 per cent of the purchase price for commercial premises over £150,000 and thereafter on a rising scale of up to 4 per cent of the purchase price for commercial premises over £500,000.

As an investment, you may benefit from a rising market and the increase in the property value, although, conversely you also take the risk that property prices may fall.

A big advantage of owning the freehold is having more flexibility to deal with the property as you like. However, you may still need to obtain the consent of your lender to any change of use or alterations to the premises and the grant of leases as well as the consent of your local planning authority to any change of use or alterations to the premises.

Disadvantages of owning the freehold

If you are buying for your own use and you outgrow the premises then you will need to consider selling or renting it out. This is unlike taking a lease where you can more easily relocate to bigger premises to suit your needs. If you are buying the premises as a base to run your business, you may need to make a strategic choice as to whether you wish to invest your money in a freehold property or your business.

If you eventually let the premises, you will need to factor in the costs of managing tenants and periods where the premises are vacant and you have to pay business rates without any rental income.

Ultimately, your decision should involve careful analysis of your budget, your long term business plans and your intended use of the property. It should also involve a thorough examination of the title, any leases or tenancy agreements to get a full picture of your rights and responsibilities.

For more information and advice on buying the freehold or any other commercial property matter, contact Yildiz Betez commercial property partner at Thackray Williams Solicitors in Bromley Kent on 020 8290 0440 or email Yildiz.Betez@thackraywilliams.com

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances