By: Dr. Khalid Kadfoor Al Mehairi - Chairman/ Managing Partner, Emirates Advocates.
As the real estate sector developing it pays that we take a look at the basic concept of the so called freehold and leasehold as it is a common terminology encountered by the buyers and sellers in the course of real estate transaction.
This article will also discuss the concept, illustration and
advantages or disadvantages of freehold and leasehold.
What is Freehold?
Buying property in freehold means that you acquire ownership of the land and the building forever. But subject to the law and planning limitations, you can do whatever you want on your land. By owning a freehold property you have the absolute right to paint the building red or you can even make your lawn or garden as a forest reserved is not an issue at all. You own it, you can enjoy it.
The common thing in freehold properties is the sale of the residential units, although there are also an increasing number of freehold flats existing. The reason is that there are legislations in some countries that are making it easier for the leaseholder to purchase the freehold.
Primarily, the advantage of owning a freehold is that the property normally appreciates in value as time goes by. Therefore, it will be reflected in your balance sheet as an increasing fixed asset, the moment you sell it you might have a considerable capital gain. But there is one disadvantage in freehold, the property is usually more expensive than leasehold to buy.
What is leasehold?
When we talk about leasehold it means the land on which the complex built is not owned automatically but is only leased, (i.e. rented) from the owner for a stipulated period. There is a corresponding annual rent associated with leasehold property. There are a number of leases and you should inquire for the details related to the terms, conditions, annual rent charges and rent review dates. Under leasehold, you are only given the right to possess and occupy a portion of the building at a given length of time. You will have to pay a small amount of regular ground rent and maintenance added to the one-off payment that buys you ownership of the lease until you either sell it or it runs out. The obligations for holding a leasehold property are to keep the property properly insured and in good repair.
Leasehold purchases generally occur in buildings that comprise more than one unit, such as blocks of flats, or commercial property. The amount of alterations you can make to the property varies in accordance with the lease and you may well have other conditions imposed upon you by the landlord. The advantage of leasehold property is that it is usually cheaper to buy, however, you can not change the use of the building or make alterations, perhaps even decorate, with or without the prior approval of the leaseholder so operating in a leasehold property can be far more restrictive. Another disadvantage is that leasehold property is actually written off in the balance sheet over the life of the lease and so shows on the balance sheet as the “depreciating asset.”
Whether one option is better for you than the other however, depends upon your circumstances and the figures involved. What is important to remember is that all premises have a cost whether freehold or leasehold.
If you do own the freehold, you don’t have to pay rent but you have either invested cash, or taken out a loan to buy it. You must judge whether you will get the best investment return from buying the freehold, or from expanding the existing business or acquiring another business.
Operating from leasehold premises is almost as secure as owning the freehold. Although the landlord does have certain rights or repossession, it is very hard for him to evict you. Obviously you can be evicted if you do not meet the obligations of the lease and when the lease comes up for renewal there are circumstances under which he can refuse to renew it. However, under the Tenancy Act or Rental Law of any jurisdictions, there are set of clearly defined grounds whereby the landlord has right to refuse the renewal of premises.
At acquisition, you should view a leasehold property no differently from a leasehold one-before you sign the lease, or buy the freehold, employ a qualified surveyor to structurally survey the property. The majority of leases are fully repairing leases, you will to make good any repairs, so make sure that these are identified and agreed with the landlord at the outset. The existing tenant should rectify them before you take over.
What if you are a leaseholder and the opportunity comes up to buy the freehold-should you go for it? This depends on the price, the current rent, the landlord and the length of lease left. No matter how keen you are, if you are just starting out, taking on a freehold is not always advisable. It increases the initial cash contribution you need to make. Try and negotiate with the landlord for an option to buy the freehold.
In summary therefore, whether buying freehold, or negotiating leasehold, you need to do three key things, namely:
Employ a qualified surveyor to get an accurate value of the property and any repairs that may need to be done.
Employ a qualified solicitor/advocate specializing in property and leasing law to attend to the legalities for you.
If you are negotiating a new lease, or a rent review, consider employing property consultant specializing in lease negotiation, to act on your behalf.